• From the market’s standpoint, Budget 2016 is a non-event due to the absence of a significant uplift to corporate earnings or sentiment. In the near term, we expect the market to oscillate around our unchanged end-2015’s fair value of 1,650 for the FBM KLCI. It would remain a trading market with funds nibbling on dips and locking in gains on liquiditydriven rebound. Although there is a general pessimism over the economy due to a confluence of factors, our sense is that the market would continue to be supported by ample domestic liquidity. Furthermore, an uneven global growth trajectory with acceleration in the US but slowdown in the EU and China as well as the ascendancy of the US dollar, have somewhat pushed back expectations of a hike in the US Fed Funds rate and the associated reversal in external liquidity. Therefore, a selldown off the current levels appears unlikely, we believe.

• The key challenge though is the lack of conviction over the earnings momentum to establish a bottoming of the market. With the exception of a select few exporters, the earnings revision cycle continues to contract due to margin compression from rising cost pressure and weaker-than-expected sales. Our bottom-up estimates now put the market’s earnings growth to just 2.2% for 2015 but it may still decelerate further approaching the year-end. We expect the market recovery to be delayed to 2016 where we are retaining our fair value for the FBM KLCI at 1,750, based on 16x PE, and earnings to reaccelerate to 7.6% from 2.2% in 2015.

• The gloves sector would be a beneficiary of Budget 2016 because of its proposal for a special reinvestment allowance (RA) for companies that have exhausted their eligibility to qualify for RA. This applies to qualifying capex incurred for years of assessment 2016 until 2018. Such an incentive sits nicely with the glove companies’ capex upcycle, which should see a lower effective tax rate going forward. The rubber gloves sector would continue to enjoy PE expansion. It is one of the few sectors that are experiencing earnings upgrades from volume growth and margin expansion. Our BUYs are Top Glove and Kossan. The proposed hike in the minimum wage under Budget 2016 would not significantly increase the operating cost of select industries as labour typically accounts for less than one-third of total production costs. We estimate that the hike in minimum wage would increase CPO production cost by less than RM20/tonne. We are Overweight on the plantation sector with IJM Plantation as our top pick because of its younger oil palm trees. We also like Inari within the technology space given its superior growth prospects from optimising its capacity expansion towards its high margin products. Laboir accounts for about 20% of its total production costs.

• We are Overweight on property equities with BUY on Mah Sing, MRCB, E&O and Titijaya. The sector is already trading on trough discount to NAV of more than 50%. Valuation-wise, the market has not only priced-in cuts in presales target but also, default risks eventhough developers’ balance sheets are healthy. The risk here is that property equities may be caught in a value trap because of the lull in residential transactions. But we believe that the upside potential far outweighs the downside risk particularly when developers embark on inventory liquidation to kick start transaction volume. Such a move would lead to a rapid narrowing in discount to NAVs.

• Budget 2016 reaffirms the execution of MRT 2 and LRT 3. Following its appointment as the PDP for the MRT 2, Gamuda is a frontrunner for the tunnelling package of this RM28bil project. We believe Econpile and Kimlun Corp to be strong contenders for specialist works under the LRT/MRT projects, given their niche in piling and tunnel lining/segmental box girder (SBG) works, respectively. Other frontline projects that will kick off in 2016 include the Pan Borneo Highway, DASH and SUKE highways as well as more BRT projects. The Sunway Group is set to benefit from the latter given its experience in delivering Malaysia’s first BRT project at Bandar Sunway.

• MRCB is expected to reap the benefits of its restructuring initiatives in 2016. Construction earnings are set to improve with the award of the PDP contract to the MRCB-George Kent JV. More assets injections into MRCB Quill REIT are on the cards. MRCB is trading at a steep discount of 55% to our NAV of RM2.76/share.

• Teo Seng, a leading egg producer, is one of the cheapest consumer stocks. It is trading on a PE of just 7x on 2016’s earnings, and with a net cash balance sheet. The rebound in egg prices from 28 sen/egg in 2QFY15 to 34 sen/egg in 3QFY15 combined with the timely addition of two new farms (+25% capacity) would underpin a strong earnings rebound in 2HFY15. Our fair value of RM2.70/share is based on an FD FY15F PE of 13x. Tenaga Nasional (TNB) is expected to continue to report cost over-recovery under the Imbalance Cost Pass Through (ICPT) mechanism, due to cheaper fuel costs on the back of sustained power demand growth. Hence, we maintain BUY with a DCF-derived fair value of RM16.70/share. TNB’s 4Q15 results will be released next week.

Source: AmeSecurities Research - 26 Oct 2015