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15 October 2010
The 2011 Budget
Setting The Pace Towards Transformation
◆ The 2011 Budget sets the pace of economic transformation with the right emphasis on reinvigorating private investment and intensifying human capital development. These are the major positives in the Budget which, in our view, are critical to chart the direction of the country in moving towards a high income economy. There are, however, no substantial new information that will likely excite equity investors in the immediate term, in our view.
◆ Whilst the Budget aims to strike a balance between fiscal consolidation and the need to sustain spending to cushion the economy against the risk of a sharper-than-expected slowdown in the global economy, the lack of broader measures to increase revenue, and reduce subsidies and other operating expenditure suggests that there is limited room for manoeuvre. As a result, despite a less expansionary Budget, the fiscal deficit is only projected to ease marginally to 5.4% of GDP in 2011, from 5.6% estimated for 2010. ◆ Consequently, our views on the market outlook, earnings and sector calls remain relatively unchanged. In fact, the Budget speech focused attention primarily on private sector projects that are already in the news. While there are still lack of details, we believe the news flow will likely come after the Budget speech, now that the timelines for the major projects have been set and are mostly expected to begin in 2011. This suggests that the groundwork will accelerate from here on and we believe this will maintain the positive flow of news to the construction sector and, to a lesser extent, the property sector. Therefore, we believe any knee jerk to sell would only be temporary as the post-Budget news flow continues to sustain the liquidity-driven rally.
◆ Whilst market valuations are no longer cheap, the influx of G3 liquidity to Emerging Asia's equity, bond and currency markets in search for higher returns could still send the market higher in the near term, in our view. These short-term capital, however, are transient in nature and could reverse out relatively quickly with changes in outlook. Already, the destabilising capital flows and sharp appreciation of currencies in Emerging Asia have created concerns and induced policy intervention in the form of short-term capital control and currency intervention in some countries. As a result, we believe the market may move into a phase of greater volatility in the months ahead. ◆ Longer term, we believe there is still room for the market to trend higher in 2011. This is primarily predicated on the view the global economy is more sustainable than feared, which in turn implies sustained corporate earnings growth (+12.8% projected for 2011) that will continue to create new shareholders' value for investors. Consequently, our end-2011 FBM KLCI target remains unchanged at 1,640, based on 15x mid-cycle 2012 earnings. This, however, will not be without volatility as the global economy enters into a period of slowing growth in an uneven phase of recovery. Under such circumstances, investors should remain vigilant and do some top slicing on stocks where valuations have become rich in the run-up of the market. This would then provide more room for investors to accumulate fundamentally-robust stocks on weakness.
Please read important disclosures at the end of this report.
Key Tax And Expenditure Measures
◆ Fiscal consolidation is not as sharp as earlier expected given that the projected budget deficit comes in higher than the guidance provided under the Tenth Malaysia Plan. This suggests that the Government intends to front load its expenditure to facilitate the implementation of the various initiatives proposed for the NKRAs and NKEAs under the New Economic Model. This is prudent given rising risk of a sharper-thanexpected slowdown in the global economy. The deficit of the Federal Government is projected to drop slightly to 5.4% of GDP in 2011, from a deficit of 5.6% of GDP estimated for 2010. Taken together, the impact on the Malaysian economy is likely to be less expansionary in 2011, but still contributing to growth, albeit by a smaller magnitude compared with 2010, in our view. The consolidated public sector is projected to record a smaller deficit in 2011 due mainly to a reduction in development expenditure by both the general government and the non-financial public enterprises (NFPEs). As a result, the consolidated public sector is also expected to exert a less expansionary impact on the economy during the year.
Reinvigorating Private Investment
◆ Given the budget constraints, the Government appears to be even more dependent on Public-Private Partnership (PPP) initiatives to drive investments. ◆ Although some of the investments were already announced previously, the market has been waiting for confirmation and more details on: o RM46bn Kuala Lumpur International Financial District, to be developed by 1Malaysia Development Berhad (1MDB) and Abu Dhabi’s Mubadala Development Company, commencing next year. o Mass Rapid Transit (MRT) project within the Greater KL NKEA, which will be implemented between 2011 and 2020 with an estimated private investment of RM40bn. o Development of the 2,680-acre Malaysian Rubber Board land in Sungai Buloh by EPF, which is estimated to be worth RM10bn and expected to be completed by 2025. o PNB’s RM5bn 100-storey Warisan Merdeka to be built on the site of the Stadium Merdeka and Stadium Negara, and targeted for completion by 2015. ◆ The Government repeated earlier statements for the Government-Linked Investment Companies (GLICs) to divest their shareholdings in major listed companies. However, the GLICs will now also be allowed to increase their overseas investments, e.g. EPF’s overseas investments will be allowed to rise to 20%, from 7% currently. ◆ Three new stockbroking licences will be issued to local or foreign players to increase the retail market participation, while new fixed income and equity products such as Exchange Traded Funds will be facilitated by the Securities Commission and launched by Bursa Malaysia to meet investors’ demand. ◆ The Government will establish a RM1bn syariah-compliant Bumiputera Property Trust Scheme under the Bumiputera Property Trust Foundation (BPTF) to enable more bumiputera ownership of prime commercial properties in the Klang Valley, through a group ownership scheme. ◆ In the oil & gas industry, as previously mentioned in the Economic Transformation Programme (ETP), the Government will allocate RM146m to help establish an Oil Field Services and Equipment Centre in Johor although the project will be mainly driven by RM6bn private investments over 10 years. ◆ For green technology, the Government extended the pioneer status and investment tax allowance for renewable energy and energy efficiency activities until 31 Dec 2015. Import duty and sales tax exemption on related equipment has been extended until 31 Dec 2012. Full import duty exemption for hybrid cars will be extended to 31 Dec 2011, while excise duty exemption was raised to 100%, from 50% previously. ◆ The B5 programme to blend biofuels with petroleum diesel will be mandatory from June 2011 in Putrajaya, Kuala Lumpur, Selangor, Negeri Sembilan and Melaka. The Government also intends to follow up with the Feed in Tariff (FiT) mechanism under the Renewable Energy (RE) Act, but no timeline was given. ◆ The Government plans to boost the tourism industry via a number of measures including improving infrastructure and facilities. The Government also mentioned but did not elaborate on the RM3bn integrated eco-nature resort in Karambunai, Sabah, which will commence in 2011. More importantly, import duties on 300 consumer goods (including apparel, handbags and shoes) ranging between 5% and 30% were abolished. ◆ For palm oil, plans are to encourage replanting activity by replacing aged trees with high quality new clones, through a RM297m fund, while RM150m will be allocated to support downstream oleo derivatives and vitamin production.
