Jul 16, 2013

3Q13: Top 10 Malaysia stock picks by MIDF

KLCI: 1,773.54  (2013 Year-end Target: 1,800 points)

A risk-balance portfolio during period of heightened volatility

Changes to Top 10 list. We made 6 relegations to our earlier list of Top 10 stock picks (refer to our “2Q13 Outlook: A Nation Decides”, dated 1 April 2013). Sunway, TNB and Gamuda were relegated as they have risen by +25.4%, 15.6% and +14.5% (against FBM KLCI: +5.2%) respectively during the past 3 months hence their near-term  upside potentials are deemed as limited. Furthermore, the  relegation of MAHB and WCT were decided upon as these stocks are susceptible to the financial headwinds related to the further delay in the completion of KLIA2. FGV, on the other hand, is replaced by Sime Darby. While both plantation companies are expected to benefit from the expected firming up in CPO prices, we believe the latter holds better defensive qualities particularlyin the current period of heightened uncertainties. In place of the6 relegated stocks, we introduce Dayang Enterprise, AirAsia, Glomac, Gas Malaysia, Maybank, and along with Sime Darby to our Top 10 list.

A combo of earnings quality, growth potential and/or attractive valuation. Even if the knee-jerk market reactions over the tapering QE3 may be transient in nature, it may take quite a while for the ‘hot money’ investors to unwind its positions hence the selling pressure scan last for weeks or even months to come. During  this period, we can also expect heightened volatility due to the flare up in tug-of-war between the so-called optimists and pessimists elements in the market. Hence we continue to recommend a portfolio with combination of stocks with: (i) inherent earnings quality, (ii) good earnings growth potential, and/or (iii) attractive valuation.Below is a list of 10 stocks that fit the investment criteria and which we reckon are in good stead to outperform the broader market.

TOP 10 Malaysia Stocks Picks (click to enlarge):
malaysia top 10 stock picks

•  TM Berhad (BUY, TP: RM6.75).
  We continue to favour TM due to its potential earnings in regards to its high speed broadband (HSBB) and Unifi offering. Unifi subscribers continue to gain traction despite the presence of
competitors. With its long term dividend prospect remains intact, we maintain our BUY call for TM with a target price of RM6.75.

•  Dayang Enterprise Berhad (BUY, TP: RM6.08).
Dayang Enterprise Bhd is by far one of the more active oil and gas stocks in terms of contract wins. Its current 2013 contract wins totaled RM3.8b mainly from the Pan Malaysia hook up and commissioning (HUC) jobs. We like Dayang for (i) its high quality strong orderbook of >RM5b which will last till 2018, (ii) strong fleet  of relatively new and well equipped vessels with additional vessel capacity from Perdana Petroleum, its associate company, and (iii) strong balance sheet with net cash position.

•  AirAsia (BUY, TP: RM3.98).
The threat from Malindo Air, a new domestic-based  LCC, seems overhyped. Given its strong foothold in the domestic market and continual oversea expansions, we expect AirAsia’s earnings trajectory to be maintained or even grow at faster  pace. Other positive factors that underpin our arguments are (i) impending public floating of its Indonesia  associate and long haul arm, AirAsia X, which will  crystallize
their shareholders value, (ii) expected lower shares of associate losses in Philippines and Japan, (iii) continual strong regional travel demand growth, and (iv) slightly lower projected FY13 jet fuel price. Our TP is premised on undemanding CY14 P/E valuation of 10x.

•  Glomac Berhad (BUY, TP: RM1.46).
Its recent FY13 record sales of RM802m and unbilled sales of RM888m are very encouraging. Moreover, its growth prospects are good given that its core developments (80% of outstanding GDV) mainly comprise of landed residential projectslocated at prime location (Lakeside Residence, Puchong) and at new growth areas (Saujana Utama, Sungai Buloh and Saujana Rawang). Furthermore, the potential curb on Developer Interest Bearing Scheme (DIBS) will not affect Glomac as it does not offer DIBS on its highly demanded landed developments. Lastly, it pays good dividend with payout ratio of 40%.

