1Q13 Investment Strategy - Mixed Feelings

Our NEUTRAL view remains unchanged. We believe the FBMKLCI is likely to trade in a range-bound mode. While the market could be upward bias as per our Simulation, Seasonal and Statistical studies, we see signs of weakness and risk of corrections potentially capping any significant upsides from here. As such, we continue to adopt a trading stance - “Buying-on-Weakness” below 1,610  and “Selling-on-Strength” above 1,710 in a range-bound market environment. We also reckon that Consistent Performer (i.e. AIRPORT, MAYBANK, NESTLE & TM), Defensive (KOSSAN) and High Yield (i.e. P&O & UOADEV) stocks will still be the mainstream investment choices. Selective stocks with thematic angles (i.e. GAMUDA, SKPETRO & UMW) could potentially perform in the limelight as well.

Earnings revisions. As opposed to previous quarter, our FY13 net earnings growth has been revised down marginally from 10.3% to 9.9%. However, we have cut our FY12 net earnings growth substantially from 36.3% to 8.2%, mainly skewed by TENAGA (OP, TP: RM8.05) and partially due to the downgrade in plantation and gaming counters’ earnings.

Fine-tuning index target. Our Bottom-up methodology yields an index target of 1,730. This values the FBMKLCI at 16.6x FY13 earnings. We  reckon, however, that this valuation is only achievable in a bullish market sentiment as the level implies a +1 Standard Deviation above the Trailing 6-year Forward Average PER.  As such, we prefer to peg our index valuation on a lower FY13 PER of 16.0x, representing the average of the Trailing 6-year Historical PER, to derive an index target of 1,670.  Combining both the Top-Down and Bottom-Up approaches,  we have also fine-tuned our 12-month index target to 1,700, implying 18.1x-16.3x PER on our FY12-FY13 earnings estimates, from 1,750 in the previous quarter.

In line with the consensus. Our FY13 earnings growth and Index Target are fairly in line with the consensus estimates. The consensus estimates that corporate earnings to grow 9.5% in the coming year and the FBMKLCI is targeted to achieve ~1,740.

1Q13 Sector Outlook. We are generally bullish on Banking, Non-Bank Financials, Oil & Gas and Power Utilities. We are also optimistic on Consumer F&B as we believe that value has emerged following the recent price corrections here. We have recently downgraded the Telco and Gaming sectors to NEUTRAL. We have a longer list of NEUTRAL and UNDERWEIGHT calls currently. Apart from the Plantation sector, which is rated as an UNDERWWEIGHT, the rest of the other sectors are rated NEUTRAL.

1Q13 Top Picks. Our Top 10 stock picks are AIRPORT (OP, TP: RM6.42), GAMUDA (OP, TP: RM4.29), KOSSAN (OP, TP: RM3.64), MAYBANK (OP, TP: RM10.40), NESTLE (OP, TP: RM72.10), P&O (OP, TP: RM1.60), SKPETRO (OP, TP: RM3.42), TM (OP, TP: RM6.50), UMW (MP, TP: RM12.37) and UOADEV (OP, TP: RM2.30).

Source: Kenanga