May 16, 2018

Malaysia’s Council of Eminent Persons

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Reassurance From New Council Of Eminent Persons


The Council of Eminent Persons held a briefing for investors, shedding some light on certain broad-based measures. However, details of fiscal reforms will only be announced in the first 100 days, aimed at raising disposable income. Architects of the PH manifesto reiterate that the government must deliver: a) institutional reforms – including reducing/eliminating corruption, b) strong check and balance, and c) economic reforms – ensuring that money is in the hands of Malaysian households.

council of elders
WHAT’S NEW
Council of Eminent Persons instilling confidence. The newly-formed Council of Eminent Persons (Council) held a briefing for investors yesterday with Tun Daim Xainuddin and Tan Sri Zeti Aziz as speakers. Raising disposable income is a key focus. The Council has been actively meeting various representatives from the investment community (eg GLC funds) and regulators (eg MoF, Securities Commission, Chamber of Commerce) and reassured that Malaysia’s fundamentals and financial system remain strong, and that any near-term weakness in the fiscal position due to the abolishment of GST will be short-term in nature as swift execution of its economic and institutional reforms should lead to stronger market confidence and consequently improved fiscal position and ringgit strength.

Key highlights of the briefing. a) Measures of the comprehensive fiscal reform to be released within the first 100 days will be orderly in nature. b) Comprehensive review of the tax regime with emphasis on GST. c) Emphasis on reducing public wastage (eg government’s procurement cost) and curbing of corrupt practices as well as scrapping certain mega projects will help to partly plug the revenue gap from the abolishment of GST. d) A task force to be set up to recover 1MDB monies and a separate group comprising the MACC, Attorney General and police to investigate scandals and charge relevant people involved in the 1MDB scandal. e) The government’s role will gradually decline and the private sector playing a more prominent role, hence reducing the “crowding out effect” on private investments. f) More transparent open bidding and assessment of mega infrastructure projects. g) Made recommendation to the government that no politicians be involved in GLCs. h) The government will also honour its debt obligations with regard to toll concessionaires.

Setting up a committee on institutional reforms. The Council has also announced the formation of a committee on institutional reforms, crucial in ensuring a strong follow through and execution of the positive economic reforms

ACTION
Strategy. While we still favour defensive stocks and apolitical growth stocks, upside for most of these stocks is limited by the recent days’ run-up (eg BAT). We also advocate buying oversold construction stocks. We maintain our end-18 FBMKLCI target of 1,830. Stocks which offer good upside visibility include defensive large caps DiGi, Magnum, the Genting group, E&E stocks Globetronics and VS Industry. growth stocks Bumi Armada and Yong Tai. Some recent run-down stocks appeal, eg CIMB, Gamuda and Gabungan AQRS.

stock picks post GE14

ESSENTIAL
The Pakatan Harapan manifesto… We had recently attended a forum titled “Keeping The
Promise of Reform” organised by the Jeffrey Cheah Institute on Southeast Asia. Key panelists Wan Saiful and Liew Chin Tong were some of the many architects behind the Pakatan Harapan manifesto.
...focuses on the well being of the rakyat and a strong check and balance system. Key takeaways are: a) strong emphasis on the need for institutional reform, and b) economic reforms. The key message on economic reforms is that ordinary Malaysians must benefit from economic growth and it is the role of the government to make sure that the money is in the hands of the households (focusing on productivity and multiplier effect of the economy). It is also the job of the current government to reduce/ eliminate corruption and create a strong check and balance system (including limiting the Prime Minister’s term of office and ensure a strong and viable opposition party by providing funding for them).

source: UOBKayHian – 16/05/2018

May 14, 2018

GE14 Results: Market Sell-off To Create Opportunities

GE14 Results: Sweeping Changes

Pakatan Harapan creates history with its surprising sweep of parliamentary and state seats in the most hotly contested elections in Malaysia. While widely expected, post- GE market jitters should create good buying opportunities as the sell-down may not be too deep should the new government quickly assert business-friendly policies. However, 2018’s outlook remains challenging amid expectations of a global liquidity contraction.

