By Chan Quan Min
Sustained selling on the local bourse over the past three weeks have wiped off most of the gains made by the FTSE Bursa Malaysia KLCI over the last two years. As a result, blue chips are no longer quite as pricey as they were at their mid-year peak. For oil & gas counters in particular, plunging prices for the world’s most widely traded commodity have opened up bargains.
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Election year 2013 was the year of the relief rally. The year 2014, now drawing to a close, was almost another story altogether as typically bullish traders on the local bourse realised how overpriced blue chip stocks were getting after an unbroken rally lasting almost six years.
Blue chips have not given investors inflation-beating returns this year. The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) moved mostly sideways from January to mid-November before a rout in crude oil prices sent the index down more than a 100 points in just three weeks. The index as of last week was down about 9.5% from the start of the year.
Before mid-November, trading interest in less visible counters saw rallies in several dozen small and mid-cap stocks as capital gains looked to be increasingly difficult with blue chips. This was not surprising given that fund managers have been telling investors to practise stock picking and if they have the risk appetite, to put part of their money in high growth companies.
As the year draws to a close, the more important question is: What will 2015 hold in store? Will it be another 2013 with money to be made at every turn? Not quite. If anything, market watchers say 2015 is likely to be unpredictable as investors exercise caution in an environment of high inflation, low oil prices and the ever present prospect of capital outflow.
With the performance of the stock market so closely tied to economic growth, it would only be reasonable to expect a more moderate pace of growth in capital markets. The Ministry of Finance expects the economy to grow between 5% and 6% next year, which is about a percentage point lower than what was achieved in the first nine months of the year.
The implementation of a goods and services tax (GST) three months into 2015 on April 1 will cause inflation to spike temporarily. Economists say higher prices for most goods and services could have an adverse effect on consumer and investor behaviour although the effect will be limited.
Bargains in the oil & gas sector
Despite the unenthusiastic mood going into next year, there is no shortage of options for investors looking for a bargain and most of them are easy to search out. Research houses have been touting one sector in particular for affordable buys: That sector is oil & gas.
Oil & gas majors on the local bourse such as Bumi Armada, Dialog Group and Sapura Kencana are now trading at far lower valuations. Sapura Kencana and Bumi Armada shares have halved in value and are now trading at about 50% and 45% (adjusted for stock split) of their respective June peaks. Dialog Group, which is on more stable ground than the other two, saw a 30% decrease in share price from June.
As a whole, oil & gas counters on Bursa Malaysia have come under pressure from plunging crude oil prices, now at their lowest in years. Brent crude, the most commonly used benchmark, was trading at about US$110 (RM381.33) a barrel in June but has since fallen to about US$60 a barrel.
Lower prices for crude oil inevitably led to selling in most, if not all, oil & gas counters on Bursa Malaysia on expectations of weaker earnings. This despite the assurances from upstream oil & gas players that the terms of their contract are barely affected.
A recent report by UOB Kay Hian comparing regional oil & gas majors found that following the recent share price correction “valuations have seen compression.” The Singapore-based investment bank also reported that “Sapura Kencana garnered the most fund manager interest” during a marketing trip to North America.
However, its was Dialog that was marketed as the investment bank’s top pick among the large caps as a “play on its storage terminal business and the Petronas Rapid Project.” The national petroleum company, Dialog and other oil & gas majors are building massive oil storage and refinery facilities in Pengerang, Johor. The entire project could cost in the region of RM90 billion and is slated to begin operations in 2019.
However, analysts at UOB Kay Hian found that the fund managers they spoke to in North America did not take to the the region’s oil & gas majors despite an abundance of affordable options.
“Fund managers, wary of catching knives, await better clarity on oil prices despite cheap stock valuations. We believe the next six to nine months will be a period of stock differentiation,” they said.
CIMB’s oil & gas analyst Norziana Mohd Inon was straight to the point with her recommendation to investors. “We advise investors with a long-term investment horizon to take advantage of the recent share price correction to accumulate,” she said in a report last month.
According to Norziana, Petronas is not expected to cut back on its spending at current oil price levels as the breakeven level of even the most marginal offshore oil fields in the country is around the US$60 per barrel of Brent Crude mark. Older fields producing in high volumes are expected to have an average production cost that is “substantially lower.”
The oil & gas industry is perhaps the most important source of government revenue, contributing 31% of all revenue last year in the form of taxes, royalties and Petronas dividends.
Edible oils
Oil companies of a different sort, the edible variety, have had a challenging time this year with persistently low crude palm oil prices, for the most part due to a glut in production of soybean oil, palm oil’s closest replacement.
Interestingly, the plantation index marginally outperformed the FBM KLCI this year to early-December. This only because of the sudden decline in the benchmark index over the past three weeks. For the most part, investors in plantation stocks would have have lost out by about 5% year-to-date.
Palm oil prices are said to track crude oil prices as a significant part of palm oil production goes to making biodiesel. Many countries worldwide, including the world’s largest producers Malaysia and Indonesia, mandate the blending of biodiesel with commercially sold diesel.
According to UOB Kay Hian, the plantations sector is likely to put up “mixed performance again in the first half of 2015.” The research house favours “companies that are able to deliver more stable earnings and better earnings visibility” such as “upstream players with growth supported by new maturing areas and rising fresh fruit bunch yields.”
Analyst point to at best a gradual recovery in crude palm oil prices on tightening supply. And while most plantations stocks appear to be cheap at the moment, UOB Kay Hian only assigns a “market weight” rating to the sector. Oil & gas, in comparison, is expected to be ‘overweight’.
Yesterday: Slowing economic growth in store for 2015
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