1Q15/2015 Investment Strategy - Be Selective. All told, the local equity market is expected to remain choppy and volatile for the time being. As such, we have to be very selective and probably be more trading-oriented in our stock picks.
Timing-wise, the benchmark index is traded at c.9% discount to the consensus index target of 1,900. This is fairly close to its 6-Year -1SD-level of 8.5%. In fact, at the recent low of 1,730.77, it was traded at c.10% discount; hence a temporary bottom could have been seen. Coupled with the favourable seasonal factor (stronger 4Q & 1Q), the downside could be limited from here. Of course, this anticipation is premised on stable oil price above USD60/barrel. As such, we would advocate a Buy On Weakness (B.O.W.) strategy.
Focused Theme Plays.
· Bottom-fishing. Under the assumption of a stable oil price above USD60/barrel, we would like to bottom-fish stocks especially those heavily sold down stocks i.e. index-linked as well as Oil & Gas stocks in 1Q15 to capitalise on any possible rebounds due to the recent oversold technical condition. Figure 23 clearly list these OUTPERFORM calls that YTD, have way underperformed the FBMKLCI including Oil & Gas stocks. Within this list, we notice SKPETRO (OP, TP: RM3.03),BARAKAH (OP, TP: RM1.62), UZMA (OP, TP: RM2.02), PERDANA (OP, TP: RM1.61) and CIMB (OP, TP: RM6.27) were the Top few laggards even after the recent downgrades.
· Natural hedge against oil price weakness. On the contrary, we believe AIRASIA (OP, TP: RM3.27) as well as Plastic Packaging players i.e. TGUAN (OP, TP: RM3.70) are likely to get a boost from the lower oil prices. Nonetheless, the recent tragedy of AirAsia Indonesia Flight went missing could be a share price dampener for AIRASIA, at least in the short-term.
· GST beneficiaries or sectors/stocks those are less sensitive to GST. As GST will be implemented starting 1 April 2015, consumption driven sectors could turn weaker. Based on other countries’ experience, we believe a weaker tone could set in for the next two consecutive quarters after the implementation of this new tax regime. As such, for middle-term investment horizon, we would emphasis on GST beneficiaries, such as MYEG (TB, TP: RM4.73), or sectors/stocks that are less affected by GST such as export-driven sectors i.e. E&E players, OEM and Gloves manufacturers. Coupled with the trend of weaker ringgit and new products launching, we believe HARTA (OP, TP: RM7.36), MPI (OP, TP: RM6.80)and VS (TB, TP: RM3.56) should act as good proxies under this investment thesis.
· Construction, the next major engine of growth apart from export. While some market observers are sceptical over the job flows continuity as: (i) Petronas is likely to cut capex by 15%-20% in 2015, and (ii) lower government revenue arising from lower oil prices, hence, the need of government to cut development expenditure to meet its fiscal deficit target; we beg to differ. We opine that the cut in Petronas capex could translate into an effort to maintain Petronas’ dividend to the government. Besides, most of the sizeable projects are under PPP (Public Private Partnership) or PFI (Private Funding Initiative) arrangements. As such, we reckon that the concerns over government fiscal position may be overly magnified. Furthermore, we believe government could still re-prioritise some of the projects instead of cancelling them. Recall that in Budget 2015, the government is expected to focus on transportation infrastructure and affordable housing projects namely: (i) KVMRT2, (ii) urban highways, (iii) TRX, and (iv) PR1MA housing. Our preferred stocks to benefit from news/contract flows in the near-term is GAMUDA (OP, TP: RM5.29) (one of the major beneficiaries from KVMRT2 news flows and M&A activities in water).
· Back to the basic. In view of the higher market volatility going forth, investors may also consider resilient sectors such as Telco, Sin, REIT, Power, Pharmaceutical and Consumer Staple Food sectors. Within these sectors we like TENAGA (TP: RM14.65), SUNREIT (OP, TP: RM1.56), PHARMA (OP, TP: RM5.03) and QL (OP, TP: RM3.86).
Any More Alpha Stocks? We also like stocks/sectors surrounded by corporate exercise newsflow (i.e. M&A, privatization, IPO, restructuring). For instance, …
· We like MBSB (AO, TP: RM2.82) as we believe the VGO is likely to go through due to attractive valuation. Hence, at this price level, it offers arbitrage opportunity.
· SIME (OP, TP: RM10.10) is likely to be a beneficiary of high corporate newsflow in view of frequent media highlights. It is widely expected that the Group could embark in corporate restructuring exercises that include spinning off its automotive or property business segment.
· We also may see potential corporate exercise in SPSETIA (OP, TP: RM3.95). Besides, the stock has been trading sideways after rebounded from its multi-year low of RM2.95. As such, tactically speaking, any potential news flow in corporate exercise could act as re-rating catalysts.
· Listing of MALAKOFF should benefit MMCCORP (OP, TP: RM3.21) as our SOP valuation only factor in 12.3x FY15 PER for MALAKOFF (vs. TENAGA’s 14x FY15 PER).
· BJAUTO (OP, TP: RM4.29) is a clear beneficiary of weaker Japanese Yen. 1Q15 Top Picks. All told, after taking the above-mentioned thoughts into consideration, we propose the following stocks as our Top Picks. Brief comments for these picks are listed down in Figure 24. While various sector outlooks are featured in Figure 25-27.