AmWatch - Budget 2015 : MARKET STRATEGY: Which stocks to BUY?, 13 Oct 2014

FOCUS OF THE DAY

Budget 2015 : MARKET STRATEGY: Which stocks to BUY?

From the market’s standpoint, Budget 2015 is a non-event. We have tweaked our end-2014’s fair value for the FBM KLCI to 1,800 as we trim our corporate earnings growth estimate to only 1.8% for this year (2013: 10%). Although we are currently projecting corporate earnings growth to reaccelerate by 9.9% moving into 2015, we are introducing a modest 2015’s fair value for the FBM KLCI at 1,880 – based on 16x PE.  We expect to see elevated volatility as a stronger US economy with the associated robust macro data points collide with growing concern of a sooner-than-expected reversal in liquidity from a hike in the US Fed Funds rate.

While the risk of a pullback in external liquidity is a lingering concern, we do not believe that the exit of foreign funds would have a significant impact on the FBM KLCI. This is because foreign ownership of the market is already very low at only 23.6% as at end-August 2014. Furthermore, domestic liquidity would be more than enough to offset the outflow of foreign funds. The risk is in the MGS market where foreign ownership is very high at 47.3% (RM148 bil) as at end-August 2014, which may have some repercussions on the cost of funds.

The key challenge for the market is the lack of conviction over its earnings momentum to improve current valuations. We continue to advocate a bottom-up stock picking approach.

In 2015, several infrastructure projects that would be implemented include the construction of the 56km Second MRT line (RM23bil) as well as the LRT 3 project (RM9bil).  The MMC-Gamuda JV may be awarded a significant portion of the MRT 2 project given its current track record as both the Project Delivery Partner and tunnelling contractor for MRT 1. Likewise, Econpile is in a strong position to bid for the piling works for MRT2 because of its experience in MRT 1.

Budget 2015 proposes several incentives to increase first-time homeownership and affordable homes but we do not believe that the impact is significant for the listed developers as these initiatives would be directly undertaken by government entities. Nonetheless, the various infrastructure projects – MRT 2, LRT 3, West Coast Expressway and DASH – to be implemented in 2015 would surely underpin property prices because of improved accessibility and greater urbanisation.

We remain BUYers of Mah Sing and E&O. The government’s targeted initiatives for youth and first time homeowners that involve funding limit not exceeding RM500k for married youth between 25-40 years with household income not exceeding RM10k should benefit Mah Sing; 70% of its buyers are aged 40 years and below, and 45% of its pre-sales are priced below RM500k.  We remain committed to our investment thesis on E&O where we see significant accretion to its NAV from STP 2. Reclamation works are expected to commence in 1Q 2015.

The Youth Financing Scheme will provide home financing subject to certain terms. This is limited to “first come-first-served” basis for 20,000 units only. Given the limitation, we do not expect a major negative impact to the industry’s mortgage loans. We maintain a NEUTRAL stance on the sector, while our top pick is Hong Leong Bank.

For telcos, the GST implementation paves the way for them to pass on the existing 6% prepaid service tax to subscribers. DiGi (BUY, FV: RM6.30/share) is the biggest beneficiary given that it has the largest proportion of prepaid subscribers (84% of total) compared to Maxis (73%) and Celcom (78%). The plan to construct 1,000 new telco towers could benefit two major players in this sub-segment namely OCK (Non-Rated) and Instacom (Non-Rated). Both players are experienced in telco tower construction and ownership.

Others :

Parkson Holdings  : PRA accepts mandatory offer to sell Odel stake          BUY

CIMB Group : Adjustments to book value estimates        HOLD

Plantation Sector : Palm oil inventory up 1.8% MoM in September  (MPOB)         NEUTRAL

Economic Update : Factory output grows on higher production of E&E in August

Econ Watch : Budget 2015: Striking a balance between growth and Rakyat’s welfare

QUICK TAKES

Plantation Sector : Newsflow for week 6-10 October       NEUTRAL

Water Sector: MMC-Sumitomo consortium wins RM1.5bil Langat  sewage job                                    NEUTRAL

NEWS HIGHLIGHTS

Alam Maritim Resources : Sees falling oil prices as short-term issue

Construction Sector : LRT3 to be done on PDP concept, tender calling in 1 to 3 months

Construction Sector : Original plan was for new MRT2 to start from Sg Buloh and not Selayang

FOCUS OF THE DAY

Budget 2015 : MARKET STRATEGY: Which stocks to BUY?