DEFENSIVE STOCKSmalaysia defensive stocks
WHAT’S NEW
PH paves way for new dawn. Pakatan Harapan (PH) led by the 93-year old former prime minister, Tun Dr Mahathir Mohamad, fulfilled the ‘Rahman’ prophecy by dislodging Barisan Nasional (BN) to win 121 (54.5%) of parliamentary seats inclusive of ally party Warisan’s 8 seats (GE13: 89 seats), and an additional 5 states (in all controlling 7 states).
In state results, PR successfully defended Penang and Selangor, and won Kedah, Malacca, Perak, Negeri Sembilan and Johor from BN. A surprise, PAS retains control over Kelantan and wrested control of Terengganu from BN.
Sweeping control over hot seats, reflecting majority of voters’ sentiment. Of the 60 perceived hot seats, PH wrested 19 seats from BN while losing only 5, according to available (but incomplete) information. Many prominent BN leaders lost, including component parties MCA’s and MIC’s presidents, and several ministers.

NOTABLE STOCKS TO ACCUMMULATE ON WEAKNESSmalaysia stocks to accumulate

ACTION
Market sell-off to create opportunities. We are reviewing our end-18 FBMKLCI target of 1,830 for a modest downgrade. While PH brings hope for better transparency, accountability and financial prudence, investors would be sidelined by the current transitory state. Foreign inflows (+RM2.7b ytd) could reverse, potentially causing the ringgit to weaken. Nevertheless, this is not a ‘-1SD’ sell-off. Hopefully, the widely market sell-off may not be as deep as feared should PH quickly obtain the royal pronouncement as the rightful government, while declaring a two-day cooling-off holiday can provide some leeway for PH to ensure the investment community that it would pursue a business-friendly policy. PH has just publicly declared that it would not avenge and its main motivation is to ensure the rule of law.
Knee-jerk impact. The most impacted stocks could include perceived politically-linked companies (DRB-Hicom, George Kent, MyEG) and selected mega projects’ beneficiaries on concerns that PH may want to review pricing or defer some mega projects. In his final campaign address, Dr Mahathir voiced his displeasure over DRB’s stake sale in Proton. There could also be a knee-jerk impact on AirAsia, given Tony Fernandez’s open support for BN.
Buy high-yielding defensive stocks with relatively low foreign portfolio ownership and apolitical growth stocks. The former category of stocks should gain prominence, including sold-down BAT, DiGi, Magnum and YTL Power. FMCG stocks (including brewery stocks) also appeal, with the exception of the well-overvalued Nestle. We would accumulate selected export-oriented stocks, particularly E&E stocks Inari, Globetronics and VS Industry. On paper, gaming companies should benefit, given PR’s intention to repeal GST, although pragmatically, these companies may be subject to other forms of new taxes. We would also accumulate on weakness MRCB, which is considered apolitical (as it MRCB’s good welfare benefits EPF contributors).

source:  UOBKayHian – 10/05/2018

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May 3, 2018

Bursa Malaysia’s KLCI: Fundamental Outlook for May 2018

We found that the historical performance of the KLCI in May has been mixed, registering average mom negative return of 0.1% over the past 10 years and posting positive mom declines in five out of the past 10 years. However, over a 40-year period, it posted an average mom gain of 1.4%.

On the local front, investors will be closely tracking the results of GE14 on 9 May 2018. To recap, Malaysia’s Prime Minister dissolved the parliament on 7 April (Saturday) and the polling date will be on 9 May 2018 (Wednesday). The government has also declared 9 May as a public holiday.

FBM KLCI performances before and after General Elections (click to enlarge)klci before and after election
The 11-day campaigning period for GE14 has started following nomination day on 28 April 2018 (Saturday). According to press reports, 687 candidates will be vying for the 222 parliamentary seats and 1,646 candidates will be eyeing the 505 state seats. This represents an increase of 20% compared to GE13. This time around, ruling coalition Barisan Nasional (BN) has fielded candidates in all 222 parliamentary and 505 state seats, while the Opposition coalition Pakatan Harapan, under the banner of PKR, has placed its bets on 191 and 448 candidates for both parliamentary and state seats respectively. Meanwhile, PAS becomes the third leading contender in GE14 by fielding 158 candidates for parliamentary and 393 for state seats.

