RHBRI 4Q12 Market Strategy: Stay Defensive And Buy On Dips To Outperform The Market

Given the persistent headwinds from the external sector and general election overhang on the home front, we are of the view that the market will likely be stuck in a range-bound trading pattern in the 4Q. Consequently, we believe investors would still need to accumulate fundamentally-robust stocks on weakness in order to outperform the market, while staying defensive on the core holdings will provide greater stability to the portfolio performance.

In addition, as the search for yield will likely remain a key driver for both retail and institutional investors in the 4Q, high divided-yielding stocks will also continue to outperform the market, in our view. A list of our top picks is reflected in table below, which includes “buy on weakness” tactical stocks.

Which Sector to look at?

Sector-wise, our key overweights are telecommunications and banking, although we also have an overweight stance on the consumer, utilities, gaming and rubber gloves under the healthcare sector (see table below). We expect the high-yielding telecommunications stocks to remain relatively defensive for equity investors under the current market environment.

The banking sector, on the other hand, carries a 34.7% weighting in the bellwether index and, in our view, cannot be ignored, given the better-than-expected recovery in earnings momentum over the last two consecutive quarters. The year-to-date annualized loan growth stood at 11.9%, ahead of our and the consensus forecasts of 10-11% and 8-9% and the pipeline of corporate deals remains healthy. This suggests that banking earnings could continue to surpass expectations in the quarters ahead, which coupled with decent valuations and dividend yields vis-a-vis the FBM KLCI benchmark, would bode well for share price performance in the 4Q, in our view.

Source: RHBRI research report

Post-Japan Disaster: After Timber, it's Glove Sector?

As per our previous posts (How Should Investors trade after the Japanese Disaster?), we wrote about timber counters, and it's proven the right sector investors should look at. And, below is the performance of those mentioned counters.

www.financemalaysia.blogspot.com

All of them outperformed KLCI, which recorded -2.20%. Why WTK outperformed its peers? Simple answer is its cheaper share price and better liquidity. In fact, TaAnn and WTK is the main focus because they export 80-90% of their products to Japan. This puts them in the limelight of stocks investors should look at for the moment.

Why should you look at Glove sector next?

After timber, glove sector should outperformed the generally weak market sentiment. Investors are scared. Those who already bought was stuck-in there. Those who already sold was staying sidelined. And, those who dare to buy now is focusing on timber stocks only - and today glove.

Main reasons were:

1. Demand for medical glove is expected to increase substantially. After the disaster, Japan should be facing another problem - outbreak of diseases. Because of the wet and dirty condition after tsunami, diseases tends to spread easily and this could intensify the demand for gloves being used by medical personnel and public in general.
2. Stronger USD. One of the setback for our glove makers is weakening of USD which could harm the export market to US. Post-Japan disaster, USD was expected to strengthen in line with "flight to safety" strategy employed by global investors. This is an advantage, or in fact, the turning point for our glove makers.

www.financemalaysia.blogspot.com

With these two important factors, glove sector should be on investors' radar in the near future. Indeed, you do not have much choice in this kind of market where everything seems going down hill. Either you stay sidelined, or brace the storm to invest in these counters. And, my personal stock-picks would be Supermax due to its attractive valuation and good liquidity.

Finance Malaysia urged all Japanese to stay strong, and we will support you from afar. We are living in the same planet. We are 1 actually.

Analyzing Latexx Partners' takeover offer

Just before CNY, Latexx surprisingly announcing that the company had accepted a non-binding takeover offer by two private equity funds. However, the deal looks unattractive with limited upside given the offer price of RM3.10 only. For your information, it is only 10.7% above the last trading price of RM2.80 only.

About the offer:

• The offer values Latexx at 8.2x P/E only versus sector's average of 11.7x
• The takeover offer needs to secure a 75% shareholders' approval as lay out by the new rules
• With RM3.10 per share, the offer was valued as RM 852.03 million (inclusive of 55.03 million warrants)

Would the deal materialize?

Finance Malaysia doubt the deal will go through, given the unattractive valuations attached. Please take note that Latexx was one of the largest medical examinations gloves producers globally. By taking over at a mere 8.2x P/E, it would be a very good buy, but not a good sell at all. Another issue which sparks our interest was that the background of the two private equity funds being the acquirers.

