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30 April 2010
Marke t Upda te
30 April 2010
MARKET DATELINE
Taking Stock
Position For More Volatility Ahead
♦ … as well as the World Cup effect. We also see potentially reduced Table 2. Laggards
trading volumes during the 2010 FIFA World Cup in South Africa in Rel. Price FV Rec
Jun/Jul. Price charts for the last five World Cup years indicate the FBM YTD* (RM) (RM)
EMAS and FBM KLCI generally having a downswing in the early part of (%)
each event. However, we also note that in 1990, 1994 and 2006, a Gent Spore (38.2) 0.87 1.35 OP
market rally followed almost immediately after the end of the event. Sino Hua-An (15.9) 0.44 0.59 OP
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♦ More volatile market ahead. We expect the market volatility to continue due to changing external factors
including rising interest rates, fluctuating exchange rates, rising commodity prices, and balanced against the
global economic recovery. Athough the benchmark FBM KLCI is still positive (+4.7%) YTD, we note that most of
the top 30 stocks (including banks, plantation, power and telecom) have been relatively lacklustre over the last
two months, as investors focused on the smaller caps.
♦ Valuations related to size ... Some of this can be attributed to relative valuations. The heavyweights (i.e. the
FBM KLCI stocks under RHBRI coverage) are on average trading at 2010-2011 PERs of 17.9x and 15.4x. This
compares with the mid caps (i.e. the non-FBM KLCI stocks under RHBRI coverage with market cap above
RM700m) which are trading at 12.8x and 11.1x respectively, and the small caps (with market cap below
RM700m) at 8.8x and 7.0x respectively (see Table 4).
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♦ … suggest that the market has normalised. For 2010, the market has thus imputed a 29% discount in
terms of valuations between the mid and big caps, and a 31% discount for small vs. mid caps. Historical data for
2006-2009 (see Table 5) indicate that average discounts between each category can fluctuate depending on the
“flavour” of the market. Latest valuation data suggests the broader market is still moving in tandem although
the gap between the mid and small caps appears to have widened. We believe this may due to investors’
concerns on individual stock liquidity.
♦ Looking ahead to the May effect ... We caution that May has tended to be volatile with the FBM EMAS and
FBM KLCI showing a decline in terms of end-May prices vs. end-Apr in six out of the last ten years (see Table 6).
The only years with positive May performance for the two indices were in 2009 (anticipation of economic
recovery), 2007 (bullish sentiment despite plunge in Shanghai bourse in Feb), 2003 (recovery from SARS
outbreak) and 2001 (recovery after the dotcom bust).
♦ … in addition to the World Cup effect. We also see potential volatility in the equity market during the 2010
FIFA World Cup in South Africa from the first match on 11 Jun (10pm Malaysia time) to the final on 11 Jul (or
2.30am on 12 Jul in Malaysia). Price charts for the last five World Cup years indicate the FBM EMAS and FBM
KLCI generally having a downswing in the early part of each event. However, we also note that in 1990, 1994
and 2006, the market volatility during the World Cup was followed almost immediately by a big upswing in the
FBM KLCI (see Charts 1-5).
Chart 1. FBM KLCI 8 Jun – 8 Jul 1990 (Italy) Chart 2. FBM KLCI 17 Jun – 17 Jul 1994 (US)
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Chart 3. FBM KLCI 10 Jun – 12 Jul 1998 (France) Chart 4. FBM KLCI 31 May – 30 Jun 2002 (S. Korea/Japan)
Chart 5. FBM KLCI 9 Jun – 9 Jul 2006 (Germany) Chart 6. FBM KLCI 11 Jun – 11 Jul 2010 (S. Africa)
Taking Stock
♦ Focus on liquid stocks with value, trading stocks may suffer. We believe there is nothing fundamentally
wrong with the market, although 2010 valuations may not appear cheap relative to the post-crisis mean of 15x.
Therefore, even though 65% of the stocks under our coverage have underperformed the FBM KLCI over the last
month, we continue to advocate our top picks of liquid and fundamentally-robust stocks over a 12-month view,
i.e. stocks which should be able to ride out the near-term volatility. However, during this volatile period, trading
stocks that have outperformed the market (on M&A themes and GLC links) may experience further profit taking.
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♦ Stars and laggards. We note that some star performers including Daibochi, Faber and Kossan have already
seen some correction in the last five days if not the last month, while others such as Unisem, Tan Chong and
Media Prima have continued to outperform. Nevertheless, we remain bullish on these stocks as their strong
earnings growth through FY11 should sustain share price performance through the volatility. At the other end of
the spectrum, we also highlight YTD performance laggards like Genting Bhd, IOI, KLK, TNB, IJM Land and Maxis,
which we have rated as Outperform stocks. We believe these laggards deserve more attention, given their
resilient earnings and better stock liquidity.
