From the Wall Street crashes in October 1929 and October 1987, as well as the panic selling between September and October 2008 following the failures of several large banks, the two months have remained a nagging thorn in the minds of investors and dealers alike.
Given the current global uncertainties, is the local stock market headed for gloom or will it be Sweet September?
While agreeing that the September-October period often spelt gloom for the local bourse, analysts were optimistic that stocks on Bursa Malaysia Securities would fare well next month.
MIDF Research head Zulkifli Hamzah and Inter-Pacific Research Sdn Bhd head Anthony Dass projected a gradual upswing in the equity market with the first objective of 1,450 for the FBM KLCI this year.
Historically, September had been a weak month for the FBM KLCI, they said.
Zulkifli said in the last 15 years, the mean monthly return for September was a negative 1%, and that the month was the worst period for the KLCI in four straight years from 1999 to 2003, with more than a 10% decline.
However, he said he was looking forward to a “Sweet September”, adding that although it was hard to discard the psychological aspect of the market, there were reasons to expect that the momentum of the current upward trend may continue into September.
Among them, he said positive sentiment towards equities globally should continue into next month, as corporate earnings even in the US had proven to be resilient.
“The risk of interest rates rising in the US, which will be bad for equities, is still low. The earliest that we expect the Federal Reserve to raise interest rate would be in 4Q11,” he said.
Zulkifli also said weak US economic numbers due out in September, especially on unemployment, had already been discounted by the market.
The adverse impact of the all-important non-farm payroll numbers had been pre-empted by the weekly jobless claim figures, and therefore, the market would not be caught by surprise this time around, he said.
“Valuation is relative, and after the 2Q10 earnings results season, we expect upward revisions in earnings which make the markets more attractive. We do expect the FBM KLCI to correct any time soon. When it happens, we expect only a mild correction,” he said.
Anthony said based on historical trend, the local bourse had been rather mixed in the month of September.
“The market did exhibit a trend of dullness in September versus August between 2000 and 2003, while on the other hand, it showed a positive trend from August to September between 2004 and 2009, except for 2008 due to the global crisis,” he said.
Anthony said he was optimistic that the local bourse would continue to exhibit a positive trend in September, driven by a variety of factors, including positive economic developments in Southeast Asia, room for the ringgit to appreciate further and a pre-budget rally.
Meanwhile, Maybank Investment Bank Bhd head of retail research and chief chartist Lee Cheng Hooi said traditionally, the September-October period every year was a turbulent one for most equity markets worldwide.
“As such, we favour tactically price-defensive as well as industry defensive counters in times like these. If the stocks have an added feature of high dividends — then this is an extra bonus,” he said.
OSK Investment Research head of research Chris Eng said the market performance in August was within their expectations, with the big caps doing rather well.
“The banking and casino sectors did rather well in terms of share price. Big caps like Tenaga, Genting and Axiata also posted some really good results,” he told The Edge Financial Daily, adding that he was positive for the month of September.
His top picks for August were Malayan Banking Bhd, CIMB Group Holdings Bhd, Axiata Group Bhd, Supermax Corporation Bhd and KPJ Healthcare Bhd.
“These counters did well both in share price and also posted excellent results,” he said.
Areca Capital Sdn Bhd CEO Danny Wong said August was a good month for Bursa as it outperformed the regional and US markets.
“Most of the corporate earnings were on the upside. We have also seen higher gross domestic product (GDP) coupled with the central bank’s liberalisation move, which boosted confidence in the market,” he said.
The banking sector and cash-rich corporations were some of the top performers of the month, said Wong, following Bank Negara’s foreign exchange liberalisation moves.
“The central bank’s move to normalise interest rate is also seen to be more likely than before, and this would benefit the financial sector. Cash-rich corporations with large deposits would also stand to see higher yield,” he said.
For the mid-term, Wong is upbeat on the market, especially for the banking sector, where he expects stronger earnings ahead.
“The upcoming 10th Malaysia Plan budget should create some excitement in the equity market. The economic slowdown in Europe and US, and to some extent China, would be as bad as the previous economic crisis. This is a good chance for Malaysia as the influx of funds will be directed here and Asia instead,” he added.
For the month of August (up till Aug 27), the FBM KLCI has seen a hefty gain of 50.1 points or 3.7%, closing at a three-year high of 1,411.05.
The ringgit has seen surging as well, helped by Bank Negara’s liberalisation moves and the inflow of foreign portfolio funds, which now own over 25% of Malaysian government securities (MGS). At RM3.145 to the US dollar, the ringgit is near a 13-year high.
