gravitate towards fundamentals as capital flow normalises · 2011-01-18 · neighbours, the nordic...

RHB Research Institute

1January 2011

Gravitate Towards Fundamentals As

Capital Flow Normalises

2011 Market Outlook & Strategy


2

Market outlook

� Rising confidence on the sustainability of global economic recovery.

� As developed countries are mired in debt problems, emerging markets that are

with stronger economic fundamentals and growth prospects attracted

significant inflow of capital.

� Foreign flows into the Malaysian capital markets, however, may have

peaked.

Net Foreign buying into M’sian equity

on a receding trend

Foreign holdings of fixed income instruments

in M’sia surpassing the previous peak

RMbn

2.92.6

2010

RMbn RMbn

Source: RHBRISource: Bursa M’sia

0

10

20

30

40

50

60

70

Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10

0

10

20

30

40

50

60

70MGS/GII

PDS

Money Market

-2

-1

0

1

2

3

4

5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


3

Push-and-pull effect : a volatile year ahead

� Whilst optimism abounds, liquidity-driven rallies seldom last and sometimes

unexpected events could cause the reversal of capital flow earlier than expected.

� Strengthening of US dollar.

� Relative market valuations.

� Any bond default in Europe could also cause fears of contagion, bringing back

fears of a “double-dip” recession in the global economy.

� Domestically, news flow continue to be positive, but may still be clouded by

global developments.

� Impending award of projects/contracts under the various economic

transformation programmes.

� Sarawak state elections and the possibility of early general elections.


4

Upward-trending market in 2011, but expect more volatility

� Nevertheless, we believe there is still room for the market to trend higher in

2011.

� Predicated on the view that there would be no “double-dip” recession for

the global economy.

� Resilient growth of the local economy (projected to normalise to 5.0% in

2011), which would in turn imply sustained corporate earnings growth

(+16.3% projected for 2011) that will continue to create new

shareholders’ value for investors.

� End-2011 FBM KLCI target : 1,700 based on 15x mid-cycle 2012 earnings

(bottom-up methodology: 1,753).


5

Economic worries persist, but recovery is building momentum

� Despite the lack of confidence, the US economy will unlikely fall back into a

recession, in our view.

US economic growth still subpar

and below trend

Improving but still weak labour

market conditions

% yoy

-8

-6

-4

-2

0

2

4

6

8

10

05 06 07 08 09 10

GDP

Exports

consumer spending

(‘000) % of labour force

Source: Bloomberg, RHBRI Source: Bloomberg, RHBRI

-1000

-800

-600

-400

-200

0

200

400

600

00 01 02 03 04 05 06 07 08 09 10

0

2

4

6

8

10

12

Non-farm payrolls (LHS)

Unemployment rate (RHS)


6

Eurozone economy also unlikely to fall off the cliff, despite the debt problems

� Relatively sound economic conditions in Germany and its immediate

neighbours, the Nordic countries and Poland.

� UK has more flexibility to undertake additional measures to steer its economy out

of the doldrums.

Fiscal austerity in Europe

Country 2009 2010 2014

Budget Deficit (% of GDP)

Greece 15.4 8.1 <3.0

Portugal 9.4 7.3 4.61

Italy 5.3 3.9 2.72

Spain 11.2 7.3 3.0

Ireland 14.3 11.7 2.9

Germany 3.3 n.a 3.0

UK 11.5 12.6 4.7

1 for year 20112 for year 2012

Source: Various news reports

Germany a key stabiliser

% yoy % yoy

Source: Bloomberg, RHBRI

Exports

(LHS)

GDP

(LHS)

Disposable

Income

(RHS)

-30

-20

-10

0

10

20

30

05 06 07 08 09 10

-2

-1

0

1

2

3

4

5


7

Japan continues to be export-dependent, China’s growth is stabilising

� Japan’s recovery remains weak, China still on tightening mode to contain asset

bubble and rising inflation.

Japan still mired in deflation

Source: Bloomberg, RHBRI.

(The core inflation)% yoy

-3

-2

-1

0

1

2

3

00 01 02 03 04 05 06 07 08 09 10

China’s economy showing signs

of stabilising

% yoy Index

Source: Bloomberg, RHBRI.

