AmWatch - Budget 2016 : Market Strategy : A trading market, 26 Oct 2015

FOCUS OF THE DAY

Budget 2016 : Market Strategy : A trading market

From the market’s standpoint, Budget 2016 is a non-event due to the absence of a significant uplift to corporate earnings or sentiment. In the near term, we expect the market to oscillate around our unchanged end-2015’s fair value of 1,650 for the FBM KLCI. It would remain a trading market with funds nibbling on dips and locking in gains on liquidity-driven rebound. The market would continue to be supported by ample domestic liquidity. The key challenge though is the lack of conviction over the earnings momentum to establish a bottoming of the market.  With the exception of a select few exporters, the earnings revision cycle continues to contract due to margin compression from rising cost pressure and weaker-than-expected sales. Our bottom-up estimates now put the market’s earnings growth to just 2.2% for 2015 but it may still decelerate further approaching the year-end.  We expect market recovery in 2016, where we are retaining our FBM KLCI fair value at 1,750 based on 16x PE, and earnings to reaccelerate to 7.6% from 2.2% in 2015. 

The gloves sector would be a beneficiary of Budget 2016 because of its proposal for a special reinvestment allowance (RA) for companies that have exhausted their eligibility to qualify for RA. Our BUYs are Top Glove and Kossan. We estimate that the hike in minimum wage would increase CPO production cost by less than RM20/tonne. We are Overweight on the plantation sector with IJM Plantation as our top pick. We also like Inari within the technology space given its superior growth prospects from optimising its capacity expansion towards its high margin products. We are Overweight on property equities with BUY on Mah Sing, MRCB, E&O and Titijaya. The sector is already trading on trough discount to NAV of more than 50%. Budget 2016 reaffirms the execution of MRT 2 and LRT 3. Gamuda is a frontrunner for the tunnelling package of this RM28bil project. Econpile and Kimlun Corp are strong contenders for specialist works under the LRT/MRT projects. Construction earnings for MRCB are set to improve with the award of the PDP contract to the MRCB-George Kent JV.  Teo Seng, a leading egg producer, is one of the cheapest consumer stocks. The rebound in egg prices from 28 sen/egg in 2QFY15 to 34 sen/egg in 3QFY15 combined with the timely addition of two new farms would underpin a strong earnings rebound in 2HFY15.

Others :

Bursa Malaysia : 9MFY15: Resilience through volatility     HOLD

Hong Leong Bank : Rights issue price fixed at RM10.40    HOLD

Economic Update : Inflation slows to 2.6% in September (CPI)

QUICK TAKES

Rubber Gloves : Positive surprise from Budget 2016        OVERWEIGHT

Plantation Sector : Newsflow for week 19 to 23 October (Newsflow)       OVERWEIGHT

Plantation Sector : Impact of higher minimum wage (Budget)     OVERWEIGHT

NEWS HIGHLIGHTS

Berjaya Food : To open more outlets

Water Sector : Selangor needs federal funding to acquire Splash?

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.