ETP progress report card
The Economic Transformation Programme (ETP) was a key market catalyst even before it was officially rolled out in Sep2010.Threeyears have since passed and we analyse in this research its impact on the key winning sectors -oil & gas, construction and property.
As ETP has been well executed thus far, it will continue to be the key catalyst for the broader market. We introduce our new end-2014 KLCI target of 2,030pts, which is based on bottom-up targets for individual stocks rather than the top-down approach previously. Our sector preferences remain the ETP winners as well as companies in the small- to mid-cap space.
With the 13th general elections out of the way and political fatigue plaguing both sides of the divide, the focus has now shifted back to government policies and the most important initiative of the Najib administration, the ETP. Since the ETP's launch in Sep 2010, total committed investments have amounted to RM218bn, with a gross national income contribution of RM143bn and 434,268 jobs created so far. During its mid-year review, it was revealed that the ETP had met its 2013 key performance indicators at a rate of 66% for the NKEAs and 51% for the strategic reform initiatives.
In this research, we track the progress of the key winners of ETP, i.e. the oil & gas, construction and property sectors, to see if they have indeed benefited from the investment opportunities created. The conclusion is a resounding affirmative. The mega projects, such as the MRT, Pengerang and high-speed rail, and strong property price gains of the past few years can trace their roots to ETP. Petronas's 5-year capex spending of RM300bn is the main catalyst for the oil & gas sector while the Greater Kuala Lumpur transformation programme is hugely positive for both the construction and property sectors.
Sector and stock picks
Within the oil & gas sector, SapKen is our big-cap pick while Perisai is our small-cap pick. For construction, it is Gamuda while, for property, it is UEM Sunrise and Mah Sing. We also favour small- to mid-cap stocks due to their attractive valuations and the encouragement by the prime minister to government-linked investment companies to invest in such stocks. Our top 3 smaller-cap picks are Karex, Signature International and Tune Insurance.
6.5 Top picks
Based on expected sector winners, SapuraKencana and UMW O&G are our oil & gas picks. In construction, Gamuda should provide the best exposure to mammoth MRT projects while IJM Corp is the other big-cap that should benefit from subcontracting jobs as well as its own highway jobs. In the property sector, Mah Sing is our preferred pick while UEM Sunrise provides investors with the best exposure to Iskandar Malaysia. Banking stocks are indirect beneficiaries of ETP from financing needs. Maybank and RHB Cap are our choices here.
Gamuda – ETP-driven developments in 2014 are likely to pick up, which will benefit the progress of MRT 2. Investor interest could return to potential MRT plays in 2014 and should catalyse Gamuda, being the biggest beneficiary. Share price weakness is a good re-entry point. Job win prospects in 2014 hinge on the award of the RM8bn Gemas-JB double-tracking works, before the over RM10bn in potential works for MRT 2. Maintain Add. Gamuda remains our top sector pick.
Genting Malaysia – Genting Malaysia is the cheapest gaming stock under our regional coverage and yet it offers a number of significant catalysts over the next twelve months. The most material are announcements related to its RM3bn capex programme for Resorts World Genting, where upgrades and gaming capacity expansion are long overdue. Overseas operations are also looking more interesting, with a steady state of growth in both London and New York unfolding compared to the volatility of the past few years when the businesses were either starting out or under restructuring.
IJM Corp – IJM's tender book mix is exposed to minimal risk of project sequencing. The WCE job packages should be rolled out after the financial closure while contract flows are backed by upcoming in-house works. There is valuation upside from the listing of its concession assets. We see a re-rating window in 2014 pending the financial closure and award of WCE. The stock is a blue-chip laggard, with strong job flow prospects. Maintain Add.
Mah Sing Group – Mah Sing is our top pick in the property sector and could benefit from a switch of funds from SP Setia to other developers due to the imminent departure of SP Setia‘s CEO Tan Sri Liew Kee Sin. Mah Sing is the next best developer in terms of execution after SP Setia and is targeting new sales to increase 20% in 2014 to RM3.6bn despite the 2014 Budget measures to curb property speculation. The group is very much on track to meet its sales and profit targets for 2013.
Maybank – We like Maybank for its push for regional expansion, with the sweet spots for growth coming from the emerging markets like Indonesia and the Philippines. In Indonesia, it is expected to enjoy a loan growth of around 20% and a lucrative net interest margin of circa 5% in the next 2-3 years. Another catalyst will be the regional expansion of its investment banking business, which will help to support its fee income growth.
RHB Cap – RHB Capital has one of the lowest P/E valuations among the Malaysian banks under our coverage despite its aspiration to be an established regional player in the longer term. With the regional platform from its acquisition of OSK Investment Bank (IB), it is poised to gain market share in the IB space, not only in Malaysia but regionally. It also plans to conclude the acquisition of Bank Mestika in the next few months, which will mark its entry into the underpenetrated Indonesian market.
SapuraKencana - SapuraKencana, already one of the world‘s top five integrated oil & gas service providers, has integrated its rig business with Seadrill. This makes it the world's largest tender rig operator with 56% market share. After the Seadrill integration, we expect contributions from the ongoing Newfield acquisition to come through in FY1/15. The acquisition will allow SapuraKencana to become a full-fledged producer. Meanwhile, its key ETP project, which is the Berantai marginal field development, is already a commercial success after the company hit first gas in Oct 2012.
Tenaga – The implementation of the incentive-based regulation (IBR) provides for increased clarity with regard to Tenaga's earnings as it reduces earnings volatility caused by the fuel costs. In the same vein, the regasification terminal in Melaka also increases earnings stability as Tenaga will no longer have to rely on expensive fuels, i.e. oil and distillates, in the event of a gas supply shortage from Kertih.
