Market ahead of fundamentals. With the Ratio of upgrades versus downgrades rising to 0.70 from 0.23 in 4Q08, the market would have been expected to rise. Nonetheless, we feel that the 21% rally YTD has been excessive since the ratio has yet to rise above 1.00. While we turn more optimistic on the economy and the market in 2010 (our KLCI fair value for 2010 has been raised to 1150 pts), we still feel that the market is fairly valued as it has exceeded our 2009 fair value of 1040 pts. We would advise investors continue to trade the market with focus on O&G, and selected steel and construction stocks. Any rally that takes the KLCI towards the 1150 pt-level would trigger a Sell call.
O & G
Weaker showing in 1QCY09 factored in earlier. Like others, we had already expected weaker performance for this quarter due to: 1) the wait-and-see attitude of oil majors; 2) massive re-tendering of projects in view of the lower raw material prices, and 3) uncertainty in crude oil price. In the case of Alam, we believe the betterthan- expected results came about because the industry had earlier factored in a downward revision of charter rates by Petronas and its PSC contractors in tandem with the lower crude oil price but this did not materialise.
Going forward, we believe the O&G industry is at the recovery stage given the stabilisation in crude oil price at See important disclosures at the end of this report
OSK Research PP/10551/10/2009 (022563) June 2, 2009
OSK Research 13 above US$50/barrel. Our top picks are Alam (BUY, TP-RM1.95), Petra Perdana (BUY, TP-RM3.50), Kencana (BUY, TP-RM2.14), and Wah Seong (BUY, TP-RM2.58).
Sustainable production cost. The price of latex has been sustainable at RM4.00-RM4.20/kg over the past 3 quarters following the fall in commodity prices. Latex cost makes up about 50%-60% of rubber glove manufacturers’ total production cost. The stable cost has contributed to the industry expectations of their
performance. However, Hartalega’s results were above our expectations on better margins from its product mix while Kossan suffered losses from its non-glove segment of technical rubber products (TRP), where sales fell in line with the slowdown in the automotive industry and Adventa was affected by the forex loss. Our stock coverage includes Top Glove (Call and TP under review), Kossan (BUY, TP-RM4.48), Supermax (BUY, TPRM2.05), Hartalega (BUY, TP-RM4.10) and Adventa (BUY, TP-RM1.31).
Steel
A sea of red in 1H09. In projecting more spring cleaning by local steel mills for 1HCY09, we had accordingly revised downwards most of the steel companies’ earnings forecasts ahead of their official results announcemnts but as it turned out, most of the players still reported weaker numbers. However, we are not surprised with the performance as we have anticipated a further loss of one or two quarters before steel mills make a fresh start in 2HCY09. Based on the projected quarterly earnings trend, we are most certain FY09 will be a washout year for most of the local steel millers. However, we remain hopeful of a better FY10 as various governments pour in money via their respective stimulus packages. As the market always prices in a company’s future outlook 6 months ahead, investors should shift their focus to a potential revival next year and thus we had recently rolled over our existing valuation parameter to FY10.
