OSK Research — SELL small, BUY big

OSK Investment Research expects interest to shift back to big caps this month as the results season goes into full swing, and has advised investors to look into these stocks, especially banks, for which it anticipates robust results.

The research house said the shift in its strategy for August was due to defensive small caps in the consumer, healthcare and education sectors that strongly outperformed in June and July.

“We therefore advise investors to look at big caps one month earlier than previously advised, especially banks, on which we remain overweight and expect a strong set of results.

“While there is still a chance of another retracement, we believe the market will at most take a breather before rallying towards our unchanged year-end target of 1,465 points for the FBM KLCI,” it said in its August outlook.

It said the sectors it expected to post strong results included banks, consumer-food, media, steel and utilities.

“As such, we drop most of our smaller cap names except for KPJ and instead include CIMB, Maybank and Axiata among our Top Buys as we expect all three to post strong 2Q results.
“After a long absence, we also reintroduce Supermax into our top buys although as a whole the rubber glove sector may post flat earnings as Supermax might be an outperformer in terms of both results and share price,” it said.

Reviewing the previous month, OSK Research said it had more downgrades in July as the market continued to race ahead and exceeded the previous year's high, thus limiting the upside on some of the counters under coverage.
It also raised the fair values of a number of stocks whose share prices had rallied but which it felt were still deserving of buy calls, such as Freight Management, KPJ Healthcare and Tan Chong Motors, it said.

“For July, three out of our top five buys outperformed the market namely KPJ Healthcare, Faber and CI Holdings.

“The laggards were TNB that disappointed on results and Hektar REIT as the listing of the two REITS, namely Sunway REIT and Capitamall REIT did nothing to excite the market,” it said.

OSK Research said that within the FBM100 in July, aside from Titan Chemicals which soared on news that South Korea’s Honam was buying out PNB and the Chao family’s stake for RM2.35 per share, the other gainers were either related to a resurgence in interest in consumer plays such as AirAsia, F&N, KPJ and QL Resources, or were linked to foreign interest returning to selected property plays such as UEM Land and IJM Land.

On the flip side, Berjaya Corp was the top loser as interest waned after it failed to secure a sports betting licence, it said.

JCY was also among the top losers on an increasingly negative outlook for hard-disk drive manufacturers, in part due to the strong launch of the iPad, it said.

The research house said the highlights for July were two significant corporate actions by prominent Malaysian companies, namely Genting Malaysia’s announcement it was buying the UK casino assets of Genting Singapore for RM1.7 billion, and secondly, T Ananda Krishnan’s plans to take his Measat Global Bhd and Tanjong plc private.

Moving forward, the research house said it was introducing two strategies for the remainder of the year, namely, buying bigger cap cyclical stocks and trading on infrastructure ideas.

“This strategy is not really new as we had highlighted in our Strategy report on March 23, and which we reiterated in our 2H10 Strategy report on June 8, that investors should first look at defensive smaller cap plays from April/May onwards until market stability returns in mid-3Q10.

“Then investors should switch towards the bigger cap and more cyclical sectors such as banks and oil & gas to catch the year-end rally. While many small caps are still buys, we feel that sentiment may likely shift back to the bigger caps for the next two to three months, especially as the 2Q results reporting season goes into full swing,” it said.

OSK Research said as the 2Q results reporting season goes full force in the second week of August, investors’ attention would switch back to the big caps, adding that if the results were in line or above expectations, there could be a big-caps rally.

“Our particular pick for a results-driven rally among the big caps are the banks, from which we expect strong results for 2Q driven by strong loans growth, an interest rate up-cycle and a buoyant capital market.

“Other sectors for which we see robust 2Q numbers are consumer — food, media (driven by the World Cup), steel and utilities. The sectors likely to report poorer 2Q results are gaming, rubber gloves, oil & gas, plantation and technology,” it said.

OSK Research said its second strategy relates to the resurgence in infrastructure-related news in the areas of mega construction and property projects.

It said that while any profits from such developments would likely only be recognised in 2011, there should still be plenty of news to sustain interest before then.

The research house also said that during its recent roadshows to Singapore and Hong Kong, investors there showed interest in three areas of infrastructure development in Malaysia.

These were namely the large-scale property development around the Klang Valley, such as what the EPF will be doing in Sungai Buloh within the Rubber Research Institute (RRI) land; the KL Mass Rapid Transit (MRT) project; and the progress in Iskandar Malaysia.

It said based on the above infrastructure developments, its three trading ideas would be Malaysian Resources Corporation Bhd (MRCB), UEM Land Holdings Bhd and MMC Corporation Bhd.

It said MRCB was currently a trading buy with limited upside to a target price of RM1.80 but a confirmed co-development of the RRI land would boost its target price to RM1.98.

“UEM Land — not rated by us but a revaluation of its landbank in Iskandar Malaysia could see its P/RNAV drop to close to market leader S P Setia’s multiples.

“MMC Corp — currently a trading buy with no upside to our target price of RM2.54. However, possible land sales in Iskandar Malaysia and securing the KL MRT would push up its target price to RM3.15,” it said.

This article appeared in The Edge Financial Daily, August 3, 2010.