Stocks-What to Expect for the Rest of 2010

Out of the 84 companies that we track, 24% fell short of expectations, higher than the 21% that failed to deliver in May. The percentage of companies that outdid expectations fell from 22% to 21% while the proportion of those that lived up to expectations declined from 57% to 55%. The number of sectors that missed the mark increased from three to four; they are industrial, insurance, oil and gas, and telcos. The number of sectors that did better than expectations also fell from five to three — automotive, media and building materials.

The year-on-year (y-o-y) EPS change for the KLCI moderated from a hefty 58% jump in 1QFY10 to 30% in 2QFY10. On quarter-on-quarter (q-o-q) basis, the EPS growth strengthened from 4% to 8%. The still-robust y-o-y and q-o-q earnings growth means that our forecasts could have run ahead of expectations and that despite the relatively good earnings performance in 2Q10, it was still below our projection.

The three-month period including the August results season was positive as we raised our core CY10 EPS by 2.1% while upping CY11 by 2.7%. The strong performance during the results season came mainly from the media, utilities, automotive, gaming and banking sectors. Shortfalls came from stocks in the industrial, insurance, oil and gas, and telcos.

The number of companies which saw earnings downgrades increased from 16 in May to 18, namely Bursa Malaysia Bhd, Lafarge Malayan Cement Bhd, Berjaya Sports Toto Bhd, RGB International Bhd, Adventa Bhd, Guinness Anchor Bhd, Tomypak Holdings Bhd, Wellcall Holdings Bhd, MTD ACPI Engineering Bhd, Kurnia Setia Bhd, Petra Perdana Bhd, Wah Seong Corporation Bhd, Notion Vtec Bhd, JCY International Bhd, Maxis Bhd, Telekom Malaysia Bhd, MISC Bhd and Malaysian Airline System Bhd.

The number of earnings upgrades, meanwhile, slipped from 23 to 19, ie Proton Holdings Bhd, UMW Holdings Bhd, AMMB Holdings Bhd, Malayan Banking Bhd, Ann Joo Resources Bhd, Fraser & Neave Holdings Bhd, Genting Bhd, Genting Malaysia Bhd, PLUS Expressways Bhd, Media Chinese International Ltd, Star Publications (Malaysia) Bhd, KL Kepong Bhd, JobStreet Corporation Bhd, Uchi Technologies Bhd, Unisem (M) Bhd, DiGi.Com Bhd, AirAsia Bhd, Suria Capital Holdings Bhd and YTL Power International Bhd.

Looking at the sectoral changes for reported profits, the numbers were relatively positive in absolute terms. CY10 reported earnings were cut for five (eight previously) out of 18 categories.

Earnings were reduced most for the insurance, oil and gas, technology and telco sectors. We upped our forecasts for 10 sectors, against five previously, with the upgrades coming mainly from the gaming, auto, conglo and F&B sectors. For CY11, we scaled back our earnings numbers for five sectors (seven previously) while raising them for eight categories (seven previously).
Since the big jump in profit forecast in November 2009, earnings estimates have been creeping up for CY10 and spiked up again in August 2010. Consensus forecasts were similar but August EPS still trails behind that of May. For CY11, both our and consensus forecasts have shown a gradual upgrade in recent months.

We expect EPS to rebound a strong 30% in CY10, still higher than consensus growth estimate which has bounced back from 14% three months back to 24%. Our CY11/12 growth forecast of 13% is also ahead of consensus. Our EPS forecasts are 1%-6% above consensus estimates.

The KLCI net profit growth to nominal GDP growth ratio for 2010/11 is in positive territory. We still believe that the figures are achievable as we are coming out of an economic recession, and the same pattern was seen in 1999 after two consecutive years of earnings contraction. However, the ratio should be declining for future years as growth moderates.

The Malaysian economy grew, albeit at a slower pace of 8.9% y-o-y in 2Q (10.1% in 1Q), thanks to continuing high domestic consumption, investment amid slower exports. The 2Q10 GDP growth was a shade higher than our estimate of 8.6% but markedly above consensus (7.9%). On q-o-q basis, real GDP growth was 3.5% in 2Q (-2.6% in 1Q). In 1H10, real GDP strengthened 9.5% (-5.1% in 1H09). Domestic demand continued to propel growth, with private consumption providing a strong lift to 2Q10 GDP. Consumer spending rose 7.9%, much higher than 5.1% in 1Q. Total fixed investment also picked up steam, expanding 12.9% in 2Q (5.4% in 1Q) largely on continuing fiscal support while private investment activity also increased.