PMI

(RHS)

Fixed-asset

Investment

(LHS)

Loan

growth

(LHS)

10

15

20

25

30

35

40

06 07 08 09 10

0

10

20

30

40

50

60

70


8

A new global economic cycle

� Global economic recovery is more sustainable than feared, in our view. It is, however,

entering into a period of slowing growth in an uneven phase of recovery.

e estimates

f forecasts

*: Total OECD

Global Economy -0.6 4.8 4.2 4.5 3.3 3.3 3.5 4.6 4.2 4.6

2.8* 2.3* 2.8*

US -2.4 2.6 2.3 3.0 3.3 2.9 3.0 2.7 2.2 3.1

Euroland -4.1 1.7 1.5 1.8 0.7 1.3 1.8 1.7 1.7 2.0

UK -4.9 1.7 2.0 2.3 0.5 2.0 n.a 1.8 1.7 2.0

Japan -5.2 2.8 1.5 2.0 2.5 2.1 2.2 3.7 1.7 1.3

Canada -2.5 3.1 2.7 2.7 1.5 2.5 n.a 3.0 2.3 3.0

China 9.1 10.5 9.6 9.5 10.0 8.5 8.2 10.5 9.7 9.7

India 5.7 9.7 8.4 8.0 8.2 8.7 8.2 9.1 8.2 8.5

Asia ex-Japan 6.9 9.4 8.4 8.4 6.6 7.8 n.a n.a n.a n.a

Malaysia -1.7 6.7 5.3 5.2 5.7 5.3 5.5 n.a n.a n.a

Advance economies -3.2 2.7 2.2 2.6 2.3 2.4 2.7 - - -

Emerging & developing 2.5 7.1 6.4 6.5 6.2 6.0 6.0 - - -

economies

IMF World Bank OECD

2009 2010f 2011f 2012f 2010f 2011f 2012f 2010f 2011f 2012f


9

M’sian economic growth likely to be resilient, underpinned by domestic demand

� Sustained increase in

consumer spending on the

back of rising consumerism

and high savings.

� Supported by rising rural

household incomes on the

back of sustained high palm oil

and rubber prices.

� Expect some projects under

the various economic

transformation programmes to

kick-start and the economic

growth to gain momentum in

2H2011.

Domestic

demand

GDP

Exports

-20

-15

-10

-5

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10e 11f

% yoy


10

Consumption

Public 10.7 1.5 9.4 0.7 6.3 6.9 -10.2 3.1 -1.4 4.5 0.2 4.6

Private 8.5 0.3 1.3 1.6 5.1 7.9 7.1 0.7 6.3 5.4 6.7 6.3

Fixed capital formation 0.7 -9.6 -7.9 8.2 5.4 12.9 9.8 -5.6 9.3 6.3 11.6 5.3

Public 0.5 n.a n.a n.a n.a n.a n.a 8.0 10.8 4.9 8.3 0.6

Private 1.0 n.a n.a n.a n.a n.a n.a -17.2 8.6 7.8 15.2 10.2

Agg. domestic demand 6.8 -2.2 0.1 2.8 5.3 9.0 5.0 -0.5 5.8 5.5 6.9 5.8

Exports of goods andnon-factor services 1.6 -17.9 -12.9 6.0 19.3 13.8 6.6 -10.4 9.7 7.6 11.6 6.7

Imports of goods and non-factor services 2.2 -19.4 -13.2 7.0 27.5 21.9 11.0 -12.3 13.9 8.4 16.6 7.2

GDP 4.7 -3.9 -1.2 4.4 10.1 8.9 5.3 -1.7 7.3 5.0 7.0 5.0-6.0

M’sia: slower growth, but will likely regain momentum in 2H2011

f: forecasts

Source: Dept of Statistics, Ministry of Finance and RHBRI.

