Highlights

Affin Hwang Capital Research Highlights

Author: kltrader   |   Latest post: Mon, 20 Jan 2020, 2:33 PM

 

FBM KLCI ETF - Gear-up for Another Sedate Year

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Gear-up for Another Sedate Year

  • As at 10th December, the fund’s return of -6% outperformed the benchmark’s return of -7.6% by 1.6 ppt
  • We lowered our end-2019E KLCI target to 1,600 (from 1,650) based on a 5-year mean PER of 18x applied to our 2019E EPS.
  • Based on KLCI EPS growth of 3.6% for 2020E and the 5-year historical mean PER of 18x, we introduce our end-2020E target for the KLCI of 1,660.
  • We also introduce our new fair value of RM1.75 for the FBM KLCI ETF by dividing our end-2020E KLCI target of 1,660 by the current KLCI of 1,561.79 and multiply by its NAV price of RM1.65. Maintain HOLD on the ETF.
  • Downside risks could arise from an escalation in global trade tensions between the US and China, which could lead to a disruption in economic growth, weak corporate earnings growth and sell down of emerging market stocks, including those listed on Bursa Malaysia, due to risk aversion.

The Fund and Its Objective

FBM KLCI ETF aims to achieve a price and yield performance, before fees, expenses and tax, that is similar to that of the FTSE Bursa Malaysia Large 30 Index. The Fund manager, AmFunds Management Berhad, aims to achieve performance, over time, with a correlation of 95% or better between the Fund’s Net Asset Value (NAV) and the Benchmark. It will have an asset allocation of at least 95% in Index Shares and options and warrants referencing the Index Shares and no more than 5% in cash or cash equivalents. Income distribution is expected to be made semi-annually.

As of 10th December 2019, the NAV per unit was RM1.6471 a decline of 6% ytd and 11.5% from initiation respectively. The trend was in line with the KLCI index which fell 7.6% ytd and 12.1% since initiation. As such, the fund outperformed the benchmark by 1.6 ppt. At a 3-year tracking error of 0.86%, we believe the fund is tracking the benchmark effectively. On 4 December, the Fund announced a 2.80 sen dividend per unit, a total of 3.30 sen (net yield of 2%) in 2019, similar to the distribution made in 2018.

2019 Underperformed

The KLCI underperformed in 2019, posting a -7.6% ytd return, mimicking the capital outflows from the market. The poor performance is attributable to disappointing corporate earnings and hence unattractive valuations, while the unfavorable rebalancing of the KLCI weighting on the MSCI did not help. In 3Q19, there were generally less earnings disappointments but the negative trend remained, dragged down by large-cap disappointments in the O&G, Telcos and Aviation sectors. Post-revision of KLCI stock earnings in 3Q19, we expect KLCI companies to see aggregate earnings growth of -1.6% in 2019E and 3.6% in 2020E. Consequently, we lowered our end-2019 KLCI target to 1,600 from 1,650 previously.

Rosy Indicators Priced in But Downside Risk May Sting

At 17.3x PER, we believe the positive factors such as the country’s robust domestic demand, improving fiscal deficit position and fiscal/monetary muscle (to avert a slowdown) have been largely priced in. However, external turbulence and prospects of a weaker RM may have been down-played. Judging from successive years of disappointments, we fear that conviction in corporate earnings growth in 2020 may be lacking. Consequently, we maintain a NEUTRAL outlook for the KLCI. Going into 2020, we believe downside risk is low for the KLCI on the back of its defensive attributes and its relatively attractive dividend yield of 3.6%.

2020: Through the Glass Eye

Looking into 2020, we expect corporate earnings forecast at the start of the year to lack credibility given the disappointment in recent quarters and the past few years. Furthermore, we believe corporate earningsgrowth revision will likely be negatively biased, given the risks of weaker global trade and a deceleration in global growth. The sliver of hope comes from the Plantation sector, which will benefit from rising CPO prices. Amidst the challenging macro environment, our 2020E KLCI EPS growth is +3.6%.

Domestic Economic Outlook in 2020

We expect Malaysia’s GDP growth to slow from 4.7% in 2019 to 4.5% or lower in 2020E, given the challenging external environment. Nevertheless, we believe steady domestic demand, especially from private consumption, backed by Budget 2020’s support to B40 group and low unemployment rate of 3.3% as at September to support any market weakness. The government also has monetary and fiscal policy flexibility to avert any sharp slowdown. Nevertheless, we anticipate a 25bps cut in OPR to 2.75% in 1Q20.

Upcoming Events in 2020 to Look Out for

i) A US presidential election year which typically leads to a strong DJIA and US$. This may subsequently limit repositioning of fund flows into the KLCI stocks, but a strong DJIA may lift overall sentiment. ii) Trade diversion into Asean nations stemming from relocation of supply chains as new manufacturing hubs emerge to avoid US import tariffs for products from China. iii) A weak RM, which should help with Visit Malaysia Year 2020, but the real beneficiaries are exporters such as rubber glove manufacturers and semiconductor players.

Maintain HOLD With a 12-month KLCI Target of 1,660

Based on KLCI EPS growth of 3.6% for 2020E and the 5-year historical mean PER of 18x, our 12-month target for the KLCI is 1,660. Should there be any sharp deceleration in global growth or escalation of the US-China trade war, the KLCI could trade lower at -1SD of 17x or -2SD of 16x, translating to a lower 12-month KLCI targets of 1,570 and 1,480 respectively.

Downside Risks

Key downside risks include: (i) burgeoning global trade tensions between the US and China, which could lead to a disruption in global economic growth; (ii) Malaysia losing sight of its fiscal consolidation plans, leading to a sovereign rating downgrade; (iii) A pick-up in inflation levels in the US and a hawkish Fed which could lead to outflows from the emerging market; (iv) KLCI corporate earnings disappointments; (v) taxes that could curb consumption spending; (vi) Geopolitical tension from North Korea or the Middle East disrupting the financial markets; and (vii) Malaysia falling off the FTSE World Global Bond Index and other related indices. Key upside risks are: (i) easing global trade tensions; (ii) a sovereign rating upgrade; and (iii) positive surprises in KLCI corporate earnings

Source: Affin Hwang Research - 12 Dec 2019

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