Net trade had a negative impact on 2Q10 GDP growth as import growth outpaced that of exports. Gross exports grew at a slower pace of 13.8% y-o-y in 2Q (19.3% in 1Q), lower than import growth of 21.9% (27.5% in 1Q). As such, net trade contributed to a pullback in GDP growth, subtracting 5.3% percentage points (ppts) from 2Q10’s GDP growth (-2.7 ppts in 1Q). Also, inventory restocking added 6.3 ppts to overall growth (+8.1 ppts in 1Q).

We expect inventory correction to weigh down GDP growth in 2H10. The services sector showed 7.3% expansion in 2Q (8.5% in 1Q) while the manufacturing sector grew 15.9% (17% in 1Q), followed by the construction (4.1%), agriculture (2.4%) and mining (1.9%) sectors.

The 2Q10 GDP data underscore our view that the strong rebound peaked in 1Q as the effects of fiscal measures and inventory restocking fade in 2H10. The bottom line remains that the growth outlook for the Malaysian economy is still positive but growth will be at a more sustainable pace in 2H10. A softer global environment, coupled with the diminishing low-base effect, is expected to restrain export growth in 2H10. Higher interest rates are expected to cool household demand. As such, we estimate real GDP growth to slow to around 5% in 2H10 from 9.5% in 1H10, taking this year’s GDP estimate to 7%. For 2011, we maintain our real GDP growth estimate of 5.5%.

The 2Q10 results season disappointed as the revision ratio fell from 1.1 times to 0.9 time. This was a negative surprise for us as it comes on top of the relatively uninspiring major results seasons in February and May. This means that positive earnings surprises for the broader market could be dissipating and market EPS remains driven primarily by the larger caps, particularly the banks. The banking sector has largely topped expectations and lifted market EPS for four-five quarters in a row.

In view of the mixed August results season, we are keeping our end-2010 KLCI target of 1,450 points which is based on an unchanged 2011 P/E of around 14 times. The strong YTD performance of the KLCI, stoked in recent weeks by foreign funds, could take a pause before picking up pace later in the year. We now introduce our end-2011 KLCI target of 1,520 points, based on 13 times 2012 EPS or a 15% discount to the three-year moving average P/E of 15.3 times to factor in global uncertainties as well as a gradual slowdown in the domestic economy and market EPS growth.

The 1,520-point target implies a P/BV of 2.2 times, close to the mid-cycle P/BV of 2.3 times. We maintain our Overweight stance on Malaysia in light of the potential catalysts of 1) the disclosure of Part 2 of the New Economic Model, 2) the award of 10th Malaysia Plan construction contracts, especially the mammoth RM36 billion MRT project, and 3) the announcement of the 2011 Budget in 4Q.

Nonetheless, we remain optimistic about stockmarket prospects for 2H10 as domestic newsflow on policy liberalisation and transformation programmes will remain strong. There should be low-lying fruits for the reaping during the period and potentially spilling over to 1H2011 as well. Also, Malaysia’s low-beta defensive qualities, strengthening ringgit (US$:RM exchange forecast to hit 3.05 by end-2010) and recent inclusion in China’s QDII are factors that should encourage continued inflows for the market. Already, we have seen net foreign purchases of Malaysian equities boosting foreign ownership in July to 20.8%, the highest level since October 2009. This is positive as slight inflows could have a significant impact on stock prices given the market’s relatively low liquidity.

Longer term, however, the true test of the government’s ability to deliver on transformation promises made is likely to be seen only from 2H2011 onwards. Any misses on this front could be a sore disappointment for the market. Although progress made so far has been encouraging, particularly on the Government Transformation Programme, we should not underestimate resistance to change from certain quarters. Already, there is frustration over changes in policy on sports betting, GST and petrol price hike. It is imperative that the government’s efforts to liberalise the economy and transform both the government and the economy yield results as the next general elections must be held by mid-2013.

We have removed the oil and gas sector from our preferred sector picks after downgrading Petra Perdana and Wah Seong due to their poor results. We continue to like the banking sector for its heavy weighting in the market and its stronger-than-expected performance over the past year. The sector continues to anchor earnings growth for the broader market. The rubber glove sector has come under some selling pressure of late due to hiccups in earnings as a result of high latex prices. We believe the earnings hiccup is temporary and weakness in share prices provide investors with a cheaper entry point.

