Another quarter of upgrades
• Third consecutive quarter of earnings growth. More positive surprises, Banks exceeded expectations. Our universe earnings are raised by 1.7% for 2009 and 4.4% for 2010. • We believe the longer term upward trend is intact (end-2010 KLCI target: 1,448) on the back of projected robust growth
and strong liquidity, although the benchmark KLCI is vulnerable to a near term correction.
• Positive outlook for bank, construction and power stocks. Stock-picking remains our preferred strategy - we like selected value and yield plays, and small-mid caps. More upside for selected sectors.
BANKING: We remain keen on banks being key beneficiaries of the economic recovery. Provisions should continue to taper off in the coming quarters and there could be further earnings upgrade for selected banks when the Overnight Policy Rate rates move up. Our picks in the sector:
(i) Public Bank (Buy; TP: RM12.20) for its superior asset quality, extraordinary loans growth, attractive 6% dividend yields and inspiring ROEs of above 23%;
(ii) CIMB (Buy; TP: RM15.20) as a capital market recovery play, cheaper proxy to Indonesian exposure and its regionalization;
(iii) high quality plays such as Hong Leong Bank (Buy; TP: RM9.50) that has impressive ROEs and
EON Capital (Buy; TP: RM6.30), which is the cheapest bank in our universe at 1.1x book value.Construction opportunities. We believe recent share price weakness over worries of a devaluation of the Vietnam dong and Middle East exposure would be a good opportunity to accumulate construction stocks. Players with larger balance sheets such as IJM Corp (Buy; TP: RM6.00) and Gamuda (Buy; TP: RM4.25), and Government-Linked Companies such as MRCB (Buy; TP: RM1.80) may benefit from the Government’s plan to secure greater private
sector participation. A key earnings and share price driver for these players would be margin recovery as new projects secured achieve greater level of completion.
Power picks. We like Tenaga (Buy; TP: RM9.60) as a beneficiary of the economic recovery. Earnings are sensitive to demand growth. Every 1% improvement in electricity demand would raise earnings by 9%. Moreover, we believe Tenaga could receive a base tariff hike by January 2010 following higher capacity payment to Jimah. We also favour Tanjong (Buy; TP: RM19.25) as a value play. The stock is trading at 10x FY10 earnings and offers 4.2% yield supported by its resilient earnings. Other favourites include MISC (Buy; TP: RM9.60), PLUS Expressways (Buy; TP: RM3.80), Malaysia Airports (Buy; TP: RM4.50) and SP Setia (Buy; TP: RM5.00).