•  SapuraKencana Petroleum Berhad (BUY, TP: RM4.86). We are bullish on SapuraKencana and have a high-conviction BUY recommendation on the stock. We likethe company for (i) its integrated oil and gas business
model, (ii) consistently strong orderbook replenishment (RM13b, with burn rate of two years), and (iii) being a main potential beneficiary of Petronas’ major capexspending for the next few years. This strong standing is already evident from its ability to secure contracts for the North Malay Basin and also packages underthe Pan Malaysia HUC projects. Its recent acquisition of Seadrill’s tender rigs business will further boost earnings given that the rigs are attached to contracts worth approximately USD5b.

•  Star Publications Berhad (BUY, TP: RM3.15).
After the removal of uncertainty post GE13, we believe that Star should be an attractive option given its cemented reputation as a stable and generous dividend paymaster. It dividend yield now exceeds 6% and the stock is currently trading at a discount from its 5-year historical PER. We believe that at current price, it is a cheap entry point for investors.

•  Sime Darby Berhad (BUY, TP: RM10.90).
We continue to like Sime Darby as we anticipate itsFY14 earnings to rebound, supported by (i) Higher contribution from  plantation division underpinned mainly by higher sales
volume and better CPO price in 2H2013, (ii) Improvement in Industrial earnings due healthy level of order book for Malaysia and Singapore. In 3QFY13, order book for Malaysia and Singapore grew by 13.0%qoq, (iii)
Improvement in the property division supported by overwhelming response to its launches in Elmina. In addition, further launches in Elmina is expected tocontribute positively to its property division going forward,
(iv) The proposed JV with the Ramsay Group allows Sime Darby to capture the tremendous potential in the healthcare industry and focus on its core businesses going forward.

•  Unisem Berhad (BUY, TP: RM1.08).
  The recent performance of global semiconductor sales and book-to-bill ratio continues to be encouraging. Hence, we believe that Unisem will see earnings recovery in 2H13 especially after the reorganization of its business. Although we are maintaining our target price of RM1.08 for now, we do not rule out an upward adjustment as we expect stronger recovery in demand for next year. With the
undemanding stock valuation, investors can gain exposure in a recovering sector at an attractive entrypoint.

•  Gas Malaysia Berhad (BUY, TP: RM3.65). Gas Malaysia is one of the more stable stocks with predictable  recurring income. Its earnings are expected to risein tandem with the domestic economic growth. We continue to reiterate our BUY recommendation on Gas Malaysiafor its (i) monopoly in the supply of gas for industries consuming less than 5mmscfd, (ii) commendable dividend yield of >3.5%, and (iii) new business catalyst from its virtual pipeline business which serves to provide gas to clients which are not within its supply route.

•  Maybank (BUY, TP: RM11.30). Maybank has stable market shares for retail loans and deposits. Net fund based and fee based income are likely to improve in 2HCY13. This is based on expectations of a pickup in thepace of
corporate lending and capital market transactions after a slow start in 1QCY13 due to GE13. Financial performance of BII, its Indonesian subsidiary, continued to show improvements. We are positive on its  regional investment banking focus with strong market shares  in Thailand and Malaysia. This is expected to enable the Group to capture potential IB deals in the region and grow its IB income. The stock’s dividend yield has been decent. We reiterate our BUY call on Maybank with aTP of RM11.30 pegged to a PB multiple of 2.0x on FY14 BVPS.

Maintain FBM KLCI 2013 year-end target of 1,800 points.The equity market may be somewhat perturbed by the liquidity impact of tapering QE3. However, as stated earlier, we do not expect the pace of liquidity rollback to go any length ahead of the recovery in the US real economy. Furthermore, as the ‘hot money’ dust settles,we expect the market to measuredly regain its upward thrust conceivably towards the last quarter of the year. Hence we reiterate our FBM KLCI 2013 year-end target of 1,800points, equivalent to 16.4x current year earnings  or +1.00SD (15.2x next year earnings or +0.25SD) above its 6-year average from 2007-2013

by MIDF 1st July 2013