While uncertainties in the market are certain, this has not stopped investors and fund managers from attempting the absurd in order to hit a “home run” in their stock picks. One of the key themes that will come into play in 2017 will be the US President-elect Donald Trump’s policies as well as a possible increase in the pace of rate hikes by the US Federal Reserve. This would lead to a stronger US dollar that could benefit some of the export players.
Thematic investing continues to include construction plays with the rollout of new major infrastructure projects in the country. There has also been a rising earnings prospect for the plantation sector as crude palm oil price remains high and output is expected to improve moving into the second half of 2017.
The oil and gas sector also sees a gradual improvement in sentiment following the gradual recovery in oil prices after the deal on production cut between the Opec and non-Opec members.
Higher tourist arrivals with 2017 being Asean@50 Year and as Malaysia plays host to the 2017 Southeast Asian Games and Asean Para Games could also benefit airlines, gaming and leisure sectors. A possible early general election in the country could also give a boost to the market. With external headwinds remaining dominant driving volatility, a defensive strategy remains prominent for the Malaysian equity markets.
The Edge Financial Daily has compiled a list of stock picks based on these investment themes.
Inari Amertron Bhd
Inari Amertron Bhd is expected to return to double-digit growth as analysts are positive about the impact from the iPhone’s 10th anniversary that is expected to see something major planned by Apple Inc for the device.
Bloomberg data shows earnings per share for the financial year ending June 30, 2017 (FY17) is expected to grow by 23.4% year-on-year, while revenue will see an increase of 21.9%. The consensus 12-month target price for Inari is at RM3.73, indicating a potential upside of 12.3% from its last closing price on Dec 30, 2016 at RM3.32. Ten out of 12 research houses give a “buy” call on the semiconductor player.
Inari is the leading radio frequency (RF) test house with a solid working relationship with Broadcom, also a leader in the RF industry, which has a three-year supply agreement with Apple until 2018. Inari is expected to benefit from this.
Meanwhile, the risk and fear of how Trump’s protectionism policy might affect Inari have also been slightly overdone, according to Affin Hwang Asset Management head of equity strategies and advisory, Gan Eng Peng, as near-term changes are likely to be minimal.
The group’s FY16 saw a decline of 2.81% in its net profit to RM148.3 million from RM152.5 million in FY15 despite a revenue growth of 11.6% to RM1.04 billion during the same period. However, its latest financial results for the first quarter ended Sept 30, 2016 (1QFY17) saw its net profit return to growth, with an increase of 5.5% to RM48 million from RM45.5 million in 1QFY16. — By Billy Toh
Magni-Tech Industries Bhd
Magni-Tech Industries Bhd, the largest original equipment manufacturer for Nike in Malaysia for apparel products, could ride on the sportswear giant’s impressive growth story as Nike’s latest second quarter for fiscal year 2017 beat estimates on both sales and earnings per share.
Last year, Magni-Tech’s share price performance was disappointing as it fell by 6.47% to close at RM4.19 on the last day of 2016 despite an increase of 31.9% in its net profit for the second financial quarter ended Oct 31, 2016 to RM28.5 million.
Inter-Pacific Research Sdn Bhd has maintained its “buy” call on the apparel manufacturer with a target price of RM5.72, indicating a 36.5% upside from its last closing price on Dec 30, 2016.
With a price-earnings ratio of about 8.5 times (below the industry’s average of 9.3 times) and a strong balance sheet, the year ahead looks bright for Magni-Tech although Inter-Pacific Research cautioned that upside might take some time to materialise. It has zero debt with a total cash holding of RM62.6 million and RM74.1 million invested in investment securities.
With its dividend yield of about 3% expected to continue, its proven track record in the industry, excellent balance sheet, a stronger US dollar and an expected earnings growth riding on Nike, Magni-Tech could just entice investors to give it a second thought for 2017 after being overlooked for most of 2016. — By Billy Toh
CLASSIC Scenic Bhd
CLASSIC Scenic Bhd, the wooden picture frame manufacturer, is the classic dividend play for 2017 with its above market average dividend yield of about 7%, and might be the right defensive strategy amid the uncertain external environment.
Last year, its share price performance was impressive with a total return of 59.8%, closing at RM1.79 on the last trading day of 2016. What’s even more remarkable is that despite such an uptrend, its dividend yield for 2016 was above market average at 6.7%.
The group saw its revenue rise 22.7% year-on-year to RM14 million for the third quarter ended Sept 30, 2016, while net profit grew 87.5% to RM3.2 million. Its gross profit margin also rose to 43.9% from 38.2% a year ago.
