Aug 5, 2010

Malaysia Stocks : Sarawak Election Theme Play

Five companies emerged as consistent top performers in share price upside before the elections. They are CMS, UBG, Encorp, HSL and Weida.

State of play: Sarawak 

Election play. Our election play for Sarawak construction stocks, one of our themes for the construction sector this year, has played out well. Looking beyond that, our study of the past two state elections reveals
that share prices of most Sarawak stocks peaked on the dissolution of the state assembly, three-to-four  weeks before polling day. With the 10th state election looming, there are still trading opportunities although investors should look to lock in their gains soon. Our pick beyond the state election theme is Hock Seng Lee (HSL MK; Buy; TP: RM1.90).

A good year so far. Sarawak stocks had performed well with KKB leading the pack – share price gained 103% YTD, followed by CMS (+70%), HSL (+39%), Dayang (+35%) and Naim (+21%). Besides the
state election, construction related stocks like KKB, CMS, HSL and Naim also rode on: (i) expectations of a larger federal government development budget for Sarawak under the 10th  Malaysia Plan (2011-
15; details yet to be unveiled), and (ii) major foreign direct investments
under the SCORE programme which will boost demand for new infrastructure. UBG remains the laggard (-8% YTD), probably due to
the long wait for PetroSaudi Int’l’s privatisation of UBG (announced in
Jan 2010), and the stock’s small free float of just 10.1%. 

State elections. Sarawak’s 9th state election was held on 20 May 2006 and the next election (10th) is due by May 2011. Contrary to general expectations that the timing of elections will coincide with the school holidays, we note that the last two state elections were held one to two weeks pre- and post- the school break. PM Najib’s frequent visits to Sarawak’s interior since Feb 2010 suggest an election strategy targeting the rural votes. Whispers on the ground are that the 10th state elections may be held as early as October, after the Hari Raya.

Locking in the gains. We note that in the past two state elections, share prices of Sarawak construction and also politically-linked stocks peaked at about the same time  as the announcement of the state assembly dissolution. Since the 2006 state election, there has been a number of new listings that are politically connected – Dayang,

Sarawak Plantations, Sarawak Cable and SIG Gases (tentative listing
on 9 Aug 2010) – and, new Sarawak-based shareholding – Petra Energy. As the broader market remains bouyant, there are still trading
opportunities. Investors should however, position towards locking in
their gains on the dissolution of the state assembly.

Beyond the elections. News flows on SCORE seem to have tapered off lately. In particular, there have been no developments on 1MDB’s cooperation with State Grid Corp of China after an agreement in Jan 2010 to jointly undertake three hydro dams and one aluminium smelter plant in SCORE. This is significant as major infrastructure works involving land reclamation, roads and jetties are expected to spin off from these projects. Nonetheless, we are still positive on a higher development allocation under the 10th  Malaysia Plan. Tenders are still ongoing with at least nine closing this month. Hock Seng Lee is our top pick for Sarawak construction for its strong delivery track record. 

Trading opportunities? We observe from the last two state elections that five companies emerged as consistent top performers in share price upside before the elections. They are CMS, UBG, Encorp, HSL and Weida. These companies remain highly relevant in the economic nd political scenes in Sarawak today, and are expected to repeat the performance of previous state elections. For 2010-YTD, share price erformances of UBG (-8%) and Encorp (+15%) lagged behind that of its three peers: CMS (+70%), HSL (+39%), Weida (+21%). In terms of valuations, both UBG and Encorp are trading below their 2009 book at 0.8x. New listing like Sarawak Cable should also gain interests.

by Maybank Investment Bank