HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 24 May 2019, 10:25 AM


Strategy - Searching for That Silver Lining

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News that Malaysia may be removed from the WGBI has had a negative spill over to domestic equities. The KLCI is at its lowest since late -2016 and is the only negative index within ASEAN-5 YTD. While economic expectations have been lowered, the silver lining is that pump priming is being resuscitated. Our strategy is unchanged – seek high yielders (dovish expectations) and selective exporters (weakening ringgit). Those looking for rebound plays can consider “beta oversold” stocks. We feel that the recent market sell down now offers sufficient buffer for nibbling. KLCI P/B is at -1SD, which in the past, has been quite a credible gauge of bottomed valuations. Maintain KLCI target at 1,710.

Hampered by negative news. Earlier this week, FTSE Russell placed Malaysia on its Watch List for fixed income markets. Should Malaysia’s market accessibility level be downgraded from 2 to 1, it would be removed from the World Government Bond Index (WGBI) which it has been in since 2004. The potential exclusion of MGS from the WGBI has triggered a broad based risk aversion towards Malaysian asset classes in general, equities included. On a separate but somewhat related note, Norway’s Finance Ministry recently directed its USD1trn sovereign wealth fund to cut holdings in emerging market bonds, which includes Malaysia (totalling RM8bn). Since the start of 2Q19 to date, the ringgit has weakened -1.4% against the greenback.

Still a challenging time for Malaysia but... Post GE14, the first term PH government has implemented a slew of (perhaps socialist leaning) policies such as removing GST, fuel price ceiling, increasing minimum wage and new taxes targeted at the T20. Although such measures are rakyat friendly, these might not have gone down well with investors, especially when the government is singing the tune of tightening its fiscal belt. On a brighter note, while some of PH’s reform agenda is taking shape (e.g. “zero-based” budgeting, open tenders and Parliamentary reforms), such benefits will only be apparent over the longer term. In our view, Malaysia remains in a tough spot during this transition phase, as it walks a tight rope, balancing between growth and fiscal prudence against an uncertain external backdrop (US-China trade war and Brexit). We note that economic expectations have been lowered with BNM’s recent 2019 GDP forecast at 4.3-4.8% vs MoF’s earlier projection of 4.9% (Nov) and the 4.5- 5.5% p.a. range for 2018-2020 during the 11MP MTR (Oct).

…pump priming to restart. Our casual chats with businesses have garnered an all too common reply that “things are not really moving”. This is not entirely surprising as the new administration has spent the past year getting its house in order and fixing various alleged scandals. Not to mention “distractions” from the several by-elections that has also taken place (7 so far with Sandakan being the 8th). With almost 1 year passing since GE14, we are now getting a greater sense that the Government is placing a stronger focus on pump priming the economy. After lower price renegotiations, work on the MRT2 (RM30bn) is proceeding while the LRT3 (RM16bn) should see construction resume by mid-2019. More recently, (i) ECRL has been resuscitated at a lower price (RM66bn to RM44bn) but higher local content (30% to 40%), (ii) technical studies will soon be done on the potential revival of HSR, (iii) the Penang Transport Masterplan (RM46bn) is gaining traction with the PIL1 (RM7bn) getting EIA approval, (iv) preliminary packages for the RM11bn coastal road and 2nd

trunk road in Sarawak have been dished out and (v) 121 infra projects that were awarded by the previous BN administration totalling RM14bn will resume after cost reviews. We reckon that accelerating the pump priming process has become increasingly crucial to generate the “feel good factor”, especially so after PH has consecutively lost the 3 previous by-elections (Cameron, Semenyih and Rantau).

Malaysia lags behind. Yesterday, Malaysia’s bellwether KLCI closed at YTD low of 1,620 which is also its lowest point since late-2016. Against its ASEAN-5 peers on a currency adjusted basis, the KLCI is the only benchmark index in negative territory YTD (-4.4%) vs STI (+9.7%), SET (+8.8%), JCI (+7.6%) and PCOMP (+6.6%). Foreigners have been net sellers in Malaysian equities from Feb-Apr, bringing the cumulative YTD sum to -RM2.3bn. Still, we believe that the risk of a significant foreign outflow from Malaysian equities (à la 2015: -RM20bn and 2018: -RM12bn) should be less profound this year. Tracking the cumulative net change in foreign holdings since 2011 to date shows that this is at its lowest point (-RM14bn), signalling that foreigners are already underweight on Malaysian equities (see Figure #3).

Strategy unchanged. In our previous Market Outlook report (1 Apr), we mentioned that major central banks (Fed and ECB) as well as BNM are likely to continue with their dovish bias as external uncertainties relating to the US-China trade negotiations and Brexit will persist into 2Q19. While we do not expect an OPR cut for the upcoming MPC meeting (6-7 May), dovish expectations itself should stir such plays for 2Q19. Our strategy to seek high dividend yielders remains unchanged and the recent market sell down further solidifies the need to stay defensive. For the yield angle, we like selective REITs (IGBREIT and MQREIT), Maybank for large cap liquid yield, BAuto (strong earnings growth), Taliworks (resolution of SPLASH water deal) and LiiHen (export play). Also, our earlier view for a sequentially weaker ringgit in 2Q vs 1Q remains unchanged (-1.4% thus far into 2Q). In this regard, we like Top Glove and recently also upgraded our rating on Hartalega to BUY. The only slight change to our 2Q19 strategy is that we are turning warmer on construction in view of pump priming resumption (as elaborated earlier). While the sector remains a NEUTRAL (albeit with a positive bias), we think there could be plays on laggards such as Kim Lun and Hock Seng Lee.

Screening for the oversold. In light of the market weakness, we screened our coverage to identify which socks have been oversold YTD (vs KLCI) on a beta adjusted basis (see Figure #6) for possible bottom nibbling ideas. Stocks that have been oversold by more than 5% on a beta adjusted basis that we have BUY ratings include Hartalega (oversold by -18.5%), Pharmaniaga (-17.8%), Top Glove (-17.6%), IOIPG (-10.2%), AirAsia (-8.8%) and Homeritz (-5.6%).

KLCI target at 1,710. We maintain our KLCI earnings growth forecast of 2.1% for 2019 and 4.5% for 2020, below its post-GFC CAGR of 6.2%. While earnings growth is lacklustre, we feel there is now sufficient buffer with the recent sell down to warrant some nibbling. KLCI PE (1 year forward rolling earnings) is at -1.5SD from mean but more importantly, P/B (actual BV) stands at -1SD which in the past 5-years, has proven to be a rather credible indicator of bottomed valuations. Our KLCI target of 1,710 is based on mid-2020 EPS tagged to 15.7x PE (-1SD).

Source: Hong Leong Investment Bank Research - 19 Apr 2019

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