Investment Highlights

• We maintain our HOLD call on FTSE Bursa Malaysia KLCI exchange-traded fund (FBM KLCI ETF) but trim our FV by 4% to RM1.90 (from RM1.97) (Exhibit 5). Our FV is based on our fair values (for stocks under our coverage), consensus fair values (for stocks not under our coverage) and last traded price (for Hap Seng Consolidated, which is not under any coverage). It is at a slight premium to its NAV of RM 1.79 (Exhibit 4).

• For the three months ended 30 Sep 2018, the ETF reported an investment income of RM211,926 (comprising gross dividend income of RM38,294 and net investment gain of RM173,632). This represents a significant improvement in performance both on a YoY and QoQ basis. Having accounted for expenditure, net gain after tax came to RM202,547, vs. net loss after tax of RM282,396 three months ago and net gain after tax of a mere RM1,620 a year ago (see Exhibit 1).

• We remain positive on the outlook for the FBM KLCI. We project the FBM KLCI’s earnings to grow by 2.3% and 5.7% in 2018 and 2019 (Exhibit 2), underpinned by a GDP growth of 5.0% and 4.5% respectively. We project end-2018 and end-2019 FBM KLCI targets of 1,790pts and 1,890pts, both based on 18.5x our projected FBM KLCI earnings in 2018 and 2019 respectively.

• We believe the FBM KLCI should be fairly traded at a multiple of 18.5x, which is at 1.5x multiple premium to the 5-year historical average of about 17x, largely to reflect the introduction of largely high P/E stocks during the recent rounds of changes to the FBM KLCI constituents, i.e. Press Metal, Nestle, Dialog Group, Hartalega Holdings and Malaysia Airports Holdings.

• We hold the view that investors’ sentiment towards emerging markets, including Malaysia, will improve at some point: (1) when the market feels that the US rate hike cycle and the USD upcycle are about to taper off; (2) when the risk-and-reward profile and valuation-to-growth matrix of emerging markets become attractive again (after the recent selloff); and (3) if commodity prices stay firm, strengthening the finances of commodity-exporting emerging markets.

• However, we are mindful of various headwinds that could cap the upside of the FBM KLCI including: (1) the increased volatility in the global financial markets of late, triggered largely by a major selloff in tech stocks; (2) external risks such as the escalating US-China trade tensions, the Brexit negotiation and Italian budget impasse; and (3) the structurally rich valuations of the Malaysian equity market against its regional and global peers.

Source: AmInvest Research - 30 Nov 2018