- In the near term, we are taking a guarded approach on the
market because the passage of time to the 13th General Election (GE13) is closing in: GE13
must be held by June 2013. The perceived uncertainty over the outcome of GE13
with the associated aversion to risks would trigger a tactical shift in asset
allocation leading to a trimming of exposure to equity. Portfolio de-risking
would cast a downward bias on the market as fundamentals take a backseat in the
run-up to GE13. Our sense is that the
domestic portfolio funds would now be selling into strength as opposed to
buying on dips, implying that the market may drift lower in the coming
months.
- This de-risking maneuvering means that the domestic
institutional funds would be cashed up relative to benchmarks moving into 1Q
2013. The redeployment of freed capital would primarily depend of the outcome
of GE13. Our base case scenario is that the Barisan Nasional (BN) coalition
government would be returned to power. The uncertainty is whether the BN would
secure a stronger mandate compared to the previous General Election in 2008. A
reduced majority in the 2008 General Election was a negative surprise. It led
to a steep sell-down: the market collapsed by 9.5% in the immediate aftermath
before rebounding. Although a weaker mandate this time around would still be a
disappointment, it may not pose that big of a shock particularly with the
market already retracing ahead of GE13.
- As it is, our yield gap analysis (earnings yield less
10-year MGS yield) shows that the market’s yield gap has widened to its
five-year average of 3% (peak: 1.6%), and may continue to expand on further
index weaknesses given the current indiscriminate sentiment-driven selling.
Therefore, the eventual removal of election overhang post GE13 should precipitate
a market recovery as risk aversion eases to drive equity reweighting of
domestic portfolios. This would be the primary valuation driver as domestic
institutional portfolios account for more than 50% of trades on the exchange,
with foreign institutional funds at circa 25%. Foreign ownership has inched up
to just 23.6% (January 2012: 22.4%) despite incremental net buyings for most
parts of this year. The foreign ownership stood at 27% in January 2008 before
the onset of global recession.
- YTD, Malaysia has underperformed its ASEAN peers, rising
by 5% compared to 27%, 25%, 14% and 13% for the Philippines, Thailand,
Indonesia and Singapore; respectively. On the flipside, this relative
underperformance also underscores prospects of outperformance post GE13 because
its premium valuation has narrowed. The greater clarity on the continuation of
growth policies embedded in the ETP may spur stronger foreign interests. Under
our base case scenario, we set our end-2013 fair value for the FBM KLCI at
1,770 – based on an unchanged trend-average PE of 15x but with earnings rolled
over into 2013. The potential upside is about 10% from current the index level
of 1,600. Corporate earnings are projected to expand by 11.5% in 2013 (2012:
10%).
- The key assumption under our base case is that macro
fundamentals would hold up: GDP growing by 5% in a somewhat low inflation
environment (2-3%) in 2013. Thus far, domestic demand looks resilient with
private consumption and investment spending acting as a cornerstone for growth.
The swing factor on the downside is on the external scene where lingering
top-down concerns over the EU, the US and China may reassert themselves on
valuations particularly when the liquidity boost from QE3 runs its course.
- Our investment thesis centres on stock selections. We are
just starting to see a distinct disconnect between share prices and valuations,
particularly in select sectors/stocks – construction, building materials,
property, oil & gas, CIMB, that are perceived to be impacted in some ways
by the outcome of GE13. Despite the apparent value trap from the ongoing
tactical sell-down, our guiding principle in stock selections is franchise
value where companies would emerge from GE13 relatively unscathed regardless of
the political landscape.
- Construction stocks have been de-rated, with valuations
already at trough levels due to concerns about job flows. We retain our BUYs on
IJM and Gamuda because of their entrenched market positioning. Capex spending
in infrastructure – roads, railway and MRT –
should reaccelerate to kick-start previously delayed projects post GE13.
We expect more concrete newsflow on the new MRT 2 and 3 lines – where a firm
decision could be made by end-1Q13 ahead of the project rollout by end-2013.
