AmInvest Research Reports

Strategy - Malaysia: Turning the corner

Publish date: Wed, 01 Sep 2021, 02:13 PM
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We maintain our end-2021 FBM KLCI target of 1,695 pts

  • We maintain our end-2021 FBM KLCI target of 1,695 pts based on 16x our 2021F earnings projection (+55.5%) (Exhibit 5). This is at a discount to its 5-year historical average of 18x to: (1) mitigate the distortion arising from earnings spikes from glove makers, i.e. Top Glove and Hartalega in 2021F due to the abnormally high glove selling prices that are not recurring; and (2) factor in a higher perceived market risk premium arising from a dynamic political landscape.
  • We are optimistic that the world at large will enter into the late stage of the pandemic in the coming months, with more countries attaining herd immunity against Covid-19. A synchronised global recovery is almost a foregone conclusion underpinned by the reopening of economies and international borders. While the highly contagious Delta variant has brought about new waves of infections around the globe, the hospitalisation rate has been kept under control as vaccinated Covid- 19 patients typically develop mild Covid-19 symptoms. This alleviates the risk of a collapse of the healthcare system.
  • We maintain our base-case assumption that Malaysia will reach herd immunity against Covid-19 before the year is out. Based on the information compiled by crowd-sourced database Our World in Data, as at 29 Aug 2021, the percentage of population having received at least one dose of Covid-19 vaccine in Malaysia stood at 59%. This was just a whisker away from 61% to 78% of wealthier developed nations (Exhibit 1).
  • We take comfort of a relatively calmer political landscape following the swearing in of the new prime minister Datuk Seri Ismail Sabri Yaakob last month. However, we believe it will be challenging for the new leadership to roll out long-term policy initiatives as its priority is to significantly bring down new Covid-19 infections to enable a more lasting reopening of the economy. Once that is achieved, parliament is poised for a dissolution to pave the way for the 15th general election.
  • Despite the sharp rally in recent weeks, the local market is still underperforming most of its regional and global peers on a YTD basis (Exhibit 2). All is not lost as we believe this could be seen in a positive light whereby it makes the local market an even more compelling recovery play for the remainder of 2021.
  • Sector-wise, while 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, we take comfort that banks have started to make pre-emptive provisions in the form of management overlays, in addition to provisions based on changes to macroeconomic factors.
  • Other key sectors that are poised to benefit from the recovery are power (increased demand for electricity, particularly, from the commercial and industrial segments), oil & gas (higher crude oil prices), seaport (higher throughput on further recovery in global trade), airport (the eventual reopening of borders), consumer (cash handouts and recovery in the job market to sustain consumption) and REIT (reduced rental rebates, recovery in footfall and occupancy)

Corporate Malaysia’s downbeat performance extends into 2Q2021 from 1Q2021

  • FBM KLCI component stocks delivered a set of 2Q2021 results that had yet to show meaningful improvement sequentially, as the reintroduction of various pandemic restrictions against a backdrop of surging Covid-19 infections weighed down the corporate financial performance. The 2Q2021 results remained subdued with 27%, 55% and 18% beating, meeting and missing our projections respectively, compared with 27%, 50% and 23% for "above", "within" and "below" respectively in 1Q2021 (Exhibit 4).
  • Against the market consensus, the numbers also showed a relatively flattish performance sequentially with "above", "within" and "below" at 24%, 45% and 31% respectively, vs. 21%, 48% and 31% in 1Q2021 (also see Exhibit 4).
  • Six FBM KLCI component stocks under our coverage beat our projections, namely, CIMB Group (lower operating expenditure), Sime Darby (stronger vehicle and heavy equipment sales), Sime Darby Plantation (higher CPO prices), IHH Healthcare (Covid-19-related patients and effective cost-saving initiatives), Petronas Chemicals (higher product prices), and Tenaga Nasional (lower repair and maintenance cost).
  • On the other hand, four FBM KLCI component stocks under our coverage missed our projections, namely, MR DIY (pandemic restrictions and delays in expansion plans), PPB Group (weak performance from grains & agribusiness and Wilmar International), Dialog Group (pandemic restrictions weighed down project execution), and Petronas Gas (higher operating cost stemming from pandemic restrictions).

Our top buys

  • Our top picks reflect names that are likely to benefit from the recovery of the domestic and global economies, i.e. Maybank, Tenaga Nasional, CIMB Group, Telekom Malaysia, RHB Bank, Westports, Astro Malaysia, ATA IMS, Hibiscus Petroleum and Perak Transit . Sector-wise, we are OVERWEIGHT on automobile, cement, consumer, EMS, financial services, media, oil & gas, power, REIT, telco and transportation & logistics

Source: AmInvest Research - 1 Sept 2021

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