Thursday, July 14, 2011

FBM KLCI Strategy 2H11 – Consumption, The Forgotten Driver

FBM KLCI Target – 1,670
July 14, 2011


What has changed?
# Since our Strategy 2H11 report (dated 28 Jun 2011), there has been several changes. This report is to highlight the changes and their implications.

# Plantation sector has been downgraded from Overweight to Neutral. We are still positive on near term CPO price (maintained at average of RM3,200/MT for 2011). However, due to lack of fresh positive catalyst that will push CPO prices higher, we have lowered our CPO assumption for 2012 and beyond from RM3,200/MT to RM3,000/MT.

# TM has surged 3.7% with total potential return (capital appreciation plus yield) now less than HLIB house rule of more than 10% for a Buy rating.

# AirAsia has surged 4.3% with total potential return (capital appreciation plus yield) less than 10%. However, subsequently, we have roll forward our base year (for
valuation) and raised our target price for AirAsia from RM3.29 to RM4.24.


Implications
# As a result of our lower CPO price assumption, we have cut our FY12-13 forecasts for the plantation sector.

# Thus, our 2012 EPS growth for the FBM KLCI has been lowered from 11.9% to 11.5%.

Risks
Domestic
- fiscal position, rising interest rate and SRR beyond expectations, transformation execution risk and General Election.

External
- recent weak external economic data, China over tightening, lingering European debt woes and end of QE2.

KLCI Target change
# Maintain that sustained consumption (from wealth effect) coupled with acceleration of ETP impact in 2012 will continued to drive earnings growth higher and valuations lower.

# However, as our 2012 EPS growth has been cut to 11.5%, our year-end FBM KLCI target has been lowered to 1,670 based on unchanged 15x 2012 earnings.

Stock Picks change
# Given that TM’s potential total return is now less than 10%, we have removed it from our top 10 picks. As a replacement, we are reinstating TimeDotcom (TDC) into
the list. The recent listing of Time-OS has resulted in arbitrage opportunity between TDC and Time-OS. Although we still expect share overhang from Time Engineering offer for sale of TDC shares, we believe that the above arbitrage has somewhat diluted the overhang impact.

# As for AirAsia, it will remain as one of our top 10 picks given that our raised target price represents potential returns of more than 20%.


Source: HLIB Research

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