Agriculture 4.3 0.4 -0.4 5.9 6.8 2.4 2.7 0.4 3.8 4.0 3.4 4.5

Manufacturing 1.3 -14.5 -8.6 5.0 17.0 16.0 7.5 -9.4 11.5 8.0 10.8 6.7

Mining & quarrying -2.4 -3.5 -3.6 -2.8 2.1 1.1 -1.0 -3.8 1.5 2.3 1.0 2.9

Construction 4.2 4.5 7.9 9.3 8.7 4.1 2.8 5.8 4.2 3.2 4.9 4.4

Services 7.4 1.7 3.4 5.2 8.5 7.3 5.4 2.6 6.5 4.6 6.5 5.3

GDP 4.7 -3.9 -1.2 4.4 10.1 8.9 5.3 -1.7 7.3 5.0 7.0 5.0-6.0

2008 2009 2010 2009 2010f 2011f 2010f 2011f

Q2 Q3 Q4 Q1 Q2 Q3

RHBRI MOF% Growth in Real terms

� Dragged down by slowing export growth and as the low base effect fizzled out.


11

Sustained earnings growth to underpin market performance

EBITDA Growth (%) -6.6 27.7 13.8 7.2 -1.2 22.4 13.3 7.4

Pre-Tax Earnings Growth (%) -10.0 41.9 20.0 8.8 -2.2 30.9 19.1 9.9

Normalised Earnings Growth (%)* -10.0 30.7 16.8 9.0 -6.3 29.1 17.0 9.9

Normalised EPS Growth (%)* -14.7 24.5 16.3 8.8 -9.8 21.5 16.6 9.8

Prospective PER (x)* 21.5 17.6 15.0 13.8 20.8 17.0 14.5 13.1

Price/EBITDA (x) 11.6 9.1 7.9 7.4 8.6 8.8 7.6 7.1

Price/Bk (x) 2.7 2.5 2.3 2.2 2.0 2.3 2.1 2.0

Price/NTA (x) 3.5 3.0 2.7 2.4 2.3 2.6 1.7 1.6

Net Interest Cover (x) 7.5 8.2 10.4 11.6 7.2 7.9 9.8 11.0

Net Gearing (%) 46.8 38.5 35.5 33.9 46.5 38.5 34.3 29.4

EV/EBITDA (x) 8.8 7.0 6.1 5.7 8.5 7.1 6.2 5.8

ROE (%) 12.2 14.4 15.5 15.6 11.7 13.6 14.6 14.9

COMPOSITE INDEX @ 1,566.49 FBM KLCI RHBRI

12th January 2011 2009a 2010f 2011f 2012f 2009a 2010f 2011f 2012f

* Exclude Mas earnings in 2009-11

� With sustained earnings growth, valuations improve in 2011.


12

Regional comparisons

* as at 12th January 2011

FactSet Asian Consensus Trends report dated 11 January 2011

2010 Net EPS (%) 0.9 11.7 20.4 19.1 27.2 32.4 80.6 60.9

2011 Net EPS (%) 16.9 11.1 12.5 12.4 23.3 13.8 12.8 12.9

2012 Net EPS (%) 17.6 9.4 14.7 10.2 16.0 15.0 9.8 13.2

2010 PER (x) 16.5 15.7 13.7 15.0 18.3 14.2 14.0 10.4

2011 PER (x) 18.3 14.5 12.3 13.3 13.5 12.7 13.2 10.2

2012 PER (x) 15.6 13.3 10.8 12.1 11.7 11.7 12.0 9.0

IBES Consensus dated 16 December 2010

2009 Net EPS (%) -21.1 -12.6 31.7 18.3 10.7 19.3 88.1 30.3

2010 Net EPS (%) 29.2 21.4 18.3 39.5 22.9 26.0 100.0 59.8

2011 Net EPS (%) 16.9 11.0 19.5 11.6 24.3 10.9 13.5 14.8

2009 PER (x) 21.6 18.7 17.6 21.4 22.7 18.9 30.4 20.1

2010 PER (x) 16.2 15.1 14.9 14.7 18.3 15.2 15.1 11.5

2011 PER (x) 13.9 13.6 12.5 13.2 14.7 13.8 13.3 10.0

Performance* (%)

2009 (YOY) +45.2 +64.5 +63.2 +63.0 +87.0 +52.0 +78.3 +49.7

2010 (YOY) +19.3 +10.1 +40.6 +37.6 +46.1 +5.3 +9.6 +21.9

2011 (YTD)* +3.1 +1.7 -1.3 -3.9 -4.0 +4.7 -0.1 +2.1

M'sia S'pore Thai’d P’pines Indon H.Kong Taiwan Korea

� Comparable with Singapore, but cheaper than Indonesia.


