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8/3/2019 Invesment Strategy 2012
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EXECUTIVE SUMMARY
A NEUTRAL outlook. We have a Neutral outlook on the Malaysian market going into 2012 as the combination o
uncertain growth outlook in the US and Asia coupled with a possible recession in Europe cloud the prospects fo
strong earnings growth locally. While we see Malaysia likely to avoid slipping into a recession, the deficit reductio
exercises undertaken by Eurozone economies may well tip their slow growing economies into a recession. In an
case, for Malaysia, we see earnings growth slipping to between mid single digits and low double digits, a pale shado
of what it was in 2006, 2007 and 2010 when earnings growth came in between 20 to 30%. Newsflow on development
surrounding the handling of sovereign debt in Europe and the US will also likely lead to volatile markets worldwide. A
such, in the short term, we are faced with volatile markets which will likely give way to a dampened economic outloo
We advise investors stay cautious into mid 2012 and focus on Defensive sectors such as Consumer, TelcoHealthcare and Media. Our 2012 KLCI fair value is 1466 pts based on a PER of 13.5x or 1 standard deviation below
the historical average of 16.6x given the uncertain market conditions.
BUT opportunities to TRADE. That being the case, despite our overall Neutral stance, the volatility expected shou
give rise to plenty of Trading Opportunitites. We advise investors to Trade on Cyclical sectors such as Banks, Oil &
Gas and Construction as the market dips or rallies strongly. The trading strategy to adopt is:
x Buy when the KLCI falls towards the 1300 pts level as the broader market then offers a 10% upside to ou
2012 fair value. As we do not see Malaysia entering into a recession, we do not see an earnings contractio
and value should emerge closer to 1300 pts. A combination of still positive earnings growth, low foreig
shareholding and the Economic Transformation Programme should mean Banks (leading the economy
O&G and Construction (beneficiaries of the ETP) will present good entry points at that level of the market.
x Sell when the KLCI rises towards the 1500 pts level as the market will be overpriced then. We still se
fundamentals remaining weak. Although the 3Q2011 earnings season may have seen a slight improvemen
q-o-q, most of the improvement was focused on the Small caps where analysts have had time to pare dow
forecasts. On the flipside, Big caps continued to slide with the potential for more downgrades in the coming
quarters.
7 sectors to focus on. Given our generally defensive outlook, investors are advised to focus on the Consumer, Telco
Healthcare and Media sectors as mentioned above. At the same time, when trading opportunities present themselve
Banks, O&G and Construction should come into play. To note that we are only Overweight on 7 sectors, Neutral on
and Underweight on 2 sectors.
Top Buys reflect this overall strategy. In terms of our Top Buys, they reflect this overall strategy. 6 of our Top Buy
namely Axiata, PetGas, Telekom Malaysia, QL Resources, KPJ Healthcare and Media Chinese reflect our Defensiv
Strategy while 2 others are from our Alternative Defensive Buys namely AirAsia and TRC Synergy. While coming from
the cyclical sectors of Transport and Construction, we believe these 2 companies can leverage upon falling fuel price
and MRT contract certainty to warrant defensive investment in 2012. Finally, we choose Maybank and Dialog as ou
Top Trading Buys to round off our Top 10 for 2012.
TOP BUYS BIG CAPSStock Price Target Mkt Cap Volume PER (x) FY0 FY1 Rel. Performance % P/NTA Rat
RM RM RMm '000 FY1 FY2 ROE % DY % 1-mth 3-mth 12mth (x)
Maybank 8.25 9.60 61,693.5 8,695.2 12.5 12.1 14.7 7.6 -0.6 -4.9 -5.6 1.7 BU
Axiata 4.83 5.60 40,885.4 15,357.4 14.8 13.5 9.6 3.9 -2.6 -2.9 9.5 2.1
Petronas Gas 13.22 15.52 26,040.0 1,161.9 18.2 17.4 17.5 3.8 0.8 0.7 23.0 2.8 BU
TelekomMala sia
4.23 5.15 15,132.4 8,294.1 27.9 23.3 16.4 0.1 -0.8 5.9 40.4 2.2 BU
AirAsia 3.65 4.57 10,139.3 12,641.1 11.6 9.6 29.4 - -3.7 10.0 43.4 2.6BU
TOP BUYS MID / SMALL CAPSStock Price Target Mkt Cap Volume PER (x) FY0 FY1 Rel. Performance % P/NTA Rat
RM RM RMm '000 FY1 FY2 ROE % DY % 1-mth 3-mth 12mth (x)
Dialog Group 2.44 3.66 4,881.5 8790.0 25.5 21.5 28.7 1.4 -2.9 -5.3 66.3 6.7 BU
QL Resources 2.95 3.62 2,454.4 584.7 17.5 14.9 16.5 1.5 3.1 -2.1 4.7 2.9 BU
KPJ Healthcare 4.20 5.21 2,443.4 908.0 19.3 15.9 20.7 3.4 0 -6.1 17.1 2.8 BU
Media Chinese 1.10 1.47 1,856.0 694.9 10.0 9.3 14.4 6.0 8.8 -1.4 30.8 1.8 BU
TRC Synergy 0.62 0.76 287.7 886.4 13.9 9.1 5.5% 2.1% (3.7) 4.4 9.5 0.9 T. B
Share price as at 18 November 2011
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Chris Eng+603 9207 [email protected]
MARKET OUTLOOK
The Research Team+603 9207 [email protected]
2011 Review A Year of Two Halves
The good half. While the first half of the year was marked by volatility, especially in 1Q, thing
generally did not look as bleak as in the second half. During that half-year period, there was muc
optimism that the global economy would grow faster than in 2009. All this while though, th
European debt crisis was at the top of everyones mind. During this period, Malaysias FBM KLC
and some other Asian market benchmarks such as the Jakarta Composite Index (JCI) and th
Philippines Composite Index (PCOMP), touched all-time highs fuelled by optimism of improvin
growth global prospects.