Navis Asia VI Management Company Limited (Navis), a wholly owned unit of Navis Capital Partners, a US$ 3bn investment firm. Meanwhile, Mettiz, a holding company owned by Michael Tang Vee Mun, was the provider of equity financing for KNM Group's failed management buyout early last year. (CIMB research)

Would it be another "failed" buyout by Mettiz? A repeat of the dramatic KNM's tumbling version? Finance Malaysia really can't predict the outcome from the EGM to be convened soon on the offer. It's all depends on Latexx's shareholders to decide.

But, judging from the "not so performing" share price the day after the said announcement, most probably the outcome is already been factor-in... which was "failed". Anyway, we may heed the advise from the independent adviser appointed by Latexx's board of directors -- Hong Leong Investment Bank -- before voting.

After all, I like Supermax and Kossan for its lower P/E and larger players in the same industry.

Related Posts:

2011 Malaysia Outlook: Sunshine to Sunset

Brighter outlook for Glove Sector?

2011 Malaysia Outlook: Sunshine to Sunset

By Finance Malaysia,

Driven by better economy prospects, Malaysia successfully escape recession two years ago, particularly March 2009. Strong GDP growth and numerous government's initiatives is the main reason why local market experiencing a spectacular run-up since then. Today, our KLCI break another record high, by closing at 1551.89 points. So, what is the outlook for Malaysia in 2011?

Maybank expects KLCI will hit 1,700 mark in 2011

KLCI

The Malaysia Index will continue to perform in line with the overall economy. More IPO will be issue. More merger & acquisitions activities will be seen. KLCI will be driven by the following factors:-

• Improving sentiment
• Follow through momentum from all time high
• Hot capital inflows
• Improving liquidity
• Boost by plantation and oil & gas heavyweights, such as IOI, Sime and PetroChem

Preferred sector(s)...

• Finance sector will continue to do well in line with the economy
• 2011 will be a "Grammy Awards" show for construction sector, where government rolling out its multi-billion projects
• Another show is from oil & gas sector, organized by Petronas
• Property sector should continue chalking up sales with great demand

Sunshine to Sunset sector(s)...

Please take note that all is not so bright in 2011. Some of these sectors could face some turbulence in 2nd half of 2011. That's why I called it "Sunshine to Sunset".

• Once high-flyers in difficult times, glove sector could be facing another whirlwind quarters with excess capacity and high input costs in the second half.
• Besides glove, manufacturing sector would struggle because of electricity tariff hike imposed by TNB, speculating after Chinese New Year.
• Technology sector will be a sunset sector next year due to stronger ringgit.

Bond market

Local bond market will boom, in conjunction with the projects awarding sessions and government's ambition to make Malaysia an Islamic financial hub. Local bond market will do well in the first half, before Bank Negara Malaysia resume its interest rate hiking policy later.

Brighter outlook for Glove Sector?

Yesterday, Adventa (Malaysia's 5th largest glove manufacturer) surprisingly reported 4Q10 net profit of RM11.8 million, up 50.8% year-on-year. According to RHB research, the results were above expectations, mainly because of of a deferred tax write back of RM5.6 million. Excluding the differed tax write back, FY10 net profit would have been RM30.2 million.

Advent's range of products

However, profit before tax was lower due to a time lag as only about 70%-80% of the higher costs incurred as a result of rising latex prices and the weakening of the USD against MYR were passed on to customers --- OSK research.

To sweetened the announcement, Adventa also declared a final tax-exempt dividend of 7 sen, which translates into a net payout of 30% and net yield of 3.6%.

Indicating a revival of Glove counters?

As all of the glove counters are in the red this year, experiencing a whopping 30%-40% drops, Adventa's result sure will catch the eyes of investors again. But, Finance Malaysia cautions about it, because Adventa's business model is a little bit different from the other glove manufacturer. Adventa was in a niche position as a manufacturer of surgical gloves, in which the demand is more resilient. Even if Adventa raised the price of its products, it was unlikely to dampened the demand of gloves.

Finance Malaysia do not think that yesterday's result from Adventa is a turn-around indication for other glove manufacturers. And, if the current scenario such as higher latex prices and weakening USD persists, all the glove makers will continue to suffer of margin squeeze.

Due to different assumptions and calculations, OSK raised Adventa's fair value to RM3.80, while RHB lowered their fair value to RM2.21.