Investment Highlights

We maintain our end-2020 FBM KLCI target of 1,530 pts

• We maintain our end-2020 FBM KLCI target of 1,530 pts based on 16.5x our 2021F earnings projection (+34.2%, after a 17.9% contraction in 2020F) (Exhibit 2). This is at a discount to the 5-year historical average of 18x largely to take the one-off spike in earnings of component stock Top Glove in 2021F into consideration.
• Overnight, Pfizer and its partner and German partner BioNTech said that their experimental Covid-19 vaccine PFE.N is >90% effective with no serious safety concerns based on initial trial results. The companies estimate that they can roll out up to 50mil doses this year (for 25mil people) and then produce up to 1.3bil doses in 2021.
• We believe the latest development has turned the tide in the humanity’s fight against the virus and the much longed for normalcy in everyday life may be making a slow but sure comeback.
• We reiterate our view that the final months of 2020 shall mark the market’s continued shift from a predominantly pandemic-themed, to a recovery-focused one. We have been advocating investors to lighten their positions in the “pandemic play”, i.e. glove stocks and replace them it with the “recovery play”. With the latest positive news coming in a rather abrupt manner, we expect volatility as investors in glove stocks rush to the exit at the same time. The two FBM KLCI weighted glove stocks, i.e. Top Glove and Hartalega, command a combined weighting of 13–14%.
• We expect the gains in the recovery play to be significantly offset by losses in the pandemic play. This explains the rationale for us to maintain our FBM KLCI target despite this overwhelmingly good news.
• We already downgraded the glove sector to NEUTRAL from OVERWEIGHT on 25 Aug 2020 on the back of positive news on vaccine development. We are putting the fair values for glove stocks under our coverage under review with a negative bias. We believe investors will have to rethink the lofty valuations they ascribe to the global technology sector, a key beneficiary of new norms amidst the pandemic. However, we are still positive on the sector over the longer term given the continued digitalisation of the economy, the rollout of 5G and the ushering in of the Industry Revolution 4.0.
• Meanwhile, sectors that are poised to benefit from the recovery in demand/pent-up demand post-pandemic are power (an increase in electricity demand from the commercial and industrial segments), airport (the eventual reopening of borders), healthcare (an increase in semi-elective and elective procedures) and seaport (higher throughput on a recovery in the global trade),
• While the fundamentals of banking stocks should improve in line with the economic recovery, clarity is still lacking with regards to the extent of the irreversible damage the pandemic has inflicted on businesses, and hence asset quality of banks. Meanwhile, we have upgraded AirAsia (Trading Buy, FV = RM0.68) as the recovery in air travel and hence AirAsia’s earnings recovery has become more certain. However, we remain mindful of its need to recapitalise its balance sheet after months of massive losses amidst a collapse in air travel.

Source: AmInvest Research - 10 Nov 2020