KUALA LUMPUR: Maybank Investment Bank Research says it continues to adopt a broadly defensive investing strategy as the equity market continues to contend with multiple external and internal earnings headwinds.
It had on Wednesday cited principally continuing trade uncertainties, as well as political and policy uncertainties, but this was notwithstanding the positive macro signals.
“Our 12-month FBM KLCI target of 1,700 is based on 16 times forward price-to-earnings ratio (PER), in line with historical mean, ” it said.
Its biggest sector overweights are in oil and gas, banks, REITS and selected consumer stocks.
Oil & Gas (O&G): with Budget 2020 containing no additional demands on Petronas’ cashflow (recall in 2019 Petronas was required to pay the government a special dividend of RM30bil), the national oil & gas corporation’s 2H19 capex step-up is on track.
Coupled with broadly rising activity levels (i.e. jobs) offshore, its oil & gas sector analyst has been raising earnings forecasts, valuations and ratings across the O&G services value chain. Top sector picks are Yinson (FPSOs), Dialog (storage), Velesto (drilling), Wah Seong (pipelines, fabrication) and Favelle Favco (crane manufacturing).
Banks: While the revised expectation on the OPR is prima facie positive for the banking sector given interest rate reductions are a drag on sector NIM, its banks analyst has already factored in another OPR reduction over the next 12 months.
This is in line with the expectations of the economics team i.e. while there is near-term NIM relief from delayed OPR reduction, it does not change the long-term forecasts.
Nonetheless, indicative macro resilience bodes well for asset quality, while ample system liquidity (liquidity coverage ratio is at a generous 144%, while loan-deposit ratio is at a comfortable 88%) alleviates pressure on funding costs, especially with system loans growth remaining weak (Oct: +3.7% YoY).
“We prefer overly-discounted, high-yield mid-cap banks i.e. CIMB, RHB, AMMB and BIMB, ” it said.
REITs: the combination of stable interest rates and re-rating share prices means a narrowing spread between risk-free rate and REIT dividend yields.
Nonetheless, the REITs sector is generating conviction cash dividend yields in the 4-7% range, attractive vs. market average (3.5%) and deposit rates (c.3%).
Its REITS sector analyst prefers MRCB-Quill Reit and YTL REIT for healthy pipelines and above-average yield, while we also have a BUY rating for Sunway REIT.
Consumer (selective): While the research house no longer anticipates an impending disposable income boost from lower interest rates (transmission via lower financing costs for household debt, the latter at an elevated 83% of GDP as at end-2018), the combination of robust GDP growth projections, expedited fiscal stimulus spending, medium-term interest rate cut (note it is still expecting another 25bps OPR reduction over 1H20) and stable employment will continue to support private consumption.
“We upgraded BAT (tobacco) post-Budget 2020, and auto-based conglomerate UMW post-3Q19 reporting; we also like MyNews (convenience stores), ” it said.
For investors preferring externally-driven stocks, Maybank IB Research recommends:
i) rubber gloves exporter Kossan, which is the leading beneficiary of market share gains in the non-medical gloves segment (note incremental boost from recent US removal of Thai competitor GSP’s tariff break);
ii) conglomerate MFCB, where its dominating power generation business will begin recognizing earnings from its Laos-based Don Sahong hydropower plant’s energy sales to Cambodia from 4Q19; and
iii) iii) petrochemicals giant Petronas Chemicals for a combination of rising production capacity, recovering product prices and strong balance sheet. On the flip side, it underweights the Aviation sector on competition, cost pressures for the airlines (AirAsia, AirAsia X) and extended regulatory uncertainty re the ultimate operating model for airport operator MAHB.
iv) Other stocks on its SELL list include rubber glove exporter Hartalega (switch into Kossan) and telco Maxis, both being fully-valued.
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