Investment Highlights

• We maintain our end-2019 FBM KLCI target of 1,820pts. We are unperturbed by the recent weakness in the local market amidst a slew of domestic and global headwinds. We believe the market might be poised for a major comeback, like how the Liverpool Football Club stunned Futbal Club Barcelona by scoring four times at Anfield in the second leg to win the Champions League semifinal 4-3 on aggregate, after trailing three goals from the first leg at Camp Nou. We believe the worst is over for the market and here’s why

• In our opinion, the market in recent weeks has been weighed down by these three major headwinds (three goals by the bears):

1. The still lingering concern on capital flight from Malaysia as stock market indices provider FTSE Russell puts Malaysia on its watch list for a possible exclusion from its FTSE World Government Bond Index during its upcoming September 2019 review (which could trigger an outflow of Malaysian Government Securities of up to US$8bil or RM32.8bil based on some estimates);

2. Bank Negara’s decision to cut the overnight policy rate (OPR) by 25bps to 3.00% on 7 May 2019 that will hurt net interest margins, and hence earnings of banks in Malaysia; and

3. The escalation in the US-China trade tensions following the decision by the US to raise tariffs from 10% to 25% on US$200bil worth of Chinese goods from 11 May 2019, just right before a Chinese delegation left for Washington for the supposedly final round of trade talks.

• However, we believe all is not lost as the market will be buoyed by these four major positive catalysts (four goals by the bulls):

1. The proposed merger between telco giants Axiata and Digi.Com (subject to the blessing from the government) that has been very well received by the market, as reflected in the sharp appreciation in the share prices of both companies after the news. Both Axiata and Digi.Com are component stocks of the FBM KLCI index, carrying weighting of 4% and 3.4% respectively. In addition, by swapping its 37% stake in Axiata into a smaller 16% stake in the enlarged merged entity (which should command better share liquidity), it allows Khazanah to pursue its exit from the telco sector with less disruption to the overall market;

2. The synchronised recovery of the global markets last Friday, as investors now hold the view that a full-blown USChina trade war will be avoided as Beijing decides to stay the course with regards to the trade negotiation despite repeated provocations from President Donald Trump;

3. The landslide victory for Pakatan Harapan in the Sandakan parliamentary by-election last Saturday, easing concerns that the ruling coalition is losing support from the people, preventing it from carrying out its reform agenda; and

4. The revival of the IPO market in Malaysia with the listing of poultry player Leong Hup International scheduled on 16 May 2019, which is the largest IPO in Malaysia since the listing of Lotte Chemical Titan Holding in July 2017.

• At last traded 1,610pts, the FBM KLCI traded at about 16.8x our projected 2019F earnings. This is at more than 1x multiple discount to its 5-year historical average of 17.9x. We maintain our end-2019 FBM KLCI target of 1,820pts, which was initially (in December 2018) based on 18.5x our earnings forecast, but has since risen to about 19x as we trim our 2019F earnings growth projection to 2.7% from 4%. Fast forward to next year, at 1,820pts, the FBM KLCI will only be trading at 17.9x our 2020F earnings forecast (backed by a 6.3% earnings growth), which is in line with its historical average. Our top picks are Maybank, Petronas Chemicals, RHB Bank, Dialog Group, Top Glove, Serba Dinamik, Bermaz Auto, MPI, Malayan Flour Mills and Berjaya Food (Exhibit 1).

Source: AmInvest Research - 13 May 2019