The company is primarily involved in the manufacturing and export of high-end wooden picture framework mouldings and about 90% of its sales come from the export market, mainly to the US and is denominated in US dollars. The stronger US dollar has contributed to its improved financial results. Its net cash also saw a significant increase to RM28.7 million or 23.9 sen per share from RM21.4 million in 2015.
The company operates six manufacturing factories and is in the midst of building a new warehouse to improve its production efficiency and capacity.
InsiderAsia has noted some of the positive characteristics of Classic Scenic, such as its profitable niche market, owner-oriented management, high sustainable dividend yield and growth potential. — By Billy Toh
Gamuda Bhd
Gamuda Bhd has significant upside due to its strong outstanding order book of RM9 billion, supported by the MMC-Gamuda joint venture which secured the RM15.5 billion mass rapid transit (MRT) Line 2 underground works package in March 2016, according to TA Securities.
“We expect close to RM500 million of project development partner (PDP) fee to flow directly to profit before tax throughout the implementation of [the] MRT Line 2,” the research house said in a report.
Other catalysts include Gamuda’s works package for Pan Borneo Highway worth RM1.57 billion and the appointment of SRS Consortium, in which Gamuda has a 60% stake, as the PDP for the Penang Transport Master Plan (PTMP).
TA Securities has estimated that the alternative proposal adopted by the Penang state government has a projected value of RM40 billion, with works targeted to commence in 2018.
The potential sale of Gamuda’s 40% stake in the Syarikat Pengeluar Air Sungai Selangor water supply concession should provide the funding for its PTMP project, said AffinHwang Capital.
Shares in Gamuda have a 12-month target price of RM5.46 according to consensus estimates. Of the 23 analysts covering the company, 18 have rated a “buy” call on the stock, while three have a “hold” call.
Bloomberg data projects a 7.05% growth in earnings per share (EPS) for the construction player for its financial year ending July 31, 2017 and a further 13.17% EPS growth for the following year. — By Samantha Ho
Sime Darby Bhd
Sime Darby Bhd, which recently saw Tan Sri Abdul Wahid Omar take up the helm of its controlling shareholder, Permodalan Nasional Bhd (PNB), is set to benefit from a proposed corporate restructuring exercises.
“The expectation is that [Wahid] will unlock value [via] restructuring,” a head of research said.
PNB had a 52.98% stake in Sime Darby as at Nov 30, 2016, according to the group’s website.
Sime Darby was also highlighted as one of CIMB Research’s big cap picks in their strategy note on Dec 2.
“We expect the share price to rerate on potential plans to unlock value and better earnings prospects in view of the higher crude palm oil and coal prices in the future quarters,” CIMB Research said.
Shares in Sime Darby have shot up from an opening price of RM8.10 this year to RM8.55 at market close last Friday, suggesting investors had already begun pricing in expectations on the stock. — By Samantha Ho
Genting Malaysia Bhd
Genting Malaysia Bhd has been touted as a darling of the gaming industry for 2017 on expectations that the Genting Integrated Tourism Plan (GITP) will boost its earnings and improve market sentiment due to the legalisation of casino operations in Japan.
Research houses have pointed to expected higher visitor growth as the main catalyst for the stock in light of the full launch of the first phase of the GITP by end-2017, which includes the opening of the 20th Century Fox theme park.
The consensus 12-month target price for Genting Malaysia is RM5.13 based on estimates by 17 out of 23 investors. The stock was last traded at RM4.73, edging up from its 2017 opening price of RM4.58. Fourteen analysts have placed a “buy” call on the stock, while seven have recommended to “hold”.
According to consensus estimates by Bloomberg, the group is expected to see a growth in its earnings per share by 13.2% for its financial year ending Dec 31, 2017. Revenue is also expected to post growth of 9.35% and 9.3% by end-2017 and end-2018 respectively.
In the current quarter, the group is expected to complete the launches of Sky Avenue and Sky Plaza, which have been fully tenanted at premium rental rates of RM20 per sq ft, according to Maybank Kim Eng’s strategy report dated Dec 19.
The weaker ringgit is also expected to be a pull factor for Chinese tourists, whose arrivals had been trending upwards by 26% in the cumulative first eight months of 2016, Maybank Kim Eng said. — By Samantha Ho
Ta Ann Holdings Bhd
After a year of lacklustre performance, Sarawak-based Ta Ann Holdings Bhd is set to benefit from the improved demand for timber as well as the turnaround in the plantation sector. The company has been chosen by Kenanga Research, AffinHwang Capital and Public Investment Bank Research as their stock picks for 2017 in their latest strategy reports.
KAF Investment Bank chief investment officer Gan Kong Yik likes Ta Ann as he is upbeat about the plantation sector in 2017 with crude palm oil (CPO) price expected to be firmer.
Furthermore, the demand for timber is anticipated to increase in 2017.
