Top ten market picks
GLOBAL markets have seen a volatile first half of the year as investors cautiously took positions amidst fluctuating commodity prices, political tensions in the Middle East and North America and businesses contended with Japan's earthquake and tsunami that wrecked havoc on the nation. The second half of the year does not seem to provide better clarity for investors, as concerns loom over the escalating Europe debt crisis and US experts suggesting that the Federal Reserves consider a QE3 to spur US economic growth.
As investors mindfully enter the second half of the year, local research houses have marked their top picks for the second half of this year - mainly stocks that are key beneficiaries of the Government's Economic Transformation Programme (ETP).
CIMB Investment Bank Bhd research head Terence Wong prefers cyclical sectors such as construction, oil and gas (O&G), property and banks. “We don't like defensive sectors like tobacco and brewery and sectors that only outperform in bear markets,” he says.
Meanwhile, Affin Investment Bank Bhd research head Andy Ong says sectors to avoid include externally driven sectors such as technology due to soft economic growth and transport, mainly shipping, given poor supply demand dynamics and high bunker cost.
Below are 10 stock picks compiled from various research houses to provide investors a flavour of which stocks may remain resilient due to their respective fundamentals:
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AIRASIA BHD
Target Price: RM4.00
The key fundamentals that we like about low-cost carrier AirAsia is its forward and innovative management, its imminent listings of the Thailand and Indonesia operations and lean cost structure. This is supported by the group's continuous and successful effort in entering new markets coupled with various ways and joint ventures to increase its ancillary income (every ringgit spent per passenger helps offset US$1 per barrel increase).
Risk: Key risks include any further spike in crude oil prices which will damper earnings, while any delays from the propose listings will adversely affect the stock's market sentiment. Affin Investment Bank Bhd research head Andy Ong
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PETRONAS GAS BHD
Target Price: RM14.00
Petronas Gas' share price has rallied of late due to the vast growth potential from the upcoming second and third liquefied natural gas (LNG) regas terminals in Pengerang and Sabah, just as it is working on its first plant in Malacca (we estimate that the Malacca plant alone would contribute RM287mil in additional revenue from gas transportation and propane as well as butane extraction). The LNG plants will not only lead to more gas transportation, processing and fixed reservation revenue, but the capital expenditure incurred should also drive down Petronas Gas' tax rate to below 20%. Factoring in the lower tax rate, our forecasts are raised by 3% to 7%, while our discounted cash flow derived fair value rises to RM14.00. OSK Research head of research Chris Eng.
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PUBLIC BANK BHD
Target Price: RM14.80
Public Bank is an all-time favourite with a price target of RM14.80, implying a 3.6 times price-to-book value, premium to the sector average of 2.1 times. This can be justified due to the company's solid track record on its earnings growth and high return on equity target. Also, Public Bank's management appears comfortable with the high growth trajectory as asset risks appear to be low delinquencies are declining across all product lines, non-performing loans/ restructured assets have been reducing and loan loss coverage level is near the historical high. At our target price, the stock is trading at 14.7 times financial year 2011. Kenanga Research
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TELEKOM MALAYSIA BHD
Target Price: RM5.10
TM is a contrarian pick and our preferred choice in the telco sector as we believe there could be surprises on the dividend front from the sale of the Axiata shares (TM announced last December that it was looking to dispose 191.46 million Axiata shares). Also, in our view, the market has not fully factored in the strong take-up of TM's Unifi high-speed broadband service and wholesale revenue from Maxis and eventually Celcom and P1. TM's capital expenditure is peaking this year, resulting in discounted cash flow (DCF) yields of 9-12% for financial year 2012-2013 and gross dividend yield of 6-10% (DCF may be higher than market expectations due to lower than expected capex). - CIMB Investment Bank Bhd head of research Terence Wong.
