02 January 2012

OSK 2012 Outlook: Be Nimble in the "Way of the Market"

OSK have a Neutral outlook on the Malaysian market going into 2012 as the combination of uncertain growth outlook in the US and Asia coupled with a possible recession in Europe cloud the prospects for strong earnings growth locally. While Malaysia is likely to avoid slipping into recession, the deficit reduction exercises undertaken by Eurozone economies may well tip their slow growing economies into a recession.

In any case, for Malaysia, OSK see earnings growth slipping to between mid single digits and low double digits, a pale shadow of what it was in 2006, 2007 and 2010 when earnings growth came in between 20 to 30%. Newsflow on developments surrounding the handling of sovereign debt in Europe and US will also likely to lead to volatile markets worldwide. As such, in the short term, we are faced with volatile markets which will likely give way to a dampened economic outlook. OSK advise investors stay cautious into mid 2012 and focus on Defensive sectors such as Consumer, Telco, Healthcare and Media. OSK's 2012 KLCI fair value is 1466 points based on a PER of 13.5x or 1 standard deviation below the historical average of 16.6x given the uncertain market conditions.

But, there are opportunities to TRADE?
That being the case, despite the overall Neutral stance, the volatility expected should give rise to plenty of Trading Opportunities. OSK advise investors to Trade on Cyclical sectors such as Banks, Oil & Gas and Construction as the market dips or rallies strongly. The trading strategy to adopt is:
  • Buy when the KLCI falls towards the 1300 points level as the broader market then offers a 10% upside to 2012 fair value. As Malaysia is not likely to enter into recession, earnings contraction was expected and value should emerge closer to 1300 points. A combination of still positive earnings growth, low foreign shareholding and the Economic Transformation Programme (ETP) should mean Banks (leading the economy), O&G and Construction (beneficiaries of the ETP) will present good entry points at that level of the market.

  • Sell when the KLCI rises towards the 1500 points level as the market will be overpriced then. Fundamentals remaining weak. Although the 3Q2011 earnings season may have seen a slight improvement q-o-q, most of the improvement was focused on the Small caps where analysts have had time to pare down forecasts. On the flipside, Big caps continued to slide with the potential for more downgrades in the coming 2 quarters.

What are the sectors to focus on?

Which are the Top Picks?

Among the defensive stock calls, the Top 10 Defensive Buys are namely:
1) Axiata (FV: RM5.60) – The only listed Malaysian telco company that also offers a regional footprint in Indonesia, Singapore, India, Bangladesh, Sri Lanka and Cambodia. Still the cheapest Malaysian telco company at 13x PER.

2) Petronas Gas (FV: RM15.52) – Natural gas processor, importer and transmitter in Peninsular Malaysia with 80% of profits guaranteed by its mother company, Petronas. Growth catalyst in the form of new LNG import terminal in Melaka.

3) Telekom Malaysia (FV: RM5.15) – Incumbent fixed-line telecoms provider in Malaysia. Making waves via its new high-speed Internet offering Unifi that is acquiring new subscribers at a rate of 1,000 per day. Highest yields at 10–12%.

4) Guinness Anchor (FV: RM13.58) – Broadest brewery offering translates into defensive earnings in the event of an economic slowdown. Decent yields, coupled with the 2012 growth potential coming from the UEFA 2012 football tournament.

5) AirAsia (FV: RM4.57) – Largest Low Cost Carrier (LCC) in Asia; continues to outperform its regional airline peers. Potential IPO of regional associates and benefits from a partnership with MAS will be the catalysts for 2012.

6) KPJ Healthcare (FV: RM5.21) – Largest private hospital provider in Malaysia, which is growing its hospital chain by another five hospitals from the current 21 over the next three years. Growth areas are medical tourism and retirement care.

7) QL Resources (FV: RM3.62) – Largest manufacturer of surimi in ASEAN and second largest producer of eggs in Malaysia. It is replicating its business in Indonesia and Vietnam over the next 12 months.

8) Media Chinese International (FV: RM1.51) – Largest publisher of Chinese language newspapers in Malaysia. To benefit from falling newsprint prices in 2012.

9) Supermax (FV: RM5.50) – Second largest rubber glove maker in the world, which will benefit from a fall in latex prices, while demand remains resilient.

10) TRC Synergy (FV: RM0.76) – Leading Bumiputera contractor. Shortlisted for various packages in the KL MRT project and should be assured of some contracts over the next 12 months.

Source: OSK Research

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