This article first appeared in The Edge Financial Daily, on July 25, 2016.
KUALA LUMPUR: Given the rather unpredictable scenario in the first half of 2016 (1H16) — the ringgit strengthened after its slump in 2H15, oil prices still yet to recover since their downturn in June 2014 and Brexit — analysts are retaining a cautious stance on the FBM KLCI.
Last Friday, the FBM KLCI closed at 1.668.40. Year to date, it has dropped 1.4% since closing at 1,692.51 on Dec 31, 2015.
In a recent strategy note, RHB Research said the Brexit vote had added another layer of uncertainty to equity markets that are already in a matured stage of growth.
“The local economy is also suffering from weak exports, soft consumer sentiment and slowing domestic demand, which is manifesting itself in a sharp slowdown in money supply growth.
“We retain our cautious stance on equity markets given that we are already in a matured stage of the global growth cycle, with rising risks — although we believe that there is a low risk of a global recession in the immediate term. Policy easing is expected to continue, although policy ammunition is diminishing,” wrote RHB.
HLIB Research, in its strategy note, said the move by Bank Negara Malaysia (BNM) to cut the overnight policy rate (OPR) from 3.25% to 3% in view of the potential weakening of the external sector is positive for the market.
“The readiness of BNM to support economic growth via easing is overall positive for the market.
“Coupled with [an] improved fiscal position, low foreign shareholding and possibility of a snap election, there is potential for the market to recharge to a higher level despite [a] still-lacklustre earnings outlook,” said HLIB.
The Edge Financial Daily spoke to the heads of leading research houses on their take on stocks that are worth watching in 2H16.
Some of them cautioned that it is difficult to stock-pick in the evolving global market.
“We may be bullish on certain stocks at this point of time but the trend may go against them later,” said one head of research who requested not to be named.
Inter-Pacific Securities head of research Pong Teng Siew offered a similar view, saying it is hard for him to generalise stocks at the moment given the market’s volatility.
Pong said he does not see any specific sector being a clear beneficiary under the current market condition.
“You may say the current market is good for exports [but] those stocks under the sector may not be doing well,” he told The Edge Financial Daily.
We have still managed to list 10 that analysts think deserve attention in 2H16. The stocks are CIMB Group Holdings Bhd, Tenaga Nasional Bhd, BIMB Holdings Bhd, Kerjaya Prospek Group Bhd, Aeon Credit Services (M) Bhd, Lingkaran Trans Kota Holdings Bhd, Sunway Construction Group Bhd, Press Metal Bhd, AirAsia Bhd and IHH Healthcare Bhd.
Head of research, products and alternative investments
Investment management division Etiqa Insurance and Takaful
CIMB Group Holdings Bhd
CIMB Group Holdings Bhd would be a stock worth looking at due to its price factor. Its share price has fallen substantially over the past few years.
Compared with five years ago when it was trading at RM7.58 on July 15, 2011, CIMB’s share price has dropped as much as 43.8% to close at RM4.20 last Friday, with 9.89 million shares traded, with a market capitalisation of RM36.66 billion.
Year to date, CIMB’s share price has dropped 4% from RM4.44 on Dec 31, 2015.
The banking group saw its net profit jump 40.3% year-on-year to RM813.8 million or 9.54 sen per share for the first quarter ended March 31, 2016, from RM580.12 million or 6.9 sen per share in the previous year, on lower costs and provisions.
CIMB’s revenue or operating income for the period rose 1.2% to RM3.73 billion from RM3.68 billion a year prior.
Geographically, CIMB said that profit contribution from its non-Malaysian operations increased to 26% compared with 20% in the previous year, due to better performance from Indonesia, in line with lower provisions at CIMB Niaga.
Losses incurred in Indonesia should also be less of a drag given the write-downs and provisions it has made in the past.
The stock should also see a rebound as and when foreign interest returns to Malaysia, given its low valuation and status as a liquid blue chip.
Tenaga Nasional Bhd
TENAGA Nasional Bhd’s (TNB) status as a liquid blue chip makes it an attractive stock pick. TNB shares closed at RM14.32 last Friday, with 6.95 million shares traded and with a market capitalisation of RM80.82 billion. In a period of one year, TNB shares have appreciated by 15.4% from RM12.39 a year ago. Year to date, its shares have been up 8.1% from RM13.23 on Dec 31, 2015.
