These small-cap companies outshined Keppel, SMM in the past 3 months

Make way for Ezion, Nam Cheong and Technics.

According to DMG OSK, small/mid-cap offshore & marine (O&M) and oil & gas (O&G) stocks could continue its strong outperformance against the big-caps as  investors look to rotate into smaller cap plays with attractive valuations.

Here's more from DMG:

We like companies with strong growth profile, track record in delivering profits and management with substantial stake in the company. In order of preference, our top three small/mid-cap picks are Ezion Holdings, Nam Cheong Holdings and Technics Oil & Gas.

Our top small/mid-cap picks are trading at 25-50% discount to P/E valuations (FY13F) for big-caps.

Small/mid-caps outshined the big-caps in the past three months. Nine of the top ten gainers in the past three months were stocks with market cap of less than S$1.5b, rising 10-40%.

Our top small/mid-cap picks, Ezion, Nam Cheong and Technics, have surged 40%, 18% and 10% respectively, and we expect these stocks to continue its re-rating on strong earnings growth, and higher investors’ interest in the smaller cap space. We expect Ezion and Nam Cheong to announce record quarterly core net profit in their upcoming 3Q12 results.

Rig builders should deliver steady margins QoQ. We expect rig builders to deliver operating margins of 13-14%, lower than 3Q11 margins of 26.0% for Keppel and 16.2% for SMM but flat QoQ. The margins are likely to be in-line with guidance from management.

The rig building outlook remains robust: (1) rig supply tightened further in 3Q12 with high contracting activities; and (2) dayrates are rising with longer duration. We think Singapore rig builders are in a strong position to raise ASP, and this will be a key catalyst for valuation expansion.

Avoid Chinese shipyards with heavy exposure to the commercial (drybulk, containerships) shipbuilding due to excess shipbuilding capacity, pressure on margins for new orders, and deteriorating earnings visibility.