KLCI’s climb orderly, gradual
Fund managers at a recent StarBiz roundtable expressed optimism about the prospects for Bursa Malaysia-listed shares and offered their stock picks. The panellists were Phillip Capital Management Sdn Bhd chief investment officer (CIO) Ang Kok Heng, CMS Dresdner Asset Management Sdn Bhd CIO Scott Lim, Kurnia Insurans Bhd CIO Pankaj Kumar and AmInvestment Sdn Bhd CIO Andrew Wong. Part 1 of the discussion appeared Tuesday.
StarBiz: What is your view on the stock market?
Ang: I think the market has been orderly. There is a balance and the index is moving up gradually.
It is the blue chips that are moving the index and action in the lower liners is dominated by stockists and syndicates. A lot of retailers are not in the market.
To me, the number of retailers in the market is a fifth of what it was in the heydays.
Andrew: In terms of valuations, we are not expensive, neither are we cheap, depending on what a broker's expectation of the compounded annual growth rate (CAGR) is.
Our expectation of CAGR over the next two years is between 13% and 14%. If the forward valuation is about 15 times earnings, and you are growing at 13% to 14%, technically your market can continue to grow in a stable manner.
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What I am worried about is external. If there is an external hiccup and you still believe companies can grow earnings by 13% to 14% CAGR, then it is an opportunity.
I suspect there will be volatility this year for whatever reason and that will be a trading angle.
If there is an external hiccup, rightly or wrongly, one has to pay attention to the herd mentality. A lot of foreigners are in the market now.
Pankaj: We have come up very well and are among the best performing markets in Asia after Shanghai and Shenzhen, along with Vietnam.
The factors are: The Government is liberalising; there is the 9th Malaysia Plan and foreigners are warming up to Malaysia because of previous underweight or neutral positions.
The level of foreign participation in the market has gone up tremendously.
Based on the current consensus numbers, the fair value for the KLCI is 1,350. On the bottom-up approach to index-linked stocks, it values the index at 1,400 points on the current valuations.
One of the factors driving the market is actually liquidity. Locally, there is excess liquidity of over RM200bil.
Watch the bond market and where yields are going. Watch the ringgit as an indicator whether foreigners are happily investing in Malaysia or getting out. We will see more volatility.
At the current level, I still feel there is an upside of 5% to 7%. The growth story, good management and corporate governance have to be there. That's where you'll get your returns.
Pankaj: I think a lot of investors never believed this run could sustain, to the extent they couldn't wait any longer and just jumped in. If just 5% of that excess liquidity in the domestic market were to come into the stock market, we will have a euphoria. Lim: If you want to know what stage we are in the market, you have to look at how we fit in in the long term. The structural and a cyclical bull market started in Asia in 2003 on the world's recognition that things were taking shape in China and India. There was a paradigm shift of money from the West to the East. We are at the mid-stage of this rally. The leaders today are China and India and the other peripheral economies and stock markets are joining this integration process and enjoying this cyclical bull market. For Malaysia, we started out late and were not participating in this cycle between 2003 and much of 2006. What we are seeing now are people giving recognition and valuations being restored. The stocks on Bursa Malaysia are now close to fair-value range and the question is whether we are catching up with the rest. If we are doing better than the rest, don’t be surprised if our ratings climb from 16 times earnings to 20 times earnings. In a bull market, liquidity and investors will reward you for what you do best, which is outperforming your peers. It is significant because we will join every other Asian country that has surpassed the all-time high and put the Asian crisis behind us. StarBiz: How significant is it should the market reach all-time high? Pankaj: The rally must be sustainable by fundamentals, whether economic or earnings growth. Lim: Crossing the all-time high is in ringgit terms but if you were to look in US dollar terms, we are still 30% below the all-time high. That means the wealth effect in this market created so far was below what was enjoyed in the 1990s. Either the currency has to gain on the dollar or the market has to go up a lot more to compensate for that. Ang: Compared with the regional markets, we are far away from their levels. We had been struggling to cross the pre-crisis high and it shows that earnings of companies had been pretty weak for the past 10 years or so when compared with regional countries. Our valuations now are more or less similar to other countries in the region but their indices are much higher and that means their earnings from companies grew much faster