2013 target for FBM KLCI by TA Securities

The end-2013 target of 1,710 for FBMKLCI after applying 2008-2011 average forward PER of 14.3x on mid-cycle EPS of 120 sen appears justified for now and could be raised if BN returns with an overwhelming victory.


The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) managed to extend gains into a third week on persistent window-dressing support, optimism that the US fiscal cliff will be resolved before the year-end deadline and after Japan expanded quantitative easing and economic stimulus measures. Profit-taking ahead of the weekend, however, checked gains.

For the week, the FBM KLCI added 0.42 per cent to 1,658.85, with DiGi.com (+17 sen), Sime Darby (+21 sen), Petronas Dagangan (+RM1.38) and Petronas Gas (+45 sen) contributing most of the index’s rise. Average daily traded volume and value fell to 774.9 million shares and RM1.31 billion, compared with the 862.3 millionshares and RM1.52 billion in the previous week, with the trading pace slowing to a six-month low as most investors took to the sidelines and activity focused on window-dressing support.

There are only five more trading days before the curtain comes down on 2012. As usual, the FBM KLCI is expected to end the year on a positive  note but the rally is expected to be capped at its all-time high of 1,679, dampened by negative vibes from the looming US fiscal cliff. It is a fact that since the 1997 financial crisis, the index has always closed higher on a week-on-week basis in the final trading week of theyear, except for 2000. That year was an exception as investors’ sentiment was tempered by dismal economic and corporate earnings growth prospects.

While similar worries could return in 2013 if the US falls off the cliff, buying from domestic institutional funds (as seen in the last two weeks)is likely to support and drive the benchmark index higher for the rest of 2012. The consoling factor now is that the central banks around the globe, especially in the US and Japan, have undertaken many unprecedented measures in the last five years to sustain ultra-easing to support economic growth.

Be assured that this excessiveness of the past would return to haunt us when inflationary pressures creep up. When central banks press the panic button and raise interest rates, the unwinding of the cheap US dollar and yen carry trades will rear their ugly heads on risky asset classes. However, such possibilities appear remote in the next one or two years with high demand risk as consumers remain tight fisted due to unexciting job market and uncertain macro climate.

Sell-on-strength Strategy Remains
So, if the fiscal cliff is averted in the US, we should see a continuation in market rally with ample liquidity in the global financial system. TheFBM KLCI should temporarily reflect the ripple of excitement from the US to test the 1,700  psychological barrier in early 2013 but it should be seen as a prolonged opportunity to take profit in view of the impending political risk.

The first half of 2013 will be a choppy period and election concerns could drag down the FBM KLCI by eight to 10 per cent in the period before market rebounds in the second half. The impetus for revival will hinge on the end of election overhang and strong domestic demand. Sustained monetary accommodation on the back of low inflationary pressure and attempts to reduce budget deficits should be viewedpositively.

However, as Malaysia’s corporate earnings growth is not expected to see any revival in the immediate term based on external sentiment and dwindling demand in key export markets, the FBM KLCI’s earnings growth prospects of 8.0 percent and 8.4 per cent for CY13 and CY14 respectively is not compelling vis-à-vis key regional emerging market’s 16.1 per cent and 14.7 per cent respectively. It could come under further pressure if the implementation of minimum wages next year had greater impact in raising the input cost than the intended increase in disposable income and spending. High likelihood of subsidy cuts (electricity tariff and fuel price increases) post 13th GE would be negative on earnings as well.

So, the end-2013 target of 1,710 for FBMKLCI after  applying 2008-2011 average forward PER of 14.3x on mid-cycle EPS of 120 sen appears justified for now and could be raised if BN returns with an overwhelming victory. The strategies moving forward is to sell-on-strength, especially overvalued defensive plays in the Consumer  BAT (TP: RM59.04), Nestle (TP: RM60.84), Guinness (TP: RM16.06) &AEON (TP: RM10.05)and Telco DiGi (TP: RM4.96) & TM (TP: RM5.94)sectors and turn cash-heavy to accumulate high beta plays in domestic sectors, which are mainly related to Construction  Naim (TP: RM 3.60), Ever Sendai (TP: RM1.93) & WCT (TP: RM 3.54), Oil and Gas Buy  Perisai (TP: RM1.39), Sapura Kencana (TP: RM3.46), Pantech (TP: RM0.82)  &KNM (TP: RM0.74)and Property Buy  Huayang (TP: RM2.10), Mah Sing (TP: RM3.02), SP Setia (TP:  RM4.03) , Sunway (TP: RM3.47) & Glomac (TP: RM0.98)sectors, in 1H13. Banking Buy  Affin (TP: RM4.40), Ambank (TP: RM7.20), Maybank (TP: RM11.30)  &  RHB Capital (TP: RM9.00)sector holds good buys based on their attractive valuation, still robust loan growth and potentials of riding on the demand for funding created by ETP related projects.


by TA Securities

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