Key uncertainties stemming from the US-China trade war, Brexit and Malaysia’s potential removal from the WGBI will likely persist into 2H19. We project flattish earnings for 2019 (+0.7%) and 4.6% for 2020, below its post-GFC CAGR of 5%. Our KLCI target of 1,700 is based on 15.6x PE (-1SD). Still, we feel there are key themes to eyeball on for 2H19 – yield plays (Maybank, Axis), pump priming resuscitation (SunCon), RAPID commissioning (CCM, Dialog), growing trend of cashless payment (Revenue) and Proton’s turnaround (DRB). Our other top picks include AirAsia, Bursa and Sunway.

Central banks remain dovish. Unresolved trade tension and geopolitical uncertainty has continued to cloud trade and investment prospects. As we enter the 17th month of the US-China trade spat, there is increasing evidence of external sector negatively affecting domestic demand. This is evident in the latest manufacturing PMI data, which fell into contractionary territory (May: 49.8; Apr: 50.4). As such, major central bankers (Fed, ECB) are expected to adopt a more accommodative stance in 2H19.

No OPR cut unless... For Malaysia, we maintain our 2019 GDP forecast of 4.5%. Growth is expected to be supported by increase in the commodity sector (agriculture and mining) due to the low base effect, but will be offset by moderation across manufacturing and services due to global slowdown and domestic constraints. We downgrade inflation forecast to 1.0% (from +1.5% YoY) following delay in implementation of petrol price subsidy and weak food prices. While BNM is expected to maintain the OPR at 3.0% for the rest of the year, we do not preclude a possibility of a rate cut should the global scene deteriorate further, in an environment of low inflation and high risk aversion.

2H will be anything but smooth sailing. It is pretty much a forgone conclusion that uncertainties stemming from the US-China trade war, Brexit and Malaysia’s potential exclusion from the WGBI will persist into 2H19. In Mar, BNM unveiled its 2019 GDP forecast at 4.3-4.8%, lower than (i) MoF’s previous (2 Nov) forecast of 4.9% for 2019 and (ii) projected range of 4.5-5.5% for 2018-2020 during the 11MP MTR (18 Oct). Reading this together with the 25bps OPR cut in May, it is hard not to be cautious on growth. In our view, Malaysia remains in a tough spot during its transition phase, as it walks a tight rope, balancing between growth and fiscal prudence against an uncertain external backdrop.

KLCI target at 1,700. We project KLCI earnings to be flat in 2019 (+0.7% YoY) before growth resumes at 4.6% in 2020. As earnings growth is below its post-GFC CAGR of 5%, along with continued external headwinds, we reckon it is fair to value the KLCI at a PE target of 15.6x (-1SD), which derives our end-2019 target of 1,700. In our view, near term upside seems limited from here. We would turn buyers at 1,620, which coincides with a P/B valuation of -1SD, a credible gauge of bottomed valuations.

Key themes and top picks. With uncertainties continuing into 2H along with lingering dovish sentiments, we believe that high yielding plays will remain in flavour. In this regard, we like Maybank (large cap liquid yield) and Axis REIT (Shariah REIT). We also see signs of a resuscitation of pump priming via the revival of several mega projects and favour pure construction plays like SunCon. The impending commissioning of RAPID by end-2019 should be beneficial for CCM (supply of caustic soda) and Dialog (entrenched Pengerang beneficiary). We are positive on the growing trend of cashless payment in which we highlight Revenue (main market transfer is another catalyst). Lastly, we reckon that the turnaround of Proton is real and sustainable, with DRB as the direct beneficiary. Our other top picks include AirAsia, Bursa and Sunway.

Source: Hong Leong Investment Bank Research - 2 Jul 2019