ASEAM Watch: By Aseambankers Malaysia Berhad
SWEEPING incentives, liberalisation and administrative measures announced in recent weeks emphasised the Government’s commitment to develop the southern region, woo foreign investment, spur the property market, revamp Government-linked companies (GLCs) and address the country’s brain drain issues.
These measures make plain the Government’s efforts to change the public’s mindset and ensure continuity and regional competitiveness, and we expect these developments to underpin the KL Composite Index’s (KLCI) upward trajectory through 2007.
Consequently, we have upgraded our year-end KLCI target to 1,330, based on 17x of 2007 earnings, which would be at the high end of the post-Asian crisis historical price earnings range of 13-17x.
However, the market could be range-bound in the second quarter of 2007 (2Q07) – after considering the impressive recovery from a 13.5% decline at end February to early March – with the re-emergence of multiple global concerns, namely (i) rising delinquencies of subprime loans and a potential recession in the US, (ii) administrative tightening and active management of foreign exchange (forex) reserves in China, (iii) reversal of Yen carry trades, and (iv) geopolitical risks pertaining to Iran.
These concerns have prompted the investment community to reassess the risks of equity investments, especially in emerging markets. In particular, a massive unwinding of Yen carry trades and a major shift in the management of China’s forex reserves could significantly curtail investors’ access to cheap money which had fuelled the liquidity frenzy since the fourth quarter of 2006. Hence, risk premium is expected to rise in 2Q07.
Market catalysts include
Fiscal expansion and government thrusts significantly complement Malaysia’s appeal to foreign investors, who already like the country’s relative defensiveness against a softening US economy. Hence, we expect the KLCI to continue outperforming its regional peers.
Thematically, we anticipate rising interests in the oil and gas (O&G) sector, with the potential unveiling of a Petronas-led blueprint for the Eastern Corridor Development Programme, and water plays as tendering for the Pahang-Selangor project is expected to commence.
O&G service providers Eastern Pacific Industrial Corp Bhd (EPIC), Dialog Group Bhd and Petronas Gas Bhd which already have a presence in the O&G hub in various operating capacities in Kelantan, Terengganu and Pahang, could benefit from the positive news flow and incentives emerging from the Eastern Corridor Development Programme.
We believe there will be a focus on establishing new infrastructure as well as enhancing existing facilities under the programme.
We also foresee a new fabrication facility and a shipyard being established in the eastern corridor, along with further expansion at existing seaports, petrochemical plants and centralised tankage facilities there.
We foresee the Pahang-Selangor water project and Selangor’s non-revenue water (NRW) capital expenditure to dominate activities in the water sector in 2007.
We understand that an international tender for the 44.6 km tunnel works for the Pahang-Selangor raw water transfer project could be called soon, as the Government plans for work to start in early-2008.
This would be a positive development which could lead to the roll-out of other main packages of the estimated RM9bil project.
Meanwhile, NRW works in Selangor are also expected to pick up quite substantially from 2007, after a lacklustre 2005-2006. Our top picks for water plays are Gamuda Bhd, which we expect will feature in the tendering of the Pahang–Selangor Water project, and YLI Holdings Bhd, as a key beneficiary of NRW spending.
Apart from the thematic plays, we would focus on fundamentally attractive companies with solid near term earnings, combined with potential near term catalysts like UMW Holdings Bhd (emerging O&G play), Transmile Group Bhd (fleet expansion), Bumiputra-Commerce Holdings Bhd (strong first quarter 2007 expected from the spike in stockbroking activities), Malaysia Airports Holdings Bhd (potential restructuring) and EPIC (Eastern Corridor play).
Our other favourite large cap stocks continue to be KNM Group Bhd and Maxis Communications Bhd, whilst other notable small-mid caps include Sunway City Bhd, CB Industrial Product Bhd and Mega First Corp Bhd.