- In the last three months, macro events – Bersih 3.0 rally
and the uncertainty over the timing of the General Election, renewed debt turmoil
in the EU and economic slowdown in China – have triggered a shift in
expectations from recovery to anxiety over growth prospects. Yet, at 1,612
(YTD: +7%) currently, the FBM KLCI is already at a new high after navigating
elevated volatility for the most part of this year. This robust performance was
largely sustained net foreign buying for eight straight months to May
2012.
- Admittedly, we are at a point where it is comparatively
easier to make a compelling case for limited downside risk than articulating
catalysts for upside. Nonetheless, we
remain committed to our end-2012’s fair value of 1,690 – based on an unchanged
PE of 15.5x on current year’s earnings. We put forth three reasons.
- Earnings momentum is holding up. We rest our conviction on
the market’s domestic-centric earnings cycle that has remained robust in the
face of external woes. Unlike in 2H 2011 where earnings cuts were widespread,
we have not witnessed a significant deterioration in consensus earnings
expectations (source: IBES) thus far. We now expect earnings to expand by a
stronger 13.8% this year, versus 12% previously (source: AmResearch). For 2013,
we expect earnings to expand by a further 9% – still above trend average of 8%
over the last 10 years.
- Plenty of domestic institutional monies on the sidelines.
From our discussions with institutional clients, we sense that domestic portfolios
are cashed up with an average equity weighting of probably around 80% or less.
Many domestic portfolios have sold down their equity positions since late 1Q
2012. The monthly trade data from Bursa Malaysia reflects this. Hence, there is
ample domestic institutional money on the sidelines for redeployment. The
recent success of two large cap IPOs – Felda Global Ventures and Integrated
Healthcare – is a good testament. The domestic institutional funds turned net
buyers, acquiring some RM1.8bil of equities in June 2012, overwhelming the net
foreign selling of RM800mil in the same month.
- Liquidity rally from rising stimulus expectations? This is
an increased likelihood of monetary stimulus to spur economic growth in view of
the spate of weak macro data and falling inflation. Talk of QE3 as well as
interest rate cuts globally to rejuvenate economic growth are gaining traction.
This month, China unexpectedly cut its interest rate for the second time in
less than a month after a recent cut on 7 June 2012. The European Central Bank
(ECB) also cut its benchmark interest rates. This backdrop for net liquidity
creation is supportive of equity markets.
- The uncertainty over the timing of the General Election is
a known overhang on the market. We are not unduly worried. With inflation
almost halved to 1.7% in June 2012, Bank Negara Malaysia (BNM) has ample room
to cut interest rates (OPR: 3%) if growth were to decelerate. In recent years,
we note that BNM has even tolerated low real interest rates. Fiscal stimulus to spur consumption may be
likely in the upcoming Federal Budget given that the government has ample
fiscal flexibility (Government debt to GDP: 52%, below the prudent ceiling of
55%)
- We shift our sector calls with greater bias on cyclicals.
In our opinion, the valuation re-rating of the defensive sectors – consumer,
select dividend paying telcos and REITs – has run its course given lofty PEs.
Property is our contrarian Overweight. Discounts (40-50%) to NAVs are at trough
levels. We expect a strong return of pent-up demand to take place given the normalisation
of the impact of lending guidelines, continued urbanisation and several
prolific projects including IJM Land’s Bandar Rimbayu to kick start buying
momentum. Volume and price recovery are starting to take hold in Singapore,
Hong Kong and even China. IJM Land is our top pick.
- We have downgraded the REIT sector to Neutral, strictly
because distribution yields have compressed significantly, making MREIT much
more expensive than S-REIT. The yield spread over 10-year government bonds for
the Malaysian retail REITs has narrowed to 150bps, versus 380bps in Singapore.
At current levels, the yields for both CapitaMall Trust and Pavilion REIT are
just a tad above 5%, and which are even lower than CapitaMall Trust Singapore’s
distribution yield of 5.4%. Furthermore, the risk free rate in Singapore is
lower than Malaysia.
- The recovery in auto sales first evident in May 2012 would
continue in the coming months. More importantly, we believe transformational
growth is also taking place in UMW and MBM. The former is fast morphing into a
dominant oil & gas player with an associated lift to PE. MBM is emerging as
a major auto parts maker, having completed its acquisition of air-bag player Hirotako
and establishing an alloy wheel plant. Its associate – Perodua – is doing well.
Assembly JVs may be next.
