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KUALA LUMPUR: As the investing community continues to grapple with tugging economic forces going into the final month of the year, opportunities could still be had in the near and medium terms, research heads said.
Although the current situation could not have been any more different from a year ago, they said investment strategies would continue to hinge on the perceived strength of the economic recovery going into 2010, while stock and sector picking now would be crucial.
They said while more definitive signs of a sustainable global recovery had yet to emerge, investors would need to be agile and stay alert to near-term developments as well as the anticipated changes in the economic landscape in 2010.
RHB Research Institute head Lim Chee Sing said while corporate earnings in the third quarter (3Q) of the year had shown better-than-expected results, investors would have to factor in the anticipated global policy changes next year as well as the expected phasing out of stimulus packages and tightening of monetary policy.
“2010 will be a year of policy-tightening and we expect volatility in the financial markets. The market is also expected to be flat after the Chinese New Year, but that doesn’t mean there is no money to be made if investors position themselves now,” he told The Edge Financial Daily.
Lim said given the changing environment, investors may want to invest according to themes and sectors. For the immediate term, Lim prefers the banking sector.
“The banking sector still has good price catalyst, given that banks’ loans growth has held up and non-performing loans (NPLs) are under control.
“Given that several banks had also undertaken capital-raising exercises this year, we may see more active capital management from the banks in 2010, which in turn, results in higher dividends,” he said.
According to Bank Negara Malaysia statistics, loans growth in October expanded 7.5% year-on-year, an improvement from 7.2% and 7.3% in the previous two months. Net NPL ratio on a three months’ basis remained unchanged at 2.1%, but has improved to 1.5% on a six months’ basis (from 1.6% previously).
Lim said the next to look out for would be those in the commodities sector such as oil palm planters and oil and gas players. “With the economic recovery, we are already seeing commodity prices on the upward trend,” he said.
He added that with an improving financing outlook, there could also be a return of financial demand by commodity players.
Lim said as inflationary pressures rose gradually next year, asset prices would increase, which in turn would benefit the property players and enhance their attractiveness.
Kenanga Investment Bank Bhd research head Yeonzon Yeow said as recovery was still weak, the sustainability of corporate earnings was also in question.
“At best, earnings would be flat from 3Q onwards. There would only be a big jump in earnings if there was global recovery in a big way. Little signs of recovery will not enable the kind of pick up we would want to see,” he said, adding that real recovery might only occur towards the end of 2010.
He added that from the 3Q09 corporate earnings, there was a weaker year-on-year and quarter-on-quarter topline growth, which was worrying as it showed that growth was still slow.
Hence, Yeow believes investors should be on the defensive mode and buy into stocks with good dividends and where earnings are robust, especially in the food and beverage sector.
Nevertheless, for the immediate term, RHB’s Lim believed the FTSE Bursa Malaysia KUALA LUMPUR COMPOSITE INDEX [] (FBM KLCI) would hit between 1,300 points and 1,370 points by February 2010, on the back of continuing positive results by corporates in 4Q09.
“We are upgrading EPS 2010 growth by two percentage points, following the better-than-expected results for the quarter ended Sept 30. But, valuations are beginning to be on the high side, although not overtly stretched yet,” he said.
Lim said the market tended to “overshoot” in the early stages of recovery and the FBM KLCI could shoot up two times multiple premium, given the aggressive pump-priming by the government this year, as well as the low interest rate environment and the depreciation of the US dollar.
TA Securities Holdings Bhd research head Kaladher Govindan said the market was expected to consolidate next month as book-building activity would have been wrapped up by end-November.
He pegged the year-end target for the KLCI at 1,255 before rallying again in the first quarter of next year towards Chinese New Year.
The research house had set a target of 1,370 points for FBM KLCI in the first half of 2010. “This will be due to strong turnaround in earnings momentum, continued strong liquidity, increase in domestic demand, improvement in commodity prices as well as the strengthening of the ringgit,” Kaladher said.
Given the rosier outlook, he advised investors to be selective with exposure to high-beta stocks. He also expected 4Q09 financial results to be “good”, especially in commodities-related industries, as crude palm oil (CPO) and crude oil prices would likely pick up going forward.
Meanwhile, Deutsche Bank in a recent report on Malaysia said greater earnings per share revision from the financial sectors for 3Q would continue to drive momentum.
It forecast a 17% EPS growth for 2010, with an upward bias given recently revised gross domestic product growth estimates of 5.5% for 2010 from 4.4% previously.
Continuing to be underweight on Malaysia, the research house also noted that 2010 would be a crucial year for the government and three major themes would guide growth next year including greater corporate activity, infrastructure growth and leveraged to global economic recovery.
