KUALA LUMPUR (Dec 27): The FBM KLCI's earnings growth in 2017 may yet be stronger than what is seen so far in 2016, which increases the probability of the equity benchmark inching up from its current sideways performance, according to MIDF Research.
In its 2017 outlook report released today, the research house said the FBM KLCI's valuation is mostly cheaper relative to its regional peers.
"And its longer-term trend path is highly dependent on the expected earnings growth performance during the next 12 to 18 months.
"Therefore, premised on the rooted behaviour whereby earnings and price are trending broadly hand-in-hand, we reiterate our 2017 FBM KLCI target at 1,830 points which equates to PER17 of 17.1x," it said.
MIDF Research also listed a selection of 10 stocks that represent its top picks beginning with the preference of inherent earnings quality, an attractive valuation and growth at reasonable price.
Malaysian Resources Corp Bhd (Buy rating with a target price (TP) of RM2.08)
Key catalysts for the company include their construction orderbook of RM1.5 billion providing 36-month construction backlog underpinned by 1.91x FY15 construction revenue cover. Secondly, the Development of Kwasa Damansara Plot C-8 worth RM3.08 billion, Kuala Lumpur Sports City valued at RM1.6 billion and Cyberjaya City Centre with a gross development value of RM9 billion and finally the potential sale of the Eastern Dispersal Link (EDL) highway for RM1.8 billion to unlock its balance sheet.
Tune Protect Group Bhd (Buy rating with TP of RM2.18)
MIDF Research is overweight on Tune Protect Group premised on the fact that the group has a first mover's advantage of digital insurance space and it will continuously grow within that parameter.
Tune has also predominant market share in local travel insurance and extends to establish new airline partnerships and venture beyond airline industry in the next two years. This will translate into positive significant fundamental impact, which the firm expects a sturdy FY17 estimated earnings growth and improvement in underwriting margin of 15% and 23% respectively.
On balance sheet, the group will stand on strong forecasted double-digit return on equity of 17% and a net cash position.
Malaysian Bulk Carriers Bhd (Maybulk) (Buy rating with TP of RM1.04)
The Baltic Dry Index (BDI), which measures charter rates across dry bulk ship sizes and routes, has recently surpassed the 1,200 level after averaging at 500 for the majority of 1HFY16.
The recent surge in the BDI can be attributed to a recent increase in coal and iron ore imports from China due to lower domestic production of these materials and a pick-up in demand for construction and power generation.
In addition, the prospects of the US embarking on infrastructure spending as part of its stimulus measures have also propped up sentiment on the industry.
The firm's 'buy' call on Maybulk with target price of RM1.04 is based on five-year average price-to-book ratio of 0.88x.
Deleum Bhd (Buy rating with TP of RM1.25)
Deleum is an oil and gas services specialist with undemanding valuation currently trading at forward price-earnings ratio (PER) of only 7x. The company's orderbook stands at approximately RM2.9 billion, providing earnings visibility of up to four years.
In addition, the company is a frontrunner for Petronas maintenance, construction and modification works worth approximately RM500 million for its portion.
The TP of RM1.25 is based on earnings per share (EPS17) of 12.5 sen pegged to PER17 of 10x. The firm's target PER17 is based on its five-year historical average rolling PER. At peak valuation, the stock traded at PERs in excess of 18x.
Muhibbah Engineering (M) Bhd (Buy rating with TP of RM3.05)
Key catalysts for the group are a construction orderbook of RM3 billion providing 36-month construction backlog or 3.5x construction revenue, a steady growth of 15% from operating income and an annual growth of 5 million from 3.3 million passengers (11% growth rate) for the three concession airports: Siem Reap, Sihanoukville and Phnom Penh, Cambodia.
AirAsia Bhd (Buy rating with TP of RM3.45)
MIDF Research said Airasia makes a re-entry into its top 10 picks after a recent share price correction which saw a 21% drop from its high of RM3.20 reached in August 2016 stemming from the ringgit losing ground against the greenback.
However, the research house said it was not too concerned about the falling ringgit as AirAsia's unhedged exposure to US dollar for its borrowings and expenses are capped at 33% and 50% respectively.
Meanwhile, AirAsia recently recorded a cumulative nine-month (9MFY16) load factor of 89% which was a group record. Looking ahead, the fourth quarter of 2016 will be even better as October–November loads have already hit 93%.
AirAsia highlighted that it has received eight non-binding bids for full ownership in Air Aviation Capital and one for an 80% stake.
MIDF Research said it is increasingly optimistic on the potential for special dividends as the deal draws nearer to a possible conclusion.
It said that a divestment of a 70% to 80% stake in AirAsia's leasing arm could translate into proceeds of RM2.9 billion to RM3.3 billion (RM1.04 to RM1.19 per share) which could be used to pare debts, fund future expansion and be paid out as special dividends.
Ta Ann Holdings Bhd (Buy rating with TP of RM4.70)
MIDF Research favours the company for its good set of earnings in 9MFY16 due to better-than-expected fruit bunch production, its strongest production growth among peers (+8% year-on-year (y-o-y) in 9MFY16) and a better outlook for timber division due to recent strengthening of US dollar and Sarawak State Government's effort to promote timber products in Japan.
My E.G. Services Bhd (MyEG) (Buy rating with TP of RM2.84)
MIDF Research said MyEG has an attractive business model and strong cash-rich balance sheet. As at 1QFY17, it has a net cash position of RM49.7 million.
It is also enjoying an attractive profit margin of more than 50%.
The upcoming implementation of the customs tax projects would also reaffirm the group's revenue and earnings growth trajectory.
Our TP of RM2.84 is premised on FY18 EPS of 10.8 sen pegged to FY18 forward PER of 26.3x.
Kuala Lumpur Kepong Bhd (Buy rating with TP of RM29.05)
Key positives about the company include its high exposure to palm oil business and good earnings growth of +33% y-o-y to RM1.05 billion in FY16, new capacities in the fatty acid business has started to contribute positively to the company, with FY16 EBIT for downstream division surging by 75% to RM323 million.
Bermaz Auto Bhd (Buy rating with TP of RM2.45)
MIDF Research said significant value has emerged after a 10% fall in share price since the market selldown post-US elections. Ex-cash, Bermaz Auto now trades at just 9x CY17 earnings.
The Japanese yen has actually weakened to RM3.80–RM3.90 levels and it was mainly the US dollar (which Bermaz Auto has no exposure to) that strengthened against the ringgit in the past month.
Key share price catalysts over the next 12 months include an attractive dividend yield of 7% (based on 85% payout ratio) underpinned by net cash which accounts for 12% of market capitalisation and a solid 9% free cash flow to equity yield (FY17F).