The large presence of foreign funds in MGS is often a precursor to a better stock market performance, says an analyst. He says the funds often move from the bond to the equity market later to get better returns.
Contrary to historical expectations, August has been an amazing month for the local equity and currency markets.
Will an “Amazing August” lead to a “Sweet September”?
Four heads of research — OSK Research’s Chris Eng, MIDF Research’s Zulkifli Hamzah, Inter-Pacific Research’s Anthony Dass and Maybank Investment Bank’s Lee Cheng Hooi (who provides a technical chartist perspective), plus Areca Capital’s CEO Danny Wong shared with The Edge Financial Daily their top five stock picks.
MIDF Research head
Zulkifli Hamzah
Malayan Banking Bhd
We have a target price of RM9.20 for this heavyweight, based on 15 times PER for FY11. We continue to like the stock for its (1) stronger loan growth from its domestic operations and BII, (2) higher international profit contributions to the group, (3) improving asset quality, (4) improving investment banking pipeline deals riding on recovery of capital market, and (5) expected strengthening of capital position through dividend reinvestment plan to improve its capital ratios and support expansion plans.
Bursa Malaysia Bhd
As a proxy of Malaysia’s growth story, investors cannot go wrong with Bursa Malaysia. Our conviction is premised on (1) stronger equity market performance, increasing both equity trading volume and value, (2) derivative trading revenue expected to improve after migration works of derivatives products and trading activity onto the CME Globex trading platform are completed for CPO futures to be traded internationally, (3) greater internationalisation of markets, and (4) consistent dividend payout exceeding 90% in the past two years.
SapuraCrest Petroleum Bhd
SapCrest is a laggard but carries an attractive growth story, given its sizeable order book of RM15 billion (providing strong earnings visibility), ownership of strategic assets via its pipe-lay barges and Seadrill rigs, proven track record with both NOCs and Petronas and has thus far been a key beneficiary of Petronas contracts.
Its position as one of only a few Malaysian O&G players with ownership stakes in Installation Pipeline Facilities assets (which are vital for deepwater and subsea works) further cements its value.
At present, SapCrest is trading at 12.2 times FY11 earnings, a 12.8% discount to our PER average of 14 times for FY11, but within its five-year PER band of 7.6 times to 20 times, suggesting upside potential for the stock.
C.I. Holdings Bhd
FY10 EPS for C.I. Holdings is likely to be more than 26 sen, which is higher than our estimate of 24.9 sen. Moving forward, we believe C.I. Holdings’ earnings momentum is well supported by encouraging sales of the “Tropicana Twister”, which is the No 1 ready-to-drink fruit juice in Malaysia with a market share of about 35%.
Though launched less than three years ago (March 2008), the product is already a market leader. Relationship with PepsiCo is also excellent as evidenced by the recent bottling contracts renewal for another 10 years until June 30, 2020.
Target price for C.I. Holdings is conservatively pegged at RM3.40 at 12.5 times FY11 PER, providing an upside of more than 17% (including 2.8% dividend yield).
Sime Darby Bhd
We currently assign valuation target of circa 18.5 times forward earnings to large-cap companies in the plantation sector — IOI Corp and KL Kepong — due to the positive equity market undertone.
This target was premised on 2/3rd-percentile of historical PER range at one standard deviation. Hence, we reckon a similar valuation target is warranted for Sime Darby. At 18.5 times of its FY11 earnings, we arrived at a target price of RM8.40. We thereby reiterate our neutral recommendation on the stock with a target price of RM8.40.
Inter-Pacific Research head
Anthony Dass
Tan Chong Motor Holdings Bhd:
(outperform; TP: RM6.10)
Our earnings assumptions for FY10 and FY11 have been revised upwards by 10% and 8.1%, respectively. Hence, we have raised the target price to RM6.10 (previously RM5.60) based on FY10 EPS of 41.1 sen and PER of 14.8 times.
Tan Chong’s Nissan’s 2QFY10 sales volume swelled by 11.6% year-on-year backed by strong growth from the Grand Livina, Sylphy and Navara.
By November 2010, Tan Chong will be launching the Nissan Teana, while in August it should capture the sales of the newly launched Nissan X-Trail. Currently X-Trail’s monthly sales is just under the 100 mark.
MBM Resources:
(outperform; TP: RM4.30)
We revise upwards our target price to RM4.30 (RM3.30 previously) based on FY10 forecast EPS of 48.5 sen and PER of 8.9 times. MBM’s remarkable improved performance for 1HFY10 was attributed by (1) higher sales from additional dealership for Volkswagen, Mitsubishi and Hino; (2) margin expansion on greater economic scale as well as lower imported cost stemming from the strengthening ringgit; and (3) lower base effect in 1HFY09.
