Malaysia (Underweight)
“Earnings growth still intact”, 5 5 March Bernard Ching,
“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 valuations4Q17 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.
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.
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