From the market’s standpoint, Budget 2015 is a non-event. We have tweaked our end-2014’s fair value for the FBM KLCI to 1,800 as we trim our corporate earnings growth estimate to only 1.8% for this year (2013: 10%). Although we are currently projecting corporate earnings growth to reaccelerate by 9.9% moving into 2015, we are introducing a modest 2015’s fair value for the FBM KLCI at 1,880 – based on 16x PE.  We expect to see elevated volatility as a stronger US economy with the associated robust macro data points collide with growing concern of a sooner-than-expected reversal in liquidity from a hike in the US Fed Funds rate.

While the risk of a pullback in external liquidity is a lingering concern, we do not believe that the exit of foreign funds would have a significant impact on the FBM KLCI. This is because foreign ownership of the market is already very low at only 23.6% as at end-August 2014. Furthermore, domestic liquidity would be more than enough to offset the outflow of foreign funds. The risk is in the MGS market where foreign ownership is very high at 47.3% (RM148 bil) as at end-August 2014, which may have some repercussions on the cost of funds.

The key challenge for the market is the lack of conviction over its earnings momentum to improve current valuations. We continue to advocate a bottom-up stock picking approach.

In 2015, several infrastructure projects that would be implemented include the construction of the 56km Second MRT line (RM23bil) as well as the LRT 3 project (RM9bil).  The MMC-Gamuda JV may be awarded a significant portion of the MRT 2 project given its current track record as both the Project Delivery Partner and tunnelling contractor for MRT 1. Likewise, Econpile is in a strong position to bid for the piling works for MRT2 because of its experience in MRT 1.

Budget 2015 proposes several incentives to increase first-time homeownership and affordable homes but we do not believe that the impact is significant for the listed developers as these initiatives would be directly undertaken by government entities. Nonetheless, the various infrastructure projects – MRT 2, LRT 3, West Coast Expressway and DASH – to be implemented in 2015 would surely underpin property prices because of improved accessibility and greater urbanisation.

We remain BUYers of Mah Sing and E&O. The government’s targeted initiatives for youth and first time homeowners that involve funding limit not exceeding RM500k for married youth between 25-40 years with household income not exceeding RM10k should benefit Mah Sing; 70% of its buyers are aged 40 years and below, and 45% of its pre-sales are priced below RM500k.  We remain committed to our investment thesis on E&O where we see significant accretion to its NAV from STP 2. Reclamation works are expected to commence in 1Q 2015.

The Youth Financing Scheme will provide home financing subject to certain terms. This is limited to “first come-first-served” basis for 20,000 units only. Given the limitation, we do not expect a major negative impact to the industry’s mortgage loans. We maintain a NEUTRAL stance on the sector, while our top pick is Hong Leong Bank.

For telcos, the GST implementation paves the way for them to pass on the existing 6% prepaid service tax to subscribers. DiGi (BUY, FV: RM6.30/share) is the biggest beneficiary given that it has the largest proportion of prepaid subscribers (84% of total) compared to Maxis (73%) and Celcom (78%). The plan to construct 1,000 new telco towers could benefit two major players in this sub-segment namely OCK (Non-Rated) and Instacom (Non-Rated). Both players are experienced in telco tower construction and ownership.

Others :

Parkson Holdings  : PRA accepts mandatory offer to sell Odel stake          BUY

CIMB Group : Adjustments to book value estimates        HOLD

Plantation Sector : Palm oil inventory up 1.8% MoM in September  (MPOB)         NEUTRAL

Economic Update : Factory output grows on higher production of E&E in August

Econ Watch : Budget 2015: Striking a balance between growth and Rakyat’s welfare

QUICK TAKES

Plantation Sector : Newsflow for week 6-10 October       NEUTRAL

Water Sector: MMC-Sumitomo consortium wins RM1.5bil Langat  sewage job                                    NEUTRAL

NEWS HIGHLIGHTS

Alam Maritim Resources : Sees falling oil prices as short-term issue

Construction Sector : LRT3 to be done on PDP concept, tender calling in 1 to 3 months

Construction Sector : Original plan was for new MRT2 to start from Sg Buloh and not Selayang

DISCLAIMER:

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.