Top Down Strategy and Large Cap Stock Picks - the DBS Vickers ...

Country Assessment
Regional Equity Strategy Q4 2007
Sector recommendation and stocks for Malaysia
SECTOR REMARKS STOCK SELECTION
Banks
Overweight
Construction
Overweight
Concessionaires
Overweight
Gaming
Overweight
Transport & logistics
Neutral
Motor
Underweight
We remain positive on the sector, premised on selective better-than-expected
earnings, especially in the non-interest income segments with strong pipeline for
the debt and equity market mandates. We expect loans to grow at a moderate
pace with SMEs outpacing retail growth towards end-2007. We believe the M&A
theme is at its tail end with EON Cap as the final candidate. While 4Q appears to
be more domestic-driven and focus is expected to surround the implementation
of 9MP projects, following the call for more private funding via the capital
markets, it is apparent that the key beneficiaries would be BCHB and AMMB.
We still like Public Bank-F for dividend yields.
We remain optimistic on the outlook for this sector. Construction activities grew
4.8% in 2Q07, the highest level in more than four years. With implementation
of mega projects gaining momentum, we expect growth to increase in
subsequent quarters. Expectations for an early election could provide added
excitement for the sector. We prefer those contractors with strong execution
capability, track record and pipeline of new contracts. Our top pick remains WCT
Engineering, which should also benefit from the construction boom in the
Middle East.
The projected increase in consumer spending is positive for the sector. Year-todate
traffic volume growth for PLUS Expressways has been very encouraging
at 6.3% y-o-y. Based on historical correlation between traffic volume and GDP
growth, there could be upside to our traffic volume assumptions. Although
higher crude oil price has sparked potential reduction in petrol subsidies, we
believe such a reduction would be unlikely in the near term, given the impending
general elections. Litrak would be a key beneficiary of the change in the tax
structure announced in Budget 2008. Without having to accumulate section 108
tax credit, Litrak has the capacity to double dividend payments to 20 sen (5.3%
gross yields), in our opinion. In addition, there is still a chance of special dividend
payment.
Companies conducting the numbers forecast totalisator business (i.e. BToto,
Tanjong and Magnum) are investors’ safe haven, against a backdrop of external
uncertainties. We like the NFO business on the following merits: i) limited
reliance on external economies with top-line growth essentially tracking
domestic consumption (which is expected to remain healthy with a GDP forecast
of c. 6% for 2008); ii) inherent cash and asset-light business model; and iii)
downside supported by high dividend payout. We expect BToto to strive for a
90% payout, implying gross dividend yield of 8% for FY08.
MISC’s near-term outlook has improved with the surge in petroleum tanker
rates, which has increased 17% m-o-m. The Group is also a beneficiary of the oil
& gas industry’s buoyant industry prospects through its offshore and heavy
engineering businesses. For passenger airlines, we expect improved profitability
from MAS resulting from its ongoing business turnaround. However, passenger
airlines may see some volatility in the near-term with sharp increases in jet fuel
prices.
Car sales are beginning to show signs of recovery with August recording 1% y-
o-y and 6% q-o-q increase to 47,585 units. This brings the first eight months of
new vehicles sales to 313,250 units (down 8% y-o-y). We maintain our forecast
of 6-10% y-o-y contraction in new vehicles sales to 442,000 – 460,000 units
for 2007 (FY06: 491,000; FY05: 551,000). Into 2008, we expect a rebound in
total industry volume, possibly testing 2006’s 490,000 units. However, we
believe industry players are likely to report uninspiring earnings, as they
continue to experience intensifying competition (implying higher A&P).
AMMB, BCHB, Public
Bank-F
WCT, IJM, Gamuda
Litrak, PLUS
Resorts World, BToto,
Magnum
MISC, MAS
MBM Resources
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