Its top picks for 2010 include CIMB Group Holdings Bhd, AMMB HOLDINGS BHD [] and IJM CORPORATION BHD [].
Stock picks
RHB Research
CIMB Group Holdings Bhd (Target price: RM14.70; Thursday’s close: RM12.88)
CIMB Group is rapidly evolving into a regional universal bank. Its growing fee-based income will continue to give the banking group upside in terms of share price.
PUBLIC BANK BHD [] (TP: RM12.57; RM10.92)
Public Bank has consistently topped market share in terms of loans growth and it should be reflected in its earnings for 4Q09.
TENAGA NASIONAL BHD [] (TP: RM9.50; RM8.42)
Tenaga is a good proxy to economic recovery. Despite being a key index-linked stock, Tenaga is trading at 13 times PE, which is a discount to KLCI’s 16 times. Given that manufacturing activities are recovering, demand for electricity by the industrial sector would rise and drive earnings. Tenaga is also ripe for tariff re-rating as its returns on assets is 3.9% while cost-of-debt is 5.3%. Each percentage point increase in tariff translates to 2.5% to 3% rise in earnings.
KUALA LUMPUR KEPONG BHD [] (TP: RM16.40; RM15.60)
KLK is the cheapest PLANTATION [] stock. With CPO prices on the upward trend, KLK earnings are expected to rise in tandem and its focus on plantations will give the counter further upside.
GENTING BHD [] (TP: RM8.70; RM7.05)
Although the stock is trading on the more expensive side (14 times PE), it is preferred to Genting Malaysia Bhd, as the latter lacked re-rating catalyst, given that it might suffer from cannibalisation when the Genting group’s Singapore integrated resort opens.
Kenanga Research
Coastal Contracts Bhd (TP: RM3.68; RM1.95)
Far-sighted management, strong visibility and a strong record of outperforming their guided numbers are key factors. Trading at a mere 4.2 times 2010 is unjustified as compared to the oil and gas sector which is trending at least in the teens.
PLUS EXPRESSWAYS BHD [] (TP: RM3.78; RM3.31)
The upward revision of traffic assumptions will be the immediate catalyst for a higher target price and which will also lead to higher dividend assumptions.
NOTION VTEC BHD [] (TP: RM3.16; RM2.40)
Target price is raised to RM3.16 from RM2.80 previously given improving earnings visibility, sterling margins as well as the strong execution track record exhibited by the group all this while. New customers are expected to drive growth.
Tenaga (TP: RM9.28, RM8.42)
Current prices attractive. Tenaga remains a laggard to the KLCI. Expect buoyant share price performance on positive news flow 1) base tariff revision in Jan 2010, 2) fuel-pass-through formula, 3) improving demand and 4) lower coal prices.
My EG Services Bhd (TP: 55 sen; 45 sen)
A buy with target price of 55 sen using FY10E PER of 14 times and EPS of 3.9 sen. The stock is trading at attractive FY10E and FY11E PER of 11 times and nine times, respectively.
TA Securities Research
KNM GROUP BHD [] (TP: RM1.04; 76 sen)
The visibility for new orders in the industry is improving, albeit at a slower pace, after oil majors delayed their major expansion/upgrading plans for almost 14 months. Award of new projects is expected to pick up momentum gradually in the next two quarters.
BURSA MALAYSIA BHD [] (TP: RM9.50; RM8.13)
Further catalysts include a compression in risk premiums, pick-up in velocity, further improvement in sentiments, and return of foreign investors in full swing.
Public Bank Bhd (TP: RM13.50; RM10.92)
The company is expected to maintain its strong earnings growth momentum on the back of healthy double-digit loan growth (given strong approvals in the pipeline), higher operating income (particularly due to the fund management, bancassurance business with ING, various other wealth management products and remittances), and further expansion of overseas business, particularly in Hong Kong and Indochina.
RHB CAPITAL BHD [] (TP: RM6.60; RM5.36)
3Q09 net NPL ratio improved to 2.37% (2Q09: 2.52%), although still higher than the industry’s 2.1%. Management expects asset quality to strengthen and recoveries to escalate. They also do not foresee the need to make further lumpy provisions, going forward.
KL Kepong (TP: RM17; RM15.60)
The target price is revised to RM17 on the back of upgrade in earnings forecasts and long-term rubber price assumption to RM7 per kg, up from RM5 previously, in line with rising current market prices. KLK is an excellent proxy to CPO price.
This article appeared in The Edge Financial Daily, November 30, 2009.
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