Inflation, Arab Spring led to a shaky start. The KLCI got off to a rally at the start of the year bu
fears of rising inflation in East Asia quickly sapped the strength of the run-up. Chinas 4Q201
economic growth of 10.3% raised fears that its runaway economic growth would be followed by
hard landing. Aggravating these fears was the move by the Chinese government in February t
move up its benchmark interest rates. Soon after, the attention shifted to the Middle East, where w
saw the Tunisian government being toppled first, followed by the fall of the Egyptian governmen
Revolts spread to Libya, Yemen, Syria, Algeria and Bahrain, raising concerns over the overa
stability of the Middle East. Even as trouble started to brew in that region, Japan was hit by a tripl
disaster in the form of the Tohoku earthquake, tsunami and subsequent nuclear leakage at th
Fukushima power plant. This rattled the KLCI all the way until the end of March, after which th
local bourse took off with a bang in April as local factors began to have more bearing on thbenchmark index. However, selling intensified ahead of the Sarawak state elections, where th
Opposition parties made some headway. After this blip, the KLCI started to pick up strength in Ma
as banks raised interest rates while RHB Capital shares shot up on talk that CIMB and Mayban
were vying to take over the group. Despite the uncertainties in Europe, the first half general
ended on a positive note, with the KLCI charting new highs closer to the 1,580-pt level.
Figure 1: Key events and KLCI movements in 1H2011
1,420.00
1,440.00
1,460.00
1,480.00
1,500.00
1,520.00
1,540.00
1,560.00
1,580.00
1,600.00
3-Jan 10-Jan 17-Jan 24-Jan 31-Jan 7-Feb 14-Feb 21-Feb 28-Feb 7-Mar 14-Mar 21-Mar 28-Mar 4-Apr 11-Apr 18-Apr 25-Apr 2-May 9-May 16-May 23-May 30-May 6-Jun 13-Jun 20-Jun 27-Jun
4 - 5 Jan. Optimism atyear start from strong
economic numbers inSingapore and the US
21 - 25 Jan. China'seconomy grew
10.3% in 2010raising fears of
inflation
2 Feb. Gamuda -MMC awarded PDP
role in MRT
10 Feb. Chinaraised interest
rates by 25 basispts
14 Feb. EgyptianPresident Hosni Mubarak
resigned, easing fears onMiddle East unrest
22 -24 Feb. Continued fearsin theMiddle East as Libyan and Bahrain
credit ratings were cut and LibyanPresident said that he would not
resign
4 Mar. DJIA rallied as oil pricesdeclined and labour market
improved in the US. First mentionof multi-billion investment in
Pengerang
11 Mar. 9.0 magnitudeearhtquake in Sendai,
Japan followed by tsunamiand nuclear leakage
18 Mar. Japan appearscloser to resolving its nuclear
issue. UN Security Councilapproves No-Fly zone over
Libya
30 Mar - 1 Apr.Buying ahead of
Invest Malaysia KL
11 - 12 Apr. Selling ahead ofthe Sarawak State Election.
IMF cuts US and Japan growthforecasts
11 May. Malaysian banksraise their benchmark
lending rates by 30 basis ptsafter BNM raises the OPR by
25 bps the previous week
31 May. Government raisesElectricity and Gas prices,
boosting TNB's profits. CIMB andMaybank both get BNM approval
to negotiate with RHB on merger
13 June. Greecebranded with lowest
credit rating by S&P
28- 29 June. Signsthat the European debt
crisis can be resolved.Strong debut by MSM
Source: Various
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The Bad Half.Although other markets continued to soar into the month of July, the KLCI suffered
setback due to a purely local development - the Bersih 2.0 rally - which sought to push for politic
reforms. The backlash from the events surrounding the rally set off a series of downgrades by
number of research houses, leading to the KLCI lagging its regional peers in July. Nonetheless, th
hammer hit the local bourse particularly hard in August and September as the index plunged t
levels last seen in July 2010. As at the time of writing, market conditions remained shaky an
uncertainties still clouded developments in the US and Europe.
