Sunday, January 23, 2011

Market Outlook and Stock Picks for 1H2011

How high will the market go? Most of the analysts are expecting a good run in KLCI in the 1H2011 while 2H2011 performance remains uncertain. KLCI at current valuations does not appear cheap anymore as it is already trading slightly above historical average 1Y Forward PER of 15x but remains below PER’s historical peak of about 18x. Should the market breach historical levels, it should be able to touch above 1,800 points. However, I do not want to be too optimistic. Consensus is targeting KLCI to reach around 1,700 points which is at PER of about 17x (+1σ), about 10% upside from current level. Corporate earnings growth is going to be about 16% y-o-y this year based on consensus. The impetus for 1H2011 would be QE2 (Quantitative easing 2), roll-out of ETP projects, earnings growth and election play.

QE2 is going to flush the market with a lot of liquidity, at least in the early part of this year, causing money to flow into markets with higher returns including Malaysia. Foreign shareholding remains relatively low, though it has risen from a low of about 20% to current levels of close to 22%. Its 10-year peak was about 27.5% in mid-2007. Nonetheless, this could also contribute to greater volatility in the stock market. Investors should have the holding power to invest in stocks or risk losing out. One should take note of monetary tightening policies in major economies such as US in 2H2011 as QE2 ends in June 2011 which might adversely affect equities and bonds. Tightening measures could cause money outflow from Malaysian market, thus dipping the KLCI. Nonetheless, tightening measures will likely be gradual in the form of draining excess reserves via increasing fed funds rate-discount rate spread and interest rate hikes (or having the word ‘extended period’ erased from their announcements :p). Economic conditions in US such as lower unemployment, higher inflation and improving financial conditions should drive tightening measures. But for now, we are still seeing low inflation and high unemployment in US, thus tightening measures should be rather distant. Therefore, I think we could just enjoy the ride for now before unloading our chips off the table as KLCI approaches 1,700 points.

Elections should benefit sectors like construction, property and O&G sectors. Contract newsflow should be more intense ahead of the elections. Construction sector is going to benefit from rollout of LRT and MRT projects, Pahang-Selangor Water Transfer, LCCT 2 and SCORE projects. I still like Sunway Holdings (RM2.25; Target RM2.90) with news of merger with Suncity to form a newco. I’m seeing more than 30% upside from here. Naim Holdings (RM3.60; Target >RM5.00) looks attractive and could ride on Sarawak election play, another stock with possible >30% upside.

Property stocks that caught my attention: Plenitude (RM2.15; Target RM2.80) and Hunza Properties (RM1.73; Target RM2.60) appear undervalued. Plenitude has a huge cash pile of RM325mil or RM1.20 per share, about 55% of the current stock price (Wondering how they are going to utilize the cash. Acquisitions? Projects? Privatization? Bumper dividends? Plenty of financial flexibility for land purchases and projects), trading at P/BV of 0.7x and forward PER of 6x. At least the management is now taking interest in its share liquidity, as indicated by its recent 1-for-1 bonus issue in Nov 2010. On the other hand, Hunza Properties is trading at P/BV of 0.7x, relatively low gearing, forward PER of 5-6x.

O&G stocks: Generally I shun most O&G stocks, highly leveraged, high PER, earnings instability and therefore high risks in project execution. The one that I like is Coastal Contracts (RM2.46; Target RM4.00), a counter which has been highly recommended by most research houses for the longest time. At least it appears to be moving now. Having said that, it’s still trading at absurd forward PER of below 5x!!! Its ROE remains one of the highest in the industry. A Forbes’ Asia 200 Under A Billion company. Consensus target price is at around RM4.00. For my previous post on Coastal, click here. Another counter is EPIC (RM2.30; Target >RM3.00), trading at PER of 7x. Recently its shares were bought over by Terengganu Inc from AZRB for RM3.09. In view of its strong balance sheet, resilient earnings and beneficiaries of greater O&G activities in the east coast, it should be trading around 10x with fair value at around RM3.10. For EPIC posts, click here.

