Investment Highlights

• We maintain our HOLD call on FTSE Bursa Malaysia KLCI exchange-traded fund (FBM KLCI ETF) but trim our FV by 2% to RM1.97 (from RM2.01) (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 1.90 (Exhibit 4).

• For the three months ended 30 June 2018, the ETF reported an investment loss of RM269,811 (comprising gross dividend income of RM26,637 and net investment loss of RM296,448). This represents a significant deterioration in performance both on a YoY and QoQ basis. Having accounted for expenditure, net loss after tax came to RM282,396, vs. net income after tax of RM121,456 three months ago and RM55,606 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 3.6% and 6.8% in 2018 and 2019 (Exhibit 2), underpinned by a GDP growth of 4.8-5.0% and 4.2-4.5% respectively.

• We maintain our end-2018 FBM KLCI target of 1,900pts. The implied that P/E for our 1,900pts end-2018 FBM KLCI target based on our projected FBM KLCI earnings in 2019 is at 18.3x, which is consistent with our medium-term target multiple for the FBM KLCI of 18.5x.

• We believe the FBM KLCI should be fairly traded at a multiple of 18.5x, at a 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 US Fed who has remained relatively hawkish; (2) investors’ cautiousness towards emerging markets; (3) the structurally rich valuations of the Malaysian equity market against its regional and global peers; and (4) external risks such as escalating international trade tensions and the potential of a new EU existential crisis.

Source: AmInvest Research - 3 Sept 2018