Despite the Greece’s debt crisis seemingly moderated, the local market is expected to continue its sideways trading mode this week amid the prolonged domestic issues. Technically speaking, we expect the FBMKLCI to trade in the range of 1,685/90 – 1,735/40 this week with the limelight fixated on 1MDB-related issues and the on-going corporate earnings, which may provide some fresh clues for the market. However, should FBMKLCI able to overcome the resistance of 1,735/40, it could signal a completion of “Double-Bottom” pattern with a measurement target of 1,785/90. The THEMATIC and GROWTH portfolios performed tremendously well last week due to the strong performance in XIN HWA’s share price riding on its sound fundamentals and sector re-rating. Following the disposal of XIN HWA shares, we have added more bets of its peer – CENTURY, in view of its attractive valuations and high dividend yield. On portfolio performance-wise, all our portfolios outperformed the FBMKLCI’s total return last week and by 472-2,234bps on a YTD basis.

Not out of the woods, yet. While the headlines out of Greece seemed to be dissipating for now, the local domestic/political concerns (i.e. 1MDB-related saga) will continue to influence the market direction in the near term. Trading sentiment is not expected to improve significantly with these lingering issues clouding market sentiment. With the US and local reporting seasons starting to kick-in last week, corporate earnings are likely to emerge as the prevailing important factor. Wall Street expects a 2.9% dip in quarterly earnings, according to Thomson Reuters; while we expect the local listed companies to post challenging quarterly results in general due to the weak consumer sentiment post the implementation of GST, rising cost environment and weaker Ringgit. Technically speaking, we expect the key index to continue to trade sideways in the range of 1,690 to 1,740 this week.

Cheered by Greece’s new bail-out deal. The much-improved European picture led to a strong rebound in the global equity market last week. The DJIA re-emerged in positive territory for the year last Monday, after euro zone leaders reached a tentative deal to bail out Greece. Greece won conditional agreement to receive a possible USD95b over three years, along with an assurance of talks to bridge a funding gap until a bailout is ready. Meanwhile, the disappointing US retail sales in June also pointed to slower economic growth this year. Weaker economic growth may delay the first-rate hike as the US Fed tries to find a balance between normalizing rates and accommodating an uneven recovery. The Fed funds futures market is putting a 13% chance of rate hike happening in September and that number may go further down, pushing the odds to a later date. Back home, the FBMKLCI also strengthened during the shortened-trading week, in-tandem with the key regional markets’ performance. The improved trading picture has led the benchmark index to rise 11.15 points or 0.65% to end at 1,726.73 last Friday, despite the prolonged domestic issues (i.e. 1MDB saga). PETCHEM (3.2% WoW), BAT (6.2%), and PUBLIC BANK (0.9%) were the top weekly gainers among the blue chips while the laggards were TNB (-1.4%), DIGI (-2.2%) and PPB (-2.3%). Having said that, the FBMKLCI still retreated 1.5% YTD amid the persistent foreign funds outflow and weak currency.

A strong 33% gain in two-week! We have sold all our 15k XIN HWA shares @ RM1.19/share each from THEMATIC and GROWTH portfolios last Thursday. With the disposal, we have made a decent profit of RM4.4k or 33% gain over the two-week investment horizon. XIN HWA has soared 70% since its debut on 30-June at RM0.70/share and traded at 12x forward PER (based on last Thursday’s closing price of RM1.19/share) vs. 10x-11x in its peers. We believe the strong performance was mainly due to its superior gross profit margin (34% vs. 20%-28% of its peers) and its expansion plan, where we projected the group’s net profit to grow 14% YoY in FY15 followed by another 16% in FY16.

Logistic sector’s re-rating is still on the cards. While we do not discount XIN HWA’s share price may continue to trend higher as a result of the sector’s re-rating, we are adding more bets to one of the industry’s laggard – CENTURY, where its forward PER is merely trading at 10.8x with 5.9% dividend yield. We have added another 10k CENTURY shares @ RM0.94/share each (bringing the total number of shares to 15k each) to our entire model portfolio.

Source: Kenanga Research - 20 Jul 2015