A recent presentation by Merdeka Centre on 26 April 2018 to the press, revealed that although there is a swing of Malay support towards Pakatan Harapan in certain states, it will not be sufficient to put the opposition coalition in power. He added that for Pakatan Harapan to take Putrajaya, it needed 14% more Malay support in addition to its current 20%. The centre also predicted that the opposition would retain Penang and Selangor comfortably, but would be unlikely to see much gain in other states. The survey was conducted among 1,206 voters across all states of Peninsular Malaysia, Sabah and Sarawak through telephone interviews between 3 and 9 April.

Since the dissolution of parliament on 7 April 2018, the KLCI has gained 1% to 1,870 points as at 30 April 2018. We predict that market will remain volatile until the election and the results of the election could depend on turnout rate, how successful the candidates are in persuading the undecided voters and the outcomes of the three-cornered fights in many seats in GE14 following PAS’s departure from the opposition coalition after GE13, which is expected to split the Malay opposition votes.

We believe the stock market performance immediately after elections will be largely determined by 1) the degree of selling pressure during the campaigning period and 2) the actual polling results. If selling pressure is intense in the few days before the polls, it would mean that most of the potential bad news would already be factored in the share prices. Also, the market is likely to stage a relief rally if the incumbent wins, leading to continuity of existing policies. However, if polling results were in line with market expectations and there were no selling pressures prior to the polling date, we expect the KLCI performance post polling results to be muted and to be driven largely by external events.

Based on the past eight election results, our analysis found that the market tends to perform better, on average, post general elections than pre-general elections. The exception was in 2008 when the market fell post GE, due partly to the global financial crisis and in 2004 when the market succumbed to profit- taking following its strong performance pre-GE. (Figure 16)

Apart from GE14, investors will be tracking the 1Q18 results of Malaysian corporates in May, where banks in Malaysia will reveal the impact of the new accounting standard MFRS9 on their earnings. Plantation companies are expected to see weaker earnings in 1Q due to lower CPO prices. On the macro front, all eyes will be on the 1Q18 GDP figure due out on 17 May 2018. We are projecting 1Q18F GDP for Malaysia to come in at around 5.4%.

One of the key events to watch out for in the international market is how the ongoing trade spat between the US and China develops. The US Retail Federation, Consumer Technology Association and other trade groups have been working together and separately to lobby the US administration to strike a deal with China that avoids tariffs, and otherwise to exclude specific products from the list. Companies are making requests to have products removed
or added, with a public hearing set for 15 May in Washington.

Another event to watch is the development in the crude oil market and its impact on crude oil prices. Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), re-emerged as a major oil exporter in January 2016 when international sanctions against Tehran were lifted in return for curbs on Iran’s nuclear programme.

The United States, however, has expressed doubts over Iran’s sincerity in implementing those curbs and President Donald Trump has threatened to re- impose sanctions. If US President Donald Trump decides to reimpose sanctions on Iran on 12 May, it may lead to a removal of more than 1 mbd of crude oil supplies or 1.4% of global oil demand. This may trigger a very strong upward movement in oil prices.

The Federal Open Market Committee (FOMC) is set to meet on 2 May 2018. Most investors are not expecting the central bank to tighten its policy. We maintain our end-2018 KLCI target of 1,880 pts which is based on 15.9x 12M forward P/E. We have also identified the consumer and construction sectors as potential winners from BN’s GE14 manifesto. We maintain our top three picks for Malaysia, which are Axiata, Dialog and Westports.

FBM KLCI Monthly Chart (click to enlarge)fbm klci monthly chart

Technical outlook for the longer term
Based on the last three stock market crashes (1987 Black Monday, 1997 Asian Crisis, and 2008 Global Crisis), it looks like a crisis ‘happens’ once every 10- 10.5 years. The current situation, where the FBMKLCI index has broken out of its triangle formation, is similar to the triangle breakout that took place during the 1997 Asian Crisis.
If history repeats itself, the current movement would likely have trouble taking out the all-time intra-day high of 1,896. 1,708 is the critical support level and a decisive breach below this level suggests that the 10-year cycle bearish phase is likely under way. Price movements in the next few weeks or months would likely give us a better idea as to which direction the market will take for the future.

source: CIMB Research – 02/05/2018

Apr 18, 2018

Technical Buy - KOBAY

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Trading Idea - KOBAY TECHNOLOGY BHD (stock code 6971)