European concerns drive the market down. The bear market in 2H2011 was primarily driven b
resurfacing concerns over the European sovereign debt crisis. While concerns over the finances
Ireland and Portugal seemed to have eased temporarily, Greece took over the spotlight when became clear that the nation was teetering on the brink of insolvency. With its bondholders cajole
into accepting a 50% haircut and a new unity government formed under new PM Luca
Papademos, Greece may have avoided bankruptcy this year but the future risks remain very high
The focus then shifted in quick succession to Italy, France and Spain, claiming the incumben
governments of both Italy and Spain. At the time of writing, there did not appear to be a clea
resolution of this issue as yet, and as we discuss in the following sections, there appears to be ve
real risk of Europe falling into recession. On the other side of the pond, political issues fuelled fear
in the US markets. As US lawmakers only managed to hammer out a very last minute agreement t
raise the debt ceiling in August, Standard & Poors downgraded the US long-term credit ratin
citing political risks. Since then, the US had somewhat stayed out of the limelight until recently
when the congress super-committee failed to reach an agreement on how to achieve USD1.2trn i
US budget cost savings. Over in Asia, the headlines had been less dramatic, other than that Asia
nations efforts to combat inflation were now more fairly balanced, with a slight bias toward
spurring faltering economic growth. That said, the global markets and the KLCI continued to b
plagued by uncertainties towards the end of 2H2011, a scenario that we foresee would persist we
into 2012.
Figure 2: Key events and KLCI movements in 2H2011
1,200.00
1,250.00
1,300.00
1,350.00
1,400.00
1,450.00
1,500.00
1,550.00
1,600.00
1,650.00
01/07/2011 12/07/2011 21/07/2011 01/08/2011 10/08/2011 19/08/2011 02/09/2011 13/09/2011 23/09/2011 04/10/2011 13/10/2011 24/10/2011 03/11/2011 15/11/2011
6 Jul. Govt announcesStrategic Reform Initiatives as
next step of the ETP
12 -18 July. Bersih rally. Fearsthat the European debt crisis
will escalate. Rumours ofshareholding cap on
Indonesian banks sparksCIMB sell-off
5 - 9 Aug. Downgradeof US long term credit
by S&P to AA+ leadingto major global sell off
15 Aug. Decline in USjobless claims and
subsequent marketrebound
26 Aug. Sellling aheadof long Hari Raya break
2 Sep. Rebound afterlong Raya break after
12 Sep. Top GermanOffical in ECB resigns in
protest to bond buying
19 Sep. Italy's creditrating cut by S&P. Sime
Darby sold down onrumours that it will
have to do a GO onE&O
12 Sep. Top GermanOffical in ECB resigns in
protest to bond buying
22 - 26 Sep. US FedReserve cautions on
outlook. Also does the"Twist' by selling short
term debts and buyinglong term debts. Investors
worldwide unconvinced
that this will help 29 Sep. Greek PM wonparliamentary backing
for a tax to reducedeficit
3 Oct. German financeminister opposes
moves to increase thescale of the European
rescue fund
6 Oct. US Fed chairmanindicated that he will push
forward with furtherexpansion of monetary
stimulus if needed
11 - 12 Oct. French andGerman leaders pledged a plan
to support European banks.China's state investment fund
begins buying shares in thecountry's top 4 banks
27 - 28 Oct. Europeanleaderscajole bondholders
into accepting a 50%haircut on their Greek
bonds. Also plan toleverage up the European
rescue find to EUR1trn.
1 Nov. Italian bond yieldsrise above 6%. Greece PM
decides to call for areferendum on the bailout
package received. Latercancelled
10 - 14 Nov. Market swingsdue to uncertainty on
whether Greece and Italywill be able to form new
Govts which eventually theydo
17 - 21 Nov. Italian bondyields rise above 7%. US
congress supercommitteefails to agree on USD1.2trn
of cost savings
Source: Various
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Key themes in Malaysia. In 2011, particularly 2H11, the KLCI was driven largely by global factor
not for a lack of local market-moving headlines, but because these were overshadowed by the risk
posed by global developments. In the broader context of the Malaysian market, we identify fiv
themes that were prevalent in 2011, namely:
x The ETP. Announcements and projects continued to be rolled out under the Economi
Transformation Programme (ETP), which was unveiled in October 2010. Thus far, 9
projects have been launched under the ETP, aimed at attracting planned investment
totalling RM177bn in the coming years and providing jobs for over 389,000 people. Th
key projects announced under the ETP include the MMC-Gamuda joint venture (JV
taking on the role of the Project Development Partner (PDP) for the KL MyRapid Trans
(MRT) project and MRCB-Ekovest doing the same for the River of Life project. ACMarket-listed companies also took the opportunity to jump onto the ETP bandwagon b
announcing ETP-related projects.