◆ Allocations have been given to the economic corridors of Iskandar Malaysia (RM339m). Sarawak (RM93m) and Sabah (RM110m) for development of infrastructure and industrial projects. Enhancing Quality Of Life Of The Rakyat Measures ◆ RM1. plus RM250m to be allocated for development expenditure to religious schools. vernacular schools. missionary schools.2bn will be allocated to construct new hospitals. ◆ RM568m is provided to build houses for the poor and low-income group. effective immediately. and easier access to housing loans with effect 1 Jan 2011. ◆ RM974m will be allocated to increase food production. Intensifying Human Capital Development Measures ◆ The Government will establish a Talent Corporation in early 2011. increase the number of doctors and nurses as well as to obtain supplies of medicines and equipment. while RM213m will be allocated to enhance proficiency in the national and English languages. The investment tax allowance period for the last mile broadband service providers has also been extended. petrol and diesel in rural areas. The maximum loan eligibility will be raised to RM450. religious leaders and village heads.000 per month. while a scheme is open to all Malaysian permanent estate workers to obtain housing loans at 4% interest rate and a repayment period of up to 40 years extending to the second generation. Strengthening Public Service Delivery Measures ◆ The Government will introduce a point system to facilitate applications for permanent residence status. while the import duty and sales tax exemption on broadband equipment will be extended until 2012. ◆ The service tax will be raised from 5% to 6%. ◆ Toll rates for four highways owned by PLUS Expressway will not be raised for the next five years. THE 2011 3 BUDGET .000.000 currently. hostels. ◆ RM350m will be allocated to various programmes to combat crime. including implementing the River of Life Programme (under the ETP) and greening of Kuala Lumpur. flour. from RM360.◆ RM199m will be allocated to multimedia content. The service tax will also be imposed on pay-TV services.000. ◆ RM15.000. ◆ The Government is allocating RM200m to standardise the prices of rice. East Coast (RM178m). ◆ The 1Malaysia Training Programme will commence in Jan 2011 with an allocation of RM500m. This follows the increase in salaries of postmen on 1 Jul 2010. cooking oil. ◆ Basic minimum wages will be enforced for security guards with effect from Jan 2011.9bn will allocated to finance environmental preservation projects. ◆ Cagamas will introduce the Skim Rumah Pertamaku. plus RM170m incentives for fishermen as well as boat owners and workers to increase fish landing. and only for first-time house buyers with household income less than RM3. ◆ RM1. gas.4bn is to be allocated for building and upgrading of schools. ◆ RM6. and Government-assisted schools nationwide.9bn will be allocated to implement basic infrastructure such as water and electricity supply and rural roads. RM6. ◆ RM576m will be allocated for scholarships. ◆ RM474m is provided to enhance productivity and skills of non-graduates to meet the demand for skilled workforce in technical fields. Family and Community Development to carry out various welfare and community programmes. sugar. facilities and equipment. ◆ First time buyers will also be given stamp duty exemption of 50% on instruments of transfer and loan agreement instruments on a house price not exceeding RM350. which will provide a guarantee on down payment of 10% for houses below RM220. All mobile phones will also now be exempted from sales tax. ◆ For the rural population. ◆ Civil servants will be given financial assistance. ◆ The rebate for electricity bills of less than RM20 will continue to ease the burden of the low-income group. ◆ The Government will increase the monthly allowance for various community leaders. Northern (RM133m).2bn is allocated to the Ministry of Women.
the Federal Government’s budget deficit is projected to only narrow slightly to 5. but still contributing to growth in 2011 THE 2011 4 BUDGET . but still contributing to growth in 2011. Similarly.4% of GDP in 2011. have also been earmarked to undertake some huge development projects. As a result. albeit gradually. we expect consumer spending to remain resilient. the Government intends to spend more in the initial period of introducing the New Economic Model (NEM). As a whole. is unlikely to impact consumer spending significantly. As a whole.Impact On The Economy : Less Expansionary But Still Contributing To Growth THE REVENUE AND EXPENDITURE PROPOSALS Federal Government : Less Expansionary Although the Government will continue to reduce its budget deficit in 2011. In addition. Meanwhile. targeting construction of highways. underpinned by rising consumerism and high savings in the country Fiscal policy will exert a less expansionary impact on the economy. We believe the Government’s initiatives announced in the 2011 Budget to reinvigorating private investment will help to sustain the sector’s growth. to ensure that fiscal policy remains supportive of economic growth. the Government will offer three new stock broking licences to increase retail market participation. from +8. underpinned by rising consumerism and high savings in the country.0%. As it stands. power plant and healthcare related projects. Infrastructure and property developments are expected to drive private investment in 2011 as well. together with measures announced in the 2011 Budget.0bn for the Facilitation Fund to drive the Public-Private Partnership projects. The reduction in the Government’s budget deficit is not as sharp as earlier expected in 2011 The Government is serious in lead transforming the economy by taking the Initiatives announced in the 2011 Budget will help to sustain private investment growth Consumer spending will likely remain resilient. Although consumer spending will be affected somewhat by the reinstatement of employees’ contribution to the Employee Provident Fund back to 11% in 2011. we believe the 1.7bn for the Government. in order to instill confidence. an extension of tax incentives for another 5 years to 2015 to encourage companies to undertake food production activities. this will exert a less expansionary impact on the economy. investors in particular. the Government has allocated RM1. that the Government is serious in transforming the economy by taking the lead and putting the money where its mouth is. given that the Federal Government will spend more than what it collects in terms of revenue. As a result. particularly to facilitate the implementation of various initiatives under the model. The Governmentlinked investment corporations such as the 1Malaysia Development Bhd. This. which will in turn hurt the country’s exports. the abolishment of 5-30% import duties of approximately 300 goods preferred by tourists and locals and the RM500 Special Financial Assistance money provided for civil servants will help to sustain consumer spending. is also aimed at convincing the general public and. a cut in import duties to boost tourism and incentives to develop green technology.6% estimated for 2010.8% in 2011. it is not as sharp as earlier expected given that the projected budget deficit comes in higher than the guidance provided under the Tenth Malaysia Plan (10MP).2% provided under the 10MP. albeit by a smaller magnitude compared with 2010 (see Table 1). Furthermore. we expect private investment to moderate to 7. in our view.0% increase in services tax to 6.6% of GDP estimated for 2010 and compared with the guidance of 4. albeit at a more moderate pace. These measures include an allocation to encourage electrical & electronics industry to invest in high value-added activities. the Employees Provident Fund and Permodalan National Bhd. It also indicated that the Mass Rapid Transit (MRT) which cost about RM40bn will be implemented in 2011. we believe the Government is committed to reduce its budget deficit. We view it as a prudent move given rising risk of a sharper-than-expected slowdown in the global economy. from 5. The 1% increase is estimated to bring in additional tax revenue of RM0.
