Overall market sentiment has been improving since last month with the FBM Small Cap Index rising >7% in the past one month as buying started with export-oriented counters, followed by election-play stocks and now investors are snapping up broader base counters such as oil & gas stocks. This was partly attributed to the stabilising of MYR as well as Crude oil prices. We like to see if the buying could last until Chinese New Year, which is just three weeks away. Technically, the immediate support for the market is at 1,675/80 while key resistant is at 1,692/1,700. Fundamentally, the local market is still lacking convincing catalysts to propel the key index higher. However, we believe the General Election could be a key theme this year while we employ a two-prong approach of Buy defensiveness/resiliency as well as Bottom-Fish for laggards or underperformed/heavily sold down stocks. Meanwhile, our OR tracker portfolio is tracking the broader market with December’s total returns of 2.56% against FBMKLCI’s 1.63%. The average returns between realised OR portfolio and unrealised OR tracker since inception of 19.23% still fared better than the FBMKLCI’s total return of 14.64% for the same period.

Two new trading ideas. Despite the holiday mood, we issued a total of seven OR reports, which included two new trading ideas in December. We started the final month of 2016 with new Trading Buy on NHFATT (TB; FV: RM3.78) as we see value in this manufacturer of replacement automotive parts, which has expanded its export base to lessen the vulnerability of discouraging automotive market sentiment locally. We also see trading opportunity in DNEX (TB; FV: RM0.28) for its strong earnings growth of 193%/48% in the next two years. In addition, it has superior net margin of 20%-22% and is in net cash position. We upgraded the fair value of ELSOFT (TB; FV: RM2.46) to RM2.46 from RM2.12 after meeting with the management which reaffirmed our positive conviction on the stock. Besides existing automotive and smart devices segments, new orders from ATE for solar cell players and possibly medical devices would lead future earnings growth. However, we had closed up our position on TASCO (Not Rated) with a Not Rated call given its stagnating earnings outlook in the short to medium term, which limits stock upside. Lastly, the remaining two Not Rated stocks were ALAQAR and HLIND.

A better month to end 2016. After a 3.20% monthly decline in November, the FBMKLCI rebounded 1.40% MoM or 22.61 points in December to close 2016 at 1,641.73 as the weak MYR stabilised between 4.40-4.50 levels against the greenback while crude oil prices were trending higher on the OPEC members and non-members’ decision to cut production. AXIATA (+12.65%) was the main market mover as investor bargain hunted the stock following recent weakness. This was followed by MAYBANK (+5.53%) and SKPETRO (+13.19%) which benefited from the recovery of crude oil prices. However, upside was mitigated by IHH (-3.79%), TENAGA (-1.00%) and TM (-3.57%). Meanwhile, foreign investors remained net seller for the 4th consecutive month in December with a total net outflow of RM961m, which was 19% MoM lower from November. It also marked the 3rd straight year of net outflows totalling RM3.22b in 2016 which declined sharply by 84% from RM19b net outflow in 2015. On our OR Tracker Portfolio, the tracker portfolio posted an average return of 2.56%, which outperformed the benchmark index’s total returns of 1.63%, mainly led by EATECH (+34.78%), HOHOP (+13.10%) and GKENT (+11.27%).

Overall tracker performance so far so good. With two new Trading Buys and the removal of TASCO from the tracker list mentioned above, our OR tracker list now stands at 48 stocks. Together with 45 stocks in the realised portfolio, the average total return for the tracker stocks (+4.56%) and realised portfolio (+28.61%) since inception in Aug 2012 is 19.23%, which is higher than the total returns of 14.64% from the FBMKLCI for the same period. XINHWA (+75.45%) is the top performer under our OR unrealised tracker list followed by CAB (+65.59%) and KTC (+60.00%) while the top three losers, on the other hand, are EATECH (-53.19%), HOHUP (-33.87%) and KNM (-31.31%). Meanwhile, PESTECH (+225.92%), VS (+204.54%) and MITRA (+152.98%) remain as the top three realised stocks in our tracker list. On the flip side, K1 (-60.39%), SAPRES (-36.54%) and TASCO (-24.02%) are the top three losers.

Source: Kenanga Research - 13 Jan 2017