x Upcoming general election. Although the PM has refuted speculation that the Gener
Election will be held in 2011, there were plenty of signs that the polls would be held soon
likely in 1H2012. These include the continuing provision of subsidies in Budget 201
although there was a hike in gas prices and electricity rates in mid-2011. Other indication
are the postponement of the 6% telco service tax pass-through to consumers and a
election-friendly budget that incorporated a pay hike for civil servants, cash payouts fo
lower income households and school children as well as the abolishment of school fees
The PM also proposed greater civil liberties for Malaysians, including proposals to abolis
the Internal Security Act (ISA).
x Government still very involved in the private sector. The Government did take step
towards fulfilling its promise of reducing its participation in the private sector such as bdivesting its stake in Pos Malaysia to DRB-Hicom. However, its other corporate move
contradicted this, making it look like the Government was taking a one step forward, tw
steps back. These moves included Sime Darbys acquisition of a 30% stake in E&O an
PNBs General Offer for SP Setia shares, which drew criticism from certain quarters. Th
share swap proposal between shareholders of AirAsia and Malaysian Airline System
(MAS) also did not appear to be in sync with the Governments promise reducing i
involvement in the private sector.
x Privatisations and Listings. The number of privatizations from the Malaysian stocmarket still ran high in 2011. After the high-profile privatizations in 2010 that include
MEASAT, Tanjong, Astro, Sunrise and EONCap, the privatization exercises in 201
tended more towards the smaller caps. The companies that were privatized or thos
which received takeover offers included: (i) Maybank taking over Kim Eng, (ii) MT
Capital, (iii) Latexx Partners, although this was eventually abandoned, (iv) Berjaya Reta
(v) Mamee-Double Decker, (vi) RHB Capital merging with OSK Holdings, (vii) the merge
of Kencana Petroleum and SapuraCrest, (viii) CI Holdings selling Permanis to Asah
(ix) Eng Teknologi, (x) The sale of ExxonMobil units to San Miguel, (xi) EPIC, (xii) Sindora
(xiii) Ranhill, (xiv) DXN, (xv) Fututech, (xvi) Leader Universal, and (xvii) Hirotako
Nonetheless, there were also prominent listings in the form of MSM, Bumi Armada an
Pavillion REIT.x O&G news flow. With the O&G sector being the largest among the 12 National Ke
Economic Areas (NKEAs), it was understandable that news flow for this sector wa
substantial. These noteworthy developments were the award of a marginal oilfiel
development contract to a consortium involving Petrofac, Kencana and SapuraCrest, a
well as a small field development contract to a consortium comprising Dialog, ROC O
and Petronas Carigali. Petronas also unveiled its USD20bn RAPID project in Pengeran
Johor, comprising refineries and petrochemical plants. Some parties could not resis
jumping on the bandwagon by announcing some somewhat questionable projects, suc
as Gulf Asian Petroleums refinery and storage facility, Sabio O&Gs marginal oilfiel
development and PanelPoints 8,000km Trans-Asian pipeline. Nonetheless, withou
Petronas endorsement, none of these projects seemed to have taken off at this moment.
2 line-ups of Top Buys. We unveiled our Top 10 Buys for 2H2011 in early June. These include
names such as Maybank, CIMB, Axiata, UEM Land and AirAsia, as well as Kencana Petroleum
QL Resources, KPJ Healthcare, Media Chinese and KimLun Corporation. However, when w
downgraded our call on the KLCI to NEUTRAL on 8 Aug 2011, we also unveiled a new set o
Defensive Top Buys. It is these Top Buys that we benchmark against the KLCI for 2H2011, seein
six of our defensive 10 Buys outperforming the index, namely Telekom Malaysia, Petronas Gas
Guinness, Supermax, QL Resources and TRC Synergy.
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Figure 3: Performance of OSK Researchs Top 10 Buy calls for 2H2011
70
75
80
85
90
95
100
105
110
KLCI
Axiata
PetGas
TM
Guiness
AirAsia
KPJ
QL Resources
Media Chinese
Supermax
TRC
Source: Bloomberg
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2012 Outlook: Be Nimble in the Way of the Market
Volatile, to say the least. Moving into 1H12, we see global equity markets continuing to be ver
volatile, with Malaysia unlikely to escape this volatility. Swings of 1% in the KLCI will be common
Nonetheless, we do not see a looming recession for Malaysia nor the market returning t
recession-level valuations. Instead, value is likely to emerge in the KLCI at some point. In thi
reports remaining sections, we will identify a market strategy that is nimble enough for investors t
reap profit from the volatility.
