Last year saw a litany of issues that took a toll on the nation’s psyche. These range from the implementation of the Goods and Services Tax (GST), weak commodity prices, lacklustre property market and limp corporate earnings. There was also deafening “political noise” over the 1MDB issue, unstable global environment and a diluted ringgit.
Credit Suisse Securities Research & Analytics (Credit Suisse) believes that 2016 will be another challenging year for Malaysia with the ringgit having weakened 17 per cent year to date (YTD) and a downed KLCI by four per cent and an underperforming MSCI NJA by 13 per cent in US dollar.
Credit Suisse expects a squeeze in corporate margins in 2016 due to rising costs of big and small ticket items due to the frail ringgit, an increase in minimum wage and a sharp hike in highway toll rates coupled with weak consumer sentiment which will all burden the consumer.
“Meanwhile, the fear of a breakdown in Malaysia’s governance, China’s weakening economy and capital flight will result in the ringgit continuing to lose more fiscal flavour,” it said.
The research institute also believes that market earnings forecasts are overwhelmingly positive and will need to be revised downwards.
It noted that negative earnings momentum does not bode well for the stock market and has predicted Malaysia will underperform the MSCI NJA again in 2016.
In contrast, the research arm of CIMB Investment Bank Bhd (CIMB Research) believes that although Malaysia still faces numerous headwinds in 2016 including slower economic growth and an uncertain external environment, much of the bad news should have been priced in already.
Foreign shareholding, the research arm said, is relatively low and most foreign funds are very underweighted in Malaysia.
“The negative impact of GST on consumption should start to wane and companies that benefit from a weaker ringgit, including exporters, tourism and those with overseas earnings, could enjoy a windfall,” it added.
On another note, while political noise can be expected to continue this year, CIMB Research believes the volume peaked in August, when there was a major cabinet reshuffle.
“A quieting would be positive for the market,” it said.
CIMB Research’s top sector picks for 2016 are banking, construction and smaller caps.
The research arm recently upgraded the banking sector on the back of very attractive valuations, while in its view construction will benefit from large mega-projects to be rolled out. It continued to like smaller caps for alpha.
CIMB Research’s end-2016 KLCI target has been raised from 1,850pts to 1,900pts based on a higher 16.5-fold price-earnings (P/E) (15.5-fold previously), which is a five per cent premium to the three-year moving average.
The research arm believes the slight premium is justified, as it believed most of the bad news is in the backburner. In addition, it has listed eight stock market catalysts in 2016 – waning of political noise, foreign selling to subside, GST impact to subside, silver lining from ringgit plunge, flood of China money and investments into Malaysia, valuecap buffer, wild card observations and technical charts – that could all lift the market higher.
Similarly, UOB Kay Hian Pte Ltd (UOBKayHian) continued to predict a less volatile year for Malaysian equities in 2016 despite continuing concerns over the emerging markets and domestic consumption slowdown which is yet to bottom out.
It noted that systemic risks are contained, 1MDB’s financials have been mostly addressed in 4Q15, and it expected “moderate foreign portfolio outflows at worst, as investors embrace a less pessimistic scenario post the US rate hike.”
“Our market assumptions implicitly assume a flattish to weaker US dollar index amid a moderate rise in long-term US treasuries rates,” UOBKayHian added.
Growth in construction sector
The construction sector has seen Budget 2016 lending the industry with growing opportunities and better prospects, looking ahead.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), the construction growth is a continuity from the National Key Results Area (NKRA) under the guise of the Economic Transformation Plan (ETP) and Government Transformation Plan (GTP) Phase 3 (3.0) from 2016 to 2020.
MIDF Research noted that the plans are a strong impetus for higher tenderbook replenishment rates for companies under its coverage.
“The projects will emphasise on inter and intra urban infrastructure such as high speed, light dual line and monoline railway construction, bus rapid transit (BRT), highways and toll-ways,” the research arm said.
It added that Budget 2016 echoes the commitment in solving the ‘last mile’ problem of public access to transportation since the start of the NKRA implementation in 2009 by the Performance Management Delivery Unit (Pemandu).
Based on MIDF Research’s gross domestic product (GDP) projection of five per cent for financial year 2015 (FY15) and five per cent for FY16, growth potential is poised to sustain.
The research arm noted that the sustained projection will ensure an upward trajectory of construction growth of 10 per cent for 2015 and 10.3 per cent for 2016.
MIDF Research estimated a contribution of circa 5.6 per cent of GDP in 2015 (circa RM60 billion) from the total of RM1,073 billion and six per cent of GDP in 2016 (circa RM66.9 billion) from the total of RM1,116 billion.
