Investment Highlights

• We initiate coverage on FTSE Bursa Malaysia KLCI exchange-traded fund (FBM KLCI ETF) with a HOLD recommendation. We value the ETF at RM2.02, 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).

• The ETF tracks the performance of the benchmark index in Malaysia, i.e. the FBM KLCI, by investing in the constituents of the index, in accordance with their weighting in the index. The top five holdings of the ETF are Public Bank (14.5%), Tenaga Nasional (11.3%), Malayan Banking (11.1%), CIMB Group (7.3%) and Axiata Group (4.4%).

• We are positive on the outlook for the FBM KLCI. We project the FBM KLCI’s earnings to grow by 5.3% and 7.1% in 2018 and 2019, underpinned by a GDP growth of 5.5% and 5.3% respectively. We have year-end targets of 1,900pts and 2,040pts in 2018 and 2019 for the FBM KLCI, based on 18x 2018F and 2019F earnings respectively. This is at a 1x multiple premium to the 5-year historical average of about 17x, largely to reflect the cyclical upturn in corporate earnings growth.

• We believe the key catalysts for the FBM KLCI could potentially come from: (1) the normalisation of the market risk premium as greater clarity on new government policies emerges; (2) improved sentiment towards emerging markets; and (3) a more level playing field across the sectors that may unleash the growth potential in corporate Malaysia .

• On the other hand, we believe the performance of the FBM KLCI could potentially be weighed down by: (1) strongerthan-expected US inflation and wage growth, rekindling the prospects of a steeper rate hike cycle in the US and a stronger USD; (2) the escalation in the US-China trade war and geopolitical tensions; and (3) earnings disappointments by FBM KLCI heavyweights such as banks, telcos and Tenaga.

• The performance of FBM KLCI ETF was mixed over the last five years. It registered positive returns (in terms of total return, i.e. appreciation in price plus dividend) in 2013, 2016 and 2017, but losses in 2014 and 2015. On average over the five years (2013-2017), it delivered an annual total return of 4.2%.

• Our analysis shows that there is a strong positive correlation between the FBM KLCI and FBM KLCI ETF, and similarly between the price and net asset value (NAV) of FBM KLCI ETF over 2013-2017.

Source: AmInvest Research - 30 May 2018