There is a limited downside to TNB’s business model as Malaysia’s national electric utility. The fuel cost pass through mechanism seems well in place in Malaysia and demand for electricity should remain decent, although not spectacular, for the remainder of the year.
Demand for industry electricity should be weak but offset by demand from the commercial side with a huge number of new malls being opened.
TNB announced on May 9 that it will subscribe to a 30% equity interest in India’s GMR Energy Ltd for US$300 million (RM1.2 billion), which is presently under the control of GMR Infrastructure Ltd, one of the largest diversified infrastructure conglomerates in India.
The investment is in line with the group’s five-year International Expansion Roadmap, which is targeted to secure new generation capacity internationally.
Earlier in April, TNB completed the acquisition of a 30% stake in Turkey-based power producer Gama Enerji for US$255 million.
BIMB Holdings Bhd
BIMB Holdings Bhd’s current 1.65 times financial year ending Dec 31, 2016 (FY16) price-to-book value (PBV) is relatively attractive considering its industry-leading return on equity (ROE) of 16%. Public Bank Bhd, for example, with similar ROE dynamics trades at 2.3 times PBV.
Our Gordon Growth-derived target price of RM4.40 (1.85 times 2016 forecast PBV underpinned by an ROE of 16%) implies 11.9 times 2016 forecast price-earnings ratio and a dividend yield of 3.4%.
We believe the stock deserves to trade at a premium to the industry’s PBV of 1.15 times, given its far superior ROE of 16% versus the industry’s 10.3%.
This is further reinforced by stronger Islamic Banking structural long-term growth prospects in tandem with the government’s initiatives to cement Malaysia as a leading global Islamic finance hub.
BIMB also boasts a relatively stronger liquidity profile, with a Common Equity Tier 1 of 12%, compared with the industry’s 10.8%, and a loan-to-deposit ratio of 87%, compared with the industry’s 89%, as well as a significantly higher loan loss coverage ratio of 200% versus the industry’s 94%.
As the only pure syariah-compliant Islamic financial institution listed on Bursa Malaysia, BIMB is likely to be a prime beneficiary of the eventual launch of the Employees Provident Fund’s first fully syariah-compliant fund by January 2017, which will have an initial capital of RM100 billion to RM120 billion.
Existing anecdotal evidence suggests that fully syariah-compliant public listed companies in other sectors, which typically comprise mainly non-syariah-complaint companies such as real estate investment trusts (REITs) and insurance companies, tend to trade at a 10% to 20% premium to conventional peers. Cases in point are the likes of Al-Salam REIT, KLCC Staple REIT and Syarikat Takaful Malaysia Bhd.
BIMB has the third-lowest gross impaired loan ratio in the industry at 0.94% (industry: 1.65%) and the highest loan loss coverage ratio at 200% (industry: 94%). This, coupled with its superior projected loan growth of 11% versus the industry’s 6%, places the group in a strong position to weather asset quality and growth challenges that the industry is currently facing.
BIMB shares closed down 0.5% at RM3.96 last Friday. Year to date, its share price has appreciated by 4.4% from RM3.83 on Dec 31, 2015.
Head of research for Malaysia
UOB Kay Hian
Kerjaya Prospek Group Bhd
KERJAYA Prospek Group Bhd currently trades at a 2017 forecast price-earnings ratio (PER) of 10 times, 30% below its peers’ average PER of 13 times. We believe the stock should trade at a premium to its current valuations given its ability to deliver significantly superior building construction margins compared with its peers of 5% to 7%.
The group is able to deliver superior margins compared with its peers as it takes the Mivan shuttering construction method, which requires significantly lower labour requirements by only using one-third of conventional construction method’s labour requirements and significantly shorter construction period of seven to 10 days per floor compared with 10 to 14 days for other contractors.
Kerjaya’s outstanding order book is at RM2.4 billion, which would be able to last it for the next three years. Year to date, the group has secured about RM666 million of new orders, surpassing its RM600 million target. However, we believe that the group may be able to easily surpass our RM700 million estimate as it is tendering for several construction jobs, whose outcomes are expected to be favourable to Kerjaya.