13

Non-strategic foreign ownership of the M’sian market has picked up, but still below recent highs

Source: Bursa Malaysia

0

5

10

15

20

25

30

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Sep-10

%

21.7

� Still room for greater foreign participation.

27.5


14

Major events and potential catalysts for the market

� Award of infrastructure projects and privatisation of government land.

� Sarawak state elections and the possibility of early general elections.

� Iskandar development corridor is also building momentum

� Rising FDIs as well as land and property values.

� Creation of a regional oil & gas storage and trading hub by 2017.

� Initiatives to make the country a preferred Asian hub for oil field services

by 2015.

� Greater M&A activities would provide some cheers to the market from time to

time.

� More aggressive reform of the GLCs and the reduction of its holdings by

GLICs could also attract new focus into the Malaysian market.


15

Value*(RMm)

KL MRT 40,000

Ampang & Kelana Jaya LRT line extension 7,000

Gemas-JB double tracking 5,000

Flood mitigation programmes 5,000

Expansion of airports 3,300

3,580km of paved roads, of which 72% in Sabah and Sarawak n.a.

Remaining work for East Coast Expressway (Phase 2) n.a.

Kuala Lipis – Cameron Highlands road n.a.

Jerantut – Sungai Lembing road n.a.

Sewerage treatment plant in Lembah Pantai, KL n.a.

Eight hospitals (including specialist hospitals), 197 clinics and 50 1Malaysia clinics n.a.

78,000 units of affordable public housing n.a.

Repair and maintenance of public/private low-cost housing 500

Source: The 10MP

*The 10 MP & various news reports

Key public projects earmarked for implementation under the 10MP

� KL MRT and LRT line extension projects the near-term focus.


16

“High-Impact” Projects Via PFI Under The 10MP

Value* (RMm)

Seven toll highways including West Coast Expressway, Guthrie-Damansara Expressway,

Sungai Juru Expressway and Paroi-Senawang-KLIA Expressway 19,000

Two coal-fired power plants 7,000

Development of the Malaysian Rubber Board’s 2,680 acres of land in Sungai Buloh 10,000 (GDV)

Five Universiti Teknologi MARA (UiTM) branch campuses n.a

Redevelopment of Angkasapuri into a “Media City” n.a

Integrated transport terminal in Gombak n.a

Privatisation of Penang port n.a

Senai Hi-Tech Park in Iskandar, Johor n.a

The raw water supply project for industrial complex in Tanjong Langsat, Johor n.a

Land reclamation in Westport, Port Klang n.a

Malaysia Truly Asia Centre in KL n.a

Source: The 10MP

*The 10 MP & various news reports

� Toll roads, power plants, property development, ports, etc.


17

Federal land to be privatised for re-development

Land Area GDV Potential Master

(acres) (RMm) Developer(s)

Matrade Jalan Duta 65 15,000 Naza TTDI (Awarded)

Rubber Research Institute, Sungai Buloh 2,680 10,000 EPF, MRCB

Royal Malaysian Air Force, Sungai Besi 400 Multi-billion 1Malaysia Development Bhd(1MDB), Qatar Investment Authority

Jalan Cochrane 150 Multi-billion To be auctioned

KL International Financial District 85 Multi-billion 1MDB, Mubadala

Batu Cantonment army base, Jalan Ipoh, KL 245 - 1MDB, LTAT (Boustead)

KLCC, Jalan Ampang & U-Thant vicinity - - MRCB

Source: Various news reports

Federal land parcels for re-development

� Catalyst for the property sector, though could create fears of impending oversupply.


18

Near-term risk mainly external

� Destabilising capital flow is a key risk to watch up for in the foreseeable future.

� Risk of contagion from the euro-debt crisis could also revive fear of a “double-

dip” recession.

� Rising protectionism in developed countries.

� Rising inflation, the building of asset bubble and more significant policy

tightening in the emerging world could also cause jitters among investors.

� Potential domestic credit tightening, however, is not expected to dampen the

market significantly.


19

Market Strategy

� Stick to fundamentals, trim stocks where valuations have become rich.

� Take advantage of any significant pullbacks in the market to accumulate fundamentally-robust

stocks on weakness.

