The FBMKLCI is expected to find a temporary bottom near the 1,710-1,732 level (at between -1SD and -2SD of the three-year discount to its consensus target band), which is not that far off to yesterday’s closing. Thus, we believe it is a good time to nibble on selective stocks, especially those in resilient and export-oriented sectors, despite domestic and external uncertainties expected to continue weighing down the market. The local benchmark index started trending down since the late-April and further weakened by another 3.9% MoM in May. Our OR tracker portfolio total returns, meanwhile, also performed in tandem with the broader market and declined by 3.0% last month, lowering the YTD gain to 14.7% but still strongly outpaced the FBMKLCI’s total returns of -1.24% during the period.

An eventful month. We have issued in total seven On Our Radar (OR) reports in May, which include three new stock ideas (TASCO, TP: RM5.41, CENTURY, TB: RM1.19 and MMSV, TP: RM0.95), and four NOT RATED pieces (MIKROMB, HOVID, SENTORIA, and SASBADI). We are optimistic on the outlook for TASCO and CENTURY and believe these companies as well as the sector is poised for re-rating due to: (i) huge growth potential from E-commerce in the local market, (ii) FMCGoriented customers' mix that provides resilience and recurring business, (iii) value asset play, and (iv) growing trend of logistics outsourcing. Similarly, we also favour MMSV, a Penang-based one-stop factory automation solution provider, due to its right segments (LED for Smartphones and Automotive segments) with solid balance sheet and healthy cash flow. On top of that, being an export-oriented player, MMSV also stands to benefit from the current strong USD vs. MYR trend. All in, these three newly added TRADING BUY stocks have an average total return of 1.1% in May since being recommended.

Gloomy sentiment remains. The on-going concerns over the 1MDB-related issues, the weak Ringgit and the persistent foreign funds' outflow continued to weigh down the local market sentiment and led the FBMKLCI closing at the five-month low of 1,739.45 yesterday. On monthly performance basis, the 30-stock index declined by 3.9% MoM May with the 29 indexlinked counters recording negative growth. Our OR tracker list’s total returns, meanwhile, also performed in tandem with the weak FBMKLCI and fell by 3.0% in May (no thanks to K-One which share price tumbled by 37.8% after reporting a poor set of results), lowering the YTD to 14.7% (vs. the FBMKLCI of -1.24%). On Wall Street, stocks remained choppy last month on continued concern on Greek debt as well as better U.S. economic data that helped to make an interest rate hike this year more likely. Having said that, all three major indices in Wall Street (Dow Jones, S&P500 and Nasdaq) managed to set new record closing highs in May despite the volatility.

Continued to deliver despite escalating market volatility. With an additional three new TRADING BUYs added in May, we now have a total of 19 stocks in our OR tracker list. Together with 61 stocks in the realised portfolio, the average total returns for the tracker stocks and realised portfolio since inception (13-Aug-2012) is 30.8%, which still outpaced the FBMKLCI’s total return of 16.2% for the same period.

Approaching temporary bottom. The FBKLCI has dipped 123.35 points (or -6.6%) since the April high. On YTD basis, the benchmark index has weakened by 1.24%, which we believe was mainly led by both external (i.e. US’ interest rate direction, Greece’s debt concern, etc.) and domestic (i.e. 1MDB saga, sovereign rating review) issues. While these uncertainties will continue to haunt the local equity market, the FBMKLCI (discount to its consensus target at 1,850) could potentially find a temporary bottom near the -1SD level (at 1,732) of the three-year discount band, if not, the -2SD level (at 1,715/10). Thus, under such scenario, we would be very selective as we see no fresh factors and earnings catalysts. Having said that, we believe it is a good time to nimble on selective stocks, especially those in resilient (i.e. Telco, MREIT, pharmaceutical, gloves, education, consumer F&B and consumer packaging) and export-oriented sectors. Buy-On-Weakness on selective stocks strategy is still our preferred approach for 3Q15. 

Source: Kenanga Research - 9 Jun 2015