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June Outlook
On IPOs and KLCI Review
The KLCI performed as expected as a reasonable stream of results provided a stable floor while strong news flow drove up Bigger Caps. For June, while the 4 upcoming IPOs and the KLCI review may draw some attention, we believe all eyes will be on the potential tussle between CIMB and Maybank over control of RHB Cap. We have accordingly added financial stocks RHB Cap and AFG into our June top buys while UEM Land, KimLun and Pos Malaysia round out our Top 5 on potential news from Iskandar Malaysia, as well as plans from DRB-Hicom for Pos.
May indeed saw Bigger Caps outperform. With companies’ results coming in largely within expectations, there were no major earnings disappointments. As such, the strong news flow on the Hong Leong – EONCap merger, gas and electricity tariff hikes and Petronas’ USD20bn RAPID project lifted the market, with attention focused back on Bigger Caps as forecast. The KLCI was the region’s best performer, bucking a global trend of weakening markets in May.
Had expected June to be quiet. We had earlier expected June to be rather quiet even as our earnings growth forecast is lifted back to 18% from 16% for 2011 and to 12% from 11% for 2012 after the 1Q2011 results reporting season. This because we had expected investors to hold on to their cash to invest in the 4 upcoming IPOs of UOA, MSM, Axis International REIT and Bumi Armada in the next 2 months. We had also expected a review in the KLCI, with the possible inclusion of UEM Land and MMHE at the expense of MAS and PLUS, to be another main market kicker in June.
But Banks may perform with a Bang. With both CIMB and Maybank announcing that they have Bank Negara’s permission to discuss merger plans with RHB Cap, we no longer think that June would be a quiet month. We could see the KLCI rally further towards our year-end 1680 pts target as buying on banks lifts the whole market although we see the 1600 pts level as difficult to crack before October. Banks and Situationals our Top Buys. All our Top Buys in May again outperformed the KLCI. Given that speculation may arise over which smaller bank could be the next acquisition target, we are fielding both RHB Cap and AFG as our Top Buys for June.
We also add in situationals UEM Land and KimLun on potential good news in Iskandar Malaysia while Pos Malaysia could benefit from the official sale of Khazanah’s stake in the company to DRB-Hicom during the month.