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Malaysian Market Watch Today 23rd July 2012

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Oil & gas-related stocks such as Dialog Group, Perisai Petroleum and Perdana Petroleum look promising after recent bullish breakouts from their consolidation phases, says a head of research.

THE blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) extended its rally into record territory for a fourth straight week, boosted by hopes the US and China will act to stimulate growth in their economies amid signs of a slowdown that forced the International Monetary Fund to cut global growth estimates.

For the week, the FBM KLCI advanced 16.62 points, or 1.02 per cent to 1,643, with gains in Tenaga Nasional (+27 sen), Axiata (+15 sen), Telekom Malaysia (+31 sen) and Public Bank (+22 sen) representing more than two-thirds of the index’s rise. Average daily volume and value fell to 1.18 billion shares worth RM1.66 billion from 1.26 billion shares and RM1.72 billion in the previous week.

Trading at 1,643 and a consensus CY12 price-to-earnings ratio of 13.6x, the FBM KLCI has gained 7.3 per cent year-to-date, outperforming Indonesia but still distant from other Southeast Asian markets such as the Philippines, Thailand and Singapore that have surged between 13 per cent and 21 per cent.

Being the second highest after the Philippines in terms of valuation, a similar outperformance appears remote unless earnings growth catch up fast enough to support such an outcome. We are already in the earnings reporting season for the April-June period but no significant improvements are expected to revise corporate earnings growth projections upward after four consecutive quarters of downgrades previously.

The FBM KLCI is projected to record a normalised earnings growth of 12.4 per cent and 11.1 per cent in 2012 and 2013 respectively.

In the absence of further earnings catalyst, we could be nearing the peak target for the year. It has been indicated in this column on June 25 and July 2 that the benchmark index may advance 3 per cent to 5 per cent more prior to dissolution of Parliament, which points to a range of between 1,650 and 1,680. The upper range was based on a CY12/13 mid-cycle PER of 14.5x.

Anything more than that appears highly stretched based on historical forward multiples. As such, continue to offload as the index rises and exercise extreme caution in selecting your picks for long-term exposure. The fact that defensive plays in the telco, consumer, brewery, tobacco and healthcare sectors have attracted big interest in the last few months and are trading at hefty PERs are signs of what lies ahead.

To keep the momentum in the benchmark index alive, the institutional funds are likely to maintain the rotational play in undervalued blue chip counters, including TNB that was recommended last week. Maybank and Sime Darby are other undervalued picks that are worth considering.

Maybank’s growing overseas sales are not expected to waver post completion of its third phase of integration with Kim Meng as it strengthens the group’s regional footprint and complements its entrenched domestic position. This is likely to keep earnings expansion intact and sustain future dividend payouts. Trading at FY12 price-to-book ratio (PBR) of 1.9x, it is a 17 per cent discount to its peers’ at 2.3x.

Sime Darby, meanwhile, is trading at a discount to KL Kepong and IOI Corporation. Sime is trading at FY12 PER and PBR of 15x and 2.3x respectively. KL Kepong and IOI is trading at 19.5x and 3.3x; and 16.5x and 3.3x respectively while Sime Darby’s share price has been bogged down by legacy issues.

However, the tight supply and demand dynamics for crude palm oil and competing oils like soya augur well for its plantation division, While the group will see an earnings boost of 4 per cent for every RM100 a tonne increase in CPO prices, its industrial segment will also benefit from higher demand as China introduces new stimulus measures and Australia’s mining sector gets a boost from foreign investments.

As for the direction of the index this week, it could pause for a profit- taking breather after a long drawn up-cycle. Any correction is expected to be mild ahead of the listing of IHH Holdings on Wednesday.

Technical outlook

In index futures, spot month July traded on Bursa Malaysia Derivatives gained 1.26 per cent to 1,647, improving to a 4-point premium to the cash index, compared to the 0.12-point premium previously.

Blue chips on Bursa Malaysia rose last Monday, boosted by the previous Friday’s US rally and regional strength on optimism China would do more to support economic growth. The FBM KLCI ended up 9.58 points at the day’s high of 1,635.96, as gainers beat losers 476 to 299 on trade of 1.11 billion shares worth RM1.51 billion.

Strong gains in telcos Axiata, DiGi, TM and Maxis lifted the index to a record high the next day, boosted further by regional strength on stimulus hopes from the US and China amid signs of a sharper slowdown that forced the IMF to slash global growth estimates.

The key index added 3.19 points to close at 1,639.15, off a high of 1,646.97, as losers edged gainers 409 to 401 on higher volume of 1.35 billion shares worth RM2.01 billion .

The local market extended gains on Wednesday, buoyed by hopes the Federal Reserve in the US would have options to stimulate the economy if growth weakens, ignoring the weaker regional tone due to China growth concerns. The FBM KLCI rose 5.85 points to a record close of 1,645, as gainers nudged losers 362 to 358 on turnover of 1.12 billion shares worth RM1.46 billion.

Despite profit-taking interest, stocks held firm the following day, propped up by regional gains on hopes China will take more action to boost growth and after US housing starts jumped to a four-year high. The index ended 0.4 points lower at 1,644.60, off an early record high of 1,647.94, as gainers edged losers 389 to 378 on moderate turnover of 1.1 billion shares worth RM1.59 billion.

Stocks ended lower on profit-taking interest ahead of the weekend amid soft regional markets on speculation China will retain property curbs and weaker US economic data. The index lost 1.6 points to close at 1,643, off an early high of 1,647.41, as losers beat gainers 410 to 376 on traded volume totalling 1.22 billion shares worth RM1.72 billion.

Trading range for the local benchmark index was 19.57 points last week, compared with the 16.7-point range the previous week.

Among the other indices, the FBM-EMAS Index rose 130.04 points, or 1.17 per cent, to 11,257.47, while the FBM-Small Cap Index climbed 139.11 points, or 1.13 per cent, to 12,241.98.

The daily slow stochastic indicator for the FBM KLCI continued to hover deep in the overbought zone and is hooking down following last Friday’s dip, implying correction potential, while the weekly indicator extended deeper into the overbought region. The 14-day Relative Strength Index (RSI) has also hooked down on an overbought reading of 73.77 as of last Friday, while the 14-week RSI ascended to 66.91.

The daily Moving Average Convergence Divergence (MACD) trend indicator continues to expand upwards to support an up-trend, confirmed by the positive signal on the weekly MACD indicator. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator continued their bullish expansion on a rising ADX line.

Conclusion

Short-term technical momentum remains overbought as the index extended its rise to new record highs for a fourth straight week, suggesting profit-taking correction is more likely to follow this week. The beginning of Ramadan this week may see trading volume dwindle as investors are expected to be sidelined.

However, strengthening trend indicators imply the uptrend will stay intact for the medium term.

As such, any further strength towards higher upside targets of 1,650, 1,660 and 1,672, the respective 1.500, 1.618 and 1.764 Fibonacci Projection of the sell-down from the April 3 peak of 1,609 to the May 18 trough of 1,526, should meet keen profit-taking resistance. Immediate supports upon an overbought correction will be at 1,633, the 10-day moving average, followed by 1,608 and 1,588, the respective 30- and 50-day moving averages.

Chart wise, stocks such as MMHE and TM should experience profit-taking corrections given their overbought technical conditions, while buying interest could switch to lower liner property stocks like Hua Yang and IJM Land.

In the meantime, oil & gas-related stocks such as Dialog Group, Perisai Petroleum and Perdana Petroleum look promising after recent bullish breakouts from their consolidation phases.