While Malaysia remained a laggard compared to the rally in developed markets, the global rally that had started in January finally dragged the local bourse kicking and screaming up during February with a rally of more than 3%. Globally, markets continued to rise despite the patchy fundamental landscape. Thus, while we had anticipated a potential rally in the 1st half of February, our expected market retraction in the 2nd half failed to materialize.
Top Gainers for February were dividend plays such as Carlsberg or companies with corporate activities such as Hartalega with its bonus issue or potential targets such as RHB Cap and MBSB. Smaller plantation companies such as TH Plantations and RImbunan Sawit also had a good run.
On the flip side, companies with poor results such as Maybulk, MAS and KNM got sold down. On a broader sectoral basis, telcos were the dominant play. It was the return of the Big Caps in February as the catch-up played by the KLCI meant that big caps ran up with the inflow of foreign funds.
KLCI year-end target set at 1,620 pts!!!
Moving forward, we unveil our KLCI year-end target at 1,620 pts. This is derived from the average of our 2012 and 2013 fair values at 1,466 pts (13.5x PER) and 1,775 pts (15.0x PER) respectively. We still believe that weak fundamentals justify a lower PER than the historical average of 16.6x for the KLCI. While we remain unconvinced of the current rally’s fundamentals and still see a risk of market correction, news flow with regards to large infrastructure investments should help the KLCI post a stronger 2H2012.
The derivation of our target is as such:
- There is no change to our 2012 KLCI fair value of 1,466 pts based on 13.5x PER on 2012 numbers
- We still believe that weak fundamentals justify a low PER for 2012 and that there may be mid-year weakness in global markets
- We derive our 2013 KLCI fair value of 1,775 pts based on 15.0x PER on 2013 numbers
- The higher PER of 15.0x is based on 0.5 std dev below the historical average 16.6x PER of the KLCI
- We are still holding back from applying a historical average PER as we remain concerned on overall global economic fundamentals
- Nonetheless, the global liquidity fuelling the current rally could continue to drive markets and the news flow with regards to large infrastructure investments should keep the KLCI buoyant in 2013. Hence, we apply a higher PER compared to 2012
- Our 2012 KLCI year-end target is the average of the 2012 and 2013 fair value which gives a figure of 1,620 pts
Upgrading market call to NEUTRAL
Rolling forward our investment outlook horizon and nothing that the year-end target gives some 3.2% upside to the market, we upgrade our call on the market from Sell to NEUTRAL. Given our view that this is a Liquidity-Driven Rally with risk of correction, we recommend investors take a Balanced approach to the market for the remainder of 2012. As the market could still turn south in the middle of the year, we keep some Defensive stocks among our Top 10 Buys. At the same time, the burgeoning news flow on Construction and Oil & Gas means we recommend investors take some positions in these sectors. We, thus, expand our Top Sector calls from Consumer and Telcos to also include Construction, Oil & Gas and Banks.
Top Buys are a balanced mix
Our revised 2012 Top Buys represent a balanced mix of Defensive and Cyclical stocks with a range of deep value to reasonable yield plays. Our Top Buys are Maybank, CIMB, Axiata, TM, Gamuda among the Big Caps and Dialog, KPJ, QL, Padini and KimLun among the Mid and Small Caps.
For March, given the uncertainty remaining in the market, we introduce a balanced Big-Small-Cyclical-Defensive portfolio. As such, we select Maybank, CIMB, Axiata, Gamuda and KPJ as our March top buys.
Source: Excerpt from OSK Research report