Jan 9, 2012

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