0 -47.1 57.3 -5.8 132.0 +6.5 54.6 4. change) 165.6 119.5 49.9 +9. excluding 2011 tax measures Source : Ministry Of Finance Economic Report 2010/2011 THE 2011 5 BUDGET .2 -0.1 62.1 2.8% of GDP or RM60.2 59.8 168.5 7. change) 2011(f) Revenue Operating expenditure NFPEs current surplus Public sector current balance % of GDP Development expenditure General government NFPEs Overall balance % of GDP 1 134.1 -10.Table 1 Federal Government Financial Position 2010(e) (RM bil) 20111(f) 2010(e) (%.7 53.6% of GDP or RM63.8 -9.1% projected at the general government level for 2011.2 64.2 0. will also be less expansionary in 2011.5bn in 2011.0 54.8 138.6 111. which is envisaged to narrow slightly to 7. excluding 2011 tax measures f : Forecasts e : Estimates Source : MOF's Economic Report 2010/2011 Consolidated Public Sector : Also Less Expansionary The consolidated public sector’s fiscal spending.4 -7. The consolidated public sector’s fiscal spending will also be less expansionary in 2011 Table 2 Consolidated Public Sector Financial Position 2009 2010(e) (RM bil) 20111(f) 2009 2010(e) (%.2 -15.1 1.2 -0.1 2.6 49.1 152.5 -4.2 10.0 -60. local governments and non-financial public enterprises (NFPEs).0 4. from a deficit of 7. statutory authorities.2 -3.8 162.0 170. compared with a deficit of 5.5 -7.0 94.8 -46.8 3.9 -1.8 -9.3 7.7 48.4% in 2011.0 0.0 -6.4 -6.3 54.8 Budget estimate.5% estimated for 2010. Similarly.0 2011(f) 2009 Revenue Operating Expenditure Current balance Gross development expenditure Less : Loan recoveries Net development expenditure Overall balance % to GDP 1 158.6 157.3 -6.0 8. This is on account of a smaller deficit of 5.2 -1.5 56. which includes the state governments.8 93.0 2.4 3.0 162.6 118.3 -43.5 -45.1 41.0 +7.8 63.0 49.2% of GDP estimated for 2010.5 -5. the NFPEs development expenditure is projected to slow down and its deficit is projected to record a smaller deficit of 2. This is reflected in a smaller deficit projected for the consolidated public sector. on the back of a reduction in development expenditure.9 4.4 5.1 -7.7 -63.4 9.6 Budget estimate.2 55.8 9.1bn estimated for 2010 (see Table 2). compared with a deficit of 2.5 0.3 101.9 -23.6 176.1 7.
No significant catalysts for key economic sectors In fact. we believe that a knee jerk reaction to sell would only be temporary as the post-Budget news flow (relating to the ETP blueprint to be published on 25 Oct. In fact. and the potential Sarawak state election) continues to sustain the liquidity-driven rally. FV = RM2. plus the revival of PNB’s proposed 100-storey RM5bn Warisan Merdeka building on the site of the old national stadium.55). which suggest that the groundwork will accelerate from here on. the Budget speech focused attention primarily on private sector projects that are already in the news.33). the MMHE and Petronas Chemicals listings. it is perhaps not surprising that there was a lack of major incentives and significant measures from the Government.30) and MAHB (OP. While there were the usual allocations for healthcare.51) and MRCB (TB.to mid-end range housing with incentives for first-time buyers. TNB (OP. there were no significant catalysts for other key economic sectors.to high-end properties.75). Our preference would thus still be on the mass housing developers like Mah Sing (OP. TM (MP.Impact On The Equity Market : Neutral Given the 2011 Budget’s spending constraints. rural development. FV = RM2. the RM26bn Kuala Lumpur International Financial District. FV = RM5. but the upshot is that investors will receive a capital repayment that can be redeployed in other stocks. but this has been the case even with past budget speeches. and EPF’s RM10bn development of the Malaysian Rubber Board land in Sungai Buloh.49). and incentives for civil servants. We note that EPF and UEM Group’s proposal on 15 Oct to jointly acquire PLUS’s assets and liabilities for RM23bn cash could be seen as a contradictory move. education.96). FV = RM10. Therefore. Incentive for first-time house buyers The PM’s call again to the Government-Linked Investment Companies (GLICs) to divest their shareholdings in listed companies will once again focus attention on the key GLCs. Focus on private sector projects While the lack of details on these projects could be a major disappointment for investors. and sustain the bullish sentiment for Gamuda (TB. FV = RM4. we note the Government’s focus on the low. However. thereby indirectly improving the market’s liquidity. Post-Budget news flow to sustain liquidity-driven rally THE 2011 6 BUDGET . which was in line with the theme to assist the lower-income groups. we believe the news flow will in fact come after the Budget speech. These included the RM40bn MRT. the projects are mostly expected to begin in 2011. We believe this will maintain the positive flow of news to the construction sector. we believe this does not preclude subsequent post-Budget measures to curb speculation on mid. GLICs called upon to divest GLC shares We believe the 2011 Budget has not provided major catalysts for the equity market. FV = RM5. FV = RM3. News flow likely to come after the Budget speech As for the property sector. like Axiata (MP. and this uncertainty could have a negative impact on the property sector. now that the timelines for each of these projects have been set.