● Target Price RM1.30
● Last closing price RM1.12
● Potential return 16.0%
● Support RM1.05
● Stop Loss RM0.950

buy kobay

Possible upside. KOBAY is showing signs of recovery from recent major pullback. Improving RSI and MACD indicators currently signal reasonable entry level, with anticipation of continuous improvement in both momentum and trend in near term. Should resistance level of RM1.13 be genuinely broken, it may continue to lift price higher to subsequent resistance level of RM1.30. However, failure to hold on to support level of RM1.05 may indicate weakness in the share price and hence, a cut-loss signal.

source: PublicInvest Research -  18/04/2018

Apr 17, 2018

Malaysia’s Stocks Immune To a Trade War

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Many stocks have been caught up in the sell-off, which include domestic-centric stocks that should not have been directly impacted by a limited trade spat. We highlight four such stocks: Genting Malaysia, Mynews Holdings, Petron Malaysia and WCT.

US And China Trade Tariffs
There is no trade war yet….
… but the rhetoric on both the US and Chinese sides had been escalating until President Xi Jinping’s conciliatory speech at the Boao Forum for Asia on Apr 10, where he pledged “new phase of opening up” for China’s markets.

So far, the proposed measures over the past three months have been as follows:
● Jan 22: President Donald Trump approved a 30% tariff on solar panels and a 20% tariff on washing machines which affect China and South Korea the most.
 ● Feb 16: The United States Department of Commerce presented several options to combat China’s trade practices, including tariffs of 24% on all steel imports (and 7.7%
on aluminium) which are widely seen as aimed particularly at China, the world’s largest steel maker.
 ● Mar 7: Europe pushed back as the EU officials threatened to place tariffs on American-made goods if the US would impose such tariffs on imported steel and aluminium.
●  Mar 8: The US approved 25% tariffs on steel and 10% on aluminium; Mexico and Canada were granted initial exemptions.
 ● Mar 22: President Trump announced a plan to impose annual tariffs on USD50bn worth of goods from China.
 ● Mar 22: China made its own threat stating it would impose tariffs on USD3bn worth of American-made goods. The move was in response to the earlier decision in March by the Trump administration to impose steel and aluminium tariffs; this announcement came shortly after President Trump had disclosed his USD50bn tariff plan.
 ● Mar 22: The US decided to grant more exemptions on its steel and aluminium tariffs by offering temporary exemptions to the EU, South Korea and others.
 ● Apr 2: China imposed tariffs of up to 25% on 128 American-made products (including wine, pork, pipes, etc.) in response to the US-imposed tariffs on steel and aluminium. This action would mainly affect the US farm land and the rust belt communities, which have been politically important for President Trump.
 ● Apr 3: The US targeted electronics and it formally proposed tariffs on USD50bn worth of Chinese-made products, including flat-screen TVs, medical devices, aircraft parts and batteries.
 ● Apr 4: China countered with tariffs on soybeans, cars and chemicals and proposed USD50bn in tariffs on additional American-made products.
 ● Apr 5: President Trump doubled down and said he was considering imposing additional tariffs on USD100bn worth of goods, in response to China's retaliation.
 ● Apr 10: While speaking at the Boao Forum, President Xi promised a new round of opening up in China. Chinese officials were quick to emphasise that these measures were always a part of China’s economic plans and were not in response to the US threats.

There is an important reason to take this war of words seriously. For many years, before he became President, Mr Trump has been critical about the global trade system being unfair to the US economy and it is one area where he has been consistent. President Trump has always felt the US was not getting a fair deal from its trading partners. China has been singled out as the most “unfair” partner of all as it ran the largest trade surplus with the US at USD375bn in 2017 2 .

Regardless, there is a reason to predict this won’t go much beyond words. After all there are no winners in this war and this fact alone makes one believe that an actual trade war may not actually materialise. The issue really comes down to what each party hopes to achieve, what tools they have at their disposal, and ultimately what each is willing to compromise.

To be fair, the US complaints do have a certain amount of legitimacy, since China is not as open to imports from the US as the US is to imports from China. Just a couple of examples: the tariff China applies on US-made cars is 25% while the US imposes only a 2.5% tariff on Chinese-made autos; also, there is a forced transfer on technology that is imposed by China on the US firms, when setting up of joint ventures, as there are limits on ownership.

