Maybank favoured among heavyweights


DESPITE analysts' generally neutral stance on top heavyweights Malayan Banking Bhd (Maybank), Tenaga Nasional Bhd (TNB) and Telekom Malaysia Bhd, their shares have outperformed the market of late. 

Since the announcement of the start of operation by Valuecap Sdn Bhd on Jan 10, Maybank's share price has gone up by 9.4%, Telekom (9.5% ) and TNB (9.8%) compared with a 6.7% increase on the benchmark KLSE Composite Index (CI).  

So far, other heavyweight stocks have not performed as well. Maxis Communications Bhd, the fourth largest CI-linked counter, went up 4.6%, Malaysian International Shipping Corp Bhd gained 5.8% and Sime Darby Bhd was up 6.8%. However, Petronas Gas share price went up 10%. 

Among the three heavyweights at the moment, Maybank is most favoured in terms of valuation. 

A prudent loan provisioning policy, strong management team and leadership position in the banking industry are selling points for Maybank, which remains the top pick in the sector. 

With external uncertainties, OCBC Research advises investors to pick the safer banks with superior asset quality and respectable earnings growth. Maybank is within this category, OCBC said. The bank has set aside adequate loan provisions and can realise significant write-backs in the medium term. 

Profitability in the banking sector, a good proxy to the recovering economy, is expected to improve and will be driven by declining loan loss provisions and loan recoveries. 

However, weak loans growth will cap the rise on banks' earnings. 

“With anticipated slow loans growth of 4% and intense competition for consumer-related financing, the risk for possible downgrades in earnings is high,'' said TA Securities.  

Maybank is reported to be eyeing higher income in the payments sector to help offset factors such as slow loans growth. 

In general, investment managers said they would buy TNB, Maybank and Telekom, given the high weighting that these three stocks had on the KLSE Composite Index (CI). 

However, not many of them intend to have overweight positions on these three heavyweights, particularly TNB and Telekom, as they find that the two may not be “as blue as before”. 

“I need to have them in my portfolio so that my fund could keep track of the CI's performance. But I would just hold a “neutral” position on these three counters,'' said a fund manager with an investment bank. 

He said a large portion of his fund would be allocated to valued stocks with solid financial track records and earnings prospects. He will also look at laggards that have been left out by the investing crowd.  

The stocks carry about 26% weighting on the CI. TNB is the largest CI-linked counter in terms of market capitalisation with 9.3% weighting, followed by Maybank 9% and Telekom 7.97%. 

Expensive valuations make TNB and Telekom less appealing.  

Global Multex estimates show that market consensus forecasts TNB's earnings per share (EPS) at 45 sen for the financial year ending Aug 31 this year and 48.72 sen the next financial year. 

At last Friday's closing price of RM9.50, TNB shares were traded at a price-earnings (P/E) ratio of 21 times on current financial year earnings and 19 times on the next financial year earnings. 

Meanwhile, Telekom was also traded at P/E of 20 times based on forecast EPS of 40.70 sen for current financial year ending Dec 31, and 18 times on forecast EPS of 45.30 sen for the next financial year. 

“These stocks (TNB and Telekom) are expensive at current levels with P/E of almost 20 times, compared with market average of about 13 to 15 times. There are better values in the market,'' said a fund manager who manages a RM1bil mutual fund. 

Apart from valuations, these heavyweights are not within the currently favoured sectors such as plantation and construction, which many analysts are recommending for the year. 

The telecommunication sector has fallen out of favour because the sector's growth area - mobile service - is facing intense competition that squeezes profit margin and decelerating growth in mobile subscriber base. 

Analysts do not see good reason to invest heavily in Telekom, whose earnings are still dependent on fixed line service, which has limited growth. And fixed line service is losing business to mobile segment. 

Furthermore, Maxis has become a better alternative.  

As for the utility giant, fuel cost and slow electricity demand were likely to eat into TNB profits. 

According to JP Morgan, TNB's foreign shareholding has now reduced to 2.9% from a peak of 15%-20%.  

It said TNB might have difficulty maintaining current profitability levels in the next two years in light of an expected rise in reserve margins from the current 30% to 40% by the end of this year. 

Large capital expenditure, which is projected to be RM5bil to RM6bil in the next two years, is also a main concern in regard to TNB's cashflow. 

However, TA Securities said worries of overcapacity in the power industry had been over-exaggerated as it expected the power reserve margin to remain at around 30% until 2007, based on TNB's projected plant-ups and an 8% annual growth in electricity consumption. 

Nevertheless, its efforts to slash its net gearing ratio of 1.6 times to one over the next five years should help to strengthen its balance sheet. 

With the highest weighting of 9% on the CI, TA Securities said TNB remained one of the prime movers of the KLSE. 

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