MBM’s financial position continued to strengthen with its net cash position improving substantially to 92 sen per share in 2QFY10 from 46 sen cash per share in 1QFY10. Also, given the recent tie-up between Volkswagen and DRB-Hicom, we believe MBM will benefit from its Volkswagen distributorship via Federal Auto.
Sunway City
(outperform; TP:RM4.70)
Sunway City’s injection of its RM3.7 billion worth of investment assets into Sunway REIT following the REIT’s listing has unlocked underlying value of the properties. Retaining 37% equity in the investment trust as well as property management of the assets preserved future income from the properties.
We are convinced of SunCity’s prospects considering (1) unbilled sales of RM743 million (2) target launches raised to RM1.76 billion driven by encouraging sales of RM424 million in 1HFY10, and (3) launching of Sunway Velocity, an integrated development worth RM3 billion in 2HFY10.
Our fair value of SunCity is pegged at RM4.70 based on a PER of 12 times and EPS of 39 sen. Our target price is a 28% discount from our estimated RNAV per share of RM6.51.
Malayan Banking Bhd
(outperform; TP: RM9.34)
We reiterate outperform with target price of RM9.34 based on the Gordon Growth Model, using a WACC of 10.43%, with P/BV of 1.8 times FY11 and ROE of 14.8% FY11. We like Maybank due to stronger FY10 net interest income of RM6.77 billion and lower interest expense; increase of non-interest income underpinned by surge in investment and trading, commissions, service charges and fees, foreign exchange and net premium written; stable loans/deposit ratio at 86.8% in FY10 from 87.4% in FY09; and good dividend payout of 76.5% (subject to dividend reinvestment plan).
Parkson Holdings Bhd
(outperform; TP: RM6.50)
We reiterate outperform with target price of RM6.50 based on sum-of-parts (SOP) valuation, with CY11 EPS of 35.4 sen and PERs of 10 times for Malaysia; 12 times for Vietnam; 22 times for China; and 10 times for China, excluding stores. We like Parkson for its unique position which targets the mid-high target market spanning its presence in China, Malaysia and Vietnam with strong same-store sales growth (SSSG) of 11.3%, 11% and 26.9% in China, Malaysia and Vietnam, respectively in FY10. Going forward, we believe that its new store openings planned for FY11-FY12 (China: 5-6 stores per year, Malaysia: 2-3 stores/year, Vietnam: 1-2 stores/year) bode well for the company.
Maybank Investment Bank head of retail research and chief chartist
Lee Cheng Hooi
PLUS Expressways Bhd
Malaysia’s largest toll operator with steady cash flow broke to a new high of RM4.17 recently. Posted 1H10 net profit of RM619 million. Discounted cash flow-based (DCF) house target price is RM4.30. Expect traffic to stay robust in 3Q10 (September Hari Raya balik kampung) and 4Q10 (year-end school holidays). Chart-wise, RM4.25 and RM4.60 target price for PLUS’ upside.
QL Resources Bhd
Yet another fine quarter with net profit growth of just over 20% year-on-year in 1Q. It also surprised by emerging with a 23.29% associate stake in another poultry player, Lay Hong. Fundamental buy on QL with RM5.10 DCF-based target price. Chart-wise, we are looking at RM4.85 initially and then higher at RM5.13, in sync with our fundamental analyst.
Lay Hong Bhd
Sold a 23.29% stake to QL. It can produce 1.5 million eggs a day and five million broilers per year. Nuggets and burgers are sold under brand names of Nutriplus and Wise Choice. Maybank IB does not cover Lay Hong on the fundamentals. Chart targets of RM2, RM2.31, RM2.61 and RM2.82.
Cocoaland Holdings Bhd
Fraser & Neave Holdings Bhd agreed to take a 23.1% stake in Cocoaland to expand in the food business as F&N gets set to end a bottling agreement with The Coca-Cola Co. Maybank IB does not cover Cocoaland on the fundamentals. Chart targets of RM3.13, RM3.38 and RM3.64.
Tradewinds (M) Bhd
It reported its 2Q ended June 30 figures recently. EPS rose from 4.36 sen to 29.88 sen. It also declared a five sen dividend. Pre-tax profit rose from RM20.825 million to RM155.653 million. Maybank IB does not cover Tradewinds on the fundamentals. Chart targets of RM4.09 and RM4.49.