Sarawak alone has been allocated more than RM50 billion worth of projects by Budget 2016, with a strong emphasis on the state’s development amounting to RM6 billion on top of ongoing infrastructure projects.
Meanwhile, the recently concluded 2016 Sarawak State budget saw an expected budget surplus of RM175 million.
According to Chief Minister Datuk Patinggi Tan Sri Adenan Satem, this is on the basis of expected total revenue of RM5.55 billion against a total ordinary expenditure amounting to RM5.37 billion.
“To stimulate a desirable level of economic activities and sustain economic growth, Budget 2016 will continue to be a development biased budget with RM5.97 billion or about 74 per cent of the total budget is proposed for development and RM2.07 billion or 26 per cent for operating expenditure,” he said last month.
MIDF Research noted that the immediate sequential effect would be on infrastructure development – connectivity of road and bridges amounting to RM571.8 million, as well as RM260.7 million allocation for water treatment projects for Kuching and rural areas.
Moving forward, following a strong period of job awards in early-second half of 2015 (2H15), the research arm of CIMB Investment Bank Bhd (CIMB Research) is still looking at double-digit order book growth for most contractors under its coverage going into 2016.
CIMB Research maintained its average construction order book growth assumption of 61 per cent (backed by an achievable 20-30 per cent success rate) and its assumption of RM500 million-5.5 billion worth of new order wins for each contractor.
The research arm expected Gamuda Bhd’s order book to grow by more than sevenfold with the underground scope of MRT 2.
Aside from MRT 2, CIMB Research noted that there are still more sizeable packages within Petroliam Nasional Bhd’s (Petronas) Refinery and Petrochemical Integrated Development (RAPID) that will be due for award in 2016.
“This should sustain the job flow momentum for Rapid in 2015, which saw the award of several new packages, especially in 2H15, worth RM400 million to RM950 million each,” it said, adding that year to date (YTD) total infra/civil works-related jobs awarded in Rapid have increased to over RM3.5 billion.
The research arm further noted that Muhibbah Engineering (M) Bhd provides the best exposure for new incoming scopes in RAPID due to the group’s large tender book there.
Not forgetting the water-type contracts, CIMB Research expects over RM2 billion worth of these contracts to be awarded largely in 2016.
“This does not include potential jobs from the private sector side,” it said.
Overall, the research arm noted that this is good news for pure water infra contractors, where the average order book based on its checks is currently running at below RM1 billion.
CIMB Research believed that Salcon Bhd, which is the only pure water infra contractor under its coverage, could emerge with a bigger share of wins.
“Its tender book (jobs in tender) stands at RM1 billion to RM2 billion,” the research arm added.
Overall, CIMB Research remained ‘overweight’ on the sector.
In the coming months, the research arm expects sector drivers relating to the three major segments to gain momentum.
“Job visibility continues to look good, backed by the 11MP and the private sector,” it said.
On the other hand, construction growth remained ‘positive’ in MIDF Research.
The research arm observed that the growth potential in the sector is underappreciated, valuation-wise, noting that KLCON is trading at an undemanding five years rolling price earnings ratio (PER) of 16.2-fold.
“As at December 8, 2015 the KLCON Index’s blended and forward valuations were trading at 14-fold and 12.43-fold PER respectively.
“This means the Street is valuing the construction sector lower, probably to impute a moderate GDP growth in FY16,” it said.
Despite a modest sectoral growth, under its coverage, of circa 5.4 per cent from the current results, the research arm reckoned that the insipid numbers are transitory in nature.
Henceforth, MIDF Research expect the sector to continue to grow higher than the FY16 estimated GDP growth of circa five per cent.
Plantations: CPO prices to rise in 2016
The Malaysian plantations sector will likely see its crude palm oil (CPO) prices rise by more than 10 per cent this year, with analysts saying that the key driving factors are El Nino and Indonesia biodiesel mandates.
According to analyst Ivy Ng of CIMB Research, they project that the average CPO price will rise by 12 per cent in 2016 to RM2,450 per tonne, driven by slower edible oils supply growth, higher biodiesel demand from Malaysia and Indonesia, as well as stronger consumption of edible oils.
“For 2015, average CPO price is expected to decline nine per cent to RM2,180 per tonne, due to slower biodiesel progress in Indonesia, weak discretionary biodiesel demand and higher soybean output from the US,” Ng said.
On the other hand, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) expected CPO price to surge above RM2,500 per metric tonne (MT) in the first quarter of current year 2016 (1QCY16) as inventory drops below 2.5 million MT.
“We expect strong depletion of stocks level for palm oil in the 1QCY16 due to significantly reduced supply of palm oil.
