MARKET STRATEGY. Moving towards a liquidity-driven rally?

Transcription

1 MARKET STRATEGY 6 July 2012 Moving towards a liquidity-driven rally? Benny Chew, CFA benny-chew@ambankgroup.com Rationale for report: Market strategy Investment Highlights 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 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 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 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 M- REIT 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. AmResearch Sdn Bhd PP 12246/05/2013(032379)

2 Despite tight demand/supply dynamics, CPO prices corrected swiftly and steeply by 22% from its peak of RM3,619/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 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 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. AmResearch Sdn Bhd 2

3 TABLE 1: TOP PICKS Stock Rating Share price (RM) Fair value Mkt Cap. EPS (sen) PE (x) P/B (x) Div yield (%) as at 5 July 2012 (RM) (RM bil) FY11 /12F FY12/13F FY11/12F FY12/13F FY11 / 12F FY11 / 12F FY12 / 13F RHB Capital Buy CIMB Group Holdings Hold Tenaga Nasional Buy UMW Holdings Buy (UR) MBM Resources Buy IJM Land* Buy IJM Corporation* Buy Kuala Lumpur Kepong Buy (UR) Genting Plantations Buy (UR) IJM Plantations* Buy (UR) Telekom Malaysia Buy Axiata Group Buy SapuraKencana Petroleum* Buy Malaysia Marine & Heavy Engineering Buy Sime Darby Buy Top Glove Corporation Buy * Estimates are for FY12/FY13F and FY13/14F ** under review (UR) Source: Company data, AmResearch CHART 1 : IBES CONSENSUS EPS INTEGER EPS-FY12F EPS-FY13F Source: IBES AmResearch Sdn Bhd 3

4 CHART 2 : EPS ESTIMATES - FBM KLCI AND ALL SECTORS UNDER COVERAGE KLCI Earnings Growth (%) AmResearch All Sectors (%) Source: AmResearch TABLE 2 : RELATIVE PRICE PERFORMANCE OF REGIONAL ASIAN MARKETS Country Market Jan - Dec 2011 (%) 2012YTD (%) Malaysia FBMKLCI Index Indonesia JCI Index Singapore FSSTI Index Thailand SET Index Philippines PCOMP Index Korea KOSPI Index Taiwan TWSE Index Hong Kong HSI Index China - Shanghai SHCOMP Index Source: Bloomberg, as at 5 July 2012 closing AmResearch Sdn Bhd 4

5 CHART 3 : FOREIGN OWNERSHIP RATIO ON BURSA MALAYSIA (%) Jan-08 Jul-08 Jan-09 Jul-09 Dec-09 Apr-10 Oct-10 Jan-11 Jul-11 Dec-11 Feb-12 Source: Bursa Malaysia CHART 4 : FOREIGN INSTITUTIONAL TRADES ON BURSA MALAYSIA Buy value Sell value (RM bil) Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Source: Bursa Malaysia AmResearch Sdn Bhd 5

6 CHART 5 : LOCAL INSTITUTIONAL TRADES ON BURSA MALAYSIA 25.0 Buy value Sell value (RM bil) Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Source: Bursa Malaysia CHART 6 : INFLATION AGAINST OVERNIGHT POLICY RATE (OPR) Inflation (%YoY) OPR (%) Source: Bloomberg AmResearch Sdn Bhd 6

7 Published by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15t h F l oor B a ng un an A m B a nk Gr ou p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03) ( re sear c h) F a x: ( 03) Printed by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15t h F l oor B a ng un an A m B a nk Gr ou p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03) ( re sear c h) F a x: ( 03) The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 7