Other catalytic projects include Langat 2 WTP, Gemas-JB double tracking, West
Coast Expressway, Tun Razak Exchange, and RRIM Sg.Buloh Redevelopment.
- Mah Sing’s ascendancy as a liquid proxy to the property
sector would not be derailed by the outcome of GE13 given its entrepreneurial
spirit, slick execution track record, brand equity and strong residential
presales.
- As in previous market downturn, share buy-backs are
gaining traction. Most notably, Ann Joo Resources (AJR) has bought back some
23m shares in recent months. Admittedly, its earnings outlook is somewhat
clouded by uncertainty over steel prices. We believe that the market may have
under-appreciated the strategic importance of its blast furnace plant – the
second blast furnace plant in ASEAN. Despite the near-term earnings headwinds, we
believe that valuation has bottomed from the assets perspective. At
RM1.33/share currently, AJR is trading at just 0.7x PB, even below its previous
trough of 0.9x PB in 2008. Lafarge Malayan Cement (Lafarge) is a BUY in view of
the strong prospects of high dividends, with the company just turning debt-free.
- We expect CPO prices to recover in 2013F underpinned by
draw-down of inventory and a large price discount to soybean oil. We believe
that palm oil exports would be supported by the revised export tax rate system
in Malaysia and soft soybean production in the US. The revised export tax rate
system in Malaysia, which would be implemented from 1 January 2013 onwards,
would give upstream players more options to sell their CPO. Upstream players
would be able to export their CPO apart from selling them to the local
refiners. Although soybean production in South America is expected to expand,
this would only come from 2Q2013 onwards. As such, importers would have to buy
more palm oil in the meantime due to the shortage of soybean from the US.
- We like Genting Plantations for the strong volume of FFB
production coming from Indonesia. The group would record a double-digit
percentage expansion in FFB output in Indonesia in FY13F on the back of an
increase in mature areas. For the group, we expect FFB production growth of 20%
in FY13F after a 3% deficit in FY12F.
- The banks’ leading loan indicators have remained slow in
the past few months, both from the household and corporate segments. We foresee
loans growth to taper off slightly to 8.0% in 2013, from 10.1% in 2012. The
latest bank results indicated that earnings were boosted by impaired loan
recoveries. Our top pick is RHB Cap, given its cheap valuation, with the final
piece of its Indonesian acquisition falling in place soon. CIMB’s share price has been lacklustre but we
are unmoved. CIMB has demonstrated its ability to boost regional reach with
strong growth from its Indonesian bond market income and treasury activities.
It also offers the most comprehensive banking infrastructure. At 1.8x PB, CIMB
looks undervalued relative to its peak of 2.3x PB.
- Tenaga is a BUY with a DCF-based fair value of
RM8.15/share. While the commencement of the Lekas regassification plant in
Malacca has been deferred to June next year, the continuation of the current
fuel cost sharing mechanism with Petronas and the government provides earnings
visibility over the next 6 months. Also, falling global coal prices translate
into a leaner cost structure, which cushions the net impact of any potential shortfall
in natural gas deliveries from Petronas. And, the regulators’ continued support
for a fuel-pass through mechanism undergirds the group’s longer term margin
profile in the event of any revisions in natural gas and electricity prices
next year. At RM6.90/share currently, Tenaga is still trading at a depressed
P/BV of 1x despite its improving operating dynamics.
- On the oil & gas front, the recent lull in project
rollouts due to project deferrals, re-tendering exercises and
design changes should fuel a pent-up resurgence of fresh
contract flows post GE13. The RM8bil hook-up and commissioning umbrella
contract, and over RM1bil fabrication contracts for the Malikai tension leg
platform job are expected re-catalyse the sector. Next year, the rollout of the
second phase of the North Malay basin gas cluster project, which will involve a
large central processing platform at the Bergading field and multiple satellite
well-head platforms are added-kicker to share prices. Our sense is that there
would be renewed focus on RAPID, Pengerang and Tanjung Piai in Johor.
- 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.