- Despite tight demand/supply dynamics, CPO prices corrected
swiftly and steeply by 22% from its peak ofRM3,619/mt in mid-2Q 2012 due to sentiment-led weakness
from renewed worries over the EU. This is now reversing. Current inventory of
1.7mt has dipped below the two-year average of 1.8mt (peak: 2.1mt). Exports have
remained robust at 1.5mt in the last six months. This belated rebound in CPO
prices would be driven by sentiment recovery against a strong demand backdrop.
We are BUYers of KLK, Genting Plantations, IJM Plantations and Sime Darby.
- CIMB’s share price performance has been very weak, having
retraced by some 20% off its peak. Election risk appears to be priced-in. Given
our bullish market view, CIMB is an excellent beta trade, although our fundamental
view is a HOLD due to earnings risk from CIMB Niaga in Indonesia. RHB Cap is a
BUY given its cheap valuation (PB: 1.3x) and potential value-accretive
acquisitions. In a recent report issued by our banking analyst, we outline the
accretion from the potential acquisition of MBSB, if it materialises. Public Bank appears best positioned to
capitalise on the return of pent-up demand for property, given its low cost of
funds. At PB of 2.9x, Public Bank is also trading at the lower end of its
historical bands.
- Construction stocks are going through a lull due to
uncertainty over the timing of the General Election, with the associated
repercussions on new contract flows. That said, share prices have pulled back
from their peaks in 1Q 2012. Valuation support appears intact: At RM5.06
currently, IJM is trading on bottom-of-the-cycle PE of between 11x-14x, versus
its trough PE of 12x. Once there is more clarity on the political landscape, we
believe the perceived risk premium on construction stocks should dissipate on
expectations of a resumption of delayed projects, including the West Coast
Highway and Gemas-JB double tracking. In any case, the MRT works are
progressing well with jobs under Phase 1 earmarked to be dished out by
end-2012. IJM and WCT are our picks although the former needs to demonstrate a
recovery in construction margins (1Q: 5%).
- We are cognisant of the high valuation of the oil &
gas stocks. But, given an accelerating capex cycle at all points of the value
chain, newsflow momentum would continue to be strong. PE would remain elevated
as the oil & gas industry is experiencing massive investments in multiple
projects, including the development of marginal fields, deepwater fields, tank
terminals and floating LNGs. The merger of SapuraCrest and Kencana has created
a liquid sector proxy. At current levels, the stock is trading at a PE of 15x
based on 2013’s earnings. We continue to like MMHE as it is earmarked to be a
deepwater fabrication yard for Petronas. Admittedly though, the earnings turnaround
appears somewhat slow. But, expectations are already muted. Newsflow should
improve with the delayed awards of several platform and floating LNG jobs.
- Petronas Gas is a BUY. We expect PGas to reach an
inflection point in earnings growth with the 530mmscfd Malacca regassification
plant commencing operations in September this year. Secondly, there is a global
shift towards natural gas for power generation due to nuclear safety concerns
and incoming abundance of shale and unconventional gas supply. Thirdly, the
government’s strategy is to gradually remove natural gas subsidies by 2015,
which will lead to a more viable pricing mechanism for electricity generation.
Lastly, multiple domestic regassification terminals and power projects may lift
our SOP by 16 sen, for every fresh investment of RM1bil, assuming an equity
discount rate of 10% and debt:equity ratio of 80:20.
- Tenaga is a BUY with a DCF-based fair value of
RM7.35/share. We expect stabilising natural gas supply from the Lekas
regassification plant in Malacca by September this year to provide clearer
earnings visibility. Also, falling global coal prices should now underpin a
leaner cost structure by cushioning the impact of potential tariff hikes arising
from higher gas costs. This is supported by the regulator’s continued support
for a fuel pass-through mechanism undergirding the group’s longer term margin
profile in the event of any revision in natural gas and electricity prices. At
RM6.50 currently, Tenaga is still trading at a depressed PB of 1x despite its
improving operating dynamics. It is also a liquid proxy to the market.
- On the telco sector, Maxis has had a great run this year,
with the stock now trading at a steep premium to our DCF value of RM5.50/share.
DiGi is also trading at a premium to our DCF value of RM3.50/share. Both stocks
look overpriced with a somewhat limited scope for dividend surprises. In
particular, we see growing risk of margin erosion from intensifying competition
in the migrant/low-end mobile segment where DiGi has a dominant 60% sub-market
share. We are BUYers of Axiata and Telekom Malaysia (TM). The former offers a cheaper
exposure with a strong likelihood of dividend surprises or acquisitive growth
from an under-leveraged balance sheet. We anticipate strong organic growth in
TM coming from its fast-expanding fixed broadband HSBB (customers: 315,745)
clientele. Dividend policy may also surprise given as its broadband capex is expected
to peak this year.
Source: AmeSecurities
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