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SP SETIA BHD
Target Price: RM4.68
While we are downgrading our call on the property sector from an “Overweight” to “Neutral”, we continue to include SP Setia in our top picks portfolio for another quarter as we expect significant news flow for the company. On top of double digit sales growth, we believe the stock is a beneficiary of Federal Government and Penang state Government land sales given SP Setia's sizeable goodwill projects in Kuala Lumpur and Penang. But we opine that positive news flow impacts on its share price could be short-lived and we expect the inherent property cycle to lean towards downward movements on the back of softer overall property demand (particularly residential) for next year. Kenanga Research
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WCT BHD
Target Price: RM4.15
WCT is well positioned for the construction boom and is a main beneficiary of the Economic Transformation Programme (ETP). The construction firm still has an edge in open tenders as it remains one of the efficient contractors and boasts a strong track record. Local project flows this year are likely to be as good as last year for WCT. It is targeting RM2bil worth of new jobs this year, backed by the ETP and 10th Malaysia Plan. WCT has also pre-qualified for the RM10bil- RM11bil mass rapid transit elevated works. Despite the Middle East tensions, we remain optimistic about the group's prospects in the Gulf region, especially in Qatar and Abu Dhabi. Factors that could trigger a re-rating (on its Outperform rating) include projects wins and ebbing Middle East concerns.
Risk: The risk entailed would be any delays to the implementation of the ETP. CIMB Investment Bank Bhd head of research Terence Wong
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PERISAI PETROLEUM TEKNOLOGI BHD
Target Price: RM1.40
Another stock that is set to benefit from the ETP under the O&G initiatives. Following last year's restructuring, Perisai enjoys clearer earnings visibility. It is set to benefit from opportunities in deepwater and marginal field developments. Furthermore, skilled new management is firmly in place and is backed by major shareholder, Singapore-listed Ezra Holdings Ltd's operational strength. Currently, Perisai's only revenue-generating asset is a pipelay barge, Enterprise 3, which is chartered to SapuraCrest Petroleum Bhd until Jun 2013. An ongoing asset injection of a vessel operator, Intan Offshore, by asset rich Ezzra will give Perisai a new revenue stream come June and the acquisition of Garuda Energy (L) Ltd, which owns a mobile offshore production unit, will enlarge Perisai's asset base further.
Risk: As with WCT, the risk entailed would be any delays to the implementation of the ETP. CIMB Investment Bank Bhd head of research Terence Wong
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WAH SEONG CORP BHD
Target Price: RM2.73
We advice investors to re-look at Wah Seong, due to continuous positive newsflow and its relatively cheap valuation, given that its share price has lagged compared with other O&G stocks. Furthermore, we believe that the proposed de-merger of Wah Seong's O&G business will provide buying interest in the company in order for investors to be entitled for the new listed entity shares. MIDF Amanah Investment Bank Bhd research head Zulkifli Hamzah
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MALAYSIAN RESOURCES CORP BHD
Target Price: RM2.58
We have chosen MRCB as one of our picks owing to its huge outstanding gross development value (GDV) in KL Sentral, its bulging property investment portfolio and recurring income from toll highways and rental incomes, good prospects from new GDVs from new land acquisitions and significant participation in the RM10bil Sungai Buloh land development. Aside from this, its engineering and construction order book replenishment from the river of life project (rehabilitating the Klang river) of as well as other 10th Malaysia Plan and ETP projects will boost the company's earnings. Affin Investment Bank Bhd research head Andy Ong
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MSM Malaysia Holdings Bhd
Target Price: RM4.80
Coverage on MSM was initiated before the company was listed on Tuesday, with a target price of RM4.80 per share, based on 11 times calendar year 2012 (CY12) earnings per share. We applied a 10% discount to the 12.3 times regional CY12 price earnings ratio to account for a smaller market size and minimal physical upstream control (ownership of sugar cane plantation). MSM is positioned as a consumer concessionaire' due to its highly cash generative business model and healthy balance sheet, which will see it stacked as a high-yielding stock (FY 12 net yield of 6.5% versus market yield of 3%). Tradewinds (M) Bhd is MSM's single comparable peer and has seen its share price surge 61& year-to-date. We believe the valuation gap and MSM's leading market position will see some switching over when MSM is listed Affin Investment Bank Bhd research head Andy Ong
Stock picks from Kenanga Research were extracted from its third quarter calendar year 2011 investment strategy report, picks from CIMB Investment came from its mid-year strategy report Making the big leap, while details on the stocks picked by OSK Research, Affin Investment and MIDF Amanah came from the respective reports issued on these companies.
