What to look for in 2H2017: Buy Gamuda, Inari, Globetronics and Classic Scenic (The edge)

Cover Story: Beyond Earnings Recovery (The edge Malaysia weekly)

What to look for in 2H2017

UOB Asset Management’s Lim says she will be watching the construction sector in the second half as major projects, especially rail-related infrastructure and the Pan Borneo Highway, are expected to be rolled out. “We anticipate strong construction job flows and this is expected to sustain interest in the construction sector. Identifiable contracts in the medium term include LRT3, the East Coast Rail Link, the Pan Borneo Highway and the remaining packages for MRT2.”

The construction sector is also on JP Morgan’s radar with Gamuda Bhd remaining the top pick due to its exposure to more than RM241 billion of rail-related infrastructure spending. Gamuda is also Affin Hwang IB’s pick for big-cap construction exposure, as is WCT Holdings Bhd.

Affin Hwang IB’s Chue says WCT is his top pick among mid-cap construction stocks with a 12-month target price of RM2.46. The stock is trading at RM2.07, indicating an upside of 18.8%.

“We believe WCT’s chances of securing more local contracts have improved after it secured its first MRT civil works package. The company pre-qualified to bid for the LRT3, West Coast Expressway and Pan Borneo Highway projects. The change in its major shareholder could accelerate its plan to monetise its assets, such as the potential injection of two malls into a newly listed real estate investment trust this year and reduce its high net gearing of 0.95 times. We expect a strong three-year core earnings per share compound annual growth rate of 50% in FY2017 to FY2019,” Chue says.

Another fund manager who prefers to remain anonymous says George Kent Malaysia Bhd is one of the mid-cap players in the sector that is likely to benefit from the infrastructure spending in the country.

Inari Amertron Bhd is one of Affin Hwang IB’s top picks as it believes the electronic equipment manufacturer’s expansion into the new iris infrared chip (IRIS IR) could provide additional growth for the group. “This [expansion into IRIS IR] and a steady improvement in the utilisation for its radio frequency business could drive our expected three-year forward net profit CAGR of 26%,” Chue says.

To an analyst with a local research house, Globetronics Technology Bhd is a semiconductor player that has consistently delivered good results. “The earnings visibility of Globetronics has improved, especially with clearer signs from its new sensor products, particularly light sensors. The risk of a turnabout in the sensor business is also small, considering that light sensors are part of a critical component for its customers.”

Hong Leong IB’s Low believes this may be a good time to revisit the glove players that have had a rather quiet year in comparison with the market. “The demand for gloves is still there and most of the glove players are very efficient in their management. The recent decline in raw material prices could re-ignite interest in the sector,” he says.

Tokyo Commodity Exchange rubber future contracts had plunged 85.4% from a one-year high of ¥367 seen at the beginning of the year to ¥198 at the time of writing.

An investment manager opines that other than gloves, the country’s largest condom manufacturer, Karex Bhd, appears attractive, especially after it fell 28.9% from a year ago. “I think it is a bottom-fishing strategy for Karex. With its distressed valuation, perhaps it’s a good time to accumulate for the long term. While the results are falling on the back of an intense pricing competition as well as sustained marketing expenses to build its own brand manufacturing (OBM) business, Karex has a strong track record.”

Consumer sentiment bottoming out

Other than construction, consumer sentiment has hit bottom, especially with the gradual recovery in the ringgit vis-à-vis the US dollar, says Lim.

Another fund manager agrees, naming OldTown Bhd as one of his top picks, given the expansion of capacity in its fast moving consumer goods business in China.

Classic Scenic Bhd, one of Insider Asia’s top picks and which is featured in Tong’s Value Investing Portfolio (Page 18), is another counter that has continued to record better earnings. In its latest report, Insider Asia remains sanguine about the prospects for the world’s largest manufacturer and exporter of high-end wooden picture frame mouldings. “We expect the company to maintain its growth momentum this year, underpinned by rising demand for its products on the back of the improving US economy and stronger housing market,” it says.

While the banking sector outperformed the market in the first half of the year, investors are optimistic that it will remain strong as it is a proxy for GDP growth. JP Morgan’s Mak says while the research house is more upbeat about banks, it will focus on quality banks, given the potential binary risk in a pick-up in non-performing loans. “We have removed CIMB Holdings Bhd, which has outperformed the FBM KLCI by 32% year to date, and replaced it with Public Bank Bhd. CIMB has outperformed Public Bank by 40% year to date, so we think it is time to make the switch.”

Affin Hwang IB, meanwhile, is positive about the Big Three, namely Malayan Banking Bhd, Public Bank and CIMB.

What to avoid in 2H2017

On what sectors to avoid, Lim says UOB Asset management is cautious about telecommunications because of the competitive pressures while valuations have not reached levels that are deemed attractive.

According to Mak, JP Morgan continues to avoid Maxis Bhd because of a potential negative dividend surprise and upcoming spectrum payments.

Malaysian REITs have also been downgraded by Affin Hwang IB to “neutral” for tactical reasons. “We are of the opinion that investors should allocate higher weightage to cyclical names in an economic upturn at the expense of more defensive and high-yield sectors like MREITs,” Chue says.

With oil prices staying below the US$50 per barrel level, investors are advised to be cautious about upstream oil and gas players. JP Morgan believes the sector is likely to see utilisation and rate pressures, given the limited activity in the space.

While optimism is riding high in Malaysia, other markets, especially American, are showing signs of fatigue. With the Dow Jones Industrial Average and S&P 500 having reached historical highs last month, analysts have turned cautious.

Bill Gross, co-founder of PIMCO — where he managed the world’s largest bond fund — and now a portfolio manager with Janus Henderson, warned last month that financial markets were increasingly at risk. However, bullish investors over here point out that the FBM KLCI is still 6.8% below its all-time-high close of 1,892.65 points in July 2014. Certainly, those on the investing roller coaster should remember that what goes up must come down. But for now, barring unforeseen circumstances, the benchmark index should maintain its upward momentum, supported by overall positive sentiment.