Tuesday 2 October 2012

4Q12 Investment Strategy - The Best and Worst of Times


4Q12 could be a challenging quarter overshadowed by the uncertainties arising from the longawaited 13th  General Election (“GE”). However, surprisingly, we have yet to see significant foreign outflows despite the so-called GE concern. This could be the continuous efforts of the Government to strengthen the country’s budget deficit further to 4% of the GDP in 2013 from 4.5%. While our various market forecasting models reveal potential further upside for the FBMKLCI in the next 3-12 months (end-2012: 1,660, 12-month: 1,745), we do realise that the downside risk does exist. Hence, we prefer to employ a range-trading strategy between 1,610 and 1,710 before we turn more aggressive after the GE. Nonetheless, as the risk-to-reward favours the upside  as per our Simulation Study, the strategy of a “Buy-on-Weakness” is still preferred.

Our new Earnings Universe (EU) estimates EPS to grow 35.7% and 9.6% respectively for FY12 and FY13, as opposed to the consensus’ current and next year growth rates of 12.5% and 10.2% respectively. The strong earnings per share (“EPS”) growth likely in FY12 will be due to the surge in the profits of TENAGA (OP, TP: RM7.90). This single stock accounted for 23.2pps (“percentage points”) of our EU. Excluding this outlier, the EPS growth for FY12 should be restated at 13.0%, which is in line with the consensus earnings growth estimate of 12.5%.

Fine-tuning index target. Based on a Bottom-Up approach, we would value FBMKLCI at 1,780, representing 18.5x and 16.6x to our estimated FY12 and FY13 EPS  respectively, which is close to a full-fledged bull market scenario. However, we do not expect a bull market scenario even in this quarter despite 4Q historically being a strong quarter and also despite the recent launch of the 3rd  round of Quantitative Easing (“QE”) as we have seen market sentiment turning cautious ahead of the forthcoming GE. As such, we are only pegging a 6-year average Historical PER of 15.9x to our estimated FY13 EPS to derive our Top-Down index target of 1,710. Combining both approaches, we are pegging our 12-month index level at 1,745, representing a slight revision from the previous index target of 1,750. Our 12-month index target is also in line with the consensus index target of approximately 1,760. At 1,745, the FBMKLCI is estimated to trade at 18.1x F12 EPS or 16.3x FY13 EPS. Should we prorate  this upside until this year-end, the end-2012 index target should be re-estimated at 1,660, representing a 20-point downward revision from our previous target of 1,680. At 1,660, the FBMKLCI is estimated to trade at 17.2x and 15.5x our FY12 and FY13 EPS estimates respectively.

4Q12 Sector Outlook. We are generally bullish on the the Banking, Non-Bank Financials, Gaming, Oil & Gas, Power Utilities and Telco sectors. However, we have downgraded the Consumer Retail, Construction, Plantations, Property, Glove and Technology sectors to NEUTRAL. Other Neutral sectors are Automobiles & Parts, Building Material, Consumer F&B, Media, Aviations, Transportations & Logistics as well as Water Utilities. There are no UNDERWEIGHT calls within our sector coverage at this juncture.

4Q12 Investment Strategy. While we are cautiously optimistic, we acknowledge that the downside risk does exist. Therefore, we are opting to adopt a range-trading strategy that is to Buy on Weakness (“BOW”) when the index dips below 1,610 and/or Sell on Strength (“SOS”) when the index surpasses 1,710. Nonetheless, as the risk-to-reward favours the upside as per our Simulation Study, a BOW strategy  is preferred. As for investment styles, we continue to like (i) Consistent Performers, (ii) Defensive and Low-Beta yield stocks and (iii) specific budget beneficiaries (please refer to our separate report for details) in this quarter until there is greater certainty over the GE. We will only turn more aggressive i.e. switching to higher beta stocks if and only when the uncertainty over the GE is cleared. Nevertheless, we have also included some potential darkhorse or trading ideas from a tactical angle.  Our Top 5 stock picks are MAYBANK (OP, TP:  RM10.40), SKPETRO (OP, TP: RM2.80), TM (OP, TP: RM6.45), UOADEV (OP, TP: RM2.30), and WCT (OP, TP: RM3.09). Potential dark-horse or trading ideas from a tactical angle are: MEDIA (MP, TP:  RM2.40), KNM (MP, TP: RM0.73), MRCB (OP, TP: RM2.07), PUNCAK (OP, TP: RM3.05) and TENAGA (OP, TP: RM7.90).

Source: Kenanga

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