Figure 4: OSK Researchs expectations of the KLCIs trend in 1H2012
1,250.00
1,300.00
1,350.00
1,400.00
1,450.00
1,500.00
1,550.00
1,600.00
1,650.00
3-Jan-11 25-Apr-11 10-Aug-11 1-Dec-11 15-Mar-12 28-Jun-12
Source: OSK Research
Answer to extreme volatility lies in Europe. The main reason we see continuing volatility in th
Malaysian market is the uncertain outlook for Europe. While our house view is for the US an
Malaysia to avoid a recession, things look a lot worse in Europe. In the short term, the sovereig
debt crisis will continue to plague the Eurozone region while in the medium term, the more pressin
issue is the likelihood of a recession. With countries including Greece, Portugal, Spain and Ital
imposing austerity measures to bring their debt levels under control, it is likely that economi
growth will falter given the already low economic growth rates over the past few years. As such
these countries are finding themselves caught between a rock and a hard place if they stimulatthe economy to avoid recession, they would risk facing higher debt levels and rising bond yields a
investors flee, but if they tighten their budgets to cut debts, they run the risk of their economies
previously supported by pump-priming slowing sharply. Negative news such as these are likely t
weigh on markets for some time.
Figure 5: European countries struggle to contain their debts (Budget Deficit to GDP
%)
-20
-15
-10
-5
0
5
Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010
Germany
France
Spain
Greece
Italy
Source: Bloomberg
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Figure 6: But belt tightening may swing their already low growth rates into
recession (GDP y-o-y growth %)
-10
-8
-6
-4
-2
0
2
4
6
8
Mar-05
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Germany
France
Spain
Greece
Italy
Source: Bloomberg
What should the KLCI be valued at? 1,466 pts. While the KLCI has traditionally commande
an average 16.6x PER, it has ranged between 13x19x PER during non-recessionary periods ove
the past 11 years. It was only during the 2008/2009 recession that the KLCIs PER dropped belo
10x. Given that: (i) we do not foresee a recession for Malaysia in 2012, but with many glob
market uncertainties arising from Europes worsening debt crisis, and (ii) the fact that there is stsome earnings growth uncertainty in Malaysia, we believe that it is wise to be conservative an
value the market at 1 standard deviation below mean, which gives us a PER of 13.5x. Applying th
PER to 2012 KLCI earnings gives us a Fair Value (FV) of 1,466 pts for the index. Even if earning
growth were to dip in the coming months, this conservative valuation allows us to maintain th
1,466-pt FV, with an earnings contraction of up to 8.9%, whereby 1,466 pts would be equivalent t
a PER of 16.6x, or the historical average. At 1,466 pts, the KLCI would also be trading at a Price t
Book Value (P/BV) of 1.97x, above the historical average of 1.83x since 2000 but close to 2.0
since 2006. We believe the 1,466-pt FV adequately incorporates any anticipated market volatili
over the next six months and at the same time capture a potentially robust economic recovery
late-2012.
Figure 7: KLCI PER has averaged 16.6x since 2000
0
5
10
15
20
25
30
35
Feb-00
Aug-00
Feb-01
Aug-01
Feb-02
Aug-02
Feb-03
Aug-03
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
PER
Average
-1 std dev
+1 std dev
Source: Bloomberg, OSK Research
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Figure 8: KLCIs PER generally between 13x19x except during recessionary
periods
0
500
1000
1500
2000
2500
Actual Index
p/e of 22.00
p/e of 19.00
p/e of 16.00
p/e of 13.00
p/e of 10.00
Source: OSK Research , Bloomberg
Figure 9: KLCIs P/BV averaged about 2x since 2006 but 1.83x since 2000
0
0.5
1
1.5
2
2.5
3
PBV
Average
+1 std dev
-1 std dev
Source: Various
What our Headline Numbers show A slowdown. From the headline numbers estimate
directly by our Equities Research team, we see a general slowdown in earnings growth, CPO
prices and loans growth for 2012 compared with 2011. This is understandable owing to the mor
challenging global macro environment for next year. To put things in context, we look at the KLC
earnings growth. For 2012, our forecast of a y-o-y growth of 10.8% is less than half the growt
experienced in 2006, 2007 and 2010. As such, while we do not see a recession next year, th
slowdown in the earnings growth rate should have an impact across-the-board. In addition, w
believe that our earnings forecasts still remain somewhat bullish at this point in time, and there ma
be room for earnings downgrades in the coming quarters.
Figure 10: Current and previous forecasts on headline numbers from Equity Research Team
Headline Numbers Current Previous Current PreviousGDP growth (%) 5 5 5.2 5.2
Yr end Ringgit level to US$ 3.15 3.15 3 3
Average Oil Price (US$/bbl) 85 - 95 85 - 95 90-100 80 - 90Average CPO Price (RM/tonne) 3200 3200 3000 2700KLCI earnings growth (%) 13.6 14.6 10.8 11.4KLCI fair value/year end target 1533 1533 1466 1466
Loans Growth (%) 11.5 11.5 8.5 8.5
2011 2012
Source: OSK Research
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Investment Strategy 2012
2. Consumer Another safe haven business. Food & Beverage companies should
benefit from stable to falling raw material prices, which will lift margins, while Retail
companies should not see a significant drop in revenue, unless the countrys
unemployment rate rises. We observed this phenomenon in Malaysia in 2008/2009
and more recently in 3Q11 in the US, where retail sales remained strong despite
weaker consumer sentiment.
