Nov 10, 2016

Bursa Malaysia’s PEG-based Ranked Top Stocks

Among the Top 100 stocks

Resumption of earnings upcycle. Valuation yardstick such as price earnings ratio (PER) is easy to use hence its popularity. Nonetheless, it is not able to capture the trajectory of compound forward earnings growth which is vital particularly at the inflection point of an earnings trend, like where we are now. On this score, it is notable that after 3 years (2013 to 2015) of ‘earnings recession’, the market consensus is expecting positive FBM KLCI earnings growth for this year and next at +5.70% and +7.98% respectively. In a related note, recall our 2016 Outlook (dated 15 December 2015) titled “Resumption of earnings upcycle”.
• PEG valuation captures the trajectory of forward earnings. Therefore, in our quest for value, price earnings growth (PEG) may provide a better guidance. An acceptable rule of thumb with regard to the PEG valuation is 1.0 being the parity while anything below (but above zero) is considered a bargain. Thus, applying the PEG valuation measure on individual stocks among the Top 100 market capitalized companies on Bursa Malaysia have help revealed some compelling valuation laggards.
List of Top 100 capitalized stocks with PEG of less than 1.0 bursa malaysia top PEG ranking
• Bumi Armada came out on top. It should be noted that the above PER and PEG calculations were based on (i) consensus earnings estimates for current (FY1) financial year, as well as (ii) the compound annual growth rate (CAGR) of consensus forecasted earnings for next (FY2) and subsequent (FY3) financial years. The current list ranked Bumi Armada on top with the lowest PEG of 0.33.
• Oil & Gas offshore vessel service providers well represented… In total, there are only 18 stocks among the Top 100 which currently trade at below the PEG valuation parity. It is noteworthy that Oil and Gas stocks, particularly those providing offshore vessel services, are well represented with 3 names (Bumi Armada, Yinson, SapuraKencana) in the list.
• …and followed equally by Banking, Automobile, Property and Plantation sectors. The other sectors with 2 representatives each are (i) Banking (CIMB Bank, RHB Bank), (ii) Automobile (UMW Holdings, Bermaz Auto), (iii) Property (Eco World Dev, MRCB), and (iv) Plantation (TSH Resources, FGV).
• Risk. It must also be highlighted that the main risk to the PEG calculation is in the accuracy of the forward CAGR estimate.
• FBM KLCI year-end targets. We reiterate our FBM KLCI 2016 year-end target at 1,750 points which equates to PER16 of 17.5x as well as our 2017 year-end target of 1,830 points which equates to PER17 of 17.0x.
source: MIDF Research - 8/11/16