| Written by The Edge Financial Daily team |
| Monday, 03 January 2011 14:11 |
In this first of a series of special reports this week examining the outlook for the new year, The Edge Financial Daily has compiled the views of four heads of research — Benny Chew of AmResearch, Chris Eng of OSK Investment Bank, Lee Cheng Hooi of Maybank Investment Bank, Bernard Ching of ECM Libra and a fund manager, Gan Eng Peng of HwangDBS Investment.
What are your top stock picks and why?
Eng: CIMB Group Holdings Bhd — Big beneficiary of strong capital market in 2010 and 1H2011; also will benefit from bonds fund raising for the ETP in 2011. Target price (TP) RM9.77
Malayan Banking Bhd — Leveraging of the huge upside potential for BII (Indonesia). Also will continue to do well as with most banks in Malaysia with loans growth expected to grow at 9.5%.
TP RM10.07 Axiata Group Bhd — Top Telco pick should continue to see strong growth in Indonesia and much potential in Sri Lanka and Bangladesh. Trading at a discount to peers.
TP RM5.80 AirAsia Bhd — Able to unlock value from its two associates which will be listed in 2011. TP RM3.78
S P Setia Bhd — Covergence of demographics means that demand for high end landed property will continue to be strong driving up valuations across the sector. Also potential M&A play.
TP RM6.58 Kencana Petroleum Bhd — Top O&G play.
With sector valuations expanding after the listing of the two Petronas subsidiaries and with more upcoming O&G contracts, Kencana is a home grown champion that can win overseas projects. TP RM2.93
QL Resources Bhd — Diversified food player that is now replicating its successful egg and fish strategy in Malaysia to Indonesia and Vietnam. Also potential for boost from bio-mass ventures. TP RM6.88
KPJ Healthcare Bhd — Biggest private healthcare player in Malaysia. Benefiting from more disposable income amongst Malaysians. Also its continued expansion of two-to-three new hospitals per year could see mid teens growth for some time. TP RM4.62
Chew:
IJM Corp
Backed by EPF, we see IJM Corp transforming itself into an infrastructure powerhouse.
S P Setia
S P Setia is embarking on a new growth cycle with the imminent launch of two prolific multi-billion mega projects — KL Eco City and Setia City, which should propel its annual presales to a record RM3 billion in 2011.
These two projects will again be a good testament to S P Setia’s slick execution and uncanny ability to strike “deals”. Taken together with existing robust sales at its flagship township projects in the Klang Valley and Johor, we forecast S P Setia’s earnings to surpass a record RM300 million in 2011.
Press Metal Bhd
We believe Press Metal is on the cusp of a structural transformation into an integrated aluminium giant within Asean, following the successful rollout of its smelter in Mukah, Sarawak.
A game changer, Press Metal’s Mukah plant will crucially have unencumbered access to cheap hydro power and the first mover advantage as the country’s first smelter. The recent emergence of Japan’s Sumitomo as a cornerstone investor in the smelter (20% stake plus option for another 5%) has further enhanced the stock’s value proposition.
We are buyers of Press Metal with a fair value of RM3.30/share. This pegs the stock to a target PE of 11 times — at a steep 28% discount to its larger pure integrated global aluminium peers.Valuations are exceedingly compelling, at FY10F-12F PEs of only six to 14 times against EPS CAGR of 62%. We believe Press Metal deserves to trade at a scarcity premium given its deepening progression as an integrated regional aluminium player.
CIMB
We believe its share price has not yet reflected the following three catalysts: First, a far better non-interest income contribution with upbeat outlook in terms of capital markets pipelines, particularly from regional countries in Indonesia, Thailand and Singapore. Secondly, we are reassured that the company has set an internal loan-loss cover target.
A further build-up in its loan loss cover will likely lead to a stronger re-rating. Third, the company will likely reaffirm its aspired ROE target of 18% for FY11F in the near future. This would be higher than consensus’ 16.4%
Kencana Petroleum
Kencana continues to be our top pick in the oil and gas sector. We like Kencana because of
(1) visibility of new fabrication jobs from the resurgence in Petronas’ domestic capex rollout,
(2) JV participation in emerging marginal cluster field projects, and
(3) merger and acquisition prospects with foreign players against the backdrop of Pemandu’s aim to rationalise domestic fabricators. Its excellent prospects for higher fabrication orders are underpinned by its proven delivery track record and Petronas’ support for domestic fabricators. Kencana stood out among its peers for its ability to deliver on time without significant cost overruns.
Lee: From the technical perspective, they are:
Tradewinds (M) Bhd — Historical PER of 4.9 times, estimated PER of 4.8 times, rising revenue and EPS trends, average two-year growth of 20.8% for its manufacturing division;
Kumpulan Fima Bhd — Historical PER of 6.6 times, estimated PER — NA, upward revenue trend, average two-year growth of 67.3% for its estate operations division;
TDM Bhd — Historical PER of 7.4 times, estimated PER — NA, increased revenue and EPS trend, valuation is low and can see sustained growth in years to come;
AirAsia Bhd — Historical PER of 8.7 times, estimated PER of 9.3 times, in the middle of a cyclical uptrend, driven by growth in disposable income and rising intra-Asia business and commerce; and
Tasco Bhd — Historical PER of 6.5 times, estimated PER of 7.8times, economic recovery would lead to added need for transportation, can add capacity by calling on partners to deliver goods without additional equipment or infrastructure.