than ours. StarBiz: Are there any worrying signs to look out for? You have to be mindful of the direction of the US markets and you have to track it. Wong: The yen carry trade rumour/news/fact/data is still there. Without being able to pin down exposure, asset class, long or short position, this will continue and this can be an opportunity (in the event of a correction). Lim: The integration with China and India has filtered into the financial markets. Now there is a borderless capital market and people can borrow from Japan and bring the money out overnight as long as you are comfortable with the risk. We have to accept the volatility that comes with a liberalised market. Pankaj: Volatility in the market is not just confined to the equities market. It is there in the bond, commodities and currency markets. For investors, we have to watch the signs. Speculation will always be there but, at the end of the day, investors must be driven by fundamentals. The market is a bit more orderly nowadays compared with before. StarBiz: Is there too much speculation in the market? Pankaj: Higher prices are justified based on valuations but there are still some that seem unjustified. This is especially when it is based on premium to RNAV (revised net asset value), particularly for property stocks, or when companies are valued at 25 to 30 times earnings. That means target prices are just being raised. You are only inviting disappointment at higher valuation levels. Lim: In a bullish market, it is a perpetual game of trying to shift goalposts. StarBiz: What are your top five picks and why? My first pick is AMMB Holdings Bhd. The valuations make the stock good value for money. It is trading at 1.5 times price to book, relative to the banking industry, which is in the 2.5-to-3-time range. Lim: There is also the positive impact coming from the change of shareholders and we believe the ANZ management can carry the bank to a new level. That is the basis of our confidence. In terms of restructuring potential, the water sector is huge. The next wave of projects is actually coming from the water sector. We gather there is RM9bil to RM10bil worth of water contracts to be given out over the next one year. To participate in this sector, we like a company with strong cashflow and that’s why Puncak Niaga is our pick here. They have gone through a capital repayment exercise, and the company has re-jigged its balance sheet and in a healthier position after a tariff hike of 15% last year. The company is trading at 10 times price to earnings and a cashflow of 75 sen a share, which is about 5 times price to cashflow, which I believe is good value for money. I continue to be optimistic on the oil and gas sector, which is riding a big global wave. In Malaysia, the impact will be Petronas’ spending. Dialog Group Bhd and Wah Seong Corp Bhd seem to be the beneficiaries in the sector. Nobody will know how long the capital expenditure cycle will last or the amount coming in. I liked Dialog's business model. It now has a holistic business model, providing a full range of services to any energy company. Because of this, it's difficult to gauge its potential. It has built four different divisions that have equally good potential to be as big as what Dialog is today. The company also has very credible management. Based on current valuation, Wah Seong is trading cheaper than Dialog. If you're to be capped by the RNAV, you will never buy into such growth companies. They are in a growth phase that is astounding in a sense they are going into unchartered territory. As for construction, IJM Corp Bhd and Zelan Bhd represent the pioneers in terms of the globalisation process as they venture overseas and clinch contracts. They are positioned in this sphere to excel further in view of the huge infrastructure programme the whole region is going through. What you see in Zelan is its stake in IJM and there can be a lot of value unlocking that can be done here. Once it sells the IJM stake, it can reinvest the money into strong recurring income streams. But the company now does not need the earnings of IJM to support its valuation. By itself, it has RM4.5bil worth of contracts in hand. Zelan also approaches construction as a niche player in the power plan business through ownership and building. Wong: I like the resource-based sector. As I have to pick only five stocks, I have to decipher whether it is timber, plantation or oil and gas. I choose oil and gas. I have to look at what Petronas is doing in terms of deep-sea exploration and there is only one company that is constructing for this and that is Coastal Contracts Bhd. Its price/earnings (PE) ratio is very low. You have to believe Petronas will conduct deep-sea exploration and need the support vessels. The other thing is that global competitors command a premium. I think there will be pleasant surprises here going forward for YTL Corp Bhd or YTL Power International Bhd. You must believe the management has the capability and that valuations are not expensive. YTL is a company that can be dormant for nine months, actively sourcing for business and then announce something when