Banking — We maintain our Overweight rating on the banking sector given the positive earnings outlook. Banks rank among the key beneficiaries of the economic recovery, which will lead to increased business activities and investment banking deal flow. We envisage a better operating environment in 2010, with projected loan growth of 11%-12% (versus 7.8% in 2009) and stable gross NPL ratios of 3.7%-3.8%. This, coupled with healthy growth in non-interest income, will help banks to achieve our projected net profit growth of about 26% in 2010. The potential share price triggers are (1) strong earnings growth, (2) increase in investment banking income, (3) stronger growth potential for overseas operations, especially in Indonesia, and (4) potential GP write-backs.

Construction — Investor sentiment on the construction sector is likely to remain positive in the coming months. This is backed by recent news-flow suggesting that the implementation of projects (public and PFI) is underway, which also addresses concerns over execution. Several tenders have closed since the beginning of the year, suggesting that project awards, both public and private sector jobs, will be a key theme for the sector in 2H10. We expect the government to press ahead with the award of rural infrastructure projects (East Malaysia), IWTS, and PFI jobs, ahead of mega projects like the LRT extension/upgrade. The likely approval and rollout of the proposed RM36 billion MRT project will be a bonus for the sector. We continue to Overweight the construction sector, with WCT and Gamuda as our top picks.

Rubber gloves — We remain positive on the rubber glove sector in view of the sustainability of demand and the manufacturers’ pricing power. The Malaysian rubber glove sector is advancing well ahead of its competitors from other countries, thanks to continuous innovations in glove technology and manufacturing process. We retain our Overweight stance on the rubber glove sector as demand remains resilient regardless of the condition of the global economy. All the glove stocks under our coverage remain as Outperforms.
Potential re-rating catalysts include the continuing uptick in demand from the healthcare industry, ongoing capacity expansion and strong earnings growth. Supermax and Latexx remain our top picks. We like Supermax as prospects for the company are improving thanks to its growing OBM segment as well as potential earnings growth from upcoming capacity expansion plans. Potential share price triggers for Latexx include improving earnings ability, driven by its major expansion plans and move towards premium products.

In the past three months, we had far more downgrades than upgrades. We upgraded several media companies and downgraded quite a few plantation stocks. All in all, the number of stocks we upgraded edged up to eight (seven leading up to May) while the number downgraded rose to 14 (eight leading up to May). The downgrade-to-upgrade ratio was 1.75:1 in August against 1.1:1 in May. The greater number of downgrades is due to a combination of weaker-than-expected results and strong share price performances which stretched valuations.

This article appeared in The Edge Financial Daily, September 3 2010.

Capital flight - April to June 2010

 

Lee Wei Lian's article in the Malaysian Insider today will give you a mindful and eyeful of what is occurring in the economics of the country.

The trend continues from the earlier quarter, so it seems.

Malaysians invested more money abroad than what the country managed to attract as foreign direct investment in the second quarter of this year,  a CIMB report revealed  today.

Direct investment abroad (DIA) by Malaysian companies came in at RM6.2 billion, out-pacing the RM5.9 billion in foreign direct investment into the country.

The flow of money heading out in the second quarter saw a sharp increase from the first quarter of this year when only RM3.8 billion was recorded as DIA.

In the first quarter, Malaysia managed to attract RM5.1 billion in foreign investments, compared with the RM3.8 billions Malaysians invested abroad.

While Malaysians are sending more money abroad, Malaysia’s balance of payments deficit dropped sharply from RM19.6 billion in the first quarter to RM1.9 billion in the second quarter of the year.

“Overall, the strength of financial account remains weak and a sustained net inflow of capital would depend on the successful implementation of the New Economic Model (NEM) and Tenth Malaysia Plan,” said the CIMB report.

The Najib administration has been trying to open up the economy in a bid to make it a high income nation but was met with opposition from conservative vocal Malay rights group Perkasa which wants the status quo maintained despite widespread criticism that four decades of affirmative action has made the nation uncompetitive.

The government will also have to address the persistent net investment outflows as domestic private investment is a key element in its developed high income nation strategy.

The National Economic Advisory Council (NEAC) had submitted Part Two of the New Economic Model (NEM) to the Prime Minister today.

The second and final report from the NEAC was reported to contain 53 key policy measures aimed at eliminating cross-cutting barriers to a high income, sustainable and inclusive economy by 2020. It will be incorporated into the Economic Transformation Programme report to be released next month.