Ching:
With strong momentum, the easy money will be made by buying into big caps which are liquid. But that will generate only another 10% to 20% return. For outperformance, value lies in the undiscovered gems. We like the following five:
Multi-Purpose Holdings Bhd — An undervalued conglomerate which is trading at less than 10 times PER. At current valuation, investors are only ascribing value to its numbers forecast operator business but ignoring its undervalued development landbank and other businesses such as general insurance and stockbroking. Potential re-rating catalysts for Multi-Purpose include potential re-listing of Magnum, disposal of general insurance and stockbroking businesses, and development of landbank via joint venture with reputable developers.
Hap Seng Consolidated Bhd — Another undervalued conglomerate with businesses in plantation, automotive, fertiliser trading, property and building material. Its plantation division will benefit from rising crude palm oil prices and its fertiliser business is also growing from increased demand and prices.
Sunway — Merger between Sunway City and Sunway Holdings will create the fourth-largest developer by market capitalisation. At PER below 10 times, it is the cheapest among the property mergers announced so far. We expect re-rating upon listing as interest may increase given its size and improved liquidity.
AirAsia Bhd — One of the very few success stories of corporate Malaysia. AirAsia is becoming a regional champion in the low-cost carrier business, which will benefit from rising consumption growth and disposable income in the region. Further re-rating catalysts will come from the listing of associate units and AirAsia X, and the expanding of regional footholds, for example, in the Philippines.
SapuraCrest Petroleum Bhd — Proxy to rising capex for domestic oil & gas sector. Market leader for pipeline and installation of facilities. Solid orderbook exceeding RM10 billion and growing foreign business.Gan: With economic recovery, corporate spending tends to pick up as they fret less about economics and worry more about sales and market share. Hence, advertising expenditure naturally picks up as the economy picks up steam.
One of our top stock picks for 2011 is Media Prima Bhd, Malaysia’s leading integrated media investment group, due to its dominant position in free-to-view TV broadcast, Malay-medium newspaper and outdoor advertising. Comparatively, no other media group in the country commands such dominance in its field.
Again, on the back of global economic recovery, spending on IT will increase and investors should be exposed to IT stocks such as Unisem (M) Bhd. In particular, they have a very strong pipeline of customers ramping up business with their plant in China.
We also like this small-cap insurance company called Allianz Malaysia Bhd. It is the largest general insurer and one of the fastest-growing life insurers in Malaysia. Profit from life business tends not to be reflected in the early years and especially if the company is growing strongly, as it needs to make provisions for potential liabilities. As the market cannot see strong profits from the life business, it has severely undervalued this growth stock. This situation tends to reverse over time.
Some of the sectors we like are the construction sector, which is a play on the massive spending needed for the ETP. [Companies in this sector] include IJM Corp Bhd and WCT Bhd. We are also expressing this view via building material stocks like YTL Cement Bhd and Lafarge Malayan Cement Bhd.Wong: On a risk-adjusted basis, our top five calls are Axiata Group, IJM Corp, IOI Corp, Kencana Petroleum and RHB Capital.
For Axiata Group, we like its regional growth story where the group has sizeable operations in high-growth yet under-penetrated countries. Meanwhile, its domestic operation, Celcom has been performing equally well. Axiata Group has committed to a dividend policy in which it will pay 30% of its normalised net profit from this year onwards. We are of the view that this growth stock may provide significant upside surprises on dividends. Valuations for Axiata Group are appealing.
For IJM Corp, we expect its construction arm to benefit from the rising infrastructure spending in Malaysia and India. Valuations for IJM Corp are fair.
For IOI Corp, it is one of the best proxy to rising crude palm oil (CPO) prices. Based on the demand-supply dynamics, there are sufficient reasons to believe demand growth for CPO (driven by rising affordability and population) will continue to exceed its supply growth (constrained by scarcity of plantation land, climate change and strong lobbying by non-government organisation) in years to come. Coupled with the rising crude oil prices, which will eventually make non-mandated bio-fuel more commercially viable, this will naturally lead to higher and more sustainable CPO prices in future. Valuations for IOI Corp are fair.
For Kencana Petroleum, the company is currently in position at the early part of a new run-up in the oil and gas industry’s capex rollout. Thus, we expect tremendous upside to its order book, which currently stands at RM1.9 billion. Besides, we also expect its margins to improve further due to the implementation of cost efficiency measures and rig expansion. Valuations for Kencana Petroleum are fair.
For RHB Capital, we expect its returns on equity to improve further from the 15% level in FY10 ended Dec 31, to the 18% level in FY12, as a result of its strong execution to restructure and grow its businesses. The bank’s EASY concept, which is highly scalable and has a strong risk management element, will help the bank to reduce cost significantly while growing its consumer loan book to rebalance the business mix for its loan portfolio from being corporate-oriented to consumer-oriented. Thus, leading to a higher net interest margin for the bank. Valuations for RHB Capital are appealing.
Khoo: Top buys are AirAsia (catalysts: Listing of Thai and Indonesian associates, the commencement of Philippines JV), CIMB Holdings (stronger non-interest income contribution from aggressive rollout of government projects to spur demand for capital and debt financing, and Gamuda (potential to secure Klang Valley MRT job worth RM13 billion to 14 billion out of RM36 billion total project cost).
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