3. Healthcare Within the Malaysian context, the demand for private healthcare services
remains strong. Even on a global scale, demand for healthcare is sustained even
during economic downturns. There are two ways to participate in this sector - either
through domestic healthcare providers such as KPJ Healthcare and Faber, or through
rubber glove companies such as Supermax, which caters to the global healthcare
industry.
Among our defensive stock calls, the Top 10 Defensive Buys are namely:
1) Axiata (FV: RM5.60) The only listed Malaysian telco company that also offers a
regional footprint in Indonesia, Singapore, India, Bangladesh, Sri Lanka and Cambodia.
Still the cheapest Malaysian telco company at 13x PER.
2) Petronas Gas (FV: RM15.52) Natural gas processor, importer and transmitter in
Peninsular Malaysia with 80% of profits guaranteed by its mother company, Petronas.
Growth catalyst in the form of new LNG import terminal in Melaka.
3) Telekom Malaysia (FV: RM5.15) Incumbent fixed-line telecoms provider in Malaysia
Making waves via its new high-speed Internet offering Unifi that is acquiring new
subscribers at a rate of 1,000 per day. Highest yields at 1012%.
4) Guinness Anchor (FV: RM13.58) Broadest brewery offering translates into defensive
earnings in the event of an economic slowdown. Decent yields, coupled with the 2012
growth potential coming from the UEFA 2012 football tournament.
5) AirAsia (FV: RM4.57) Largest Low Cost Carrier (LCC) in Asia; continues to
outperform its regional airline peers. Potential IPO of regional associates and benefits
from a partnership with MAS will be the catalysts for 2012.
6) KPJ Healthcare (FV: RM5.21) Largest private hospital provider in Malaysia, which is
growing its hospital chain by another five hospitals from the current 21 over the next
three years. Growth areas are medical tourism and retirement care.
7) QL Resources (FV: RM3.62) Largest manufacturer of surimi in ASEAN and second
largest producer of eggs in Malaysia. It is replicating its business in Indonesia and
Vietnam over the next 12 months.
8) Media Chinese International (FV: RM1.51) Largest publisher of Chinese language
newspapers in Malaysia. To benefit from falling newsprint prices in 2012.9) Supermax (FV: RM5.50) Second largest rubber glove maker in the world, which wil
benefit from a fall in latex prices, while demand remains resilient.
10) TRC Synergy (FV: RM0.76) Leading Bumiputera contractor. Shortlisted for various
packages in the KL MRT project and should be assured of some contracts over the next
12 months.
Figure 13: DEFENSIVE sectors to consider amid market volatility
MEDIA
OTHERS
- Drop in newsprint prices
good for print media
players
Utilities
Infrastructure
CONSUMER
- Similar to the US, sentiment
dipped in 2009 but not spending
- Drop in raw material prices willhelp F&B margins
TELECOMS
HEALTHCARE- Healthcare demand is
recession resilient- Drop in latex prices good for
glove makers
- Safe Havens
- Resilient Earnings
- Good Div Yields
between 5 7%
Transport
Source: OSK Research
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Figure 14: DEFENSIVE stocks to consider
MEDIA
OTHERS
Media Chinese
Petronas Gas
TRC Synergy
CONSUMER
QL Resources
Guiness Anchor
TELECOMS
Axiata
HEALTHCARE
KPJ Healthcare
Supermax
Telekom MalaysiaAirAsia
Source: OSK Research
While the overall stance is one of DEFENSIVENESS given the expected market volatility, it is
important for investors to stay nimble and be aware of opportunities to BUY when the KLCI falls
towards 1,300 pts and SELL when the index rises towards the 1,500-pt level.
Why should investors SELL? Fundamentals still weak. Based on the financial results
announced up to the time of writing, 3QFY11 earnings continued to be poor. Among the Big
Caps, 27% of the companies had their earnings downgraded vs 22% which were upgraded. In
the Small Caps space, companies fared even worse, with 47% downgraded compared to 14%
upgraded. As such, the Upgrade to Downgrade ratio, while recovering a little to 0.47x versus
0.38x in 2Q2011, is still very weak, and the recent KLCI weakness reflects this. We foresee that
earnings will continue to be weak over at least the next two quarters as we expect Europes
problems to cause ripples and make an impact globally world, and analysts to take some time to
downgrade their earnings forecasts accordingly. As such, in view of the potential for more
earnings downgrades in the upcoming months, investors should be cautious and take profit as
and when markets rally strongly.
