KUCHING: Bursa Malaysia`s recent Market Chat 2010/11 revealed the top five sectors that investors should look at as well as top sustainable news flow-driven stocks where valuations have become rich.
Market Chat 2010/11 was held by the Exchange in collaboration with RHB Research Institute Sdn Bhd (RHB Research). Its head of RHB Research Lim Chee Sing pointed out that by riding on the volatility of the top stocks, it would provide more room for investors to accumulate fundamentally-robust stocks on weakness.
“The first year recovery in the market is always very sharp at 40 per cent to 60 per cent,” Lim said.
“Meanwhile, the second year recovery in the market which translates as the first year recovery in the economy tends to be challenging because it is still a volatile market.”
He further pointed out that by the time recovery reaches the third year, ‘stock picking’ would be the key to tactical play.
Among all the performing sectors, banks and finance sector was believed to be the best proxy to the economy and would help take the lead in lifting the market to higher grounds as loan applications had remained healthy, notwithstanding three Overnight Policy Rate (OPR) hikes thus far.
RHB Research expected consumer spending to remain resilient next year on the back of high savings and rising consumerism. In addition, fund raising activities by corporations could also pick up next year as key projects under the Tenth Malaysia Plan (10MP) and Federal land deals got implemented.
“Amidst positive gross Domestic Product (GDP) growth and ample liquidity, capital market activities could continue to remain buoyant and this would help support non-interest income ahead,” Lim explained.
He continued to pinpoint the minimum capital level that the banks which
were required to hold
under Basel III would virtually put to rest lingering concerns that investors might have had with respect to capital adequacy. “By our calculations, the banks under our coverage should comfortably meet the minimum common equity ratio schedule. with that we
see scope for some of the banks such as Maybank, CIMB and AFG to raise dividends.”
The gaming sector owned a market capitalisation of RM67 billion. from that, Genting Bhd was seen as one of the biggest player.
The research firm believed that the casino gaming space had great potential, coming from a recovering economy and exciting growth opportunities in new frontiers.
As for BToto, prospects looked bleak after the pool betting duty hike which would reduce its earnings by 12 per cent per annum. Note that this did not take into account a potential reduction in price payouts, although this could be slightly offset by a resultant fall in sales volumes.
Nevertheless, the potential of higher dividends given Berjaya Land’s need for RM711 million in cash for its convertible bonds maturing in August 2011, could provide support for BToto’s share price.
On the oil and gas front, RHB Research gathered from its discussions with industry players that 2011 would see the return of contracts.
“Many oil and gas players have reiterated that the forward outlook is more positive compared with this time last year and are relatively optimistic in regards to the coming year’s prospects,” said Lim.
While the talk of contract flows was hardly new, the research house believed that the situation could be different this time around.
“Firstly, the sector has been highlighted as one of the twelve key economic areas that will transform the Malaysian economy and the government has been a major source of news flow for the sector in recent weeks.
“Secondly, potential merger and acquisitions or new listings, such as Bumi Armada could continue to provide ‘heat’ for the sector.” it pointed out.
Near term contracts include Petronas’ hook-up and commissioning (HUC) and topside maintenance contracts as well as the Sepat marginal oil field projects worth US$250 million.
Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) had also mentioned that it expected to close some contract bids within the next six to nine months.
During the Market Chat 2010/11 presentation, Lim revealed that the winners would be the brownfield, topside maintenance and HUC players such as Kencana, Dayang, Sarku Engineering and Petra Energy. Fabricators were also likely to be champions in the near term given that new oil field developments would see a need for new structures to be built.
On the other hand, the construction sector would be the next catalyst as gross development expenditure was projected to be at RM49.1 billion next year. this would be fuelled by projects to be carried out on a Public-Private Partnership (PPP) or privatised basis, projected to rack up RM12.5 billion private investment, anchored by an RM1 billion facilitation fund.
Among the key large scale projects to kick start in 2011 were the RM40 billion Mass Rapid Transit (MRT) project, the RM26 billion KL International Financial District (KFIFD), the RM10 billion redevelopment of the Rubber Research Board land in Sungai Buloh and six toll roads including the West Coast Expressway.
Others included the RM5 billion Warisan Merdeka integrated development comprising a 100-storey tower led by Permodalan Nasional Bhd (PNB), the ‘River of Life’ clean-up of Klang Valley and the RM2 billion Academic Medical Centre.
“Buoyed by news flow, we foresee construction stocks to continue to generally outperform the market from the fourth quarter of this year. our top pick ‘tactical’ pick is Gamuda as we believe its share price will be buoyed by the sustained news flow from the RM40 billion MRT project,” Lim opined.
“Our top ‘value’ pick is Fajarbaru due to its undemanding valuations, it being a strong contender for packages of the LRT line extension project given its strong foreign partner and a strong balance sheet with a new cash per share of 75 sen.”
As the construction sector was leading the pack, property sector, on the other hand would be having its own share in the sun too.
RHB Research said the impact of 70 per cent loan-to-value (LTV) cap for the third home mortgage and onwards would be moderate on the property sector, as a young population was typically the first and second home buyers.
Among the key factors which drove the demand were the faster growth in young demographics, easy financing in addition to aggressive incentives offered by developers and the strengthening of the ringgit to spur foreign participation.
“One of the biggest news flow that support this sector is the increased sentiment and interest in land and properties in Iskandar Malaysia on expectation of rising investment on improving ties between Malaysia and Singapore, “ Lim pointed out.
Adding to the flavour, Malaysian Real Estate Investment Trusts (M-Reits) were also back in its place by support from foreigners, due to better investibility, attractive dividend yields and expected currency gain arising from the strengthening of the ringgit.
“Whilst we acknowledge that the longer term economic picture remains positive for the equity market, any reversal of short term capital can have a disproportionate impact on the market in the foreseeable future,” Lim concluded.