New report: Don't throw the baby out with the bath water
● The market is focusing on the bad news: the weak ringgit, high household debt, Fitch downgrade, high foreign ownership of the equity and bond markets, and the relatively rich valuations.
● The good news is that Malaysian corporates are in a much better shape today, as they have cleaned up their balance sheets post- AFC. Net gearing peaked in 1998 at 67% and today is at 24%. Net debt/EBITDA peaked in 1998 at 4.0x and is now at a comfortable 1.2x. ROE has improved to 11.4%.
● We could see some support from the domestic funds, which remain relatively cashed up. YTD, domestic institutional funds and local retailers have been the net sellers of equities.
● Which stocks could be vulnerable? Stocks with high foreign ownership include Maybank, Genting Malaysia, IOI Corp and YTL Corp. Stocks with significant Indonesian exposure include CIMB, Axiata and Air Asia. Losers of the weak ringgit were MAS, Air Asia, Tenaga and Tan Chong.
The bad news: Short-term pain
When sentiment is poor and regional markets are jittery, it is not surprising that investors focus on the bad news. In Malaysia, the key concerns surround the ringgit, which could weaken further due to the shrinking current account surplus, high household debt to GDP, the outlook downgrade by Fitch, the high foreign ownership of the equity and bond markets, and the relatively rich valuations as Malaysia is one of the best performing markets in the region YTD.
The good news: Malaysia corporates are in a much better shape today
Post the Asian Financial Crisis in 1997/98, Malaysian corporates have cleaned up their balance sheets. Net gearing of Malaysian corporates peaked in 1998 at 67% and today it is at 24%. FCF yield has improved to 1.8% from -5.5% in 1998. Net debt/EBITDA peaked in 1998 at 4.0x and is now at a comfortable 1.2x. ROE was -4.8% in 1998, and has improved to 11.4%. Although there could be some short-term pain, one should take this opportunity to cherry-pick well-managed companies.
In addition, we believe that the local funds remain relatively cashed up. YTD (up till July 2013), foreign institutional funds have invested a net RM14.5 bn in Malaysia. Meanwhile, domestic institutional funds and local retailers have been net sellers totalling RM9.2 bn.
No rocking of boat before the UMNO party elections
The UMNO party elections will be held on 19 October 2013. We believe that PM Najib will unlikely rock the boat before the UMNO polls; hence, there will not be any major decisions made over the next two months. The result of the UMNO party elections could determine the message delivered during the Budget speech, especially on the unpopular reforms such as the GST and the subsidy cuts.
Which stocks could be vulnerable?
● Stocks with high foreign shareholding: Stocks we do not favour and have high foreign ownership include Maybank, Genting Malaysia, IOI Corp, YTL Corp and Pos Malaysia.
● Stocks with Indonesian exposure: Indonesia is no longer in favour. Hence, Malaysian stocks with Indonesia exposure may see depressed stock prices; e.g., CIMB, Axiata and Air Asia.
● Losers of the weak ringgit: Airlines (MAS and Air Asia), Tenaga (foreign debt) and auto companies (e.g., Tan Chong) will be hit by higher cost should the ringgit weaken further.
Where do the opportunities lie?
We estimate that Malaysia trades at 2013E and 2014E core P/Es of 15.3x and 13.6x, with core earnings growth of 7.6% and 12.2%, respectively. We estimate that the Malaysia market P/E is 8% below its long-term average.
We would highlight Digi, RHB Cap, Astro, Genting Bhd and Maxis as they are underperformers YTD but fundamentals remain strong and we continue to rate these stocks as OUTPERFORM.
Stocks with OUTPERFORM ratings, which are closest to their GFC lows, include Alliance Financial Group, Bursa and Sime Darby.
Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 26/08/13