Figure 15: 3Q2011 earnings show continued weakness
Upgrade
22%
Maintain
51%
Downgrade27%
Big Caps
Upgrade14%
Maintain39%
Downgrade47%
Small Caps
Source: OSK Research
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Figure 16: The KLCI and UpgradeDowngrade Ratio are converging again
200.00
400.00
600.00
800.00
1000.00
1200.00
1400.00
1600.00
1800.00
0.00
0.50
1.00
1.50
2.00
2.50
Jan-06
Ratio of Upgrades to Downgrades KLCI
Finally the KLCI trendsinline with the ratio
Source: Bloomberg, OSK Research
Why should investors SELL? Historical precedents indicate that weakness should linger
for some time. While we do not see Malaysia entering a recession, it is interesting to note how
the KLCI performed during previous recessions and compare the current market retracement tothe earlier periods of 1998, 2000 and 2008. From the chart below, we can see that the current
retracement has rebounded earlier and stronger than the previous retracements. Assuming only
a 28% retracement this time around or half of the previous retracement in 2008, we could still
see the KLCI falling to around the 1,150-pt level. Nonetheless, we see deep value emerge in the
market should the KLCI fall to 1,300 pts (which represents more than 10% upside to our 1,466-pt
FV), which is the topic of the next section, Why should investors BUY when the market dips?.
Figure 17: The KLCI has fallen far less than in previous recessions
0
20
40
60
80
100
120
Day1
Day13
Day25
Day37
Day49
Day61
Day73
Day85
Day97
Day109
Day121
Day133
Day145
Day157
Day169
Day181
Day193
Day205
Day217
Day229
Day241
Day253
Day265
Day277
Day289
Day301
Day313
Day325
Day337
Day349
Day361
Day373
Day385
Day397
Day409
Day421
Day433
Day445
Day457
Day469
Day481
Day493
Day505
Day517
Day529
Day541
Day553
1998
2000
2008
2011
Source: Bloomberg, OSK Research
Why should investors BUY? No recession foreseen. The KLCIs correlation to y-o-y quarter
GDP growth is actually quite close, as seen in the following Figure. As such, given that we do no
anticipate a recession, we should see the eventual recovery of the Malaysian economy in late-201
drive the KLCI upwards. As such, it is better to position now if the market falls towards the 1,300-
level. Note that our 1,466-pt KLCI FV for 2012 is conservative enough, such that even with an 8.9%
earnings contraction in 2012, the 1,466-pt level would imply a 16.6x PER, which is the index
historical average since 2000. Since our 2012 FV already builds in a sufficient buffer, a wea
market would justify bottom-fishing by investors given the recovery expected in late-2012.
.
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Figure 18: Correlation of KLCI and y-o-y GDP growth
-100
-50
0
50
100
150
200
KLCI normalised
GDP growth normalised
Source: Bloomberg, OSK Research
Why should investors BUY? Foreign investors could boost upside if ETP is done righ
The interesting thing to note about the Malaysian stock market between 2008 till now is that whi
the KLCI almost doubled in value from around 830 pts to 1,590 pts, the level of foreig
shareholding has in no way moved up to the highs set in early-2007 when foreign shareholding i
the Malaysian market stood at 27.5%. Instead, foreign shareholding in Malaysia only hit a recen
high of 22.1% in July. If the Economic Transformation Programme (ETP) is done right, it woul
create a more vibrant economy, which would then lure foreign investors to our market. Given th
significant potential upside in terms of foreign shareholding, we believe our market could see stron
upside as well if this increase occurs over the next few years.
Figure 19: Malaysias foreign shareholding has not recovered to 2007 highs
20.00%
21.00%
22.00%
23.00%
24.00%
25.00%
26.00%
27.00%
28.00%
1Q2007
2Q2007
3Q2007
4Q2007
1Q2008
2Q2008
Jul-08
Sep-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Sep-09
Oct-09
Dec-09
Jan-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Mar-11
Apr-11
Jul-11
Aug-11
Source: Bursa, OSK Research
Figure 20: The ETP continues to soldier on
0
20
40
60
80
100
120
140
160
180
200
ETP update1
ETP update2
ETP update3
ETP update4
ETP update5
ETP update6
ETP update8
ETP update9
Cumulative Project Investments (RMm) Cumulative no. of projects
Source: Bursa, OSK Research
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So What should investors TRADE? Banks, Oil & Gas and Construction sectors. Given th
volatility of the market, and noting that opportunities to both Buy on Weakness and Sell on Strengt
will likely emerge, what then should investors trade when the opportunity arises? We believe th
best vehicles in such a situation would be the highly cyclical sectors of Banking, O&G an
Construction. For Banks, the financial sector tends to lead the broader economy, and as and whe
the European sovereign debt crisis blows over, there should be a general recovery in banking stoc
prices. For O&G and Construction, given the ETP emphasis on the O&G sector (the largest of th
NKEAs) and on Greater KL (with the prospects of more construction projects), we view these tw
cyclical sectors more positively compared with other cyclical sectors such as property o
technology. As for what can be bought or sold in the corresponding sectors, we advocate:
1. Banks
a. To SELL. CIMB and AMMB, especially CIMB as valuations are still notcompelling although the group has underperformed the broader market. The
stock may be trading at its 6-year historical average mean valuation of 1.84x,
after having de-rated by 24.6% over the past four months but we note that it
traded at a trough valuation of 1.12x P/BV in the recent 2008/09 financial crisis.