Another plus point for Ta Ann is that it is seen as a beneficiary from the stronger US dollar.
In a strategy note dated Jan 4, Kenanga Research expects Ta Ann to be “a double beneficiary of the sharp CPO price appreciation, as well as stronger US dollar” as the company exports nearly all of its timber products, and sales are denominated in US dollars while costs are entirely in ringgit terms.
It also likes Ta Ann for its sector-leading dividend yield of 3.8% against the average 2.4%.
The consensus 12-month target price for Ta Ann is at RM4.38. Six out of nine research houses covering the stock have given it a “buy” call.
The integrated timber producer did not perform well in 2016, falling 5.5% over the past year, underperforming the benchmark FBM KLCI, which declined by 3%. — By Yimie Yong
SapuraKencana Petroleum Bhd
Integrated oil and gas (O&G) services provider SapuraKencana Petroleum Bhd is one of the biggest beneficiaries of the oil production cut pledge between Opec and non-Opec members.
The deal is expected to start a cyclical recovery for the O&G sector and SapuraKencana is viewed as a good proxy to ride on the gradual recovery of the sector. Several research houses have upgraded their call on the O&G sector recently, after Opec and non-Opec members pledged to cut production.
Chosen as one of the stock picks for 2017 by Public Investment Bank Research, the research house said the worst is likely behind for SapuraKencana.
Given its ability to undertake comprehensive scope of works across the O&G suite, SapuraKencana is said to stand in a better position against its peers on expected recovery in O&G activities.
Maybank IB Research has pointed out that SapuraKencana is a proxy to a rising oil price play and monetising its gas assets is a major catalyst. The counter is one of its key buys in the sector.
Kenanga Research has recently upgraded SapuraKencana to an “outperform” call with a target price of RM1.88, following the rerating on the selective upstream players in view of the sustainability of oil prices above US$50 (RM236) per barrel.
Bloomberg data shows that there are five research houses with a “buy” call on the stock, and 12 with a “hold” call.
Recall that the counter fell by nearly 20% in 2016 and has plummeted by almost 63% in the last three years. — By Yimie Yong
Bumi Armada Bhd
Bumi Armada Bhd, which saw its share price fall more than 40%, may provide another opportunity for investors in anticipation of improving sentiment and operating outlook of the oil and gas sector.
TA Investment Management Bhd executive director Choo Swee Kee pointed out that Bumi Armada shares were oversold in the past two years and expected there would be strong earnings growth for its floating production storage and offloading (FPSO) business.
“Bumi Armada is one of our top picks for 2017. Moving forward, we think there will be stronger earnings growth for the FPSO. We also like earnings generated from the FPSO as they are seen as more stable,” he told The Edge Financial Daily. Bumi Armada is one of the world’s largest FPSO players.
Public Investment Bank, which has a “buy” call on the counter, expects to see a boost in earnings from four major FPSO & floating gas solutions (FGS) contributions in 2017, according to its note dated Nov 24, 2016.
Bumi Armada posted a net loss of RM96.71 milion in the third quarter ended Sept 30, 2016 (3QFY16) versus a net profit of RM70 million a year earlier, on lower revenue. Revenue fell 33% to RM377.51 million in 3QFY16 from RM559.46 million in 3QFY15, as it saw lower income from FGS and FPSO operations.
Despite weaker earnings before interest, taxes, depreciation and amortisation (Ebitda) level, UOB Kay Hian said it had assessed that there was no cause for concern as Bumi Armada was still well within the allowable range for loan covenant on net debt/Ebitda. — By Yimie Yong
Protasco Bhd
Protasco Bhd is one of the construction players that are expected to benefit from an early general election in 2017. The well-established player in the construction industry is focused on road maintenance works, where most of them are based on concessions awarded by state and federal governments, providing the company with a steady income stream.
With the heightened expectation of the 14th general election happening in 2017, there is a potential for extra emergency road maintenance works to be carried out, according to Kenanga Research.
Protasco has an outstanding order book of about RM4.4 billion for its maintenance concessions, which could last for about 10 years, contributing about RM400 million to its revenue yearly.
Looking forward, Protasco is eyeing more sizeable concessions, which could potentially contribute another RM100 million to RM200 million to its top-line.
For its construction division, management is targeting a replenishment of about RM500 million for the financial year ending Dec 31, 2017 that comprises infrastructure and government housing projects such as Perumahan Penjawat Awam 1Malaysia (PPA1M).
Protasco has a strong track record with PPA1M project, in which the company has bagged two phases of PPA1M worth RM900 million.
Besides a steady income stream, the group also has a decent dividend yield of about 5.6%, far superior in comparison with other small- to mid-cap construction players with an average of 2.9%. — By Billy Toh