Malaysian equities should
trend higher in 1Q18, fulfilling the historically good correlation
between ringgit deposit growth and market performance. However, we
continue to expect a duller performance post GE14, which is widely
expected in Mar-Apr 18. We advocate a trading-oriented, mid- to
large-cap-biased investment strategy for 1Q18, with a focus on mega
infrastructure, E&E, tourism-related and selective GE14 plays.
WHAT’S NEW
• Sparkles to broaden in 1Q18. We continue to expect the broader Malaysian equities to market to trend up in 1Q18 (although there could be a temporary trend reversal in the FBMKLCI following the last few trading days’ hefty 3.0% window-dressing gains), amid the anticipation of GE14, firm domestic economic indicators, and ample global/domestic trading liquidity. Improved domestic liquidity is well proxied by the growth in ringgit- deposit growth since Sep 17 (+4.5% vs +0.5% for 2016).
• End-18 FBMKLCI at 1,860. While we continue to peg the market at an above-historical mean PE multiple, we assume the premium will ease in 2018 (+0.6SD vs 2017’s expected +0.7SD). Our bottom-up FBMKLCI target is 1,860.
• Strategy and investment themes. We advocate focusing on beta stocks in 1Q18 before turning defensive thereafter. Market conditions still generally favour mid-caps, which continue to sustain superior earnings growth. Multi-year investment themes include: a) mega infrastructure (benefitting the construction and building material sectors; large-cap construction companies clawing back 2017’s losses), and b) electronics and electrical (E&E), followed by the situational GE14 and tourism-related picks.
ACTION
• OVERWEIGHT building materials, construction, E&E, gaming, technology and utilities The construction and building material sectors will be supported by more contract awards and implementation of mega projects, with construction activities perhaps only reaching the peak in 2019. The defensive and high-yielding utilities should outperform post GE14. However, UNDERWEIGHT cyclical sectors like automobile and plantation.
• Our top picks include large-caps Bumi Armada , CIMB Group , Gamuda , Genting Malaysia , and Tenaga Nasional , and small/mid-caps Ann Joo Resources , Choo Bee Metal Industries , Gabungan AQRS , Globetronics Technology , Hume Industries , Serba Dinamik, Tune Protect , VS Industry and Yong Tai . Other notable picks include Magnum and YTL Power , while potentially interesting election trading plays include FGV and MRCB. However, SELL the pricey Hartalega Holdings (unsustainably stretched valuations) and UMW Holdings.
ESSENTIALS
• Improving domestic liquidity to help lift equities. The growth recovery of the ringgit deposit growth (+5.8% in Nov 17 from 2016’s +0.5%), an important indicator of domestic liquidity, should eventually lift equities – historically the FBMKLCI is positively correlated to ringgit deposits (0.85 correlation in the past 10 years). Foreign equity fund flows have reversed in December (RM860.3m) from September’s year low of RM737.3m net outflow.
• Near-term positives ahead of GE14: a) the FBMKLCI has generally yielded positive returns in the three-month periods up to the past election polling dates, b) robust headline economic indicators (refer to RHS table) which support the ringgit and investment sentiment, and c) minimal risk in a portfolio sell-down of Malaysian bonds in 2018, given the more moderate maturity schedule vs that in 2017.
• However, investment sentiment may turn cautious after GE14, reflecting continuing political uncertainties (which could lead to policy vagaries that affect corporate profits), and lack of domestic consumption growth sparks despite firm headline economic growth indicators. Corporate earnings could be revisiting the downgrade phase, albeit at milder magnitudes compared to the 2013-16 period (where growth was almost non-existent). Finally, Malaysia’s regional appeal remains mediocre, based on the expected PE-to- corporate earnings growth valuation matrix (see RHS), and taking note of the World Bank’s projection for Malaysia’s GDP growth to ease by 0.2ppt to 4.8% in 2019, slightly weaker than that of Thailand (-0.1ppt) and in contrast to the sustained GDP growth of neighbouring Indonesia, the Philippines and Vietnam.
• Improving domestic liquidity to help lift equities. The growth recovery of the ringgit deposit growth (+5.8% in Nov 17 from 2016’s +0.5%), an important indicator of domestic liquidity, should eventually lift equities – historically the FBMKLCI is positively correlated to ringgit deposits (0.85 correlation in the past 10 years). Foreign equity fund flows have reversed in December (RM860.3m) from September’s year low of RM737.3m net outflow.
