Jun 13, 2013

Malaysia Equity: Market Strategy 1Q13

Liquidity boost
• Retail participation boost liquidity; Retail participation boost liquidity;    share prices  share prices have moved  have moved ahead of earnings which continue to beweighed down by  weighed down by weak CPO prices.
• Opportunities in laggards, M&A plays and  and stocks with potential to unlock more value  
• Overweight: Banks, Construction, Oil & Gas, Property. High conviction picks: RHB Capital, MISC, Maybulk, WCT
• Underweight: Telcos. Take profit: Petronas Dagangan, MAS, Bumi Armada

Better liquidity Better liquidity. Retail participation has increased along with
reduced political risk, giving the market a boost. Liquidity in regional markets should be sustainable in the near term given the relatively stable macro environment. Our YE KLCI target of 1,850, based on 16x 2014 earnings, reflects a premium to the historical mean premised on higher liquidity. The recent liquidity boost has lifted share prices ahead of earnings growth, which continue to be weighed down by lower CPO prices. Earnings downgrade have abated in the most recent quarter with our 2013 and 2014 earnings growth projected at 7.5% and10.5% respectively.

Stock gains to outpace index. In this environment, we recommend to be selective. We see opportunities in M&A plays with corporates unlocking value offering larger potential upside than the index, weighed down by gains in Telcos last year.

We see value in asset plays where current share prices are at large discounts to their sum-of-part values: MISC, DRB-Hicom and TA Enterprise and TA Enterprise. In some cases, corporates may want to realise greater value by listing some business units or demerging: IOI Corp, Maybulk, MMC Corp, Maybulk, MMC and Hong Leong Bank. For RHB Capital, there could be opportunities in merging with MBSB. Other potential M&A plays: E&O, Jobstreet, Litrak, BHIC

RHB Capital: Cheapest large cap bank in our universe at 1.3x BV versus sector average of 1.9x, and offers 13% ROE.

MISC : Trading at 0.9x BV, -1.8 SD of its historical mean, and at a discount to Petronas’ RM5.50 offer price. Chemical shipping operations riding on improving supply-demand dynamics. 

Maybulk: Listing of OSV unit POSH will help to unlock value. Solid balance sheet and trading at -1SD of mean PBV.

WCT: Unjustified laggard. Strong and diversified RM2.5bn orderbook, improving property franchise, and growing property investment portfolio.

Take profit on selected names: We see downside to stocks which earnings growth has lagged with little chance to surprise on the upside, and unattractive dividends. We continue to Underweight Telcos and see further downside for Petronas Dagangan, MAS and Bumi Armada.