8 12.6 11.3 9.2 38. These are the major positives in the Budget which. despite a less expansionary Budget.0 -10.1 2.9 13.8 7.4 10.6 2.2 -14. Already.5 30.0 28.7 11. Whilst market valuations are no longer cheap. in our view. Consequently.0 15.4 6.4 2.3 9. still influx short-term liquidity could send the market higher in the near term Table 3 Earnings Outlook And Valuations FBM KLCI COMPOSITE INDEX @1.9 13. we believe the market may move into a phase of greater volatility in the months ahead.8 2.1 13.0 23.0 1.8 6. the lack of broader measures to increase revenue.7 10.0 37.6 15.6 -10.3 -9.0 2. and reduce subsidies and other operating expenditure suggests that there is limited room for manoeuvre. are critical to chart the direction of the country in moving towards a high income economy. These short-term capital.2 2.7 2.9 1.9 13.3 2.5 40.2 15.9 1.7 8.4 2. Whilst the Budget aims to strike a balance between fiscal consolidation and the need to sustain spending to cushion the economy against the risk of a sharper-thanexpected slowdown in the global economy.8 8.5 8.1 47.4 33. the destabilising capital flows and sharp appreciation of currencies in Emerging Asia have created concerns and induced policy intervention in the form of short-term capital control and currency intervention in some countries.7 16.4 -6.6 7.6 9. in our view.4 -2.3 6.489. our views on the market outlook.2 7.9 9.4% of GDP in 2011. are transient in nature and could reverse out relatively quickly with changes in outlook. bond and currency markets in search for higher returns could still send the market higher in the near term.9 20.7 23.8 14.0 9. As a result.Market Outlook : Short-term Liquidity And News Flow Driven The 2011 Budget sets the pace of economic transformation with the right emphasis on reinvigorating private investment and intensifying human capital development.6% estimated for 2010.1 5.3 17. however.8 8.3 26.4 6.86 15/10/2010 EBITDA Growth (%) Pre-Tax Earnings Growth (%) Normalised Earnings Growth (%)* Normalised EPS Growth (%)* Prospective PER (x)* Price/EBITDA (x) Price/Bk (x) Price/NTA (x) Net Interest Cover (x) Net Gearing (%) EV/EBITDA (x) ROE (%) * Exclude Mas earnings in 09-11 -6.7 19. in our view.3 37.8 8. the fiscal deficit is only projected to ease marginally to 5. earnings and sector calls remain relatively unchanged (see Tables 3 & 4). however.4 12.6 8.8 13. no substantial new information that will likely excite equity investors in the immediate term. the influx of G3 liquidity to Emerging Asia's equity.1 9.6 48.8 2009a 2010f 2011f 2012f 2009a RHBRI’s Basket 2010f 2011f 2012f THE 2011 7 BUDGET .9 2.3 2.5 14.1 8.3 10.7 14.3 11.3 7.5 5.6 3. As a result.8 19.2 7.1 14. There are.1 7. from 5.4 7.1 12.3 2.7 16.5 32.0 -2.8 37.3 9.8 14. Setting the pace towards transformation with the right emphasis Balancing fiscal consolidation with growth but with limited room for manoeuvre No substantial from but new the of information Budget.2 46.7 6.8 9.
based on 15x mid-cycle 2012 earnings.8 119.3 12.5 14.9 11.9 17.3 13.2 7.5 16.6 21.7 9.5 9.9 Overweight Overweight Overweight Overweight Overweight Overweight Overweight Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Recommendation Longer term.5 12.6 0.1 25.7 -6.0 12.4 7.9 32.2 17.9 16. however.4 17.0 14. Longer-term outlook.7 19.6 2.6 10.7 44.6 1.3 10.3 63.9 -13.7 7.5 3. however.8 28.4 11.0 15.7 32.2 5.5 7.7 8.6 64.7 19.2 16.7 10.7 14.8 1.4 109.4 14.3 12.3 12.8 0.4 58.6 17.5 68.2 10.1 14.2 4.6 5.3 9.5 14.6 3.1 49. This.9 12.3 6.5 12.4 0.2 2.0 12. we believe there is still room for the market to trend higher in 2011.5 40.0 21.4 11.9 11.7 33.0 8.1 17.0 8.4 12.2 11. remains positive and our end-2011 FBM KLCI target remains unchanged at 1.640 THE 2011 8 BUDGET .9 41.7 17.9 9.6 23.8 18.7 2.0 833.3 15.5 0.9 15.1 10.9 8.3 9.1 8.5 14.8% projected for 2011) that will continue to create new shareholders' value for investors.9 10.0 EPS Gwth (%) FY10 24.7 FY12 12.8 2.6 13.9 11.8 FY12 10.4 13.0 16.4 21. This is primarily predicated on the view the global economy is more sustainable than feared.4 6.9 21.2 51.6 10.5 14.0 7.7 13.0 4.9 0.9 2.1 3.8 10.9 22.6 7.0 3.4 8.9 7.3 9. which in turn implies sustained corporate earnings growth (+12.1 * Exclude MAS earnings in 10-11 Note : RHBRI’s basket Sector Weightings & Valuations Weight % 25. will not be without volatility as the global economy enters into a period of slowing growth in an uneven phase of recovery.5 12.1 16.7 FY11 13.8 8. Consequently.Table 4 Covered Stocks Mkt Cap RMbn Banks & Finance Power Construction Motor Property Media Timber Insurance Plantation Telecommunications Gaming Transportation* Oil & Gas Consumer Infrastructure Building Materials Manufacturing Semiconductors & IT 213.4 FY10 15.640. our end-2011 FBM KLCI target remains unchanged at 1.3 14.6 100.3 13.3 16.2 8.9 9.4 20.0 7.8 PER (x) FY11 13.8 12.3 10.2 59.8 17.9 23.4 7.0 21.0 12.8 14.7 10.
