OSK’s Oct strategy: Buy select liquid big caps, trade small caps

Written by Financial Daily
Friday, 02 October 2009 10:55

KUALA LUMPUR: At the start of the last quarter of 2009, OSK Equity Research has maintained its neutral call on the local stock market and has recommended a two-pronged strategy that encompasses buying selected liquid big caps and trading in small-cap sectors such as oil and gas, CONSTRUCTION [] and steel.

The research house said the FBM KLCI was now almost smack in the middle of its 2009 and 2010 fair value of 1,144 points and 1,265 points, respectively.

It said in its latest strategy report that while its September top picks did well, with four out of five stocks outperforming the index, namely MMC, Top Glove, Mudajaya and MRCB, it advocated taking a shortterm approach for October.

“Our top picks are now focused on the oil and gas and construction sectors,” it said, adding that while September took it by surprise with a liquidity-driven run up, profit taking took over at the end on fears of a cutback on stimulus measures worldwide.

“Nonetheless, our top picks generally outperformed the index and benefited from the volatility. For October, with the runup to the budget, we expect a strong flow of news, which should hopefully, offset the signs of risks in global markets,” it said.

It said the endorsement by the G20 Finance Ministers’ meeting of the International Monetary Fund’s allocation of 161.2 billion worth of Special Drawing Rights (SDR) on Aug 28, with an additional SDR21.5 billion on Sept 9, gave equity markets a shot in the arm in terms of liquidity.

It was only when indications of a slowdown in mortgage securities purchases by the US Fed surfaced later in the month did profit taking set in across the globe, it said.

Asian markets were a mixed lot, with strong gains in Taiwan and Thailand but falls in Japan and China, it said.

“While trading volume in Malaysia was expectedly weak in line with the more subdued trading during the Ramadan month, the FBM KLCI nevertheless registered a gain of 2.4% in September.

“The particularly newsworthy events were the unveiling of the proposed routes for the LRT line extension to Puchong and Subang, the draft prospectus for Maxis’ upcoming IPO and the placement by Khazanah Nasional Bhd of some stakes in its subsidiaries,” it said.

OSK Research said on a sectoral basis, with all the excitement generated by the upcoming National Automotive Policy (NAP), it was not surprising that auto companies led the list of top gainers.

It said banks and financials also did well, with TA Enterprise, CIMB and Hong Leong among the top FBM100 [] gainers.

After an excellent run year to-date, some profit taking put SP Setia, Sunway City and Mah Sing among the top property losers, it said.

The research house said in line with the generally quieter news flow on the corporate front, the number of upgrades and downgrades also dwindled.

“The notable upgrades were Tenaga ahead of a potential tariff hike in January 2010, CCM Duopharma on its tendering to supply generic Tamiflu, Genting on the feel-good factor ahead of Resorts World at Sentosa’s opening and Malaysia Airports on the rush of liquidity after Khazanah placed out a 5% stake.

“Hai-O was also upgraded on the strength of its excellent quarterly results,” it said.

On the outlook for the October, the research house said there could be a slew of positive news flow, including more construction contracts, oil and gas projects and liberalisation measures of the services industry.

It said while the media reported rumours that the 10th Malaysia Plan (10MP) may see a cut in development spending of 10% to RM180 billion for 2011 to 2015 compared with RM200 billion for the 9MP to allow the government to trim its budget deficit to 4% by 2015, this cut should be compensated by the carrying forward of unutilised allocation from the 9MP and that the government may step up incentives for greater private sector participation such as through PFIs or financial guarantees.

“An example is the proposed permanent low-cost carrier terminal (LCCT) which will be funded by Malaysia Airports Holdings (MAHB) rather than directly by the government.

“In any case, we expect a number of mega projects to be awarded over the next 12 months in the final year of the 9MP while a sizeable oil and gas project could be announced before year-end,” it said.

Taking a peek at the potential announcements in Budget 2010 on Oct 23, OSK Research said the interest would be centred on subsidies and taxes, the NAP and tobacco and brewery duty hikes.

OSK Research said it believed the Malaysian brewery sector would enjoy a fourth consecutive year of unchanged alcohol excise duties as current alcohol duties were already at an all-time high.

“However, the tobacco players may not be so lucky. Our house view is that the Malaysian tobacco sector may experience another round of excise duty hike from the current 18 sen per stick,” it said.

OSK Research said its top picks for October were CIMB Group Holdings Bhd, which enjoys the potential for more large corporate finance deals associated with investments from Saudi Arabia, and oil and gas counters Kencana Petroleum and Alam Maritim, in anticipation of large contract awards.

“We maintain MMC Corporation (trading buy) and Mudajaya (buy) on positive construction news flow,” it said.