However, making the trade deficit the poster child is probably the way to go. The US current account deficit largely reflects a shortfall of domestic savings to investments, and unless the savings or investments rates change, the trade deficit will largely remain unchanged. If the US imposes tariffs on China, it may reduce its deficit with China but it may also in turn increase its deficit with some other countries. Therefore its overall deficit (as a percentage of GDP) would probably remain unchanged. There may also be a secondary effect - if the overall cost of imports rises, it would in turn affect the exchange rate, and hence the magnitude of the deficit.

In any case, if the US does go down the tariff route, the main impact on ASEAN is likely to
be through the value chains, and most likely be felt on electronics and electrical appliances sectors which we have addressed before.

The Chinese tariffs are likely to have a different effect as there isn’t really a value chain that uses intermediate inputs from the ASEAN which ends in the US. In any case, the Chinese tariffs are directed at agricultural products and more likely, the main result will be through a rise in the price of certain global commodities.

If matters get bad, there could be a rise in risk aversion, and markets may move to a “risk
off” setting. The Fed, despite its claims that its actions will not be affected by tariffs, is likely to take the rise in policy rates to a flatter trajectory than what we are predicting. At the very least, the Fed may take on a "wait and see" approach and which case the safe haven ssets, such as the US Treasuries and currencies such as the JPY, are likely to rally.
If things get really worse, it is possible that China may use other methods which it has at its disposal and the US doesn’t. For instance, there is already speculation that China may hoose to devalue the CNY 3 . There also is a possibility that China could threaten to sell or
even outright sell part of their holdings of US Treasuries, even at a loss.

Ultimately, how this pans out will depend on what both sides really want. In our view, if the US wants a greater access to the Chinese markets, it is likely to obtain it. If, on the other hand, this is actually a battle for the future of technology, such as robotics, electric cars, aerospace, or for cutting edge investments in artificial intelligence, the US may find a China that is not malleable. If restrictions are applied on Chinese acquisitions, then we may really be seeing a trade war.

For now, our expectations are that the war of words may continue with occasional threats
and occasional concessions and the markets may dance in step. This matter should probably stop at a certain stage, before it actually becomes a war of action. In such a scenario, various opportunities present themselves, both in defensive stocks or in stocks
where there has already been an over-correction.

Malaysia

Of the stocks under our coverage, about 71% have seen an YTD decline, battered not only by negative sentiment arising from the US-China trade tantrums but also by caution over the impending 14 th General Election (GE14). Both the US and China are important trading partners for Malaysia, while the electrical & electronic (E&E) segment is a major component of Malaysia’s exports. Naturally, technology sector names have been the worst affected as investors price in the potential negatives. However, many other stocks have been caught up in the sell-off and include domestic-centric stocks that should not be directly impacted by a limited trade spat. We highlight four such stocks.

malaysia stocks trade war

Genting Malaysia (GENM MK, BUY, TP: MYR5.94)
We like Genting Malaysia’s earnings resiliency from its casino operations, which in our view could prove to be one of the best defensive picks amidst current US-China trade friction. While the share price has underperformed the benchmark FBM KLCI YTD, we advise investors to accumulate on weakness as we continue to see the opening of its 20 th Century Fox outdoor theme park by end-2018 to be a major visitation re-rating catalyst. This could then spur patronage to its hilltop casinos and hence improve profitability in the long run.

To briefly recap, the new facilities under its Genting Integrated Tourism Plan (GITP) would continue to open progressively over the next 6-12 months. Management reaffirmed that the 20 th Century Fox outdoor theme park is set to open later this year, while the Skytropolis indoor theme park would commence operations in 2H18. Out of the MYR10.4bn capex allocation, the group has thus far spent MYR6bn to date, with the remaining likely to be utilised by 2018/2019. Overall, 4Q17 visitor arrivals to the hilltop resorts grew to 6.7m (+34% YoY) and we expect further upside come 2H18 upon opening of new facilities.

Mynews Holdings (MNHB MK, BUY, TP: MYR2.03)
Mynews’ prospects are largely driven by the domestic market, and we think it is unlikely to be affected by the trade friction. This is given that all of its Mynews convenience store outlets are based in Malaysia and all of the products are sourced locally. We like Mynews for its attractive value proposition of exciting earnings growth, ambitious multi-pronged expansion plans, as well as the leadership of an entrepreneurial and driven management team. Its earnings growth would be underpinned by the outlet expansion as well as the rising demand for convenient ready-to-eat (RTE) food, which would be captured by its food manufacturing plant.