8 23.3 15.4 25.4 5.21 1.1 2.3 2.3 3.01 7.55 5.9 3.0 8.82 8.9 20.9 10.3 8.6 10.177 2.2 2.849 2.605 1.2 22.8 17.9 11.6 14. investors should remain vigilant and do some top slicing on stocks where valuations have become rich in the run-up of the market.80 19. Under such circumstances.9 131.3 9. 15.9 4. As key risks are mainly external.1 21.96 1.7 38.5 34. we believe the market will be volatile in the months ahead.0 2.5 26.89 2.93 3.30 4.23 2.9 14.852 58.51 2.4 16.2 10.50 9.0 13.2 36.832 1.7 5.88 7.5 23.60 6.2 10.7 4.4 5.05 3.30 2.1 2.6 2.5 5.3 20.1 2.6 12. we believe investors may find greater price stability in companies that have less or hedged exposure to overseas markets.012 62. stock picking is key.1 37.9 12.87 10.9 11.9 4.4 11.4 3.8 12. Under such circumstances. Table 5 Fair FYE 15/10/2010 Tactical Plays Tenaga Gamuda MRCB Faber HSL Maybank CIMB IOI KLK AirAsia Parkson Dialog Media Prima KPJ Carlsberg Mah Sing Aug Jul Dec Dec Dec Jun Dec Jun Sep Dec Jun Jun Dec Dec Dec Dec 8.2 11.0 3.2 n.9 3.7 69.5 12.8 13.987 20. n.1 3.3 14.698 7.7 28.5 4.5 6.2 14.4 29.4 3.8 1.1 17.0 10.435 2.3 33.4 14.0 31.8 16.5 19.3 16.00 2.4 0.2 16.6 124.8 47.5 8.5 10.94 5.72 1.75 22.3 42.5 21.2 61.Market Strategy Top Slicing On Further Run-up Whilst the long-term economic picture remains positive for the equity market.561 6. the revival of a “double-dip” recession fear and destabilising capital flows can have a disproportionate impact on the market in the foreseeable future.1 2.30 3.6 42.5 21.8 20.5 30. but any significant pullback in the market should be taken as an opportunity to pick stocks and reposition for the new year.6 9.0 13. This would then provide more room for investors to accumulate fundamentally robust stocks on weakness.2 87.3 10.3 12.6 1.2 17.283 6.3 14.6 50.0 6.7 7.4 21.9 1.212 36.0 2.7 7. A list of our tactical plays and longer-term picks is reflected in Table 5.33 38.75 4.6 4.555 75.1 17.1 8.118 1.51 6.873 1.0 1.4 34.a.1 0.2 28.9 10.82 1.8 12.6 3.5 32.6 64.4 14.9 56.7 Price (RM/s) Value (RM/s) Mkt Cap (RM Mil) Top slicing on further runup of stocks where valuations have become excessive Stock picking is key and any significant pullback should be taken as an opportunity to pick stocks and reposition for the new year Top Picks EPS (sen) FY11 FY12 EPS GWTH (%) FY11 FY12 PER (x) FY11 FY12 P/BV (x) FY11 P/CF (x) FY11 GDY (%) FY11 Longer -Term Picks THE 2011 9 BUDGET .4 27.9 47.5 11.4 26.1 10.8 15.95 10.1 9.9 11. Meanwhile.0 11.08 3.4 21.8 50.3 2. Overall.2 16.36 5.6 2.0 2.49 3.7 17.03 2.a.08 1.7 19.0 1.9 4.8 5. there is still room for some tactical plays in the near term given the positive news flow on the award of projects now that the timelines for major projects have been set.4 3.4 8.174 1.2 19.6 1.3 12.
9 9.1 2.1 13.8 14.6 4.62 8.6 12.8 11.60 5.0 12.7-1%.7 ROE (%) FY11 FY12 15.2 3.1 1.2 8.8 12.1 75.3 13.1 23.3 91.7 12. Finally.4 15.6 2.9 1.3 1.4 9.6 16.3 64.6 72.7 1.5 10.9 1.1 1.6 5.0 14.5 13.6 1.9 70. Table 6 Valuations Of Banking Stocks FYE Price (RM/s) CIMB PBB-L AMMB^ Affin RCE^ Maybank HL Bank AFG^ EON Cap RHB Cap* Sector Avg Dec Dec Mar Dec Mar Jun Jun Mar Dec Dec 7.6 15.4 9.4 FY12 14.3 9.5 99. RCE could be a potential beneficiary of the Government’s move to increase the benefits to civil servants.4 1.2 11.6 3. These include: 1) the launch of sukuk and conventional bonds by Bursa Malaysia to help meet demand from retail investors for fixed income instruments.9 3. That said.1 11.9 EPS Growth (%) FY11 17.7 3.3 Measures capital targeted market to and revitalise the domestic strengthen Malaysia’s position in the Islamic capital market Much measures from anticipated to rein but in this household debt missing budget. We do note that this space is becoming increasingly competitive given attractive margins and low default rates (as monthly repayments from civil servants are deducted at source or salary). and 4) tax deductions for expenses in relation to the issuance of certain Islamic securities.6 8.9 15.24 6.4 14.8 2.4 1.6 69.6 2. a 70% or 80% cap per se on LTV ratio is unlikely to impact property sales momentum too significantly but harsher measures such as the discontinuance of incentives by developers.94 12.8 11.4 0.3 3.4 2. was the much anticipated measures to reign in household debt (e.7 11. On the whole. in our view.30 3.6 5.0 9. We estimate every 1%-pt change in our loan growth assumption would impact our net profit projections for the banks by 0.1 1. we would not discount the possibility that BNM may yet still impose such measures ahead.6 1.9 0.3 61.5 29.9 3.3 11. the imposition of a cap on the loan-to-value (LTV) ratio). the Government plans to implement measures that will revitalise the domestic capital market and strengthen Malaysia’s position in the Islamic capital market. However. In our view. given its niche in the civil servant personnel financing segment.1 6.91 3.8 1. I/B/E/S estimates are used for companies not covered by RHB Research Institute.8 35. 3) development of an international board to enable foreign securities to be listed.6 4.4 71.5 23.4 4.6 14.74 EPS (sen) FY11 FY12 56.8 0.8 2.8 34.0 15.0 3. on top of a cap. could still come later RCE potential beneficiary of better benefits to civil servants GDY (%) FY11 FY12 1.3 69. could potentially hit the property sector badly and impact mortgage loan growth.9 13.88 9.8 27.3 6.5 FY12 12.Banking : Revitalising Domestic Capital Market And Strengthening Position In Islamic Capital Market Overweight Consistent with the recently announced ETP.2 9.6 2.0 1.2 P/BV (x) FY11 FY12 2.98 7.8 12.1 13.8 2.9 9.1 10.4 2.3 13.5 0.7 1.g.8 10. we are neutral about the incentives and measures mentioned above.8 13.9 2.7 11.5 14.3 12.4 5.9 80.24 0.4 11.9 11.9 Rec OP OP OP OP OP OP OP MP UP NC * Not under our coverage.3 12.5 PER (x) FY11 14. we think much of such concerns have already been factored in its cheap valuations.6 1.3 1. Missing from the budget.7 47.1 5.6 1. 2) the issuance of three new stock broking licences. although we do note that these could provide further opportunities for banks to grow non-interest income.2 51. ^ FY11-12 valuations refer to those of FY12-FY13 THE 2011 10 BUDGET .1 9.5 11.6 14.2 14.1 12.
