7 Malaysia Big-Caps For A Defensive Portfolio
In the recent earnings season, Malaysia’s universe of stocks continues to underperform with 35% of companies covered by CIMB Research reporting below-expectation earnings.
Only 9.0% managed to exceed market expectation.
According to CIMB Research, revision ratio (number of forecasts upgraded versus number of forecasts downgraded) fell to its third-lowest since 1Q08.
Most of these companies were from the agribusiness, auto, media and healthcare sectors. The only sector that managed to outperform was the tech sector.
Moving forward, CIMB Research recommends investors to consider the construction, utilities and small cap sectors. CIMB Research also advises investors to take profit on cyclical stocks that have done well and switch to more defensive sectors.
We highlight seven large cap stocks that CIMB Research recommends as part of its Malaysia strategy.
1. Astro Malaysia
Astro in Malaysia is like the Singtel MIO TV and Starhub TV in Singapore.
CIMB Research recommends Astro for its relatively defensive earnings. Astro is also less susceptible to the volatile advertising expenditure market, compared to its media peers.
Investors can expect stronger earnings in FY18F to be driven by higher average revenue per user following sports package price revision and higher customer take-up of value-added services.
Moreover, Astro should also enjoy lower content costs in FY18F due to a reduction in sporting events. CIMB Research also favours Astro for its attractive CY17-18F yields of 4.9-5.3%.
CIMB Research: Astro Malaysia Holdings Berhad (KLSE: ASTRO) – BUY; Target Price RM3.25
2. AirAsia
AirAsia appears to be on a disposal spree. AirAsia recently disposed of its 50% stake in its Centre Of Excellence for US$100 million. Its 25% stake in joint-venture with Expedia (AAE Travel Pte. Ltd) appears to warrant a similar price to the Centre of Excellence.
CIMB Research also opined that AirAsia is also close to completing the disposal of a 70% stake in its aircraft leasing unit Asia Aviation Capital Ltd.
CIMB Research believes that the completion of all three disposals will give rise to special dividends of RM1.16 per share. Moreover, with a strong operating environment in Malaysia, AirAsia can expect to achieve stronger yields in 2H17.
CIMB Research: AirAsia Berhad (KLSE: AIRASIA) – BUY; Target Price RM3.51
3. Gamuda
CIMB Research has chosen Gamuda as its top pick for its rail theme.
Gamuda has been setting its sight on winning RM10 billion worth of contracts by end-2017. Key projects include the RM55 billion East Coast Rail Link (ECRL) and RM9 billion LRT 3’s tunnelling package.
CIMB Research believes that Gamuda is able to clinch sizeable portions of these key projects and will benefit strongly from these larger-value contract awards.
Apart from clinching the key projects, the news of MRT 3 (circle line) and KL-Singapore HSR are other anticipated news that could push the stock price even higher.
CIMB Research: Gamuda Berhad (KLSE: GAMUDA) – BUY; Target Price RM6.15
4. Axiata Group
According to CIMB Research, Axiata group could see its core earnings per share rebound by 29% and 50% year-on-year in FY18F and FY19F respectively.
CIMB Research opines that Axiata will receive much higher contributions from its Indonesia-based XL Axiata on robust revenue growth and better EBITDA margin.
Axiata’s Airtel Bangladesh is also close to reaching net profit breakeven. Breakeven should be achieved by end-2018.
In addition, Axiata Celcom’s revenue has been stabilising in the last three quarters.
CIMB Research expects Celcom’s earnings to be stable year-on-year in FY18F, followed by 10% growth in FY19F.
CIMB Research current valuation of Axiata shows that it is selling at a 12% discount to the ASEAN telco average. As such, CIMB Research recommends Axiata as its top Malaysian telco pick.
CIMB Research: Axiata Group Berhad (KLSE: AXIATA) – BUY; Target Price RM6.00
5. RHB Bank
Among the financial services, RHB bank is CIMB Research’s top recommendation for its IGNITE 17 transformation programme and attractive valuation.
According to CIMB Research, the programme would improve the group’s fee income generation, operating efficiency, and market share.
In terms of valuation, RHB’s FY18 P/E is around 9.1x. It is below the five-year average of 10.4x (for RHB Bank) and the sector’s average of 12x.
CIMB Research: RHB Bank Berhad (KLSE: RHBBANK) – BUY; Target Price RM5.96
6. Bumi Armada
CIMB Research opines that Bumi Armada’s share price in the upcoming six months will be driven by four main factors.
First, Bumi Armada’s LukOil contract for the Armada installer has been extended into 2018. The Armada Installer was purpose-built by Bumi Armada in 2009 for pipelay and heavy lift in Caspian Sea.
The extension translates to continuity of revenue opportunities for Bumi Armada.
Second, Bumi Aramada can expect to receive final acceptance of its floating production storage and offloading (FPSO) vessel Olombendo by 3Q/4Q17F.
Third, another FPSO, Kraken, received cash flows from mid-2017 and should achieve final acceptance by 3Q/4Q17F.
Last but not least, the FPSO Karapan Armada Sterling 3 achieved final acceptance on 22nd July 2017 and its full charter hire should contribute to the 3Q17F results.
CIMB Research: Bumi Armada Berhad (KLSE: ARMADA) – BUY; Target Price RM0.94
7. My E.G. Services
IT service management company My E.G. Services successfully launched a GST monitoring in Klang valley.
My E.G. Services is looking to push the GST monitoring into the whole nation to target 50,000 F&B outlets nationwide and also awaiting the government’s finalisation of plans to build foreign worker accommodation hostels nationwide.
If the government agrees to the proposed 50 land sites for foreign worker accommodation hostels, it could drive My E.G. Services’s share price higher.
CIMB Research: My E.G. Services Berhad (KLSE: MYEG) – BUY; Target Price RM2.68
