Earnings growth to be stronger in 2010, says MIDF

KUALA LUMPUR: The earnings growth of the KLCI component stocks is expected to be stronger in 2010 than in 2009, said MIDF Research, upgrading its earnings growth forecast for next year slightly to 17.6% from 17.2% just prior to 3Q09 results season.

This will translate into a 2010 FBM KLCI target of 1,450, based on price-earnings multiple of 17 times, its said in its 2010 outlook.

“As in 4Q09 outlook, we are keeping our portfolio-overweight recommendation for the media, CONSTRUCTION [], oil and gas and banking sectors. For smaller sectors, we are overweight on toll concessionaires (an upgrade from neutral), as well as on glovemakers and healthcare service providers,” it said.

The research house said Bursa Malaysia was slowly moving back into the radar of global investors, adding that foreign participation in Bursa in terms of value traded rose to 25.4% in October, compared with only 21% in June.

“Foreign shareholding in BURSA MALAYSIA BHD [], as a proxy for the overall market has, in our opinion, found the trough at around the 17%-mark (17.7% in September). At the end of 2008, it was as high as 41.6%,” it said.

MIDF Research included Century Logistic, KPJ Healthcare and PROTON HOLDINGS BHD [] into its top buy list in its outlook.

It included Century as a small capitalised stock idea and KPJ as an alternative defensive play, while Proton should be in fifth gear as a turnaround story.

“We are retaining AMMB and RHBCap as the banking sector’s offering but are dropping TM because it represents less of a growth story compared with other offerings.

“We are also dropping TH PLANTATION []s and MRCB; the former because of its disappointing investor relations, and the latter because the price has appreciated such that the upside is limited,” it said.

On a sectoral basis, MIDF Research said it remained optimistic over the growth prospect for the construction sector, as the government’s efforts to pump-prime the economy would bear most of the fruits only in 2010.

“The sector was a driver of Malaysia’s economy, after growing by 7.9% in 3Q09. As the implementation of construction projects under the stimulus packages picked up pace, the industry is estimated to have expanded by 3.5% in 2009.

“Going into 2010, the government would continue to promote the public-private partnership initiatives, in line with the aspiration to increase the role of the latter in the economy,” it said.

Maintaining its overweight recommendation, it said there was enough momentum in the sector to continue as contracts flow picked up pace and pressure on margin abated as building material costs fell.

“We prefer MRCB and WCT for its reasonable valuation vis-à-vis earnings growth potential as well as relatively higher share price appreciation over the next 12-month period.

“Gamuda and IJM are worthy for their leadership in the sector for its strong track record, sizeable order book. However, upside potential is limited as share price has factored in a strong recovery mode for the two construction giants,” it said.

MIDF Research also expects a resurgence in the media sector next year, and said based on the dismal performance of the sector in 1H09 and to a milder extent in 2H09, it expected 2010 to be a brighter year for the sector boosted by stronger consumer sentiment and coupled with several major sporting events like the World Cup and the Commonwealth Games.

The mild contraction experienced in 2009 is testament that the sector was now more resilient to the adverse effects of the retrenchments in the economy, it said.

“We maintain our sector recommendation on the back of improving advertising expenditure in light of the recovering economy in 2010. We believe that pent-up spending is likely to boost adex in 1H10 after advertisers’ budget cuts back in 2009.

“We like Media Prima over Astro as the free-to-air TV near-monopoly is set for an earnings rebound in 2H09 and FY10. We believe that its share price is undervalued relative to its growth potential, while Astro’s share price rally is reflective of market expectation,” it said.

Meanwhile, reviewing the market performance this year, MIDF Research said the FBM KLCI continued the strong run with a gain of 4.7% in the fourth quarter (until Nov 30), after chalking up an increase of 11.8% in 3Q09.

The market brushed aside the so called “October jinx” with a gain of 3.4%, the fourth best monthly performance this year, it said.

“In terms of participation, the market was surprisingly active after a quiet September. Average daily volume traded was 886 million units in October, but rose significantly to 1.04 billion units in November,” it said.

The finance and plantation indices were the biggest gainers in 4Q09, overhauling property as the star performer in 2009, which shed 3.1% in 4Q09.

Meanwhile, TECHNOLOGY [], industrial, consumer and services/trading continued to be the laggards this year, said the research house.

On the hits and misses in 4Q09, MIDF Research said construction was its biggest disappointment, adding the prices of most stocks in the sector had not moved in tandem with its expectation.

“Our overweight call on banks paid dividends as banking stocks continued the strong momentum, especially on strong quarterly earnings numbers.

“The oil & gas sector’s performance was mixed. The share prices of most counters in this sector hold fort in 4Q09, but Muhibbah and Petra have disappointed,” it said.

Overall, it said 42 out of the 78 stocks under its coverage outperformed the FBM KLCI in the year- to-date, with glove-maker HARTALEGA HOLDINGS BHD [] being the top performer with a whopping 252% gain.

Meanwhile, underperformers continued to be dominated by heavyweights, it said.

“TM, DiGi, BAT and MAS were the top four underperformers in our coverage so far this year, all registering negative gains (excluding dividends paid).

As expected, strong dividend-yielding defensive stocks are not favoured in a rallying market,” it said