By JEEVA ARULAMPALAM
jeeva@thestar.com.my
As investors mindfully enter the second half of the year, local research houses have marked their top picks for the second half of this year - mainly stocks that are key beneficiaries of the Government's Economic Transformation Programme (ETP).
CIMB Investment Bank Bhd research head Terence Wong prefers cyclical sectors such as construction, oil and gas (O&G), property and banks. “We don't like defensive sectors like tobacco and brewery and sectors that only outperform in bear markets,” he says.
Meanwhile, Affin Investment Bank Bhd research head Andy Ong says sectors to avoid include externally driven sectors such as technology due to soft economic growth and transport, mainly shipping, given poor supply demand dynamics and high bunker cost.
Below are 10 stock picks compiled from various research houses to provide investors a flavour of which stocks may remain resilient due to their respective fundamentals:
Target Price: RM4.00
The key fundamentals that we like about low-cost carrier AirAsia is its forward and innovative management, its imminent listings of the Thailand and Indonesia operations and lean cost structure. This is supported by the group's continuous and successful effort in entering new markets coupled with various ways and joint ventures to increase its ancillary income (every ringgit spent per passenger helps offset US$1 per barrel increase).
Risk: Key risks include any further spike in crude oil prices which will damper earnings, while any delays from the propose listings will adversely affect the stock's market sentiment. Affin Investment Bank Bhd research head Andy Ong
Target Price: RM14.00
Petronas Gas' share price has rallied of late due to the vast growth potential from the upcoming second and third liquefied natural gas (LNG) regas terminals in Pengerang and Sabah, just as it is working on its first plant in Malacca (we estimate that the Malacca plant alone would contribute RM287mil in additional revenue from gas transportation and propane as well as butane extraction). The LNG plants will not only lead to more gas transportation, processing and fixed reservation revenue, but the capital expenditure incurred should also drive down Petronas Gas' tax rate to below 20%. Factoring in the lower tax rate, our forecasts are raised by 3% to 7%, while our discounted cash flow derived fair value rises to RM14.00. OSK Research head of research Chris Eng.
Target Price: RM14.80
Public Bank is an all-time favourite with a price target of RM14.80, implying a 3.6 times price-to-book value, premium to the sector average of 2.1 times. This can be justified due to the company's solid track record on its earnings growth and high return on equity target. Also, Public Bank's management appears comfortable with the high growth trajectory as asset risks appear to be low delinquencies are declining across all product lines, non-performing loans/ restructured assets have been reducing and loan loss coverage level is near the historical high. At our target price, the stock is trading at 14.7 times financial year 2011. Kenanga Research
Target Price: RM5.10
TM is a contrarian pick and our preferred choice in the telco sector as we believe there could be surprises on the dividend front from the sale of the Axiata shares (TM announced last December that it was looking to dispose 191.46 million Axiata shares). Also, in our view, the market has not fully factored in the strong take-up of TM's Unifi high-speed broadband service and wholesale revenue from Maxis and eventually Celcom and P1. TM's capital expenditure is peaking this year, resulting in discounted cash flow (DCF) yields of 9-12% for financial year 2012-2013 and gross dividend yield of 6-10% (DCF may be higher than market expectations due to lower than expected capex). - CIMB Investment Bank Bhd head of research Terence Wong.
