KUALA LUMPUR: CIMB Equities Research expects the dividend yield play, the impending 14th General Elections and Permodalan Nasional Bhd (PNB) transformation themes to be in focus in the second half of 2017.
The research house said on Tuesday its top big cap picks were Tenaga Nasional for its attractive valuations and defensive earnings, Gamuda as a prime beneficiary of rail jobs, and Sime Darby for potential upside from the listing of pure plays.
Its preferred H2 2017 sector picks were construction, utilities and small caps. The top three smaller caps were MyEG, CCK and EITA Resources for their attractive valuations and superior earnings growth.
To recap, of the seven key themes identified for 2017, the themes which performed best in H1 2017 were PNB transformation, pump priming and tourism play.
Following the stock market’s strong H1 2017performance, the research house was turning more cautious on the second half's prospects.
It cited concerns over (1) valuations; (2) external event risks; (3) large maturities of Malaysian government bonds in August-November 2017; (4) lower commodity prices; and (5) weaker corporate earnings and GDP growth in H2, 2017 versus H1, 2017.
“But we do not expect the potential corrections to be significant due to supportive newsflow on corporate actions, stronger job awards for contractors ahead of the GE14 and a likely people-friendly Budget in October,” it said.
CIMB Research advised investors to take profit on cyclical stocks that have done well, and switch to more defensive sectors in H2, 2017.
It had downgraded its call on Malaysian banks from Overweight to Neutral due to (1) concerns over negative earnings impact from the adoption of MFRS 9, (2) slower projected 2018 net profit growth, and (3) less attractive valuations.
It also maintained its end-2017 FBM KLCI target of 1,790, which is still based on its three-year average price-to-earnings (P/E) of 16 times.
It said the Malaysian stock market was trading at 16.7 times, which was one standard deviation above its historical P/E.
The highest P/E it has achieved since the Global Financial Crisis was 17.4 times (at above its mean) and potential upside to the index at this P/E multiple is 1,836 (or 4.3% upside from the current level).
“We project market earnings rising by 8% each in 2017 and 2018, higher than consensus’ 7.3% EPS growth for 2017 and 6% for 2018,” it said.
The KLCI gained 122 points (or 7.4%) to 1,764 in H1, 2017. This was the best first half gain recorded by the market since 2009.
CIMB Research's analysis reveals that 70% of the index gain was driven by the banking and finance stocks, while Genting Bhd and Genting Malaysia contributed another 16% of the index gain.
The H1, 2017 gain was better than its expectations thanks to a stronger-than-expected cyclical upturn in global growth.