Although we do not expect valuations to de-rate to such levels, we believe that a
-1 standard deviation from mean P/BVs (ie: 1.56x P/BV) would present a more
attractive buying opportunity, which would imply share prices of below RM6.10.
Managements strategy to intentionally slow down growth given its heightened
risk aversion will likely result in further downside risks to immediate to medium-
term earnings delivery. Likewise, AMMBs management has also guided for a
deliberate deceleration of growth in the near- to medium-term given the globa
macro uncertainties. Its upcoming 2HFY12 is likely to be sequentially weaker
owing to the intentional slowdown in growth, coupled with the fact that the
1HFY12 earnings base was artificially augmented by exceptional trading gains
b. To BUY. RHB Capital - Assuming that there is no major deterioration in book
value, a close look at the individual banks P/BVs and their respective FY11/12
ROE forecasts indicates that RHB Capital is the most undervalued in terms of its
current 1.32x FY12 P/BV relative to its sustainable ROEs of 14.4%. The stock
has declined by more than 27% from its YTD 2011 peak after the M&A news with
CIMB and Maybank fizzled out and any further weakness in tandem with the
overall market would present an excellent opportunity to accumulate the stock at
a basement bargain. Hong Leong Bank: We also like HLBank for the longer-term
growth synergies emanating from its recent merger with EON Capital where the
potential to drive sustainable ROEs above the 17% level as set by
management could see its re-rating to 2.1x P/BV vs its current 1.58x. Webelieve that managements guidance of RM400m in total cost and revenue
synergies may have been understated on the side of revenue.
Figure 21: Banks ROE vs P/BV indicate the cheap and the expensive banks
y = 13.77x - 0.4688
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
2.80
10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0%
PBV
(x)
ROE
Public Bank
CIMB
Maybank
RHB CapAFG
HLBankAMMB
Source: Company Data, OSK Research
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2. Oil & Gas
a. To SELL. Based on the following chart, Dialog and Kencana Petroleum should
be the top sells among our O&G stocks, with both having the highest beta and
high FY12 PE valuations. However, these are actually our Top Buys in the
sector, with Dialog drawing a recurring income from its tank terminals, which
justifies its high DCF-based valuation, and Kencana possessing potential upside
from the contribution from its Berantai gas field and merger with SapuraCrest.
Instead, O&G stocks which we would recommend a sell on if the market goes up
include MMHE (PER 20x)and Bumi Armada (PER 19x). These two stocks are
not included in the chart because the information on their beta is not available as
both have been listed for less than one year.b. To BUY. Both Coastal and Perdana Petroleum fall into this category. Besides
having attractive valuations (low PE) and high beta, both stocks also offer M&A
opportunities. We believe Coastal has a strategic asset in its Sandakan yard, and
Sabah has the most deepwater activities going forward. Hence, we believe it
would be a matter of time before Petronas or other oil majors tie up with Coastal
to turn its shipyard into a fabrication yard. As for Perdana, we continue to see the
company as a potential candidate for M&A activities, especially with its strong
fleet of high horsepower AHTS vessels which are suitable for deepwater
development, as well as its recent Sarawakian placements.
Figure 22: O&G PER vs beta indicating O&G stocks are cheap and volatile
Alam
Coastal
Dayang
Dialog
Kencana
P. Energy
KNM
Perdana
Tjg Offshore
Wah Seong
0
5
10
15
20
25
0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7
PER
Beta
Source: Company Data, OSK Research
3. Construction
a. To SELL. Hock Seng Lee With still no clarity on the succession plan of
Sarawaks Chief Minister, we think the states jobs flow may be unexciting. For
example, the rural road networks amounting to RM7bn promised earlier this year
have yet to be dished out. We think there is shortfall risk to HSLs RM400m
replenishment target this year. The recently announced 3Q results were also
disappointing.
b. To BUY. GamudaWe remain positive that the Sungai BulohKajang (SBK) lineof the MRT will be awarded next year with the tunnelling works likely in April-
May. In our view, Gamuda (via the JV with MMC) is the only prequalified local
contractor and is definitely the front-runner. Definitely a stock to BUY on
weakness given the high possibility of orderbook inflow via the MRT tunnelling
works. The amount attributed to Gamuda is estimated at RM4bn (based on its
50% stake), which would more than double its orderbook. Gamuda is now
trading at 1312x on FY1213 (July) earnings vs its historical mean of 22x.
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