88) valuation has become very rich at 16.2 3.0 58.9 4.1 50.5 EV/EBITDA (x) FY11 8.6 2.9 P/CF (x) FY11 n. underpinned by the rollout of large-scale infrastructure projects and pick-up in property development activities.2 EPS Gwth (%) FY11 FY12 25.3 5.5 38.4 4.8 0.69 2.7 16.69).5 8.1 7.9 7. For YTLCement (OP.63 4.5 24.6 3.9 41.3 15.7 16.1 0.11 2.3 4.9 P/NTA (x) FY11 0.98 7.1 2. Fuel and electricity cost constitute about 50% of cement production cost.9 9.26 4.6 15.1x to our estimated FY11 earnings (as opposed to our PER target of 14x FY11 earnings).6 6.1 9.0 5. We think YTLCement is due for a re-rating given that it has been a laggard despite being the second largest cement producer in Malaysia after Lafarge.2 0.2 0. Although domestic long steel demand is expected to recover with the pick-up in construction activities and infrastructure developments. Maintain our Neutral stance on the steel sub-sector.88 0.5 6.9 24. FV = RM4. Table 7 FYE Price (RM/s) Hiap Teck YTL Cement CSC Steel Perwaja Hldgs Ann Joo Lafarge Sino Hua Kinsteel Sector Avg Jul Jun Dec Dec Dec Dec Dec Dec 1. as the excess capacity in China’s steel sector is still high. We believe net selling prices will also be higher as rebates given by the cement producers will be lower.7 9. We believe high thermal coal price and potential hike in electricity tariff in the future will partly offset the benefits of higher net selling price.83 1.6 1.4 4.1 -2.8 5. We are maintaining the forecasts for cement producers under over coverage (Lafarge and YTL Cement) as the pick-up in domestic cement consumption has been widely expected. we believe the impact is likely to be minimal.0 21.9 FY12 7.0 6. However.1 PER (x) FY11 7.8 7.9 49.6 8.59 1.5 GDY (%) FY11 2.91 Fair Value (RM/s) 1.9 23.9 18.9 10. as fortunes of long steel players’ are tied more to the demandsupply balance in the global market.9 7.33 1.8 6.9 10. An increase in domestic demand will also enable cement producers to sell more domestically (which command a better margin) rather than exporting their excess production.8 77.4 13.0 0. Both Lafarge and YTLCement offer decent dividend yield at 5-6% given their strong free cash flow and healthy balance sheet at net cash position.6 Cement sub-sector poised to benefit …but will be partly offset by higher energy prices Valuation has become rich Neutral stance maintained for steel sub-sector Valuations Of Building Materials Stocks EPS (sen) FY12 16.1 9.0 3.4 30. its share price is currently close to our fair value of RM4.1 OP OP OP OP MP UP UP UP Rec +>100 8.8 10. For now.0 12.Building Materials : Positive But Priced In For Neutral Cement.3 13.6 1.m 15.86 FY11 16. FV = RM6.8 0. Lafarge’s (UP.3 17. our stance on the cement sub-sector is maintained at Neutral.8 5.7 57.0 7.6 7.69 (based on 11x CY2011 fully diluted EPS of 42. Overcapacity (particularly in China) remains a key issue over the medium to long term despite the recent plants closure. with the recent run-up in its share prices.8 4.94 0.0 1.2 THE 2011 11 BUDGET .4 8.37 3.0 4.4 5.5 10.2 10.36 0.7 sen).9 7.6 0.36 0. Overall. Neutral For Steel Domestic cement producers are expected to benefit from the anticipated pick-up in domestic cement consumption.14 6.4 16. we maintain our recommendation on YTLCement pending a meeting with management.
We view this positively. Johns Hopkins Medicine International and Royal College of Surgeons. The Government has reaffirmed its commitment towards key large-scale projects. buoyed by news flow from: (1) The infrastructure development for the Greater KL National Key Economic Area (NKEA) under the Economic Transformation Programme (ETP). to fund the project with RM10bn allocation each from the 10MP and the 11th Malaysia Plan (11MP). Three new inclusions that we believe worth highlighting are: (1) The “revived” RM5bn Warisan Merdeka integrated development comprising a 100-storey tower led by Permodalan Nasional Bhd. (2) The RM7bn Ampang and Kelana Jaya LRT line extension project.2bn.9% estimated for 2010.51) as we believe its share price will be buoyed by the sustained news flow from the RM40bn MRT project. Key areas of spending (that will generate construction jobs) are rural infrastructure (RM6. expenditure down 9% Key high-profile projects reaffirmed. building/upgrading of schools (RM6. the RM40bn MRT project.e. 70% or RM4.9bn). anchored by RM1bn facilitation fund (see Table 8).8bn goes to Sabah and Sarawak. (2) The “River of Life”.4% in 2011 from +4. down -9% from RM54bn estimated for 2010. FV = RM2. the RM10bn redevelopment of the Rubber Research Board land in Sungai Buloh and six toll roads including the West Coast Expressway. construction GDP growth is projected to ease to +4. particularly. i.9bn allocation under environmental preservation. Our top “tactical” pick for the sector is Gamuda (Trading Buy. i. to kick-start in 2011 MRT to attract RM40bn private investment? Several new inclusions Maintain Overweight THE 2011 12 BUDGET . that will bring in RM2bn private investment.9bn). This is not consistent with the Gamuda-MMC JV’s proposal to the Government.5bn private investment. Of total rural infrastructure spending (comprising largely water.e. projected to rack up RM12. FV = RM4. coupled with its strong earnings visibility stemming from its firm construction margins and growing non-construction profits. i. To Kick. the RM26bn KL International Financial District (KLIFD). in 2011. Ireland. The impact of a lower gross development expenditure will be cushioned by projects to be carried out on a Public-Private Partnership (PPP) or privatised basis.Construction : Key Projects Reaffirmed.Overweight Start In 2010 Gross development Gross development expenditure in 2011 is projected at RM49. and (3) The Academic Medical Centre. the clean-up/beautification of the Klang Valley that can unlock the real estate potential of land parcels along the river. The Gamuda-MMC JV’s position has been not to carry out the project on a PPP/privatised basis as it is fully aware that large public transport projects are generally not commercially viable. with commencement explicitly spelt out to be during the first year of the 10MP. We remain upbeat on construction stocks as we believe they will continue to generally outperform the market from 4Q2010. a JV between Academic Medical Centre. These include the RM40bn MRT project.35) due to its undemanding valuations.4bn) and environmental preservation (RM1. As a result. We view positively that key high-profile projects identified during the announcement of the 10th Malaysia Plan (10MP) (2011-2015) in June this year have been reaffirmed. and (3) Federal land deals. as well as the speediness of their implementation in Budget 2011.e. One interesting observation is that the MRT project is regarded as a PPP/privatised project “with an estimated private investment of RM40bn”. electricity and roads). Our top “value” pick for the sector is Sunway (Outperform. and the balance to be financed via an off-balance sheet deferred payment scheme (to keep the budget deficit under control). funded by part of the RM1.
