CIMB Research's top three picks are Dialog, Genting and Westports.
KUALA LUMPUR: CIMB Equities Research has lowered its target for the FBM KLCI for 2018, still based on 15.4 times price-to-earnings (P/E) from 1,767 to 1,675 to reflect recent changes in the constituents of the 30-stock index.
In its strategy report for the third quarter released on Tuesday, it said the P/E at 15.4 times, was one standard deviation below the three year mean.
“We project that KLCI earnings will grow by 6% in 2018 and 8% in 2019. Our analysis of market earnings forecasts reveal that the bulk of the earnings growth will be driven by banks, the Genting group and Malaysia Airports,” it said.
CIMB Research expects the Malaysian equity market to remain volatile in 2H18 as the ongoing review of policies could pose some earnings risks for corporates.
Other challenges in 2H18 include slower GDP growth, revenue pressure from potential policy or regulatory changes, escalating trade tensions between China and the US, rising operating cost pressures and global monetary tightening.
“We believe concerns over (1) the review of mega contracts, minimum wage and broadband prices, (2) plans to break up monopolies, and (3) lapses in financial mismanagement by the previous government, could be priced in by November 2018 (after the 2019 Budget and results season).
“We expect the market to rebound by year-end as it looks forward to potential benefits from the reforms which we predict could flow through in 2H19. This, coupled with year-end window dressing activities, as well as improved local and foreign direct investments, are expected to boost market performance,” it said.
CIMB Research said there were six themes for 2H18 and the stocks that stand to gain from high crude oil prices are Dialog and Velesto
.
The government’s efforts to reduce illicit trade could benefit BAT.
As for the reforms in the government-linked companies, companies which could benefit are Maybank, RHB, Sime Property.
It pointed out that Genting, DRB-Hicom, Tan Chong, Kawan Food, CCK could benefit from higher consumer spending.
Companies with defensive earnings qualities are Digi, Westports, Gas Malaysia, KPJ, Supermax. The oversold stocks are MyEG and Signature.
“Our top sector picks are oil and gas, rubber gloves, tobacco and selected small caps. We like oil and gas for its earnings recovery story, rubber gloves for strong demand growth, tobacco for the government’s more aggressive clampdown on illicit trade and selected small caps that trade at attractive valuations.
“Our top three picks are Dialog for its robust earnings growth, Genting as a consumer play and cheaper proxy for its subsidiaries, and Westports for its defensive earnings and strong growth prospects from port expansion.
“We have also added Maybank to our top picks list as valuations have turned attractive following recent sell-down in the stock,” it said.
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