December a good month, says OSK

KUALA LUMPUR: December is historically a good month to invest in equities with the local benchmark index recording gains 85% of the time while market-moving news may yet emerge this month although corporate activities generally will be winding down, a local research house said yesterday.

OSK Research Sdn Bhd said news flow was abundant in November with Maxis Bhd’s relisting and GST-related statements but some anticipated deals did not materialise.

While news such as the award for the low-cost carrier terminal (LCCT) earthworks, PROTON HOLDINGS BHD []’s signing of a partnership agreement and details on an electricity tariff hike could emerge this month, the flow should begin to ebb given the year-end festive season, it said.

“That said, based on a historical analysis of the KLCI since 1996, December had been a good month for investing, with an average 3.96% gain 85% of the time, thus reaffirming long-held belief of window dressing at year-end.

“A similar gain this December would take the KLCI to the 1,308.97-point level, in line with our view of a 1,345-point fair value for the index in 2010. The fallout from Dubai World’s credit issue should also be limited,” OSK said in its December strategy report.

OSK said three of its top five November buys — CIMB Group Holdings Bhd, AMMB HOLDINGS BHD [] and Proton — outperformed the market.

“Our top buys for December are a sampling from our 2010 top picks. We keep big-caps CIMB and TENAGA NASIONAL BHD [] on optimism of a return of foreign interest to Malaysia. Axiata Group Bhd remains a regional growth story while MUDAJAYA GROUP BHD [] is our top pick among the CONSTRUCTION [] stocks.

“To round it off, SUPERMAX CORPORATION BHD [] is among the cheapest rubber glove companies while the sector is the last unique selling point for the Malaysian market,” it said. (See page 10 for an assessment of foreign interest in Malaysian stocks.)

OSK said preliminary analysis of the 3Q09 results season indicated that 3Q was a very strong results season as the upgrade to downgrade ratio reached multi-year highs.

It said among the results published since its half-time report card on Nov 19, PLANTATION [] companies largely came in within expectations while transport was a mixed bag, and a number of small-caps in the consumer and healthcare sectors surprisingly outperformed towards the end.

“Apart from the initiation of coverage on PLUS Expressways Holdings Bhd and Maxis Bhd, we upgraded three counters on good results — HARTALEGA HOLDINGS BHD [], EP MANUFACTURING BHD [] and MALAYSIAN BULK CARRIERS BHD [] — while upgrades on Pelikan International Corporation Bhd and MISC BHD [] were related to their corporate exercises.

“On the flip side, oil and gas counters PETRA PERDANA BHD [] and TANJUNG OFFSHORE BHD [] were downgraded in November due to their weak results,” it said.

On the uneasiness brewing from Dubai World’s request for a six-month “standstill” on its debts, OSK said Malaysia has little exposure to Dubai as most contractors had limited their exposure prior to the latest development, while Dubai-related companies had already pulled out their investments from Iskandar Malaysia.

Meanwhile, RHB Research Institute Sdn Bhd said 83.8% of the corporate results it covered came in either within or above expectations, with earnings upgrades continuing to exceed downgrades.

It said banking continued to be the key sector with better-than-expected earnings, while the manufacturing, insurance, property and transportation sectors also reported earnings that were generally above its forecasts.

In contrast, the plantation sector posted earnings that were below expectations, it said.

RHB Research said while the economy and corporate earnings were trending up and on track to recover in 2010, much of the positive developments had already been factored into the market.

It said that based on current projections, the FBM KLCI was already trading at 15.4 times 2010 earnings and 2.1 times price-to-book, representing 0.4 times price-to-earnings ratio (PER) premium to the average PER over the seven years from 2002 to 2008.

The research house said although still not stretched, valuations were by no means cheap and were back to normal levels.

Nevertheless, the market tended to trade at a premium at the early stage of an economic upcycle (1-2 times PER premium) and had a tendency to overshoot on the upside for an extended period, it said.

This implies that the FBM KLCI could potentially trade up to 17 times 2010 earnings over the next three to six months or to 1,390 points, based on the revised earnings given high liquidity, low interest rates and the trend of a weakening US dollar.

“After adjusting for the upward revision in earnings post-results reporting season, our end-2010 FBM KLCI target has been adjusted to 1,370, from 1,345 previously, based on unchanged 15 times 2011 earnings.

“This is roughly in line with our FBM KLCI target of 1,373 derived from a bottom-up valuation methodology. Our end-2009 FBM KLCI target, however, remains unchanged at 1,260 given near-term external uncertainties,” it said.

On investment strategy, RHB Research said stock picking was key and investors would have to factor in anticipated global policy changes in the months ahead.

It said this was the time to gradually rebalance portfolios and prepare for greater market volatility given expectations of policy tightening and countries implementing exit strategies in the course of 2010 as economic recovery became more firmly established.

“Whilst easy money has been made, the challenge now is to look for alpha+ stocks (that is stocks that could generate excess returns based on skill rather than market performance, which have both capital upside and attractive dividend yield) to outperform the market in an environment where we expect to see more corporate restructuring and M&A activities.

“Overall, we reiterate our view that companies with robust financials and are well-managed will more likely generate positive returns for shareholders in the longer term. The key is to avoid companies with poor fundamentals and high valuations,” it said.

The research house said in terms of thematic plays, it favoured the commodity space given expectations of higher demand and prices to underpin earnings.

It said with global economic recovery gaining momentum, prolonged low interest rates, high liquidity and the trend of a depreciating US dollar, commodity prices were likely to trend upwards, and the plantation and oil and gas sectors would return to investors’ radar screens in early 2010.

It said higher commodity prices would build inflationary expectations, leading to rising inflation and asset prices, which in turn would benefit property players.

RHB Research said in the immediate term it was more positive on the banking sector as an economic recovery play as banks finance the various sectors in the economy and would enjoy a broad-based earnings recovery when the economic cycle turns up and becomes more entrenched.

Despite the run-up in share prices, PER valuations of banks were still undemanding (at low- to mid-teens) and the banking sector still had good catalysts, given that loan growth had held up and non-performing loans were under control, it said.

“In addition, the power and telecommunications sectors also appear to be interesting.

“For the power sector, a potential tariff review this month would be a catalyst for greater share price performance of Tenaga Nasional, while our neutral stance on the telecommunications sector could be upgraded if the mobile operators show stronger earnings, driven by data growth,” it said.