KUALA LUMPUR (Oct 11): Rakuten Trade Sdn Bhd has "overweight" calls on eight sectors, namely banking, gaming, oil and gas (O&G), plantation, real estate investment trust (REIT), technology, telco and utilities.
During its fourth quarter (4Q2022) outlook briefing, Rakuten Trade Sdn Bhd vice president of equity research Thong Pak Leng said continued overnight policy rate (OPR) upcycle is expected and will provide a buffer for banks’ net interest margins.
He estimated that two additional OPR hikes of 25 basis points each to take place by the first quarter of 2023, bringing OPR to 3%.
“For 4Q2022, we like Affin Bank Bhd, AMMB Holdings Bhd (AmBank), and RHB Bank Bhd, which are firmly positioned to benefit from improved margins.
“For the large-cap banks, we prefer CIMB Group Holdings Bhd, which has demonstrated defensive performance in non-interest income (NOII), contrary to most other banks, thanks to its regional operations, and Malayan Banking Bhd, which is preferred for its alluring dividend yield,” Thong commented.
Thong also favours the gaming sector as it is seen as a major economy reopening play.
“We expect visitors’ arrivals at integrated resorts and ticket sales of number forecast operators (NFOs) to continue recovering in the second half of the calendar year 2022 (2HCY2022),” Thong said.
However, Thong is mindful of the sustained high inflation that is eating into consumer spending power, potentially hurting visitors’ arrivals and ticket sales of NFOs.
He is also positive on the outlook of the O&G sector as the sector should benefit from sustained firm oil prices and spurring capex, hence improving activities in the industry.
Citing Petroliam Nasional Bhd (Petronas) as an example, the state-owned O&G company has projected Brent crude price to range between US$90 and US$95 per barrel in 2HCY2022.
“We expect Petronas to ramp up capex in 2HCY2022, as the amount spent in 1HCY22 is still significantly trailing its full-year guidance of RM60 billion. This should spur activities in the industry,” he added.
On the plantation sector, Thong believed that plantation sector ratings may have already bottomed.
“The sector’s prospective FY2023F P/BV (financial year 2023 forward price-to-book value) of just 1.2 times and FY2022-2023F PERs (price-earnings ratios) of 10 to 11 times are approaching replacement level ratings,” he shared.
Despite the anticipation of weaker earnings for the plantation sector going forward, Thong believes consensus has already priced crude palm oil (CPO) between RM3,500 per metric tonne (MT) and RM4,000 per MT for next year's earnings.
“Even at CPO prices of RM3,500-4,000 per MT, operating margins and cash flows are still good as production cost is estimated to hover between RM2,000 and RM2,500 per MT moving into CY2023,” Thong explained.
As for Malaysia’s REITs, Thong expects strong earnings growth momentum among retail REITs to continue in the second half of 2022 (2H2022).
He pointed out that there is investment potential for REITs given their share prices have not improved much despite strong earnings growth.
Technology is also among Thong’s top pick sectors as he believes Malaysia will benefit from the US-China spat in the chip war.
“We understand that MNCs (multinational corporations) are beginning to relocate out of China and into Malaysia for chip packaging services. This trend is expected to be more prominent for US companies,” he said.
Meanwhile, Thong observed that China is showing no signs of slowing down from its aggressive push for technological superiority, which will have a positive spillover effect on the local semiconductor companies that have presences in China.
For the telco sector, Thong believes the de-rating of the sector over the last two years means a reversal in share prices is likely on the cards once the dust finally settles — referring to the telcos' acceptance of the single wholesale network (SWN) model for the rollout of the 5G network.
Last Friday (Oct 7), four mobile network operators (MNOs) — Celcom Axiata Bhd, Digi Telecommunications Sdn Bhd, YTL Communications Sdn Bhd, and Telekom Malaysia Bhd (TM) — have executed share subscription agreements to collectively take up a 65% stake in Digital Nasional Bhd (DNB), a special vehicle set up for the nationwide rollout of the 5G network.
However, their two peers, namely Maxis Bhd and U Mobile Sdn Bhd, decided to turn down the offer, saying they could not see benefits in being a minority shareholder in DNB.
Lastly, Thong continues to like the utility sector for its earnings defensiveness backed by regulated assets.
On top of that, he said recurring cash flows will anchor dividend yields of 4% to 5% for the sector.
Thong's top pick for the sector is Tenaga Nasional Bhd, premised upon it being a reopening play, and its risk premium easing as energy prices come off their peaks. He views it as a beneficiary of the return of foreign investors given its significant weighting in key indices.
In contrast, the only "underweight" rating is given to the glove sector as the sector's average selling price is expected to remain in the doldrums in 2H2022 due to massive capacity expansion by incumbent players as well as influx of new players.
“We estimate that global glove manufacturing capacity has jumped by 22% this year and will result in an excess supply.
"In 2023, we estimate that the global glove manufacturing capacity will surge by another 16% (as more capacity planned during the pandemic years finally comes online) while the global demand for gloves shall resume its organic growth of 15% annually, hence resulting in the excess supply ballooning further," he explained.