Kerjaya’s attractive valuations, good visibility of new contract wins and huge cash pile of RM209 million, which is almost 20% of its market capitalisation of RM1.23 billion, would continue to support its positive share price performance.
Its shares closed up 0.04% at RM2.42 last Friday. Year to date, its shares have appreciated by 39.3% from RM1.63 on Dec 31 last year.
Gan Kong Yik
Chief investment officer
KAF Investment Funds Bhd
Lingakaran Trans Kota Holdings Bhd (Litrak)
IN the current challenging market environment, given the low interest rate environment, we believe that investors should focus on high-yielding stocks to ride through the tough market.
We pick Lingakaran Trans Kota Holdings Bhd (Litrak) because of its consistency in paying dividends every year. At the current price, it should offer about 4.5% yield based on historical payout, which is attractive given the current market environment, and valuation is not excessive looking at its forward earnings.
With the recent scheduled toll rate hike, which led to higher free cash flows, Litrak is poised to declare a higher dividend payout going forward.
The traffic volume is normally stable, therefore earnings are consistent. Earnings for the year ending March 31, 2017 would be much stronger year-on-year because it would reflect the full-year earnings on the recent scheduled toll rate hike from January 2016.
We choose Litrak because it fits into the current challenging market condition. This is due to its defensiveness in the nature of its business, consistency in earnings and generous dividend payouts. And it provides comfort to investors.
Furthermore, since Litrak is the holding company of two established highways, namely Damansara-Puchong Expressway and Sprint Expressway, major capital expenditure is not needed.
Shares in Litrak remained unchanged to close at RM5.73 last Friday, with a market capitalisation of RM3 billion.
Chan Ken Yew
Head of research
Sunway Construction Group Bhd
WE remain positive on the construction sector, banking on news flow of awards for the remaining packages of Pan Borneo Highway, the mass rapid transit 2, at least 10 civil packages from the light rail transit 3 and 16 packages from the Sungai Besi-Ulu Klang Elevated Expressway, besides the Damansara-Shah Alam Elevated Expressway, which we would be expecting from August 2016 onwards.
Hence, we are including big-cap contractors like Sunway Construction Group Bhd (SunCon), which we initiated recently into our Top Pick for the third quarter of calendar year 2016.
We like SunCon for its strong execution track record, which positions it as one of the few major beneficiaries from the projects mentioned above.
That said, we also like it for its strong balance sheet that has a strong net cash position of RM300 million, which shows minimal risks of a cash call compared with other contractors.
For the first quarter ended March 31, 2016 (1QFY16), SunCon posted a 15.5% fall in net profit to RM29.06 million from RM34.37 million a year ago, due to lower revenue and profit margin.
Quarterly revenue also fell 14.5% to RM424.35 million from RM496.07 million in 1QFY15, attributable to lower delivery volume of existing projects.
SunCon shares rose 1.85% or three sen to close at RM1.65 last Friday, after 2.45 million shares changed hands, with a market capitalisation of RM2.13 billion.
Ahmad Ramzani Ramli
Banking & non-banking financial institutions analyst Kenanga Research
Aeon Credit Service (M) Bhd
WHILE the general perception is that financial service providers are facing tougher times in growing their loan portfolios amid current economic condition, we understand loan demand from Aeon Credit Service (M) Bhd’s targeted customers, which are the retail market, is still resilient, especially since the recent OPR cut.
We are looking at gross financing receivables growth rates of 8% to 9% for the financial year ending Feb 28, 2017 (FY17) and FY18.
Besides, we also like its healthy loan growth underpinned by decent asset quality, with non-performing loans expected to hover between 2% and 3%. It has healthy capital adequacy ratio, which is expected to be at a comfortable 20% versus BNM’s capital ratio requirement of 16%.
Aeon Credit’s high return of equity of at least 20% in FY17 and FY18, as well as decent dividend yields of 4.9% to 5.3%, are better than other non-banking financial institutions as well as most banking stocks.
Moreover, valuation is also undemanding at 7.7 times of FY17 price-earnings ratio.
Shares in Aeon Credit settled at RM13.40 last Friday, up eight sen or 0.6%, after 158,400 shares changed hands. It has a market capitalisation of RM1.93 billion.