“Timing wise, the lagged impact from El Nino is expected to hit during the seasonal low production period,” it said.
MIDF Research noted that CPO price should thus appreciate towards RM2550 per MT (or US$600 per MT assuming US$RM rate of 4.25) in 1QCY16 assuming current soybean oil (SBO) price of US$700 per MT stays.
In the research arm’s view, CPO discount against SBO should shrink to US$100 per MT (currently US$140 per MT; three-year average US$147 per MT) due to reduction in stocks level.
CIMB Research highlighted that the key bullish factors to watch out for in 2016 are Indonesia’s biodiesel consumption and positive impact of an El Nino-induced drought.
On another note, Ng said concerns were raised that the CPO price rally could be limited by the high global soybean supplies and inventories, which could compete with palm oil for market share of edible oils in 2016, as well as the low crude oil price that could prevent Indonesia from meeting its ambitious biodiesel target.
She added that the market currently assumes that Indonesia will only achieve 2.5 million to three million tonnes of its mandated biodiesel target of seven million tonnes.
In terms of labour costs, CIMB Research projected that they will rise by five to 10 per cent in 2016 due to the higher minimum wage in Malaysia and Indonesia.
“We also expect fertiliser prices to go up in 2016, in view of the ringgit’s weakness against the US$, as well as higher transport costs.
“The higher costs are likely to crimp some of the effects of higher CPO selling prices in 2016,” the analyst said.
While MIDF Research maintained its ‘positive’ view on the sector with a projection that CPO price will improve to average RM2,300 per MT in 2016 (against expected RM2,175 per MT in 2015), CIMB Research was ‘neutral’ on the sector as the planters appear fairly valued.
The research arm would turn more positive when CPO prices sustainably trend above RM2,500 per tonne (or US$800 per tonne).
“This could happen if adverse weather hits key planting areas of oilseeds and edible oils, negatively affecting supply,” Ng said.
O&G: Lower FY16 earnings across the board
Analysts are projecting lower annual earnings across the board for companies in the oil and gas sector in financial year 2016, given that new tenders and contract awards were flowing at an extremely sluggish pace over FY15.
According to AllianceDBS Research Sdn Bhd (AllianceDBS Research), FY15 has seen Malaysian oil and gas companies bear the brunt of declining capital expenditure (capex) and operating expenditure (opex) by production companies.
It noted that Petronas, Exxon and Shell have slowed down activities significantly in Malaysia and multiple earnings downgrades have been made to reflect the slow activity.
All companies – even the relatively resilient brownfield service players – are affected.
“With new tenders and contract awards flowing at an extremely sluggish pace over FY15, FY16 earnings across the board are slated to be lower y-o-y,” AllianceDBS Research said.
This however did not include rare exceptions like Bumi Armada Bhd (Bumi Armada), which continued to see progress in the group’s floating production storage offloading (FPSO) business.
AllianceDBS Research expected some earnings downgrades to continue in the first half of 2016 (1H16).
“Perhaps, by 2H16 or closer to FY17, some activity might come back online, especially those related to production and offshore maintenance activities,” it said.
On crude oil prices, AllianceDBS Research highlighted that they struggle with recovery as the OPEC continues to power ahead with production.
“At the same time, US production continues relatively unscathed by the low price environment and inventories are still climbing,” the research house said.
It has been more than 12 months of the same, and AllianceDBS Research expected this to persist into 2016.
For now, the research house’s crude oil price outlook of US$60 per barrel average (Brent) is maintained but it saw potential downside risk unless there is a clear sign that global production is declining or that demand is picking up.
Meanwhile, MIDF Research expected that moving into 2016, Brent crude oil price is to trade within the range of US$50-60 per barrel.
The research arm’s assumption is based on the global asset breakeven prices and average fiscal breakeven prices for global oil producing countries.
“We however note that there are further downside risks as the OPEC members are in a deadlock regarding supply management to contain the decline in global oil prices,” it said.
MIDF Research highlighted that Malaysia’s downstream sub-segment industry is expected to remain robust while on the other hand, the upstream sub-segment of the oil and gas value chain remains depressed as exploration and production (E&P) capex are being reduced by many, if not all major oil producers.
“Moving into 2016 and into 2017, works and activity levels at the RM90 billion RAPID Project within the Pengerang Integrated Petroleum Complex (PIPC) is expected to be at its peak.
“As such, key beneficiaries are oil and gas companies which have downstream specialties such as KNM Group Bhd (KNM) and Muhibbah,” the research arm said.
