Middle East shake-up heightens inflation, geo-political worries
While we maintain our end-11 FBM KLCI target of 1,654 based on a forward PE target of 14.5 times, recent external issues have swayed our earlier market assessment to the following conclusions:
a) the market is unlikely to rally significantly above our year-end target, despite having plentiful positive local newsflow; and
b) recognition of a rising probability of a repeat of 2010’s scenario — a sluggish 1H followed by an uptrend in 2H — although we still expect the market to rebound, and we remain cautious that 2H would bear the brunt of inflationary impact (on major global economies’ hawkish interest rate policies and domestic demand).
Market jitters seeping in, as clearly evidenced by the selldown on momentum stocks when their earnings disappointed such as KNM Group (-16.4% on day after it revealed a quarterly loss) and Proton Holdings (-5.6% on day after it revealed a quarterly loss). Overall, there was fairly hefty profit-taking across the board, but particularly in the small-mid caps space.
Nevertheless, the FBM KLCI is still expected to outperform the regional bourses and also offers the comfort of limited downside via:
a) the ringgit’s year-to-date strength (+1.1% vs US dollar) suggests ample liquidity in the financial market; and
b) steady flow of announcements relating to mega projects (infrastructure, property development, O&G) and corporate developments in 1H11, leading up to the general election.
Strategy
Tactically overweight defensive stocks and shake off some of the illiquid smaller-caps stocks. Our favourite sectors are still banking, construction and O&G (eg Kencana), and selectively gaming (mainly NFO subsector), property (event-driven companies) and telcos.
Introducing select unshakeable top picks
Our top picks are more defensive and include resilient companies like Berjaya Sports Toto (BToto), CIMB Group Holdings Bhd, DiGi.Com and UMW Holdings Bhd. We think high dividend yielding plays with potentially extra capital management would greatly appeal,
and our favourite candidates include BToto and potentially Guinness Anchor Berhad. Meanwhile, AirAsia Bhd has been replaced as a top pick due to uncertainties tied to crude oil price. Despite our near-term prudence, the construction sector still provides good news-driven upside, and our favourite remains Gamuda Bhd (anticipated award of MRT construction job in April), and we are also reviewing our target price for Malaysian Resources Corp Bhd (potential to develop part of the federal government’s 3,300 acre Sungai Buloh land, ability to clinch more mega projects).
Rebound candidates for investors with more risk appetite or longer term horizon include UEM Land Holdings Bhd, AirAsia, Genting Berhad and WCT Bhd, and among the small caps, Petra Energy Bhd and Muhibbah Engineering (M) Bhd.
Values stirring up within mid caps for the more adventurous. An increasing number of small-mid cap stocks are now trading at attractive valuations again (single-digit prospective PEs), although we prefer to be selective at this juncture. Favourite stocks in this space include Sunway Holdings Bhd.
Review of 4Q10 reporting season
The 4Q10 reporting season broadly in line, but with improving breadth of positive surprises with 62% of results in line, 26% beating our expectations and just 13% disappointing.
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AirAsia surprised on the upside yet again, trouncing consensus and our expectations by 34% and 11% respectively. Full-year earnings beat our estimates mainly on marked-to-market gains in fuel cost assumptions. The banking sector also posted strong growth (albeit results were largely within our expectations), with stronger non-interest income, write-backs and lower impairment charges.
Negative surprises
Conversely, Proton and MISC disappointed. Proton slipped to a net loss of RM60.1m in 3QFY11, amid poor domestic sales in the December quarter and with rising costs at Group Lotus for its business plan.
Meanwhile, MISC’s 9MFY11 core net earnings accounted for only 52% of our previous full-year core net earnings forecast, dragged down by higher losses from both its liner and petroleum businesses. 2011 growth expectations largely unchanged, post results season, our 2011 market earnings growth forecasts are 19.5% and 13% respectively (2011’s core growth at 17% excluding unusual items). - by UOB Kay Hian, theedgemalaysia.com
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