Petron Malaysia (PETRONM MK, BUY, TP: MYR10.70)
The group’s products are mainly sold in Malaysia (largely gasoline and diesel products) and pricing is pegged to weekly changes in Means of Platts Singapore (MOPS), therefore a trade war would not affect the group’s business directly. We like this stock because we think it has been oversold on overblown concerns of weaker refining margins. After factoring in significantly weaker (27% lower) gross margin/bbl in 2018, the implied FY18F P/E is at 8.9x, still an attractive level for a mid-cap. In addition, its petroleum product sales are also strong, with high single-digit growth (market growth was close to nil) achieved in FY17 due to effective marketing strategies. Petron Malaysia focuses on refining and distribution of petroleum products, concentrating largely on the Malaysian domestic market.

WCT (WCTHG MK, BUY, TP: MYR2.18):
A potential breakdown in trade negotiations between the US and China, in our view, would have little bearing on the Malaysian construction industry. High impact public transportation projects that have been announced or awarded such as the Mass Rapid Transit Line 3 MRT3), KL-Singapore high speed rail (HSR) and the East Coast Rail Link (ECRL) sit atop the Malaysian government’s list of priorities due to their social and economic benefits. In addition, funding for the projects has either been identified (HSR, ECRL) or is in the final stages of being determined (MRT3).

The Malaysian stretch for the HSR project is to be funded by the Malaysian Government, while the ECRL project would be funded by a soft loan provided by China Exim Bank. The MRT3 project, meanwhile, is expected to be funded by a consortium of local and international banks. A potential breakdown in trade negotiations between the US and China is unlikely to significantly shift China’s commitments on its One Belt One Road (OBOR) initiatives – and ECRL’s soft loan from China Exim Bank – in our view.

For exposure to the construction sector, we recommend that investors buy WCT. The company was one of only a handful of contractors that secured work packages for both the MRT2 and Light Rail Transit Line 3 (LRT3) – where It was the only company to secure three packages totalling MYR1.7bn. Hence, we see WCT as a good proxy to the bulge in government spending for domestic public transportation projects. The stock is underappreciated, in our view, having retraced 25% YTD. This is despite the company sitting on an outstanding orderbook of MYR5.6bn, which is a record for the company, and underpins our forecasted 3-year earnings CAGR of 21%.

source: RHB Research Institute – 13/04/2018

Apr 11, 2018

GE14 Election Themed Stocks

The upcoming general election could be a moderate market sway factor; 2H18’s market outlook would be cautious regardless of the outcome. While ruling coalition BN is set to retain the parliamentary majority in a three-way contest, there are still uncertainties relating to popular vote count and hotly-contested states. We expect the FBMKLCI to mildly trend up towards polling day, although the market remains divergent (amid deep profit-taking in small/mid caps).

WHAT’S NEW
Possibilities explored in GE14. The consensus is for Barisan Nasional ( BN) to retain its majority in parliament (albeit at a lower popular vote count) in the country’s 14 th general election (GE14), which is widely expected to take place in early-May 18. A big positive factor for BN is Pan-Malaysian Islamic Party’s (PAS) splinter from the main opposition coalition Pakatan Harapan (previously named Pakatan Rakyat), which creates a three-corner fight that opens up the possibilities of BN regaining a two-third majority in parliament (currently 59.9%) and regaining control of the states of Kelantan and Selangor. On the other hand, Pakatan Harapan is raising its challenges in BN’s incumbent states of Kedah, Johor and East Malaysia, boosted by the joining of former prime minister Tun Dr Mahathir Mohamad (who counts in his support sacked deputy prime minister Tan Sri Muhyiddin Yassin, a strongman in Johor). Meanwhile, sacked United Malays National Organisation (UMNO) vice president and Sabah strongman Datuk Seri Shafie Apdal formed a new opposition party, Sabah Heritage Party (WARISAN), in 2016.

Mild uptick anticipated, but cautious environment post GE14. Despite the current caution, FBMKLCI should mildly firm up as we head towards the polling date, in line with most previous pre-GE market behaviour. However, expect more mixed performances in the small/mid-cap space, as investment sentiment has turned defensive much earlier than expected. Our base-case scenario of post-GE result reaction remains market neutral to slightly negative, and we continue to brace for a more subdued investment climate post GE14 particularly in 2H18 (although should the market continue to languish, there would be a temporarily rebound post-GE), as global liquidity contraction remains the over-riding issue. We maintain our end-18 FBMKLCI target of 1,830 which implies a forward PE of 15.3x (+0.4SD to the historical mean).