Given the volatile and relatively negative sentiment shrouding the oil and gas industry, we are recommending investors to cherry-pick stocks which are specific to the downstream segment of the oil and gas industry.
For exposure into Pengerang, MIDF Research recommended KNM as Petronas, via Petronas Chemicals Bhd has announced three petrochemical projects within PIPC and that KNM stands to be a beneficiary for the supply of specialised process equipment.
“For investors seeking exposure in a more predictable downstream company offering stable earnings, we are recommending Gas Malaysia Bhd as the adoption of the Incentive-Based Regulation (IBR) regime will provide better earnings visibility and predictability,” it said.
As for AllianceDBS Research, it advised investors to keep an eye on service providers like SapuraKencana Petroleum Bhd which are still solid in terms of earnings delivery but in a prime position to recover quickly when the market improves.
The research house also saw it fit to keep an eye on Bumi Armada which could be a merger and acquisition (M&A) target.
It noted that the group’s earnings are resilient from ongoing FPSO contracts but in the near term, the offshore support vessel (OSV) division offsets some FPSO earnings.
“Besides that, a safe stock to consider is Dialog Group Bhd (Dialog) which is seeing earnings come through from Phase 1 in Pengerang,” AllianceDBS Research said.
Property: Slower sales volume
The overall property sector is expected by analysts to generally experience slower sales volume and for physical property transactions to dip in 2016.
The challenging outlook for the property sector this year is on the back of several headwinds previously faced in 2015 which has been projected to likely spill over into 2016.
CIMB Research said that these include the dampened demand due to weak consumer sentiment, tight lending policies which result in high rejection rate for mortgage applications and an uncertain macro outlook due to slowing economic growth and the volatile stock market.
“The only bright spot is the possibility that the government may allow for the reintroduction of the developers’ interest bearing scheme (DIBS) for first-time home buyers,” it added.
According to JF Apex Securities Bhd (JF Apex), the Property index underperformed the FBM KLCI index in 2015 (down 8.7 per cent versus minus 6.7 per cent as of December 18) weighed down by poor investor sentiment on the sector due to slower property sales as a result of stringent mortgage approvals and rising cost of living pursuant to GST implementation and depreciation of the ringgit coupled with cautious economic outlook.
The research firm noted that corporate earnings-wise, most of the property counters posted weaker y-o-y 9M15 net profits no thanks to dwindling new sales achieved for 2015 against last year.
“However, developers are generally having healthy unbilled sales which could underpin their bottom line for another one to two years till 2016-2017,” it said.
Overall results were in line or below JF Apex’s and market expectations.
Statistically, the Valuation and Property Services Department (JPPH) figures had indicated decreases of 3.5 per cent (volume transacted) and 6.6 per cent (value transacted) for 1H15 compared to 1H14.
JF Apex noted that for the residential sub-segment, transacted volume was down by 2.6 per cent y-o-y whilst transacted residential value was slumped by 9.7 per cent y-o-y.
However, JPPH’s Malaysian House Price Index (HPI) data also indicated that property prices was on a continuous rise, with an increase of 5.4 per cent during 9M15 but at a slower rate compared to 9.4 per cent in 2014.
“Empirical evidence suggests that developers have experienced slowdown in their new sales since 2H14. Some smaller players with limited variety of product offerings and localities had difficulties to achieve their targeted new sales,” JF Apex said.
The research firm anticipated physical property transaction to dip in 2016 whilst property prices to be flattish or continue to rise with slower pace.
“Property transaction volume and value are expected to decline about 5-10 per cent, whilst house price to be flattish or slightly trend higher by less than five per cent judging from continued increase of HPI by 5.4 per cent y-o-y in 9M15,” it said.
JF Apex projected that the residential market will continue to soften in 2016 as affected by the challenging economic outlook in relation to prevailing weakness in commodity prices, stringent mortgage approval, property cooling measures which is still in place (removal of DIBS, RPGT hike and LTV ratio of 70 per cent for third housing onwards and diminishing purchasing power due to rising cost of living.
AllianceDBS Research also expected slower property sales volumes in 2016 although it believed prices should hold up due to cost-push factors.
“Sentiment should remain poor given the tightening measures and inflationary pressures, but mass-market products at strategic locations will continue to enjoy healthy sales as affordability remains an important factor among purchasers,” it said.
The research house noted that developers’ margins could be affected by rising development cost as selling price hikes would be capped by relatively more subdued demand.
While there is no property bubble for now, AllianceDBS Research feared that there may be an oversupply of KL office space, hybrid highrise units and Iskandar Malaysia high-end condos.
Moving forward, the new launches from developers will be fewer amid weak consumer sentiment, JF Apex said.