OSK Investment Research head
Chris Eng
Malayan Banking Bhd
As the country’s leading domestic franchise, the group is well positioned to ride on the economic recovery. Its previous conservative provisioning, improving asset quality, strengthening capital base and larger regional footprint will propel earnings.
Post-upwards earnings revision, we are raising our fair value from RM8.50 to RM9.25 (2.2 times FY11 price-to-book value or PBV), underpinned by higher sustainable return on equities (ROE) of 14.8%. The stock is cheap at 1.9 times PBV relative to CIMB’s 2.1 times and Public Bank’s 3.6 times.
The group remains relatively well capitalised, with its core equity, Tier 1 and risk weighted capital ratio (RWCR) at 8.6%, 11.06% and 14.7% respectively. This will give more scope for future dividend upside as management has alluded that future payouts may exceed 60% if Basel III capital requirements prove to be less stringent than expected.
CIMB Group Holdings Bhd
We believe that earnings will outpace consensus estimates for the third consecutive quarter, underpinned by:
1) lower sequential loan loss provisions,
2) further traction in CIMB Niaga’s earnings growth, and
3) recognition of various one-off gains.
Post-earnings revision, we are raising our FY11 ROE from 16.2% to 16.9%, which nudges up our TP of RM7.95 to RM8.70 (2.4 times FY11 PBV and 16.9% ROE). Given the growth emanating from its regional synergies and strengthening of its Indonesian operation (35% PBT contribution to group), we think that current valuations are relatively undemanding at 2.18 times FY11 PBV vs Indonesian banks’ average exceeding 2.5 times, and Public Bank’s 3.6 times.
Axiata Group Bhd
We raise our target price for Axiata from RM4.80 to RM5.50 after revising our FY10-12 forecasts upward by 12%-24%. This follows the solid 2Q10/1HFY10 results announced which trumped both our/consensus expectations, driven by the impressive performance of XL/Celcom and a rejuvenated Dialog. The revelation of a fresh dividend payout policy should boost the stock’s appeal in addition to the superior three-year earnings CAGR of 22%.
KPJ Healthcare Bhd
Starting with two hospitals when it was listed in 1994, KPJ has transformed into the nation’s largest private healthcare provider and is increasingly seen as the sector’s benchmark as competition rises.
Armed with its well-mapped-out expansion plan, KPJ is in great shape to defend its lead as well as sustain its growth momentum. We are upgrading our FY10 and FY11 earnings by 6.5% and 6.3%, respectively, after including earnings contribution from Sabah Medical Centre and a slightly higher margin assumption. We maintain our buy recommendation at a higher TP of RM4.62 from RM3.92 previously after rolling our EPS from FY10 to FY11 at 18.5 times PER.
Supermax Corporation Bhd
Supermax’s 1HFY10 results were within consensus and our expectations, making up 52% and 50% of the FY10 forecasts. The 2QFY10 revenue of RM234.8 million was 6.4% higher quarter-on-quarter (q-o-q), again mainly due to higher selling prices of gloves, as the company passed on the higher latex cost to customers.
We maintain our buy recommendation on Supermax with an unchanged target price of RM9.11, based on the existing PER of 15 times FY11 EPS.
We continue to like the company’s ideal product mix (more than 70% natural rubber gloves) targeting the right markets in developing countries. Going forward, the company is poised to be one of the biggest beneficiaries of rising hygiene standards in developing countries such as China and India as health awareness grows.
Areca Capital Sdn Bhd CEO
Danny Wong
Malayan Banking Bhd
Maybank’s strong earnings showed that it has successfully written off the debt that arose from the acquisition of Bank Internasional Indonesia (BII) and MCB Bank of Pakistan. Maybank would also benefit from the floating rates of loans, and advance in the acquisition of regional business. It would definitely go big when things get better.
CIMB Group Holdings Bhd
I am bullish on its investment banking activities as I anticipate a few mergers & acquisitions (M&As) in the mid-term. There are possible corporate restructuring exercises in the future, including privatisation of companies like Measat and Tanjung Plc. When that happens, the companies would most likely turn to CIMB.
AMMB Holdings Bhd
AMMB’s management has proven to be efficient, while posting some impressive operating profits, with good earnings compared to its book value.
Tenaga Nasional Bhd
Tenaga has been a laggard but could see a re-rating up sharply during the next tariff review.
Genting Bhd
Genting would benefit strongly from its new Resorts World Sentosa in Singapore. It posted strong 2HFY10 earnings and is expected to do better for the second half of the year as more attractions are opened there.
Written by Surin Murugiah & Max Koh
This article appeared in The Edge Financial Daily, August 30 2010.
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