ACTION
Valid GE plays. Although the current cautious investment sentiment implies fewer beneficiaries and shallower returns, our key GE14 beneficiaries identified should still deliver attractive stock returns – MRCB, Felda Global Ventures, KPJ Healthcare and Affin Bank. Other notable beneficiaries (although some are loosely linked to the theme) include some construction companies (eg Gabungan AQRS) and index heavyweights (particularly banks like CIMB).

Top picks in this theme are BUY-rated large caps CIMB Group and Gamuda , and small/mid caps Cahya Mata Sarawak , Gabungan AQRS , and Protasco , and HOLD- rated MRCB . These stocks also offer upside post-GE

election theme stocks

ESSENTIAL
The journey towards GE14 has been accompanied by spectacular political news and developments, namely: a) the second sodomy charge and jailing of prominent Opposition leader Datuk Seri Anwar Ibrahim, b) revelation of massive corruption in the Ministry of Finance’s unit 1MDB (which gained international notoriety), c) sacking of prominent UMNO leaders who had criticised the 1MDB cover-up (Deputy Prime Minister Tan Sri Muhyiddin Yassin, Vice President Dato’ Seri Shafie Apdal and Kedah chief minister Dato’ Seri Mukhriz Mahathir) along with the country’s attorney general, d) management tussle at Federal Land Development Authority (Felda), and e) controversial reading of Hadi’s Bill (referring to PAS president Tuan Guru Dato' Seri Hadi Awang’s proposal which will empower states to implement Islamic laws). Meanwhile, Sarawak has set up state-owned oil and gas exploration firm Petros as part of its efforts to significantly raise its share of the state’s oil revenue (it currently receives only a 5% royalty).

Base case: BN to maintain a simple majority in parliamentary seats... In our base- case scenario of a three-way fight between BN, Pakatan Harapan and PAS in Peninsular Malaysia, BN should maintain a simple majority of parliamentary seats (of around 60%). However, regaining a two-third control remains an uphill task, given the likelihood of slipping popular votes.

…amid slipping popular votes. While the consensus view is for BN’s popular votes to slip a few percentage points (GE13: 47.4%), BN should maintain above the 40% commonly-thought threshold that would allow it to retain a simple majority in parliament. However, this situation is less certain in various state elections.

Election factor a short-term sway phenomenon. While unexpected election results can be a significant market sway factor in the near term, such market reactions have been short-lived in the past. For example, when BN’s control of parliamentary seats surprisingly slipped below two-thirds during GE12, the FBMKLCI plunged by as much as 9.5% in a day, triggering a trading circuit breaker at the worst level. However, the FBMKLCI recouped most of the losses within a couple of weeks, once investors were assured of the continuity of political stability and business-friendly policies. Both BN and Pakatan Harapan are mindful of maintaining business-friendly policies; Pakatan Harapan has on various occasions highlighted that it will generally uphold the sanctity of government contracts should it win the election. Eventually, equity markets will be dictated by external and domestic economic fundamentals and liquidity considerations.

election effect

Trading plays. GE14 beneficiaries should deliver attractive returns to government-linked companies Felda Global Ventures (FGV), KPJ Healthcare and Affin Bank (which interestingly has delivered good returns in most pre-polling periods). • Defensive BUY-rated stocks should gain prominence post GE14 . They include BUY- rated Berjaya Sports Toto , DiGi.Com, Petronas Dagangan, TM and Tenaga Nasional. FMCG companies continue to appeal as a safe haven, and among these, downtrodden BUY-rated BAT should appeal for its c.8% prospective yield. Likewise downtrodden Astro Malaysia (HOLD).