it's done. There will also be better surprises from Maxis Communications Bhd. Very soon, whatever number of Indian subscribers it has will exceed those in Malaysia. India will be a bigger ballgame. And also, I believe the outcome from Indonesia will be positive. As a country, we are very cheap to operate out from and so, IGB Corp Bhd is an asset reflation play. It has already locked in about 80% to 90% of The Gardens. If you believe Malaysia is at the beginning of asset reflation with tourism coming in, I think it is a natural progression. If you are also bullish about Malaysia, you need to have a proxy. I think GDP will surprise, going forward, and there will be a leverage play in utilities in terms of Tenaga Nasional Bhd. Ang: On the water theme play, I prefer Ranhill Utilities Bhd, which is trading at 3.7 times price-to-earnings and a 20% discount to NTA. Because it collects bills itself, it also has very good strong cashflow, like Puncak Niaga, and little bad debts. Last time, there used to be a high-risk premium attached to the group but since then, it has reduced the risk by raising new bonds although at a high price. This is a stock that not only depends on the Johor concessions alone and the company is also moving out to look at other privatisation projects, such as in Malacca where it is helping to reduce losses in the state’s non-revenue water segment. The company is in China and moving to the Middle East. I also like YLI Holdings Bhd. First, pipe replacement has to take place. Valuations are not expensive as price-to-earnings is 17 times and we are looking more for growth prospects. The company is also the larger of two ductile pipe producers. I also like a company like Kossan Rubber Industries Bhd. It is growing very fast like Top Glove Corp Bhd and expanding capacity by 30% a year. This business will continue to grow because the big multinational players are no longer expanding and are outsourcing to local manufacturers. It gives them scope to take over the market share of the traditionally large players. For properties, I prefer Crescendo Corp Bhd. It’s a 100% pure Johor play. All the land is in the state and it bought the land cheap. The gross development value of the land is 22 times the market capitalisation of the stock. It is the highest among listed property companies. Crescendo focuses a lot on industrial property development. It bought 64 acres in Nusajaya at RM7 per sq ft two years ago and has a seven-year option to acquire another 463 acres. That will boost its land bank in Johor and the company also owns 1,390 acres of Bandar Cemerlang, which is yet to be developed. There is no gearing in the company. With the exemption of the real property gains tax, Sunrise Bhd will be one of the main beneficiaries because all its properties are high-end and located where foreigners prefer. Because of the cheap land cost and the ability to increase the selling price, it is going to profit from higher sales and margins. Pankaj: My first pick is MMC Corp Bhd. The company is grossly undervalued at this stage. If you look at Malakoff Bhd, which MMC is about to take over, there is huge potential. The Middle East project which MMC is eyeing now or about to develop is going to be a good long-term driver for earnings. There is also the Iskandar Development Region with Port of Tanjung Pelepas and Johor Port. The ports are doing well. My second pick is Synergy Drive (Sime Darby Bhd and Golden Hope Plantations Bhd). There has been a lot of talk about Synergy Drive with crude palm oil (CPO) prices rallying. This stock is undervalued. If execution is carried out properly in terms of integration of the companies, the ability to deliver is fantastic. My mid-cap pick is related to CPO but an indirect exposure. I like Batu Kawan which is the majority shareholder of KL Kepong Bhd (KLK). If you look at KLK’s valuation and Batu Kawan's, the latter should be trading at RM11 to RM12 a share. My next pick is Muhibbah Engineering Bhd. This stock has performed well over the past nine months. If you look at the company, you have multiple exposures to various industries. Oil and gas is one and, secondly, the company has a concession to run airports in Cambodia. Muhibbah also has one of the world’s largest crane makers, Favelle Favco, which is doing well. The order book to market cap is three to four times. Valuations are still decent despite the run-up. We believe in the management of the company to deliver and continuously add to the order book. My final pick is an indirect exposure to the timber play. It’s a small cap and called Evergreen Fibreboard Bhd. It’s a beneficiary of rising timber prices. Evergreen makes medium-density fibreboards (MDF) and the company is very well run. There is an M&A (merger and acquisition) story as well as demand growth. Evergreen wants to be among the top 10 in the world in terms of capacity for MDF. It is talking to a few parties to expand capacity, whether locally or overseas. The company is also trying to integrate in terms of supply. It is going into acacia planting (rubber wood for MDF) to secure a consistent amount of wood for its operations.