The research firm noted that more product offerings in the market will be focusing on medium cost housing with pricing less than RM500,000-600,000, but smaller built-up sizes with stubbornly high average selling price (ASP) per square foot (psf), aiming for genuine demand.
Over a longer run, JF Apex believed the residential market is still supported by the moderate supply, which is the growth in future supply (i.e. under construction and planned supply) of residential property has only clinched positive growth, mid single digit, four years ago after recording negative growth since 2006, and the percentage of future supply to existing stocks only inched up marginally to current 30 per cent, slightly above its 10-year average of 29 per cent.
“Meanwhile, demand is well underpinned by young demographics in the country (circa 47 per cent of the population is aged between 20-49 years old), resilient domestic economic growth of over four per cent, healthy unemployment level and relatively low Average Lending Rate (ALR) of 4.54 per cent as compared to ALR of 6.36 per cent pre Lehman crisis,” it said.
On a side note, CIMB Research revealed that property stock could far better as should DIBS be allowed, it could signal a reversal of the government’s policy on cooling the property sector.
“That would be positive for property stocks,” it affirmed.
In addition, the research arm underlined that property stocks have traditionally been high beta plays on the broader stock market and its KLCI target of 1,900pts represents 16 per cent upside.
“Furthermore, property stocks have been aggressively sold down this year and are trading at large discounts to RNAV. In some cases, the discounts are as wide as 70 per cent,” it said.
Along with AllianceDBS Research, CIMB Research maintained ‘neutral’ on the property sector as the negatives relating to the underlying fundamentals of the physical property market offset the positives relating to deeply discount property stocks.
On the other hand, JF Apex maintained ‘marketweight’ on the sector due to the lack of near-term re-rating catalyst.
JF Apex advised investors to adopt a long-term investment strategy and start to accumulate property counters in 2H16 in view of current depressed valuations, i.e. large cap stocks and mid to small cap. stocks are now trading at respective 11 to 12-fold forward PE and six to seven-fold forward price earnings (PE), whilst at a deep discounts to their revalued net asset valuations (RNAVs) of 40-70 per cent.
Timber: Sarawak companies’ earnings could sustain in 2016
Sarawak timber companies’ earnings, which recovered last year due to the weak ringgit, are expected by analysts to be sustained as the ringgit may remain weak.
CIMB Research noted that net profit of the Sarawak timber players under its coverage – Ta Ann and Jaya Tiasa Holdings Bhd (Jaya Tiasa) – improved by 27 per cent year on year (y-o-y) in the first nine months of CY15 (9MCY15).
“Log production in this period was 21 per cent lower than last year’s but its impact on earnings was more than offset by the weak ringgit, which lost 15 per cent of its value against the US dollar YTD.
“Log and plywood prices in US dollar terms also remained stable as a result of tight supply of tropical timber in the export market,” the research arm said.
For 2016, CIMB Research underlined that the earnings of timber companies will largely depend on the exchange rate and timber and CPO prices.
“The earnings recovery in 2015 was due almost entirely to the weakening of the ringgit,” it said.
As such, CIMB Research believed exchange rate movement will continue to have a significant impact on earnings.
“Investors should also monitor the timber demand as timber is one of the few commodities with still-high prices,” the research arm advised.
“Lastly, the CPO price is another key driver as the timber players also have sizeable oil palm estates.”
CIMB Research’s economics team believed the ringgit will remain weak against the US dollar in 2016 and expected the ringgit to hit 4.60 against the US dollar by end-2016, a positive development for the timber companies.
The research arm also believed timber prices in US$ terms will remain stable next year.
“Unlike other commodities, where low prices have been a direct result of over-expansion of production capacities during the bull cycle, the production capacity of tropical timber has been in a decline due to diminishing stocks in the natural forest,” it said.
In the case of re-rating on the sector, CIMB Research revealed that despite the healthy outlook for timber earnings, share prices of the timber stocks also depend on the performance of CPO prices because most of them have sizeable oil palm estates.
CPO prices could remain unexciting, the research arm said, due mainly to high stock levels and weak demand.
“The increase in minimum wages next year will also raise the production cost of CPO and could offset any gain from higher CPO prices,” it added.
Overall, in spite of the strong timber earnings, CIMB Reserach maintained its ‘neutral’ stance on the sector given the unexciting outlook for CPO prices.
Between the two timber players under CIMB Research’s coverage, the research arm preferred Ta Ann as the group offers a much higher dividend yield than Jaya Tiasa.
“On top of that, its oil palm estates have higher fresh fruit bunch (FFB) yield. This will help it to better weather the weak CPO price environment,” the research arm said.