Opportune time for long-term investors to accumulate selected mid caps. We feel the sell-offs related to global liquidity tightening, US-China trade war and GE fear factors are overdone for many mid caps (although we would generally avoid small caps). Although many of these stocks have still retained their past years’ huge capital returns even after the recent rundown, they continue to promise solid growth prospects through the intermediate term. Conviction stocks in this space continue to be Ann Joo Resources, Inari Amertron, and VS Industry.

source: UOBKayHian – 10/04/2018

Mar 15, 2018

DBS: Underweight On Malaysia

Malaysia (Underweight)
“Earnings growth still intact”, 5 5 March Bernard Ching,
Macro conditions in Malaysia remain encouraging
4Q17 GDP growth of 5.9% was ahead of expectations, which brings full-year growth to 5.9%. Going into 2018, Alliance DBS’s economist has pencilled in a 5.4% growth.
The moderation in economic expansion reflects the high-base effects and a tighter monetary regime, both domestically and globally, which could put a lid on growth. Yet, 1H18 GDP growth should remain robust given the fiscal pump-priming ahead of the 14th general elections. Private consumption recovery as well as robust exports will remain the key drivers
of growth.

Volatility driven by external and domestic factors

Having said that, market volatility will likely remain elevated in the near term on concerns of faster-than-anticipated inflation and monetary tightening in the US. Furthermore, the imposition of anti-dumping tariff by the US administration on the import of steel and aluminium has stoked fears of retaliatory actions by affected major trading partners such as China and Europe.

On the domestic front, we believe risk aversion has picked up towards small- and mid-cap stocks as election noises have ratcheted up in recent weeks. Furthermore, the 4Q17 earnings season had failed to spring any positive earnings surprise particularly for the small- and mid-cap stocks. As a result, the FBM Small Cap and FBM ACE indices, which are gauges of small- and mid-cap stocks in Malaysia, have underperformed blue chip stocks as represented by the benchmark FBMKLCI.

Valuation is undemanding
The valuation of FBMKLCI is undemanding as it is currently trading near its historical mean at CY18 PE of 16.4x based on our forecasts. Relative valuation against regional markets is
also not demanding following its laggard performance in 2017. The KLCI 12-month forward PE premium over MSCI SEA is currently at 1.0x, which is below the historical high of 1.2x.

Rally sustainable
We believe that the market rally can still be sustained by solid macro conditions, both domestically and globally, as well as rebound in earnings growth. We view the current market correction as an opportunity to accumulate on weakness.
Regional markets’ earnings growth and PE valuationsunderweight malaysia
KLCI target raised to 1950
Following the recent earnings revision, we have raised our end- 2018 FBMKLCI target from 1,870 to 1,950 (implied 17.2x PE), which is derived using a bottom-up valuation approach.

Investment themes
Our key investment themes remain unchanged, i.e. (1) cyclical recovery in loan growth and interest-rate hikes, (2) cyclical global oil & gas capex recovery, (3) sustained E&E exports, and (4) tourism benefitting from discretionary spending recovery and an influx of Chinese tourists.

Our top banking picks to ride the cyclical recovery in loan growth and interest-rate hikes are Maybank and CIMB. We are adding Hong Leong Bank to the fray now following its stronger-than-expected quarterly results.

For the oil & gas sector, Hibiscus is the best proxy for crude oil price recovery, given that it is a pure upstream exploration and production player. We also like Wah Seong and Bumi Armada which have a significant overseas footprint to capitalise on the global oil & gas capex recovery.

Our preferred proxy for E&E exports is the electronic manufacturing services sector, given its cheaper valuation and higher growth than the technology sector. SKP Resources remains our pick for this theme. The strengthening of the Ringgit is not a concern for SKP Resources as its revenue is denominated in MYR and it enjoys a full cost-pass through an arrangement with its key customer.

On the tourism theme, Yong Tai is our sole pick, which is poised to benefit from the influx of Chinese tourists once its Encore Melaka theatre opens in May 2018. We have dropped AirAsia as a top pick as its share price has rallied to our target price, leading us to downgrade it to HOLD. We have also dropped MAHB (although it remains a BUY) as we believe regulatory uncertainty will cap its near-term performance.

There is no change to our sector call. We are reiterating our Overweight calls on banks, EMS, healthcare, and oil & gas sectors. We are also reiterating our underweight calls on the
building materials (cement) and glove sectors.

Maintaining Underweight
We are maintaining the market as Underweight as we believe foreign flows may still be lacking in this market over lingering concerns. Sentiments could continue to be positive towards the elections, but any further delay in elections could see more political volatility unravelling.
source: DBS Group Research  – 13/03/2018