Stocks FYE Price Fair Mkt Cap EPS Eps Growth PER P/BV P/CF GDY

(12/1/11) Value (sen) (%) (X) (x) (x) (%)

(RM/s) (RM/s) RM mil 11f 12f 11f 12f 11f 12f 11f 11f 11f

CIMB Dec 8.78 9.80 65,260 57.8 67.0 19.3 15.9 15.2 13.1 2.4 n.a. 1.4

Genting Dec 11.84 12.80 43,865 79.8 89.5 -0.2 12.2 14.8 13.2 2.2 6.7 1.1

KLK Sep 22.26 27.35 23,763 152.1 154.1 79.6 1.3 14.6 14.4 3.5 14.6 3.8

Gamuda Jul 4.20 4.51 8,526 19.0 20.5 36.5 7.9 22.1 20.5 2.3 54.9 2.9

MAHB Dec 6.14 8.02 6,754 44.9 49.9 20.5 11.3 13.7 12.3 1.8 9.7 3.2

SP Setia Oct 6.69 8.05 6,802 25.9 29.5 26.5 13.6 25.8 22.7 3.0 92.1 3.0

SapuraCrest^ Jan 3.78 3.86 4,826 19.3 20.4 14.4 5.7 19.6 18.5 3.2 7.2 1.9

Dialog Jun 2.21 2.82 4,395 7.8 11.4 34.2 45.5 28.2 19.4 7.2 25.5 2.0

Jaya Tiasa^ Apr 5.00 5.78 1,413 43.5 48.8 67.1 12.2 11.5 10.2 1.1 9.7 0.0

TH Plantation Dec 2.22 2.80 1,083 25.3 26.8 60.1 6.0 8.8 8.3 2.0 6.6 6.3

HSL Dec 1.82 2.27 1,012 16.2 17.7 21.4 8.9 11.2 10.3 2.3 13.2 1.4

KSL Dec 1.91 2.78 746 23.4 29.0 30.1 24.2 8.2 6.6 0.9 -83.3 2.9

^ FY11-12valuations refer to those of FY12-FY13


20

High dividend yielding stocks

^ FY11 & FY12 refer to FY12 & FY13 forecasts.

Share Price Gross Div. Yield (%) P/NTA (x) ROE (%) Recommendation

(12/1/11)

(RM/shr) FY11f FY12f FY11f FY11f

CSC Steel 1.77 8.5 8.5 0.8 9.8 OutperformMaxis 5.34 8.5 9.2 n.m 26.9 OutperformAXIS Reit 2.37 8.2 8.4 1.3 11.7 OutperformDigi 25.08 8.1 8.5 27.4 85.5 OutperformQuil Capita 1.12 7.7 7.9 0.8 6.7 OutperformParamount 4.60 7.4 8.4 0.9 12.9 OutperformP Gas^ 11.24 6.9 7.2 3.5 22.8 OutperformSTAR 3.40 6.8 6.8 2.3 16.0 OutperformEvergreen 1.48 6.8 4.1 0.9 15.9 OutperformMCIL^ 0.88 6.9 7.2 1.4 13.3 OutperformGlomac^ 1.82 6.7 7.9 0.9 12.1 OutperformTH Plantation 2.22 6.3 6.8 2.0 23.9 OutperformAdventa^ 2.58 5.7 6.7 1.6 22.3 OutperformFreight 1.01 5.4 5.4 1.2 17.2 OutperformMaybank 8.88 5.3 6.0 2.0 14.6 OutperformTM 3.66 7.2 7.2 2.1 7.2 Trading BuyVS Industry 2.17 7.1 8.0 1.2 12.8 Market PerformDaibochi 2.53 7.9 8.4 3.2 14.1 Market Perform Sunway REIT 1.03 6.6 7.1 1.1 6.9 Market Perform Amway 8.21 6.8 7.1 6.4 39.6 Market Perform B-Toto^ 4.40 5.9 6.1 n.m 78.6 Market Perform


21

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB

Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on

generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a

result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the

accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated

persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The

securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors

to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB

Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and

financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or

otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents

of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been

discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals

in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including

quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but

fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities, subject to the duties of

confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this

respect.


22

Thank You

gravitate towards fundamentals as capital flow normalises · 2011-01-18 · neighbours, the nordic...

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