Monday 9 January 2012

UBS says Malaysia looks pricey but sees FBM KLCI at 1,700

KUALA LUMPUR: Having outperformed most of its regional peers last year, the FBM KLCI is looking unattractive to foreign investors searching for good bargains, said UBS Securities Malaysia Sdn Bhd.

“It has increasingly become more difficult (for foreigners to buy into this market) valuation range right now, trading at a 40% premium to the [Asia ex-Japan] region,” said Chris Oh, UBS’ head of Malaysia research at a media roundtable on the “Malaysia Outlook 2012” here last Friday.

UBS currently has an “underweight” call on Malaysia as well as other Asean countries, given that these markets have been relatively defensive in 2011 and their valuations are no longer attractive. The Malaysian market was the third best-performing Asian market in 2011.

The local market is trading at premium price-earnings (PE) multiples largely due to the perception that Malaysia is a relatively stable market relative to other markets, Oh explained. This stability is due to the dominance of domestic institutional funds like the Employees Provident Fund (EPF) as well as the low foreign ownership levels.

Data from Bursa Malaysia indicated that foreign ownership in Malaysia stood at 22.2% as of September 2011, compared to 27% before the financial crisis of 2008.

In all the past corrections, Malaysia had been able to outperform the MSCI Asia Pacific ex-Japan index every time markets fell, he added.

As such, foreign money may still find its way into the local market, in spite of the multiples already looking rich, should global markets remain volatile and investors become increasingly nervous about developments in Europe and the US, he said. However, more of that money will flow out to markets trading at more attractive earnings multiples should prospects of a recovery become more imminent.

For now, UBS has a year-end target of 1,700 points for the KLCI, on the assumption that risk aversion normalises. The target is based on a forward PE multiple of 14 times, assuming earnings will grow 9% in 2012 and 13% in 2013.

“Malaysia is bracing for a slower external growth environment, but we believe earnings will hold up due to a resilient domestic sector and an on-going economic reform, as a result of the political transformation under Prime Minister Datuk Seri Najib Razak’s leadership,” Oh wrote in a recent note.

The brokerage expects Malaysia’s economy to expand by 3% in 2012 before rebounding to 5.5% in 2013. That’s below its forecast of a 5.9% GDP growth for Asia ex-Japan in 2012 and 6.7% in 2013. Expecting the eurozone to dip into recession, UBS sees global GDP growth for 2012 at only 2.7%, down 50 basis points from 2011, before rebounding to 3.4% in 2013.

Oh’s forecast for the KLCI will fall to 1,300 points should the eurozone crisis be worse than expected, or what he calls a “black-sky scenario”. That’s based on a 12.6 times forward PE and the Malaysian economy contracting 3.3% in 2012.

UBS foresees investors buying higher beta or cyclical names as they position their portfolios for a relief rally when the European situation or market sentiment improves. Investors are also expected to adopt a defensive strategy by going into companies with high earnings visibility, strong cash-flow generation and reasonable dividend yields.

In his presentation last Friday, Oh highlighted five themes for the year and they included the possibility of a pre-election rally, more policy reforms should Najib remain in power, improving Malaysia and Singapore relations as well as a focus on the plantation and the oil and gas sectors.

Pointing out that there was “no clear trend” on a pre-election rally taking place in the past six general elections, UBS reckons the possibility of a pre-election rally taking place here is low due to prevailing weak investor sentiment.

That said, Oh observed that retail investors’ interest in companies with perceived links to the ruling coalition and the current leadership has historically been strong during a pre-election rally. “These companies include SapuraCrest Petroleum Bhd, MMC Corp Bhd, DRB-Hicom Bhd, Malaysian Resources Corp Bhd (MRCB), Johan Holdings Bhd and George Kent (M) Bhd,” Oh wrote in a note dated Dec 1, 2011.

For 2012, UBS top stock picks include Berjaya Sports Toto Bhd, Genting Bhd, Hong Leong Bank Bhd, IJM Corp Bhd and Public Bank Bhd. UBS also likes Axiata Group Bhd and Kuala Lumpur Kepong Bhd, which it has a ‘neutral’ recommendation currently.

These companies are on its preferred list because they are well-managed, with strong fundamentals, earnings growth momentum, clear and strategic direction and provide attractive dividend yields, UBS added.


This article appeared in The Edge Financial Daily, January 9, 2012.



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