• Near-term positives ahead of GE14: a) the FBMKLCI has generally yielded positive returns in the three-month periods up to the past election polling dates, b) robust headline economic indicators (refer to RHS table) which support the ringgit and investment sentiment, and c) minimal risk in a portfolio sell-down of Malaysian bonds in 2018, given the more moderate maturity schedule vs that in 2017.
• However, investment sentiment may turn cautious after GE14, reflecting continuing political uncertainties (which could lead to policy vagaries that affect corporate profits), and lack of domestic consumption growth sparks despite firm headline economic growth indicators. Corporate earnings could be revisiting the downgrade phase, albeit at milder magnitudes compared to the 2013-16 period (where growth was almost non-existent). Finally, Malaysia’s regional appeal remains mediocre, based on the expected PE-to- corporate earnings growth valuation matrix (see RHS), and taking note of the World Bank’s projection for Malaysia’s GDP growth to ease by 0.2ppt to 4.8% in 2019, slightly weaker than that of Thailand (-0.1ppt) and in contrast to the sustained GDP growth of neighbouring Indonesia, the Philippines and Vietnam.
MAJOR KEY INVESTMENT THEMES & FEATURED BENEFICIARIES
Company& Catalyst
(A) MEGA INFRASTRUCTURE
Ann Joo Resources
Substantially stronger 4Q17 earnings, coupled with the rise in the latest published domestic steel price. Significant rollout of mega projects by mid-18.
Gabungan AQRS
Potential contract wins in 1Q18 from ECRL and Sabah Pan Borneo Highway worth >RM1b.
Gamuda
Clinching a mega project subcontract award (ECRL, MRT3) will positively surprise amid market skepticism.
Hume Industries Cement prices should firm up significantly in 2018 as mega projects reach high construction activity levels.
Company& Catalyst
(A) MEGA INFRASTRUCTURE
Ann Joo Resources
Substantially stronger 4Q17 earnings, coupled with the rise in the latest published domestic steel price. Significant rollout of mega projects by mid-18.
Gabungan AQRS
Potential contract wins in 1Q18 from ECRL and Sabah Pan Borneo Highway worth >RM1b.
Gamuda
Clinching a mega project subcontract award (ECRL, MRT3) will positively surprise amid market skepticism.
Hume Industries Cement prices should firm up significantly in 2018 as mega projects reach high construction activity levels.
(B) E&E TREND RIDERS
Globetronics
Earnings doubling in 2018; further upside on potential commercialization of sensors under development.
Inari Amertron Good visibility in doubling revenues in 3 years, driven by RF packaging segment and Broadcom’s clientele.
VS Industry High growth visibility and potential contract wins to fill up capacities at its new plant (commencing mid-18).
Globetronics
Earnings doubling in 2018; further upside on potential commercialization of sensors under development.
Inari Amertron Good visibility in doubling revenues in 3 years, driven by RF packaging segment and Broadcom’s clientele.
VS Industry High growth visibility and potential contract wins to fill up capacities at its new plant (commencing mid-18).
(C) GE-14
FGV
Improved earnings via cost rationalisation could be another positive.
MRCB
Potential sale of EDL will significantly strengthen balance sheet and lift earnings outlook. Has historically traded up to +2SD during GE periods.
FGV
Improved earnings via cost rationalisation could be another positive.
MRCB
Potential sale of EDL will significantly strengthen balance sheet and lift earnings outlook. Has historically traded up to +2SD during GE periods.
(D) TOURISM-RELATED
Genting Malaysia
Normalisation of luck factor post 3Q17, opening of 20th Century Fox theme park by end-18.
Tune Protect
Strong turnaround story with relatively attractive valuations.
Yong Tai
Opening of Impression theatre in Mar 18.
Genting Malaysia
Normalisation of luck factor post 3Q17, opening of 20th Century Fox theme park by end-18.
Tune Protect
Strong turnaround story with relatively attractive valuations.
Yong Tai
Opening of Impression theatre in Mar 18.
(E) SELECTED CORPORATE DEALS
Magnum
Monetisation via potential listing of 6.3%-owned U-Mobile allows restoration of generous dividend payout.
Tropicana
Potential monetisation of various properties which collectively account for >30% of market cap.
Magnum
Monetisation via potential listing of 6.3%-owned U-Mobile allows restoration of generous dividend payout.
Tropicana
Potential monetisation of various properties which collectively account for >30% of market cap.
source UOBKayHian – 02/01/2018