AIRASIA Bhd remains our top pick for the aviation sector. Both AirAsia and AirAsia X Bhd should remain on track to report earnings growth and recovery in 2016.
Earnings growth for the two airlines continues to be aided by an improvement in demand and lower operating costs, especially from fully hedged lower fuel prices.
AirAsia’s strong earnings growth and AirAsia X’s return to profitability are largely driven by lower jet fuel prices.
Both AirAsia and AirAsia X have hedged the rest of the year’s fuel requirement at US$54 (RM219.24) per barrel (bbl), which is 28% to 33% lower than their 2015 average jet fuel price and also below the spot jet fuel price of US$58 per bbl.
We expect jet fuel price to average US$60 per bbl in 2017 and, as AirAsia and AirAsia X had only hedged 13% to 14% of their 2017 jet fuel requirements until end of the quarter ended March 31, 2016, we estimate both airlines to report lower earnings next after a stellar 2016.
We believe this provides a strong visibility of low operating costs, as the airlines continue to enhance load factors and push revenue yields higher.
Despite the recent sharp run-up in share prices, we believe valuations for AirAsia and AirAsia X remain compelling when compared with those of global low-cost carriers.
Nevertheless, several key risks are to be closely watched, including higher-than-estimated non-fuel operating costs, lower-than-expected revenue yields due to growing competition, and a slower-than-estimated recovery in earnings from associates and joint ventures.
The counter has regained from its all-time low of 77 sen on Aug 26 last year, rising as much as RM2 or 260% to close at its one-year high of RM2.85 last Friday, after 12.55 million shares changed hands.
The current price values it at RM7.93 billion.
Ng Sem Guan
Basic materials analyst
Press Metal Bhd
PRESS Metal Bhd, whose share price peaked at its all-time high of RM4.18 last Monday, is one of the stocks that investors should consider to include back on their radar screens.
The company is all set to make a comeback, with its Phase II aluminium smelter in Samalaju having resumed normal operations late last year, coupled with the full commissioning of Phase III in May 2016.
Press Metal commands 1.3% of global primary aluminium capacity and is currently in the first quartile of the global production cost curve.
Despite our conservative aluminium price assumption, we still expect a three-year forward earnings compounded annual growth rate of 26.4%.
On July 11, Press Metal announced it was planning a share split involving the subdivision of its 50 sen shares into two shares of 25 sen each, and a bonus issue, as part of an internal reorganisation that will see a new entity assume its listed status.
The bonus issue will be on the basis of two bonus shares for every five subdivided shares. Subsequently, the group plans to exchange all its subdivided shares for shares in the new entity (Newco) to transfer its listing status.
At the close of trading hours last Friday, Press Metal’s share price was trading at RM4.11, down six sen or 1.44%, giving it a market capitalisation of RM5.36 billion. The counter has gained 96.65% since the the start of the year.
Syed Muhammed Kifni Syed Kamaruddin
Head of equity research
IHH Healthcare Bhd
IHH Healthcare Bhd is our top pick for the healthcare sector due to a strong earnings growth forecast of 21% to 23% for the financial year ending Dec 31, 2016 (FY16) and FY17, its strong management team and robust balance sheet, as well as a well-diversified revenue base.
At present, we believe there is potential for further upside to its earnings should the current condition improve in the 2H16.
Backed by strong demand and lack of public healthcare amenities, especially in urban areas, we opine that private healthcare operators will continue to be the preferred choice for urban dwellers with higher disposable income and insurance coverage.
Asia’s largest hospital operator by market capitalisation, IHH reported a 37.3% rise in its net profit for the first quarter ended March 31, 2016 to RM235.48 million from RM171.48 million a year ago, driven by robust growth in revenue.
Quarterly revenue was 23.6% higher at RM2.47 billion compared with RM2 billion a year earlier, due to the organic growth of existing operations and the commencement of operations of Gleneagles Kota Kinabalu Hospital in Sabah, the Acibadem Taksim Hospital in Turkey, and the Gleneagles Medini Hospital in Johor.
IHH shares closed unchanged at RM6.48 last Friday, valuing it at RM53.34 billion. Year to date, the stock has slipped 1.52%.