The research report noted that the reduction in balance of payments deficit was largely due to a marked reduction in errors and omission outflows (E&O).

The second quarter RM18.8 billion in E&O was down from RM30.5 billion in the first quarter, reflecting smaller foreign exchange revaluation losses as the ringgit appreciated moderately against major foreign currencies.

The CIMB report also noted that the nation’s current account surplus almost halved to RM16.2 billion in the second quarter from RM30.4 billion in the first quarter due to a lower trade surplus in goods amid widening services outflows.

“Reflecting a softer global demand, we expect the current account surplus will narrow further in the second half,” said the report.

It estimated current account surplus for 2010 to be RM103.2 billion or 13.7 per cent of GDP down from RM107.7 billion or 14.3 per cent of GDP previously.

The report said that E&O as a percentage of total merchandise trade and excluding foreign exchange revaluation had widened to between 4 and 6 per cent in the first half of the year as compared with 0.3 and 3 per cent during the period 2001-2009.

“As a rule of thumb, an “E&O” of not more than 5.0 per cent of total merchandise trade suggests no strong evidence of massive capital flight,” said the report.

The Legend Lives On!

The 23rd Tokyo International Film Festival will honour Bruce Lee.

Lee remains a legendary figure in the worlds of both martial arts and film thirty years after his demise.

“The 70th Anniversary: Bruce Lee to the Future” tribute will be part of the Winds of Asia Middle-East section at the festival where Bruce will be brought back to prominence again. Once more, we are reminded of his mark both in the world of action movies and in the martial arts.

Bruce only acted in 4 films namely, The Big Boss, The Fists of Fury, The Way of the Dragon and Enter the Dragon. The last film, Game of Death, remained uncompleted at his death and had to be re-edited for a quiet release.

Kylie Minogue-Ex-Cancer Model

 Pop star Kylie Minogue has been voted the most inspirational breast cancer star for her willingness to speak openly and honestly about dealing with the disease.

The Australian singer, 42, was diagnosed with breast cancer in 2005 and underwent surgery and hair-losing chemotherapy.

But Minogue , whose career began on the TV soap opera “Neighbours,” returned to the stage within a year and continues to perform. She toured 21 countries last year, and just released her 11th studio album, “Aphrodite.”

Minogue topped an online poll of 1,000 participants by British-based mastectomy-wear specialist Amoena, coming ahead of other celebrities affected by breast cancer like the late Linda McCartney and singer Olivia Newton-John.

“Kylie inspired many women to be more direct about their own fears, encouraging them to believe they would get through their ordeal,” Amoena spokeswoman Rhoda White said in a statement.

“Undergoing a mastectomy can badly damage a woman’s body confidence and self-image, and celebrities like Kylie play a vital role in raising public awareness.”

According to the American Cancer Society and the International Agency for Research on Cancer, 1.3 million new breast cancer cases are diagnosed around the world every year and it kills 465,000 women annually, making it the leading global cancer killer of women.

Other celebrities to publicly battle breast cancer include singer Sheryl Crow who campaigns for women to have regular mammograms, and British actress Lynn Redgrave who died of the disease earlier this year after writing a book about her battle.

The list also includes actresses Maggie Smith, Christine Applegate, Maura Tierney, Cynthia Nixon, Edie Falco, Jaclyn Smith, Kate Jackson, Sally Whittaker, singers Melissa Etheridge and Carly Simon, and US TV anchorwoman Robin Roberts.

White said women facing breast cancer were inspired by well-known women sharing their experiences with the disease but they also looked close to home for help.

“Many women said support from family, friends and other women who had been through breast cancer treatment, was the biggest motivator,” she said.

No More Rate Hikes for 2010

September 02, 2010

KUALA LUMPUR, Sept 2 – Malaysia’s central bank held its key interest rate steady at 2.75 per cent today, in line with expectations, and economists said it would stay pat for the rest of this year due to concerns over the global economy.

Bank Negara said that while domestic growth drivers remained “robust”, the slowdown in demand for exports from Asia’s third most trade-dependent economy, would drag on economic growth.

Trade data released just after the rate decision showed that export in July slowed to 13.5 per cent from a year earlier from 17.2 per cent growth in June.

“I think this is justified, they moved pre-emptively, the global economy is slowing and rates are at a neutral level,” said Kit Wei Zheng, economist at Citibank in Singapore.

