2012 - A Trader's Market?

Asia ex-Japan
Go contrarian. Investors should buy into oversold cyclicals in the near term and go Overweight on consumer discretionary, IT, industrials and materials. Asia ex-Japan equities are currently trading at very attractive valuations of 10.7x 12-month forward PER and investors’ expectations are low, but cashed up.

Policy inflexion point. Several catalysts will drive the re-rating process; the unofficial quantitative easing by the European Central Bank and policy easing in Asia will stabilise  the domestic liquidity situation. In addition, corporate earnings, especially in the industrial sectors, should be supported by better margins and an end to global inventory adjustment by 1Q12.

Prefer China and TIP.  That said, the outlook for the full year will continue to be clouded by events in the developed world. Against this backdrop, growth stocks usually outperform value stocks. On a country basis, this translates to an Overweight on China and TIP (Thailand, Indonesia and the Philippines) due to their better EPS growth outlook.

Underweight India and developed Asia. We are funding this out of an Underweight position on Hong Kong, India and Singapore due to their less supportive liquidity cycle. In particular, financials in Hong Kong will be weighed down by the relatively tight global free liquidity, in contrast to the latter’s upswing in 2009.

Despite the positive start to 2012, investors remain sceptical. Perhaps the bitter aftertaste of a disappointing 2011 continues to linger. However, we strongly recommend investors to go long on the market in the near term. We see a mini rally in the offing; what is different compared to last year is that investors are starting this year with very low expectations and the global economy is not as bad as it had seemed. With cash ratio running high, we expect investors to put the funds to work on improving macro news flow as the European Central Bank’s (ECB) unofficial quantitative easing (QE) and policy reversals in Asia make their impact felt.

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In the near term, we like oversold cyclicals and among the bigger caps, we prefer stocks in the industrials, IT, materials and consumer discretionary sectors.

For the full year, we expect 2012 to remain a trader’s market. The funding needs in Europe and prospects of further fiscal austerity in the developed world will continue to cloud the market outlook. Hence for the medium term, we are overweight on China and TIP (Thailand, Indonesia and the Philippines) on the basis of their stronger EPS growth outlook. At the stock level, investors should focus on those with topline visibility.

by Maybank Investment Bank

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Malaysia Equity and 2012 FBM KLCI Target by DBS Vickers

For 2012, our KLCI target is 1,590 based on 14x forward earnings — a target which could be reached as soon as the elections date is set.

Construction, plantations and media companies are the main election plays.

We like Malaysia for its defensive qualities in a region which will continue to suffer from high volatility. During the last UNMO meeting, PM Najib's election hints have carried an increasing certainty about them suggesting that elections are likely to occur sooner rather than later. We believe increasing election chatter is likely to boost stock market sentiment. We are therefore retaining our Overweight recommendation in Malaysia.

Our forecasts for 2012 GDP growth is cut to 4.5%. This still represents one of the strongest growth rates in Asia. DBS's economist believes investment activity should pick up, as the government pushes ahead with the award of infrastructure projects aimed at offsetting the negative effects of a potential external slowdown. Being 97% export dependent, a slowdown in commodity exports, in both value and volume terms are key risks to the economy. 

Earnings growth within our stock universe is now 8.6% for 2011 and 13.1% for 2012.  The 2012 forecast looks high compared to a consensus forecast of 11.6%. We expect downgrades to set in before bottoming out in 1Q12. Among the market heavy weights, cost pressures from higher oil prices will affect Tenaga, and MAS; while top line disappointment due to slower growth could affect CIMB and Genting

We expect Singapore and Malaysian ties to continue to improve, providing investment opportunities for companies from both countries. The landmark  railway land swap deal in 2011, followed by investments by the Singapore sovereign wealth fund Temasek, and Singapore companies in Malaysia's Iskandar region are clear evidence of the improving relationship.

Recently, parliamentary members from Singapore's ruling party attended the annual gathering of Umno leaders and party activists in the latest UMNO gathering in Malaysia. This is significant as the last time this occurred was reportedly 20 years ago. We expect average GDP growth for both countries to be enhanced to pre-1998 levels  (See “M+S, a new chapter has begun”, DBSVickers, Joanne Goh et all, 11 July 2011”) and expect M&A activity and  business dealings between Singaporean and Malaysian companies to gather pace in 2012. 

The  annual target for investment in Iskandar Malaysia (IM) has, reportedly, been already met th is year. Since the scheme's inception five years ago, IM has recorded a total cumulative committed investment of MYR77 bil across various sectors as at Sep 2011. 60% is from domestic investors vs 40% foreign.

The much anticipated premium factory outlet was officially opened on 11 December and is expected to bring shoppers from Singapore as well as the region and will add vibrancy to IM for a start. Other cataly tic projects like highways, universities, theme parks will be opening in stages in the next year. 

