By Chan Quan Min
Oil & gas stocks may come cheap but investors risk the possibility that crude oil prices take ages to recover. Big cap stocks from other sectors, like oil & gas stocks have also recently become cheap and an enticing alternative to the bargain hunter. KinBiz takes a look at expert big cap recommendations.
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Yesterday’s part two looked at oil & gas stocks and their now attractive valuations, depending on how sceptical one is over a recovery in oil prices. Other than oil & gas stocks, several, if not most, other blue chips are now priced affordably after a six-year rally in Bursa Malaysia.
The question of affordability is a subjective one. The recent stock market losses, very closely linked to the global commodities rout, has made blue chips cheaper than they were for most of the year up to late-November, but this does not necessarily mean they have bottomed out.
Today’s part three continues to look at the stock market with a particular focus on big cap stocks, usually pitched to investors looking for stability and regular returns. And a discussion on blue chips ought not to ignore how Malaysia’s banks have come to underpin most of the growth of the nation’s economy.
Malaysia’s banks dominate the FBM Kuala Lumpur Composite Index (KLCI) and are a major source of wealth creation for the economy. So it comes as no surprise, that the latest set of disappointing third quarter results for some of the country’s largest banks has put the market on edge.
The performance of banking stocks is however faring much better than that of oil & gas stocks on the local bourse, which have seen selling pressure eliminate 30% to 60% of their market capitalisation, with the exact amount depending on the counter.
In banking, the big names such as Maybank, CIMB Group, Hong Leong Financial Group and Affin posted third quarter earnings below most analysts’ expectations for the third quarter ended September this year. The main reason: Higher provisions and lower non-interest income from soft capital markets, according to a report by AllianceDBS.
For Maybank and CIMB, Indonesian operations that were meant to be growth centres turned out instead to be a drag on earnings. In this instance, geographical diversification into what is thought to be Asean’s growth engine had not worked out well.
Both Maybank-owned Bank Internasional Indonesia (BII) and CIMB-owned CIMB Niaga have for the past few quarters reported weak earnings, a reflection of difficult economic conditions in Indonesia this year.
CIMB Niaga was particularly badly hit and saw its non-performing loan (NPL) ratio rise to 3.4%. The Indonesian subsidiary is important to its Kuala Lumpur based parent, contributing about of quarter of group profit. In comparison, BII is much smaller than its parent Maybank, contributing not more than 5% to group profit.
What will become of banks in 2015?
Analysts at AllianceDBS say banks could receive a boost from a long-overdue “revival of capital market activity” next year.
“Both debt and equity markets have been downbeat. Listings from several large companies which were postponed could underpin stronger non-interest income,” Lim Sue Lin and Lynette Cheng of AllianceDBS said in a report.
They forecast loan growth of 9% for 2015, noting that business loan applications and approvals have seen some improvement. However, loan growth rate of 9% is only one percentage point above what is expected for 2014 and below that achieved between 2010 and 2013.
Consumer loans are likely to remain stable in the absence of further cooling measures for the property market, they added. Residential loan approvals have been on a decline this year after Bank Negara introduced from late 2013 stricter rules on borrowing.
Of the major banks, Public Bank is a favourite despite its expensive valuations. Analysts at AllianceDBS like Public Bank for its “defensive qualities” and unique position as the “only bank with consistent earnings delivery potential.” They add that Public Bank’s premium pricing is “justified.”
Another research house, at Kenanga Investment Bank, picked CIMB Group and Maybank to be just as likely as Public Bank to ‘outperform’ the market.
AllianceDBS however, favours Hong Leong Bank as an alternative to Public Bank for its growth prospects in the wealth management space. “We understand that Hong Leong bank has a large pool of underserved SME clients which it can leverage on,” its analysts said.
Situational plays
A word of warning came in earlier this month for clients of UOB Kay Hian. It was a report advocating for a “more defensive portfolio, looking for domestic-insulated growth.” Oddly, investors were at the same time encouraged to “be adventurous.”
According to the research house, the promising investment ideas will come from “the grossly oversold oil & gas sector” as well as any beneficiaries of cheaper energy costs and the weak ringgit. The utility, construction, gaming, media (Astro) and real estate investment trusts all got the ‘overweight’ rating.
UOB Kay Hian latest blue chip recommendations are AirAsia, IJM Corp, Genting Malaysia, Maybank and Tenaga Nasional. All have ‘buy’ calls with target prices that promise some capital gains.
One other blue chip recommendation, made with the view that “ample domestic liquidity will support selected situational plays,” is MMC Corp.
Another situational play being offered to investors by some market analysts is Sunway. The property and construction company is looking to separately list its construction division on the stock exchange.
The listing is expected to result in Sunway getting a large sum of money from selling part of its stake in the construction arm during the initial public offering. Shareholders will get a piece of the pie with a special cash dividend.
The amount is not known yet but AllianceDBS has estimated a payout of 27 sen per share with the assumption that construction business is valued at RM1.7 billion.
The initial public offering for Sunway’s construction business is targeted for completion by the second quarter of next year. The company last month put in its application to the Ministry of International Trade and Industry.
Another plus point to Sunway is that the counter is currently trading at what analysts feel is a reasonable valuation.
On potential for capital gains, AllianceDBS is of the view that Sunway’s “huge land bank” of 3,300 acres gives the company “planning flexibility.” The total land holdings are estimated to be worth about RM50 billion in gross development value and are scattered across the main population centres of the Klang Valley, Southern Johor and Penang
CIMB Research sees potential in Sunway’s order book from securing a sizeable domestic building project by end-2015. The company is reportedly targeting a RM1 billion to RM2 billion project, which if successful could raise its order book by at least 30%.
Yesterday: Oil & gas stocks going for a bargain
Tomorrow: Big isn’t always better: A tale of Bursa’s small caps
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