Our top pick is SapuraKencana Petroleum, which will be completing its
value-accreting and growth transforming acquisition of new tender rigs early
next year. We also like Dialog Group, which is set to refuel its growth trajectory
with its recent 50%-equity participation in the US$1.2bil Bayan enhanced oil
recovery project. Benalec is a cheaper proxy to the oil & gas sector. It
has been awarded the concession to reclaim some 3,485 acres in Tanjung Piai and
1,760 acres in Pengerang. We expect the group to secure off-takers soon which
should underpin our conviction in the high development potential as an oil
& gas hub on both of these sites.
- Glove manufacturers are turning more optimistic and
expecting volume growth of 8%-10% in 2013. To cash in on this recovery in
demand, the top four glove manufacturers are accelerating their capex by a
further 47% in 2013 (2012: +80%). Coupled with an improving operating
environment, we expect EBITDA margins to continue expanding going forward. We
like Top Glove as its position as the largest and “purest” natural rubber glove
manufacturer makes it the prime beneficiary of easing latex prices. With high
industry operating leverage, the enlarged revenue base will ensure profits continue
on an upward trajectory. Top Glove is currently trading at an undemanding PE
multiples of 15x to 16x FY13F and FY14F earnings, midway its 4-year historical
PE band. Our fair value of RM6.50/share is based on a higher target PE of 19x
FY13F EPS (0.5SD above its mean).
- Despite the recent sell-down on telco stocks, we remain
NEUTRAL on the sector given rising regulatory risks and on-going competitive
pressure in the market. More importantly, we see rising earnings risks, as the
fight for market share in a relatively mature telco market is starting to
impact service pricing.
- Telekom remains a HOLD given that it is most at risk from
a regulatory standpoint; in particular, broadband access pricing. Our
projections (as well as consensus, we believe) have yet to factor in risks on
this front. DiGi remains a SELL as its key segments are most at risk of
competition from Maxis and U-Mobile, while valuation remains elevated at 11x
FY13F EV/EBITDA. Our only BUY is Axiata for potential acquisitive growth and successful
execution of voice resuscitation. Axiata also stands to surprise on the
dividend front, while valuation remains very attractive at 6x FY13F EV/EBITDA,
relative to the sector average of 9x.
- We maintain NEUTRAL on REITs given the significant yield
compression and rich valuation. The yield spread over the 10-year government
bonds for the Malaysian retail REITs has now narrowed to 150bps, versus 380bps in
Singapore. At current levels, the yield for both CapitaMall Trust and Pavilion
REITs are just a tad above 5%, which is even lower than CapitaMall Trust
Singapore’s distribution yield of 5.4%. Furthermore, the risk free rate in
Singapore is lower than Malaysia. Our
top pick is PavREIT (HOLD, FV: RM1.33/unit) underpinned by a strong pipeline of
assets – likely to kick-in as early as FY14. This is also justified by the
recent launch of Fashion Avenue and 67% of NLA up for renewal next year to lift
rentals. Dividend yield is estimated at
4.5% and 5.3% for FY12F and FY13.
- We believe transformational growth is also taking place in
UMW and MBM. The former is fast morphing into a dominant oil & gas player
with the associated lift to PE. MBM is emerging as a major autoparts 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.
- We like the casino sector for its resilient profitability.
Between Genting Bhd and Genting Malaysia (GenM), we prefer the latter for its
earnings visibility and growing overseas positioning. In Malaysia, GenM’s
earnings are expected to be driven by growth in VIP patronage from China. In
the longer-term, the expansion of First World Hotel, which would be completed
at end-FY14F, would underpin profits in Malaysia. Newsflow for GenM would come
in the form of casino liberalisation in Miami and New York. Lawmakers are
envisaged to start debating on the legislation of casinos in Miami and decide
on the number of full-fledged casinos allowed in New York in early-2013. GenM
already has a head-start in both jurisdictions due to its purchase of
properties in Miami and operations of “Resorts World New York” in Queens. GenM
also has a healthy balance sheet as reflected in its net cash of RM967mil as at
end-Dec 2011.
Source: AmeSecurities
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