Target Price: RM4.68
While we are downgrading our call on the property sector from an “Overweight” to “Neutral”, we continue to include SP Setia in our top picks portfolio for another quarter as we expect significant news flow for the company. On top of double digit sales growth, we believe the stock is a beneficiary of Federal Government and Penang state Government land sales given SP Setia's sizeable goodwill projects in Kuala Lumpur and Penang. But we opine that positive news flow impacts on its share price could be short-lived and we expect the inherent property cycle to lean towards downward movements on the back of softer overall property demand (particularly residential) for next year. Kenanga Research
Target Price: RM4.15
WCT is well positioned for the construction boom and is a main beneficiary of the Economic Transformation Programme (ETP). The construction firm still has an edge in open tenders as it remains one of the efficient contractors and boasts a strong track record. Local project flows this year are likely to be as good as last year for WCT. It is targeting RM2bil worth of new jobs this year, backed by the ETP and 10th Malaysia Plan. WCT has also pre-qualified for the RM10bil- RM11bil mass rapid transit elevated works. Despite the Middle East tensions, we remain optimistic about the group's prospects in the Gulf region, especially in Qatar and Abu Dhabi. Factors that could trigger a re-rating (on its Outperform rating) include projects wins and ebbing Middle East concerns.
Risk: The risk entailed would be any delays to the implementation of the ETP. CIMB Investment Bank Bhd head of research Terence Wong
Target Price: RM1.40
Another stock that is set to benefit from the ETP under the O&G initiatives. Following last year's restructuring, Perisai enjoys clearer earnings visibility. It is set to benefit from opportunities in deepwater and marginal field developments. Furthermore, skilled new management is firmly in place and is backed by major shareholder, Singapore-listed Ezra Holdings Ltd's operational strength. Currently, Perisai's only revenue-generating asset is a pipelay barge, Enterprise 3, which is chartered to SapuraCrest Petroleum Bhd until Jun 2013. An ongoing asset injection of a vessel operator, Intan Offshore, by asset rich Ezzra will give Perisai a new revenue stream come June and the acquisition of Garuda Energy (L) Ltd, which owns a mobile offshore production unit, will enlarge Perisai's asset base further.
Risk: As with WCT, the risk entailed would be any delays to the implementation of the ETP. CIMB Investment Bank Bhd head of research Terence Wong
Target Price: RM2.73
We advice investors to re-look at Wah Seong, due to continuous positive newsflow and its relatively cheap valuation, given that its share price has lagged compared with other O&G stocks. Furthermore, we believe that the proposed de-merger of Wah Seong's O&G business will provide buying interest in the company in order for investors to be entitled for the new listed entity shares. MIDF Amanah Investment Bank Bhd research head Zulkifli Hamzah
Target Price: RM2.58
We have chosen MRCB as one of our picks owing to its huge outstanding gross development value (GDV) in KL Sentral, its bulging property investment portfolio and recurring income from toll highways and rental incomes, good prospects from new GDVs from new land acquisitions and significant participation in the RM10bil Sungai Buloh land development. Aside from this, its engineering and construction order book replenishment from the river of life project (rehabilitating the Klang river) of as well as other 10th Malaysia Plan and ETP projects will boost the company's earnings. Affin Investment Bank Bhd research head Andy Ong
Target Price: RM4.80
Coverage on MSM was initiated before the company was listed on Tuesday, with a target price of RM4.80 per share, based on 11 times calendar year 2012 (CY12) earnings per share. We applied a 10% discount to the 12.3 times regional CY12 price earnings ratio to account for a smaller market size and minimal physical upstream control (ownership of sugar cane plantation). MSM is positioned as a consumer concessionaire' due to its highly cash generative business model and healthy balance sheet, which will see it stacked as a high-yielding stock (FY 12 net yield of 6.5% versus market yield of 3%). Tradewinds (M) Bhd is MSM's single comparable peer and has seen its share price surge 61& year-to-date. We believe the valuation gap and MSM's leading market position will see some switching over when MSM is listed Affin Investment Bank Bhd research head Andy Ong
Stock picks from Kenanga Research were extracted from its third quarter calendar year 2011 investment strategy report, picks from CIMB Investment came from its mid-year strategy report Making the big leap, while details on the stocks picked by OSK Research, Affin Investment and MIDF Amanah came from the respective reports issued on these companies.
By JEEVA ARULAMPALAM
jeeva@thestar.com.my
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