Consumer sector: Beneficiaries of removal of subsidies such as Bernas (RM2.81; Target >RM4.20) and Tradewinds Malaysia – TWS (RM7.40; Target >RM13.00). For Bernas, please refer to here. TWS is a giant food conglomerate with three gigantic business segments, namely oil palm plantations, rice and sugar. Its rice and sugar businesses are monopolies in their respective fields and have the ability to set the prices of sugar and rice. Its expected profits will touch RM400 mil this year, or EPS of RM1.35. There have been worries over its high debt which is at RM2.2 bil. However, judging by its resilient earnings (Who does not need food?) of about RM400 mil, RM2.2bil is not a big issue at all. 5 to 6 years of earnings will be able to cover that. Besides, it holds more than 70% of Tradewinds Plantation which has 150k ha of plantation land, with matured plantation of 70K ha and immature plantations of 20K ha. Looks like it is going to be another Kulim in the making. Currently trading at PER of 5.5x, it is “super duper” grossly undervalued. Should it follow other F&B counters such as QSR, F&N, Mamee, QL etc, it should be trading at PER of above 10x, which is still conservative. Target price works out to be RM13.00 based on 10x PER!! Judging by its monopoly businesses, it should trade close to valuations of QSR and F&N which are trading at PER of 15-18x. Oh well, you could calculate the fair value. Just to be conservative, let’s just set it at RM13.00 first, which is already a 76% upside from current levels!!!

Conglomerates: Kumpulan Fima (RM1.70; Target RM2.20), DRB-Hicom (RM2.07; Target >RM3.00). Kumpulan Fima I’ve covered quite extensively in my previous posts. Refer here. I’m looking at another 25-30% upside for Kfima. DRB-Hicom is another giant, covered extensively by Dali here.

Automotive: MBM Resources (RM3.26: Target RM5.00) looks good fundamentally. But its share performance has been disappointing thus far as it has been stuck at this level for a very long time. Investors will just get fed up with it and sell the stock every time the stock price rises a little. Its PER is at 6x, net cash of RM120m or RM0.50 per share. Proton (RM4.54; Target RM6.00) remains attractive at PER of 7x supported by net cash of RM1.4b or RM2.55 per share.

Plantation: The sector very much depends on CPO prices. How long could CPO prices hold at this level? Will it be sustainable? I can’t really see where it is going. But this level is at historic high, I see limited upside from here. Plantation stocks might have a short run only during 1H2011 and likely cool down in 2H2011 in anticipation of higher production and potential bumper crops in 2012 especially from Indonesia (Assuming stock prices run ahead of fundamentals by half a year). The weak US dollar could be a drag to plantation stocks as well. TDM (RM3.04) had a really good run lately, as with other plantation counters as well. Hahaha. But I will be more careful at this level.

Other counters that look attractive at a glance: Pintaras Jaya, Protasco, RCE Capital, Mitrajaya, Century Logistics, Freight Management, Harrison Holdings, Poh Kong, MFlour, White Horse, Paramount (Might be rather quiet after its corporate exercises though attractive), Leader Universal, Leong Hup Holdings, Ajiya. – To be continued when I delve deeper into these counters. Please share with us as well if you find any good counters. Thanks :)

PS: I find it harder to pick undervalued stocks as many good ones have moved up :( Maybe after the rally in 1H2011, I will start unloading my investments from the stock market and put them into some bond funds. Btw, not a single research house covering TWS??!! Hopefully someone will get the ball rolling :)


  1. i would like to ask how many times PE you think HUPSENG should trade. the cashpile is growing strongly, it has about 53M (with zero borrowings) or about 0.44 PS. they have a 60% dividend policy rate as announced recently.

  2. Dear David

    am doing an academic research on klse plantation sector. which one do you recommend for the research where we can access fully to their company profile and annual financial statement?


  3. IOI, KLK, IJM Plantations. I think most of the plantation companies have their respective plantation stats. You can access their monthly production in KLSE website. Their annual reports should have all the yield rates needed.

  4. Hi David , Can you comment on MNRB ? I read the latest quarter ending Mar 2011 , i think MNRB is undervalued.

  5. In a glance, MNRB is perhaps the most undervalued among the insurance companies. Price to book is only at 0.6x (Huge discount to other peers, wonder why?). Earnings look good for the past 3 quarters. However, insurance companies in general have volatile earnings and MNRB is no exception. There are a lot of one-off items which distort the profit figures. I find it quite hard to play and hard to convince investors of the sustainability of its earnings, unless probably they could show consistency of their earnings. Maybe some M&A would trigger a rerating on the stock, like MAA.