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

Regional Equity Strategy Q4 2007
Country Assessment
Sector recommendation and stocks for Malaysia
SECTOR REMARKS STOCK SELECTION
Oil & Gas
Overweight
Plantation
Overweight
Property
Overweight
Steel
Overweight
Telco
Underweight
Power
Overweight
REITS
Overweight
We expect better earnings visibility for oil & gas players with new contract wins
and earnings kickers from rising charter rates and average selling prices, due to
growing demand and limited new builds. Over the longer-term, outlook
remains promising with increased spending by Petronas as well as annual
capex of US$300bn to improve the entire energy chain in Asia.
We expect crude palm oil (CPO) prices to remain strong over the next two
years, although a cyclical decline may start to become apparent (starting in
4Q09), due to higher production from aggressive planting in Indonesia since
2006. To offset the long-term decline in CPO prices, we prefer companies with
significant landbank and aggressive new planting. The US Renewable Fuel
Standard (RFS), which came into effect since 1 September 2007, should limit
the decline in global vegetable oil prices, as we expect the drop in soya bean
acreage to remain permanent in order to meet the renewable fuel volume
obligation going forward. Our top pick is IOI Corp.
Positive measures announced by the Government, namely relaxation of Foreign
Investment Committee (FIC) rulings, scrapping the limit on loans taken by
foreigners, and abolishment of Real Property Gain Tax should support demand
for properties. In the recent Budget 2008, the Government announced more
‘goodies’, including 50% discount to property transfer of less than RM250,000
and monthly withdrawal from EPF Account 2. We expect these broad-based
incentives to increase the affordability of home ownership and help stimulate
demand. Top picks include YTL Land, Sunrise, Eastern & Oriental and
Suncity.
International steel prices for the third and fourth quarters are expected to remain
on the uptrend, supported by the Chinese Government’s recent policies on steel.
We expect strong prices to enhance profit margins for local steel players. In
addition, production has also increased, given the recovery in construction
activities in Malaysia and Singapore. We maintain our Overweight rating on the
sector.
While fixed-line (inclusive of fixed broadband) revenue is expected to remain flat
(under Telekom Malaysia), cellular revenue growth is in sight. Competition has
intensified with cuts in prepaid call rates. However, we believe the price elasticity
of the business would translate into larger subscriber numbers and increasing
revenues. Against this backdrop, we prefer Digi for its branding skills, strong
management capabilities and rising subscriber (and revenue) market shares. We
also like Green Packet for its ability to win more than 2,000 wireless broadband
subscribers since its launch in July 2007 and its regionally diversified earnings
base.
We believe TNB is a defensive proxy to the rising domestic spending. Power
demand growth is estimated at 6% p.a. for 2007-08, supported by a stronger
industrial segment following the implementation of 9MP projects. While
generation cost will rise, due to the commissioning of the second and third
phases of Tanjung Bin, the higher IPP cost will be partially compensated by the
12% net tariff hike and TNB’s ongoing cost saving measures.
We expect MREITs that focus on office space to continue to benefit from rising
rental rates. This results from stronger demand from the services sector and
limited new supply. We prefer those MREITs with attractive underlying assets,
good acquisition pipeline and proven acquisition track record such as QCT and
Axis REIT.
KNM, Wah Seong, Alam
Maritim, Petra Perdana and
Tanjung Offshore.
IOI Corp, KL Kepong, Sime
Darby, TH Plantations, PPB
Group
YTL Land, Sunrise,
Eastern & Oriental,
Suncity
Kinsteel, Southern Steel
Digi.Com, Green Packet
Tenaga
QCT, Axis REIT
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