Kuala Lumpur Composite Index (KLCI) is at one of its lowest levels in the past five years, according to MBKE. KLCI’s current valuation is around 16 times price-to-earnings, at the low end of the range and at its long-term mean. In terms of price-to-book, the KLCI is currently valued at about 1.8 times which is a hairline breadth away from its long-term mean (since 2001) of 1.81 times.
Opportunities Arising For Long-Term Investors
MBKE thinks that value is slowly emerging for long-term investors. Investors should start to be on the lookout for oversold stocks to bottom-fish to readjust their long-term investment portfolio. MBKE recommends two investment strategies to bottom-fish in the current MY market: Bottom-up stock picking on dips and focusing on growth stocks.
Bottom-Up Stock Picking Strategy
Top Sector: Aviation Sector
With volatility to remain dominant in the Malaysian market, MBKE recommends a bottom-up stock picking on dips as investors’ long-term investment strategy. MBKE thinks that further downside could come from regulatory risks as details of new regulations are being announced. The potential downside will be a good buying opportunity for investors.
From MBKE’s bottom-up investment strategy, MBKE highlights Aviation as its top sector. MBKE believes that the market has overpriced the fears of rising fuel prices and policy uncertainty after Malaysia’s 14th General Election. MBKE’s top pick within the aviation sector is AirAsia. Recently, AirAsia has been monetising its ancillary assets. Thus, AirAsia was selected as MBKE’s top pick for the aviation sector given the potential of special dividends.
AirAsia: BUY, TP RM 3.70; Current share price RM3.57
For individual stock picks, MBKE highlights Axiata, Malakoff and AEON as one of its recommended stock picks. According to MBKE’s analysis, Axiata’s quarterly results have likely bottomed in 1Q18. Its operating conditions have improved on weaker Ringgit and improved pricing environment in Indonesia. Moreover, the government’s broadband pledges will likely be confined to just fixed broadband. This will alleviate fears that Axiata will face incremental regulatory risks.
Malakoff is one of the highest dividend-yielding stock in the MY market. It currently offers investors with yields in excess of 6.5 percent. In the consumer sector, AEON is MBKE’s top pick as it expects improving consumer sentiments to spur spending and lift AEON’s retailing revenue. MBKE also foresees retailing margins to be enhanced by lower operating expenses at new malls and better product mix. Its current valuation at 26 times price-to-earnings is an attractive entry point, given its 7-9 percent earnings-per-share growth for CY18-CY19E growth.
Axiata: BUY, TP RM 4.80; Current share price RM4.42
Malakoff: BUY, TP RM 1.15; Current share price RM0.98
AEON: BUY, TP RM 2.50; Current share price RM2.20
Growth Stock Strategy
Another strategy that MBKE recommends is to focus on sectors/stocks with strong earnings growth potential. MBKE notes that they could be re-rated even higher as funds reposition out from sectors temporarily impacted by the new government’s manifesto.
From this top-down investment strategy, MBKE recommends staying positive on Oil & Gas and Automotive. MBKE notes that fundamentals within the Oil & Gas sector has been improving and is back on track for a cyclical recovery amid higher oil prices. MBKE’s top sector pick is Yinson. MBKE highlights that Yinson offers growth visibility, steady financials, sound management and business operations.
Yinson: BUY, TP RM 4.60; Current share price RM4.58
MBKE expects a recovery in total industry volume on the back of improving consumer sentiment and higher RM/US$ exchange rate. These factors will drive and lift earnings within the industry. Among the automotive players, Bermaz Auto is MBKE’s top pick in the sector. MBKE notes that Bermaz Auto is on track for a year of growth with 56 percent earnings growth forecasted in forward-FY19.
Bermaz Auto: BUY, TP RM 3.00; Current share price RM2.16