Attracting FDI and raising income levels are key objectives of PM Najib's 'New Economic Policy' (NEP). From the latest World Investment Report (updated with 2010 numbers), FDI flows into Malaysia have held up at 5% of total FDI into Asia ex-China. The improvement in FDI in Malaysia between 2009 and 2010 was surpassed only by Singapore, Hong Kong, China, and Indonesia, whereas countries like India, Thailand, Philippines and Taiwan saw lower FDI in 2010 compared to 2009. On the face of it, therefore, we see a lot of potential in PM Najib's NEP.

For 2012, our KLCI target is 1,590 based on 14x forward earnings — a target which could be reached as soon as the elections date is set. Construction, plantations and media companies are the main election plays. 

by DBS Vickers

Read full history - Malaysia Equity and 2012 FBM KLCI Target by DBS Vickers

Buy Bumi Armada –Exponential Growth Ahead

BUY RM4.00  Price Target :  12-Month RM 5.00 
Potential Catalyst:  New FPSO contracts, lucrative 

Exponential  growth ahead 
•   Strong candidate for lucrative marginal field development risk service contract
•   Beneficiary of rising demand of FPSO solutions in the region
•   Maintain Buy with RM5.00 TP with 25% upside

Best bet for Petronas’ RSC.  We expect Bumi Armada to secure the lucrative risk service contract (RSC) for Petronas’ marginal fields next year. Its excellent track record and synergistic O&G services, particularly the FPSO solutions will be viewed favorably by foreign oil players looking for local partner for RSCs. We understand that Bumi Armada is keen to bid for marginal fields and its newly set-up oil field services division is well positioned to leverage on its expertise and aggressively bid for RSCs that command IRR of 11-20%.

FPSO tenders are picking up.  We believe that Bumi Armada is likely to bid for more FPSO contracts in Malaysia as jobs are opening up. FPSO tender for Petronas’ RM15bn North Malay basin development (PM301 and PM325) has taken off, potentially to be awarded by year-end to fast-track production by 2013. Petronas is also likely to deploy FPSO solution for its Bunga Dahlia and Teratai fields (PM302). Meanwhile, FPSO tender for ONGC’s Cluster 7 margin al fields in India has started and Bumi Armada is likely to bid for the job. It has purchased an option for an Aframax tanker in early Nov11 (similar to its option purchase for D1 FPSO bid), suggesting another FPSO project in the pipeline.
 
Maintain Buy.  Bumi Armada is our high conviction Buy given its long-term earnings visibility with RM7.2bn firm order book (exclude JV’s D1 FPSO in India worth RM1.9bn) and strong 3-year earnings CAGR of 26%. Its geographically diversified earnings base with large exposure in the growing O&G sector in Asia and Africa is set to propel its growth prospects to become a world champion.

by HwangDBS Vickers 13th Dec 2011

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Buy – DRBHcom Interested in a stake in Proton?

DRB-Hicom: Buy; RM2.20 Price Target: RM3.45; Stock code 1619

Market is rife with rumours that DRB-HICOM (DRB) is keen to acquire Khazanah’s 42.7% stake in Proton. We understand other parties which may be interested are Naza and Sime Darby. The EdgeFinancialDaily today reported that Tan Sri Syed Mokthar AL-Bukhary is believed to be in
negotiations with Maybank Investment Bank to facilitate a deal to take control of Proton. It is believed that if there are no parties prepared to acquire Khazanah’s 42.7% stake, it may choose to sell a stake of less than 33% to avoid the bidder having to make a MGO. 

It is a known fact that DRB in 2009 had submitted a bid to acquire a 32% stake in Proton but the deal fell through. We spoke to management on this and their view is that there is nothing to substantiate this rumour. However, it believes the jewel in Proton lies in its state-of-the-art Tanjong Malim plant which is strategically located. While there are also other synergies such as spillover for DRB’s autoparts business and DRB also has a 60:40 JV with Proton to develop 4,000 acres of land surrounding Proton’sTanjong Malim plant (Proton City), we believe these are longer term positives.

Also, DRB is also in the midst of expanding its Pekan plant to cater for the presence of VW and potentially Audi. There are immediate goals for VW’s production in Pekan to ramp up to 50,000 units by 2016 for export to the Asean market. In the longer term, DRB with its slew of established
relationships with motor giants such as VW, Honda, Suzuki, Isuzu and Mercedes may be an ideal platform to bring in more foreign partners to work with should the acquisition take place. 

Hence, the key would be pricing where on the surface it may not work to DRB’s benefit. At current price, Proton trades 23x FY13F PE (Y/E March) and 0.59x NTA. This compares to DRB which trades 7.5x FY13F PE (Y/E March) and 0.8x NTA.

All in, we would be sceptical if the key motive for acquisition of Proton is just capacity expansion. Its Pekan plant is running on 40-45k units per annum vs potential capacity of 95k p.a. We reaffirm our BUY rating and TP of RM3.45 based on a 20% discount to our SOP value. As it stands, we think DRB’svalue proposition is already strong with a growing presence in automotive, services and property. 

by HwangDBS Vickers

Read full history - Buy – DRBHcom Interested in a stake in Proton?