UEM Sunrise – Despite measures to curb property speculation in Malaysia and higher taxes for foreign buyers of properties in Johor, we remain optimistic on the prospects for Iskandar Malaysia. UEM Sunrise's development in Nusajaya should also be resilient in the face of a significant increase in supply of homes in certain parts of Iskandar Malaysia due to its superior location and reasonable pricing.
UMW-OG - UMW-OG is benefiting from strong demand for jack-up drilling rigs in Malaysia and other Southeast Asian markets. Its key drilling assets, which are a semi-sub (Naga 1) and three jacks-ups (Naga 2, Naga 3 and Naga 4), are fully taken up to as far as FY18. We expect three more jack-ups (Naga 5, Naga 6 and Naga 7) to be delivered in FY14. The company is also taking advantage of Petronas‘s import substitution model as the domestic jack-up segment is currently dominated by foreign players. Three of the company's four existing rigs are used to service Petronas contracts.
6.6 Top small-to mid-cap picks
We believe small- to mid-cap stocks will continue to outperform in 2014 as big-cap blue chips are not that cheap and significant value can still be found among the smaller companies. Also, the large domestic pension funds appear to be heeding the Prime Minister‘s encouragement to seek out value among the smaller-cap companies.
Cuscapi – Cuscapi‘s transformation of its existing business model to one that will provide long-term recurring income will be led by REV, its new interactive tablet for the F&B sector. The REV has already started generating commercial revenue, having been installed in three F&B outlets in Klang Valley and one in Singapore. There is strong industry demand for REV in Asia due to labour shortage problems. We look to China for its greatest growth potential in 2014/15.
Cypark Resources – Cypark Resources is ASEAN's largest pure renewable energy (RE) player, with growing RE capacity that is expected to reach 69MW by end-2014. The recent increase in the rate of collection from electricity consumers into the RE fund to 1.6% (from 1%) further lifts Cypark's earnings potential as it indicates that the government plans to continue growing generation capacity from RE sources.
Eastern & Oriental – E&O has lined up maiden launches in Iskandar Malaysia and London that will likely be very well received. However, the key catalyst for its share price in 2014 will be approval from the authorities to commence reclamation works for the mammoth RM25bn-30bn 760-acre Seri Tanjung Pinang phase 2 in Penang. This is the largest and most prime landbank in Penang island.
Hovid – Hovid's earnings growth in FY14 will be fuelled by new product launches, increased product registrations in the export markets and a weakening ringgit against the US dollar as its export sales are predominantly quoted in US$. It also aims to obtain the US FDA's approval to sell Tocovid - a type of vitamin E, for which it owns the formulation patent - as a drug that could aid stroke and liver patients in the next 3-5 years. If successful, it could open up a blue ocean worth billions of dollars in annual sales.
Karex – Karex is the largest condom maker in the world, with an annual capacity of 3bn pieces p.a. and ~10% share of global output. Given Karex‘s position and its plan to double its capacity by 2015, it is well positioned to grow in tandem or even outpace the industry‘s growth of 7.4% annually. Its strong capability of meeting customers‘ demanding orders (and hence strong pricing power) and strategic locations in Malaysia and Thailand (among the world's top three rubber-producing countries) as well as in the Asia Pacific region (accounts for 49% of global condom sales) are Karex's competitive advantages.
Prestariang – Prestariang‘s business is defensive, backed by recurring earnings. ICT training will remain its bread-and-butter although the oil & gas sector should lead its earnings growth in the next 1-2 years. The company has also just ventured into the oil & gas training market, providing technical skill courses such as pipefitting, welding and scaffolding. This business is highly scalable and management hopes to set up new training centres, likely in Johor or Sarawak. UniMY should break even in 2014 after start-up losses and disappointing student enrolment numbers in 2013.
Perisai Petroleum - Perisai is expanding its fleet aggressively as it ventures into the FPSO and drilling segments. Earlier this year, the company took delivery of its first FPSO vessel, Perisai Kamelia, which is expected to hit first gas at the North Malay Basin's Kamelia field by end-Dec 2013. Meanwhile, its first jack-up drilling rig, Perisai Pacific 101, is scheduled to be delivered in Jun 2014 while the second rig is expected to arrive in 2Q15. The rigs are currently without contracts but management is confident of having them signed with reputable clients.
Signature International – Today, developers include built-in kitchens when selling high-end condominiums. This benefits Signature, the country‘s largest modular kitchen player. Its orderbook of RM200m is already at a record high and there are plenty more jobs in the pipeline over the next few years. It is not difficult for the company to scale up its operations. Most high-volume low-value jobs, like the production of chipboards (its main raw material), are outsourced.
Ta Ann – Ta Ann is our top pick for the timber sector. Its timber earnings could improve in 2014 on the back of higher log and plywood prices and narrower losses at its Tasmanian veneer mills when its new plywood production line in Tasmania completes by mid-2014. The group also offers strong FFB output growth prospects, stemming from its estates that are young and have an average age of just seven years.
Tune Insurance – Tune Ins is a niche player in the fast-growing travel insurance segment with exposure to 16 markets. Its strengths lie with its tie-up with AirAsia, which will not be easily replicated by its competitors. Potential earnings catalysts include (1) swift expansion of its existing travel insurance business, (2) an EPS-accretive acquisition in Indonesia, and (3) potential for tie-ups with other airlines, which will provide additional sources of income to the group.
Publish date: 10/12/13