2018 is going to be an eventful year for Malaysia. With Malaysia’s 14th general election due in mid-2018, the interim run-up to the elections could be a period of volatility for both equities and Malaysian Ringgit (RM). Despite that, Maybank Kim Eng (MBKE) is still cautiously constructive on Malaysia equities into 2018. This is due to the sustained GDP and corporate earnings growth resuming for the second year.

Given its cautiously constructive outlook, for investors looking to invest into the Malaysian market, there are three investment themes that MBKE recommends.

Investors Takeaway: 3 Thematic Malaysian Investments To Make In 2018

1. Shift Towards Better Risk-To-Reward Stocks

2018 will be an inflexion point where the market will shift its preference towards plays with cheaper valuation, according to MBKE. 2017 was a year of outperformance by growth stocks, especially the tech sector which grew by ~140 percent year-on-year. However, with valuations for growth stocks now stretched, MBKE recommends stocks with better risk-reward profiles.

MBKE prefers stocks which offer attractive earnings growth while trading at reasonable valuations. In particular, MBKE highlights Genting as the top pick for this investment theme. Other top BUYs for 2018 include Petronas Chemical, IOI Corporation, Hong Leong Financial Group, Gamuda, Yinson, Cahya Mata Sarawak, Berjaya Auto and YTL REIT.

Yinson: MBKE’s Key O&G Pick

Yinson

MBKE has highlighted Yinson as its key O&G stock pick for its positive business direction, prospects, earnings growth and steady cashflow strength. Yinson is the top 6 floating production storage and offloading (FPSO) operator in the world by fleet size.

Yinson has the ability to create value for shareholders through its steady earnings growth, visible tender pipeline and cashflow strength. The tender pipeline for FPSOs worldwide remains strong for Yinson. According to MBKE, Yinson’s valuations are also undemanding. This is taking into consideration its earnings visibility, growth prospects, decent dividends and balance sheet strength.

BUY, RM4.45

2. Discretionary Consumer Goods To Stay Intact In E-commerce Boom

Based on MBKE’s research, internet retailing value has grown at an estimated 5-year CAGR of 31.5 percent. This is driven primarily by the surge in e-commerce shopping and e-commerce platforms. However, internet retailing remains a minor contributor of Malaysia’s total retailing value in 2016 (only 2.1 percent). This has lagged the region’s internet retail sales as a proportion of total retail sales.

Despite the growth of e-commerce, MBKE believes that discretionary consumer companies, companies will stay resilient. This is especially so for those with strong branding or niche/captive segments. Two of MBKE’s top picks are Berjaya Food and Atlan. Berjaya Food’s strong Starbucks brand and Atlan’s captive market in duty-free zones will help them to sustain strong sales from their brick-and-mortar shops.

Berjaya Food: BUY, TP RM1.95; Atlan: BUY, TP RM6.00

3. Hop Onto The Infrastructure Boom Bandwagon

Malaysia Infrastructure

A total of RM229 billion jobs were awarded in 2016, according to statistics from the Malaysia Construction Industry Development Board (CIDB). The momentum for confirmation of new infrastructure jobs could continue to pick up in 2018 from major rail developments such as the KL-SG High Speed Rail (RM60 billion) and KVMRT 3 (RM40 billion). The remaining packages of Pan Borneo Sabah Highway and KVLRT 3 could also be awarded in 2018.

Given the substantial construction awards, MBKE expects execution of infrastructure jobs to pick up significantly in the coming years. Demand for building materials should also improve from 2018, especially cement. The cement industry is currently at a trough, with recent capacity addition resulting in a supply-demand imbalance. Nevertheless, MBKE believes that it is a matter of time before average selling price (ASP) of cement recovers as current prices are unsustainable. Lafarge Malayan Cement is MBKE’s preferred pick for exposure to the infrastructure boom.

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