Table 8. Laggards
Rel. YTD Abs. 1 Abs. 5
Price (RM/s) Market Cap Change month Chg month
Company 28-Apr FV (RM/s) (RMm) (%)* (%) change (%) Recom
Gent Spore 0.87 1.35 11,379 (38.2) (6.0) 0.6 OP
Sino Hua-An 0.44 0.59 499 (15.9) (11.1) (4.3) OP
Genting 6.60 8.95 24,714 (14.8) (1.8) (1.0) OP
CBIP 2.67 3.60 366 (13.3) (8.9) (2.2) OP
Sime Darby 8.76 9.85 52,643 (7.1) 0.7 (1.6) OP
RCE Capital 0.66 1.08 516 (6.2) (3.7) (2.2) OP
IJM Land 2.32 3.19 2,549 (6.0) (0.4) (0.9) OP
Maxis 5.31 6.20 39,825 (5.9) (1.5) (0.2) OP
AMMB 4.96 6.13 14,920 (5.5) (0.4) (0.4) OP
IOI Corp 5.43 6.65 36,248 (5.5) 0.6 (0.9) OP
UMW 6.38 7.52 7,194 (4.3) 1.1 (1.1) OP
Tenaga 8.48 10.40 36,920 (3.8) 5.7 1.2 OP
KL Kepong 16.66 18.40 17,742 (3.8) 1.3 (1.3) OP
* Relative performance vs. FBM KLCI
Source: Bloomberg, RHBRI estimates
♦ Longer-term outlook still positive, caution on near-term volatility. While the early-stage recovery in
global economies has to some extent already been priced in to the market, we see price weakness as an
opportunity to accumulate the big banks, commodities (plantations and O&G) and power (TNB) stocks as well as
consumer-related stocks like Tan Chong, IJM Land and Notion Vtec. We also advocate a balanced portfolio to
include Alpha+ stocks such as Maxis, PLUS and Carlsberg that have resilient earnings as well as attractive
dividend yields.
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Laggards
Gent Spore Dec 0.87 1.35 (38.2) 2.7 3.8 +>100 37.9 31.7 23.0 2.3 8.4 0.0 OP
Sino Hua-An Dec 0.44 0.59 (15.9) 4.9 4.8 +>100 (2.4) 9.0 9.2 0.6 n.m 0.0 OP
Genting Dec 6.60 8.95 (14.8) 45.8 56.1 38.9 22.5 14.4 11.8 1.5 5.8 1.4 OP
Sime Darby Jun 8.76 9.70 (7.1) 39.6 48.3 5.4 22.2 22.1 18.1 2.3 15.6 2.5 OP
RCE Capital^ Mar 0.66 1.08 (6.2) 10.6 11.3 5.9 6.1 6.2 5.8 1.1 n.m 1.5 OP
IJM Land^ Mar 2.32 3.19 (6.0) 18.4 34.4 88.5 87.2 12.6 6.7 1.4 4.7 0.9 OP
Maxis Dec 5.31 6.20 (5.9) 33.2 36.2 6.6 9.1 16.0 14.7 3.9 10.3 6.3 OP
AMMB^ Mar 4.96 6.13 (5.5) 39.9 45.7 19.0 14.6 12.4 10.9 1.6 n.a. 2.0 OP
IOI Corp Jun 5.43 6.65 (5.5) 27.9 31.5 (13.0) 13.0 19.5 17.2 3.7 17.1 2.2 OP
UMW Dec 6.38 7.52 (4.3) 51.2 52.5 52.3 2.5 12.5 12.2 2.0 8.9 3.7 OP
Tenaga Aug 8.48 10.40 (3.8) 70.7 80.9 42.0 14.4 12.0 10.5 1.3 4.6 3.3 OP
KL Kepong Sep 16.66 18.40 (3.8) 87.5 123.3 23.7 40.8 19.0 13.5 2.9 15.3 2.7 OP
Alpha+Picks
PLUS Dec 3.39 4.13 (0.8) 23.6 36.3 (0.3) 53.5 14.3 9.3 2.8 8.7 5.3 OP
Carlsberg Dec 5.32 5.90 12.4 42.1 44.3 68.1 5.3 12.7 12.0 3.0 24.2 4.7 OP
Notion Vtec Sep 3.22 4.64 13.6 36.2 46.4 41.5 28.4 8.9 6.9 2.4 6.5 2.0 OP
Wah Seong Dec 2.52 3.09 5.1 19.3 20.8 46.1 8.0 13.1 12.1 2.5 4.7 3.0 OP
Dialog Jun 1.10 1.29 12.2 6.4 9.3 (3.4) 45.4 17.3 11.9 4.3 15.0 3.2 OP
#
^ FY10-11 valuations refer to those of FY11-FY12 Consensus estimates Source: RHBRI, Bloomberg
IMPORTANT DISCLOSURES
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Stock Ratings
Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.
Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.
Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.
Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.
Industry/Sector Ratings
Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
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securities, subject to the duties of confidentiality, will be made available upon request.
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