3 7.2 15. Kedah Basic infrastructure for swiftlet nets.2 17. Sabah International Islamic University Malaysia Teaching Hospital in Kuantan.4 EPS Gwth (%) FY11 FY12 21. Terengganu & Pahang Corridor & regional development ♦ Iskandar Malaysia ♦ East Coast Economic Region (ECER) ♦ Northern Corridor Economic Region (NCER) ♦ Sabah Development Corridor ♦ Sarawak Corridor of Renewable Energy (SCORE) Public housing Aquaculture zones in Sabah & Sarawak Drainage & irrigation in Muda Agriculture Development Area.6 6.95 1. Mudajaya Ahmad Zaki (Awarded) Ranhill Table 9 FYE Price (RM/s) HSL Fajarbaru Sunway Hldgs Emas Kiara Gamuda MRCB IJM^ WCT Sector Avg Dec Jun Dec Dec Jul Dec Mar Dec 1.4 7.7 8.8 10.1 7.3 8.700 2.6 19. MMC 1MDB (Awarded).2 EV/EBITDA (x) FY11 6. ornamental fish and herbs & spices ventures Integrated eco-nature resort in Nexus Karambunai.07 1.5 6. Mudabala (Awarded) EPF (Awarded).000 10. Sabah Hotels & resorts in remote areas Diagnostic lab at Agriculture College in Kubang Pasu.0 15.2 19.6 1.0 1.4 8.6 22.7 15.5 1.900 2.3 FY12 10.6 19.900 na na 850 339 178 133 110 93 568 252 235 135 100 85 70 50 Potential Beneficiaries East Malaysia-based contractors Mid-sized contractors YTL Emas Kiara.000 26. facilities & equipment Environmental preservation projects ♦ “River of Life” and greening of KL ♦ Preservation of marine sources and coastal areas in Melaka.8 18.3 1.7 16.4 32.5 11. MRCB East Malaysia-based contractors Karambunai 40.2 7.8 P/NTA (x) FY11 2.7 -7.82 1.5 2.7 19.4 25.1 15.2 16.52 4.3 0.9 5.24 Fair Value (RM/s) 1.4 -10.9 20.30 Valuations Of Construction Stocks EPS (sen) FY11 16.5 23.37 2.7 2.51 2.01 2.2 13.9 FY12 17.1 0. Kedah Shaded walkways in KLCC-Bukit Bintang area Via Public-Private Partnership (PPP)/Private Investment MRT in Greater KL Kuala Lumpur International Financial District (KLIFD) Development of Malaysia Rubber Board land in Sg Buloh Warisan Merdeka integrated development with a 100-storey tower Academic Medical Centre Ampang-Cheras-Pandan Elevated Highway Guthrie-Damansara Expressway Damansara-Petaling Jaya Highway Pantai Barat-Banting-Taiping Highway (West Coast Expressway) Sungai Dua-Juru Highway Paroi-Senawang-KLIA Highway 300MW combined-cycle gas power plant in Kimanis. Kelantan.3 16.100 696 556 300 6.9 3.4 1.2 1.7 P/CF (x) FY11 13.5 20.Table 8 Key Projects To Be Implemented Project Funded By Development Expenditure Rural infrastructure ♦ Rural water & electricity in Sabah & Sarawak ♦ Rural roads in Sabah & Sarawak ♦ Rural roads in Peninsular Malaysia ♦ Rural water & electricity in Peninsular Malaysia ♦ Housing for rural hardcore poor Building/upgrading of schools.78 3. hostels. aquaculture.0 6.2 17.2 14.9 OP OP OP OP TB TB UP UP Rec ^ FY11-12valuations refer to those of FY12-FY13 THE 2011 13 BUDGET .4 5. MRCB PNB (Awarded) Kumpulan Europlus.89 2.1 1.6 16.8 5.4 50.000 na na na na na na na na na na Gamuda.9 5.97 0.9 20.1 20.5 6.08 5.2 28.0 12.4 2.7 36.5 32.000 5.42 3.3 1.000 2. IJM Zelan.0 7.0 GDY (%) FY11 1.5 12.0 2.9 4.7 3.49 5.3 9. Pahang Women and Children’s Hospital in KL Integrated Health Research Institute Complex in KL Value (RMm) 6.0 4.5 3.0 2. seaweeds.8 PER (x) FY11 11.0 31.400 1.35 1.6 16.7 34.
and 2) introduction of the Retail Shop Transformation Programme (TUKAR). Increasing the rate of Funeral Arrangement Assistance to RM3k from RM1k previously. AEON (MP. A continuation of a rebate on electricity bill payment for monthly consumption of below RM20. Although the measures introduced during the 2011 Budget is not as exciting as the various income tax goodies introduced in the previous budget tabling. although we believe there would boost overall consumer spending tourist destination and also to ease the 1. and Hai-O (UP. of 5% to 30% be abolished. No increase in toll rates for the four highways owned by PLUS for the next five years. The tax relief amount is maintained at a maximum of RM5k. to a certain extent be a driver for growth in consumer spending. the abolishment of import duty on 300 various products will be one of the key drivers for the retail players’ revenues (like Parkson and AEON). 2. which will be for the modernisation of small retailers (mom and pop stores). A RM500 assistance for all civil servants grade 54 and below to cope with schooling expenses.4% for 2011 (2010: 5. we believe this will not have a significant impact on demand. However. by 60-78%.Consumer : Not As Exciting As Previous Budget Neutral This time around. Increasing the monthly allowance for various community leaders such as Ketua Kampung. We believe that the 1Malaysia Smart Consumer portal will increase consumer price sensitivity. 5.61) product selling prices. FV=RM2. FV=RM7. as consumer disposable income is expected to improve together with consumer sentiment.84). FV=RM5.45). FV=RM5. Imam etc. the civil servants force. This is also extended to retired civil servants.72). from just medical treatments previously. Basic food manufacturer QL Resources (OP. F&B The new policy which will affect F&B players is 1%-point increase to the current 5% service tax to 6%. consumers did not Government. given that a 6% service tax will only increase the average selling prices of KFCH’s products by 1%. An extension to the current tax relief for parents to include other expenses such as day care centre.6%).72).4% for 2011 Retail and MLM players to benefit Increase in Service Tax to 6% QL Resources to enjoy various incentives for its palm oil division . Amway (MP. 2.41) will continue to benefit from the extension of the food production tax incentive to 2015 and the RM170m incentives allocated for fishermen. The Government also announced two non-quantitative policies which include: 1) the establishment of a “1Malaysia Smart Consumer” portal to provide information on price movements of goods in about 7k business premises nationwide. Retail These measures augur well for the retail and MLM players such as Parkson (OP. FV=RM3. will benefit from: 1. we believe that all the measures above will. 3. FV=RM8. In particular. get any new tax goodies from the are some measures introduced which in terms of promoting Malaysia as a burden of the rakyat:Consumers did not get any new tax goodies 4. RHBRI projects a consumer spending growth of 5. Aside from the above. Import duty on approximately 300 goods preferred by tourists and locals.2m people. cost incurred to employ caretaker for parents and other daily needs such as diapers. while the TUKAR programme would increase competition for department stores cum supermarkets such as AEON’s Jusco as it gives the smaller players more edge to compete with the bigger players. which comprises approximately 1. The incentives for fishermen will THE 2011 14 BUDGET Consumer spending growth of 5. This will increase KFCH’s (OP. as their revenues are generally driven by growth in consumer spending.
