Report: Stay defensive, focus on quality stocks

Alliance DBS Research. In light of the current market conditions, and subdued economic outlook, the research house cautioned investors to stay on the sidelines until the Covid-19 pandemic is contained.

PETALING JAYA: A defensive strategy, focusing on quality names with resilient earnings and yields, has been advocated by Alliance DBS Research.

In light of the current market conditions, and subdued economic outlook, the research house cautioned investors to stay on the sidelines until the Covid-19 pandemic is contained.

In a comprehensive report titled “Stay defensive to ride out the storm, ” it said most sectors under its coverage were expected to post weaker-than-expected earnings in 1H20 given the deteriorating environment.

This, it said, will result in further downside risks to its end-2020 FBM KLCI target of 1,530.

It is “overweight” on sectors that are relatively less-affected by Covid-19, such as telcos, REITs and healthcare.

For banks, the research house said it was still premature to assess the impact but preliminary assessments indicated exposures of up to 3% of gross loans, based on the tourism, hospitality, transport and food and beverage-related sectors.

“These exposures may have little visibility on the translation into provisions for banks, for now, ” it said, adding that it continues to like RHB Bank within the banking space.

Its other top picks are Sunway Berhad and Westports.

On the other hand, the research house is “underweight” sectors such as automotive, property, and aviation which are likely be hampered by slower economic activities.

Here is a brief look at the research house’s five sectors with overweight calls, in no particular order:

> Construction (Top picks: Gamuda, Sunway Construction)The research house believes construction is one of the remaining tools to avert a recession. Its large cap “buy” is Gamuda, which is a likely front runner for the MRT 3 and HSR projects.

The safest pick, in its view, is Sunway Construction with its net cash balance sheet of RM0.32 per share, steady pipeline of new orders from its parent company and high dividend payout.

> Healthcare (Top picks: IHH Healthcare, KPJ Healthcare)

Longer term structural dynamics such as an ageing population; growing affluence and; broader insurance coverage, are expected to remain supportive of the private healthcare sector.

“We maintain our positive stance on KPJ Healthcare as a pure play on Malaysia’s healthcare sector, ” it said, while noting that hospital operators are unlikely to benefit significantly from Covid-19.

> Plantations (Top picsk: KLK, FGV, TSH Resources)

It believes CPO prices will be higher y-o-y and this would be able to more than offset the negative impact of lower production, El-nino and lower palm-oil demand as a result of Covid-19.

It likes FGV Holdings for its ability to lower its production cost; and KLK, FGV, TSH Resources and Chin Tek Plantations as they have been oversold.

> REITs (Top pick: Sunway REIT)

Among Malaysian REIT players under its coverage, it likes Sunway REIT for its strong distribution per unit (DPU) growth.

The research house expects earnings to be supported by contribution from other segments as it diversifies its earnings base, as evidenced by the acquisition of Sunway REIT Industrial and Sunway University.

>Telecommunications (Time dotCom, DiGi.Com, Axiata)

It noted that spending on telecommunications services is generally inelastic and should not be affected by slower economic growth or evenCovid-19.

“Historically, the Malaysian telecom sector has performed well during periods of uncertainty as investors seek defensive names, ” it said, adding that it preferred large cap stocks with resilient earnings growth.

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