Summary

• We see deep value in the local market with the FBM KLCI trading at 15.0x and 14.0x our CY23F and CY24F earnings forecasts, which are: (i) at bottom valuations during non-crisis times, and (ii) also at the lowest levels since the European sovereign debt crisis more than a decade ago.

• Market leaders in key sectors are showing the same bottom valuation pattern: PBBANK at a PBV of <1.5x, vs. >2x up until CY19; CDB and MAXIS at 10x-11x EV/EBITDA vs. 12x-15x prior to the sell-off triggered by the introduction of the Single Wholesale Network (SWN) model for the 5G roll-out, and at the current depressed PBV levels for plantation stocks, the market is effectively disregarding farm and plantation land scarcity as well as the global food security crisis.

• While we believe the local market has bottomed out, it is more likely to decisively break out from the doldrums under two conditions, namely: (i) a dovish pivot by the Fed, and (ii) a market-friendly outcome of the six impending state elections.

• The global market has rallied thus far this year driven by expectations of an end to the rate hike cycle in the US (and to a certain extent, the AI frenzy). However, our local bourse has very much sat this out. We believe the significant YTD underperformance of the local market itself already warrants a catch-up play.

• Alternatively, upon a dovish pivot by the Fed (of which the Fed is still extremely careful in not saying anything to that effect), the global market is likely to go another leg-up, which may eventually inspire a more sustainable uptrend in the local stock market.

• We define a “market-friendly” outcome from the six state elections, expected to be held in Aug 2023, as one that will not unsettle the political stability at present, or more specifically, erode the confidence of unity government’s partners in the leadership of Prime Minister Dato’ Seri Anwar Ibrahim.

• Assuming a “market-friendly” outcome of the state elections, the unity government will then be able to expedite its policy reforms. A well-thought-out subsidy rationalisation plan and the reintroduction of some form of consumption tax to broaden the tax base could spark a re-rating of the local market as they would cement the long-term fiscal sustainability of the nation.

• We pick banks, telcos and planters for value play. We believe the sell-down on banking stocks in 1HCY23, on the heels of the banking crisis in the US and Europe, was unjustified. We like telcos for their earnings resilience with telecommunications services having evolved into a basic necessity of modern life. We see an opportunistic risk-and-reward situation in plantation stocks by virtue of their downside risk that is well protected by asset value, but tremendous upside reward if the current El Niño weather phenomenon turns out to be a strong one.

• We expect significant revitalisation of the construction sector in 2HCY23 backed by the roll-out of the RM45b MRT3 project and six flood mitigation projects worth RM13b and a vibrant private-sector construction market backed by building jobs for new semiconductor foundries and data centres. We are positive on automakers/distributors on strong consumer confidence and buying interest enticed by attractive new models.

• Our top conventional picks are PBBANK, CIMB, CDB, MAXIS, KLK, GAMUDA, AMBANK, KPJ, BAUTO, and SUNCON.

• Our top Shariah picks are CDB, MAXIS, KLK, GAMUDA, KPJ, PADINI, BAUTO, SUNCON, AEON and MBMR.

Source: Kenanga Research - 30 Jun 2023