Malaysia’s central bank started tightening policy earlier than most other central banks in Asia and had made three consecutive 25 basis point hikes already. A Reuters poll showed it would hold rates today.

Malaysia’s consumer price inflation index ticked up to an annual 1.9 per cent in July from 1.7 per cent in July after the government implemented small price hikes for food and fuel.

“Despite the adjustment in retail fuel prices in July, inflation is expected to rise at a modest pace in the coming months. Going into 2011, inflation is projected to remain moderate,” the central bank said in its statement.
The pace of economic growth in Malaysia slowed to 8.9 per cent in the second quarter from the first quarter’s blistering 10.1 per cent and that pattern is expected to continue in the second half of 2010 as concerns emerge over the strength of the global economic recovery.

Interest rate hikes by the central bank mirrored the faster pace of growth in the first half and most economists now see Malaysia’s economic growth slowing in the second half of the year to 5-6 per cent.

The three-month KLIBOR was quoted at 2.92 per cent today. In the forward starting swaps space, the 3-month rates swap on a contract starting after three months was also quoted at 2.94 per cent.

This implies the market pricing in 2 bps of rate hikes until end-November. The central bank’s last monetary policy meeting for the year is on November 12.

Bursar KL Stocks are No Longer Cheap!

Most leading Malaysian firms, led by the big banks, posted robust growth in profits in the three months ended June 30, with quite a few exceeding forecasts.

But a surge of funds flowing into the market in recent months means stock valuations on a price/earnings basis are not getting any cheaper.

In fact, stocks remained expensive compared to their historical price/earnings ratio (PER) average, according to a report by RHB Research Institute yesterday.

“The stronger trading values of the top 100 stocks on a one-month and three-month basis suggests that investors are already looking beyond the relatively expensive 2010 PER valuation,” it said.

RHB Research calculated that local stocks are priced at 16.7 times based on projected earnings this year. This was higher than the post Asian financial crisis mean PER of 16 times and one-year forward PER value of 15 times.
The firm’s forecast put the PER for 2011 at 14.7 times and a normalised earnings growth of 14.5%.

“Our corporate earnings forecast have largely taken into account the anticipated slowdown in the Malaysian economy to 5% in 2011 from 7.3% in 2010,” it said.

The firm said banks and plantation companies attracted the biggest inflow of funds in August. There was a net inflow of US$308mil into local equities from foreign funds in July.

CIMB Research, in a report dated Aug 26, predicted foreign funds to remain as net buyers in August as the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) has scaled to new highs. The ringgit has also reached a 13-year high against the US dollar.

“The excellent performance in August was driven by fundamentals, including the excellent results by blue chips like banks, Axiata Group Bhd and Genting Bhd,” OSK Research’s head Chris Eng said in a note yesterday.

He advised investors to keep buying big capitalised stocks and listed down the firm’s top picks as Malayan Banking Bhd, CIMB Group Holdings Bhd, Axiata, Tenaga Nasional Bhd and SP Setia Bhd.

Shares in Maybank jumped 10 sen yesterday to a new 30-month high of RM8.49, lifting its market capitalisation to RM60bil.

Rival CIMB was unchanged at RM7.80, with its market value standing at RM57.3bil. Shares in Maybank had gained 10.8% over the past two weeks, faster than CIMB’s 6.4% rise over the same period.

“We expect growth in the banking sector to continue to outperform other sectors,” said JF Apex Securities head of research Norhashmilaidi Hashim.

The FBM KLCI climbed 9.47 points, or 0.7%, to 1,431.96 points yesterday. The index had gone up 4.5% over the past two weeks.

So are you fully invested?

PPB: Capacity Expansion

Robert Kuok's PPB Group plans to expand its flour/feed milling division with another two mills, one in Indonesia and one in Vietnam.

Managing director Tan Gee Sooi said at a press briefing today that the company was in talks with landowners in both countries for the flour mill sites.

He said the company was negotiating for a site in Indonesia with the landowner.

Tan added that the company had identified several locations in Vietnam and started tentative talks but nothing concrete has been decided.

He said the site would likely be located in Northern Vietnam.

The company has five mills in Malaysia.

Tan said future expansion for the division would be abroad.

PPB current has a 51% stake in two 500-tonne capacity mills in Indonesia.

PPB Group Bhd also indicated plans to diversify into the bakery business and expand its land bank and cinema operations after selling its sugar refining business, according to a company presentation in Kuala Lumpur today so says  Bloomberg.

So, can you see the picture now?  PPB is going  local and global aw well!