5 8.82) currently holds the concession agreement to provide hospital support services in Perak and Sabah.09 Hai-O^ Apr 3. 2) energy conservation.m P/CF (x) FY11 10.7 GDY (%) FY11 2.5 14. FV=RM4.8bn in 2010) to construct new hospitals.3 47.96 Faber Dec 3.2 1 0 .2 10.03).5 5. this could have an impact on private hospital operator KPJ (OP.5 30.7 PER EV/EBITDA (x) (x) FY11 FY12 FY11 14.4 28.7 10.45 2.7 20. where two will be in Perak while the other two will be in Sabah.6 2.6 13.4 13. Healthcare As for the healthcare sector.0 9.0 7. with more new government hospitals being built across Malaysia.3 230.6 32.9 1.0 n. RM=RM3. Nevertheless.3 12.4 9.8 -1. it would likely benefit. QL’s palm pelletisation is targeted to be commercialised by Dec 2010.1 31.2 34. four have been identified. However.6 2.2 26.3 11.5 1 2 . The Government also did not introduce a subsequent hike in excise duty for cigarettes after the increase of 16% earlier this month.41 4.61 6.3 2.72 3. is positive for BAT (UP. Brewery and Tobacco The brewers enjoy another year of no increase in excise duty.7 2.5 20.7 5.4 6.0 6.9 2.21 BAT Dec 47.ensure the sustainability of fish supply for its Marine Product Manufacturing (MPM) division given that QL sources 95% of its fishes from local fishermen. nor did it mention anything regarding the cess issue. Table 10 FYE Price Fair Value (RM/s) 3.08 QL Resources Mar 5.21 KPJ Health Dec 3. RM14.2 11. which is positive for Carlsberg.3 1.3 6.3 P/NTA (x) FY11 1.8 5. Nevertheless.26 Carlsberg Dec 5.5 13.7 2.4 8.2 233.2 38. Under the 10MP.90 Another year of cheer for the brewers Valuations Of Consumer Stocks EPS (sen) FY11 FY12 22.5 58. we expect that overall Malt Liquor Market (MLM) TIV would not be affected in 2011.5 3.9 14. FV= RM42.2 11.9 4. The FiT will further increase the attractiveness and marketability of this system. it would be dependent on whether Faber’s application for the concession is renewed by the Government. Besides the above incentives. 2) Faber’s 14-year track record and technical expertise. The palm oil division will benefit from these incentives given its venture into renewable energy (RE) such as its palm pelletisers and biomass boilers.7 14.1 10.4 17.4 Rec (RM/s) KFC Dec 3.7 41.1 42.5 26.9 37.7 5.3 13.6 28.9 34.8 5.55 Parkson Jun 5. increase the number of doctors and nurses as well as to obtain supplies of medicines and equipment. greater uptake in medical insurance and general dissatisfaction with the service of public hospitals. 6 -7.51).5 1. FV=RM6. Furthermore. 8 10.5 14.7 15.0 EPS Gwth (%) FY11 FY12 16.72 8. which will be able to generate energy through palm oil wastes. In addition.4 5.7 12.8 9.00 AEON Dec 5.0 18. which is positive for Carlsberg (OP.6 2.5 56.1 6.9 4. As Faber (OP.2bn in 2011 (vs.8 14. We maintain our projected flat TIV growth of 0% for FY11.1 3.85 Amway Dec 8. Due to this.4 11. which in the context of the 2011 Budget outcome.6 29.8 9. 9 7.82 5.3 1 0 . and 3) reduction of greenhouse gas emission to 2015.3 12.9 35.1 10.2 15.4 11.5 26.9 7.9 4.1 4.90).4 3. although we are unable to gauge the impact of this yet. we expect this to be minimal due to Malaysia’s rising affluence towards seeking better quality of care.3 2.51 7.6 12.0 47. and 3) service benchmarks are consistently met without any unit price increase.5 7.6 1.08 Daibochi Dec 3. QL’s palm oil division will benefit from the extension of the application period for tax incentives for: 1) the generation of energy from renewable sources.84 42.72 Sector Avg ^ FY11-12valuations refer to those of FY12-FY13 OP OP OP OP OP OP OP MP MP UP UP THE 2011 15 BUDGET .3 44.0 8. we maintain our view that the renewal will likely be granted on the back of: 1) continuous effort by management to improve its services. We recently highlighted QL’s ultimate aim to manufacture a zero-waste palm oil milling system to palm oil millers using its pelletising and biomass boiler technology.1 2.2 7. out of the eight hospitals that will be built. Note that the Government has not increased excise duties on beer since the year 2005.0 12.8 3. the division will benefit from implementation of the Feed In Tariff (FiT) mechanism under the RE Act.0 7.12 5. the Government has committed to allocate RM15.8 16.5 2. given the lack of details on the incentives.03 4. which allows QL to sell its RE generated from its biomass plant to be sold to electricity utility companies.8 47.5 12.5 5.
FV=RM2. effective immediately.5 Rec Puncak PLUS Sector Avg Dec Dec MP UP Insurance : Budget Impact Not Significant The 2011 Budget will not significantly impact the insurance sector given that there were no new incentives introduced.0 3.88 4.1 -36.4 8. However.32). Heightened economic activities will provide opportunities for the general insurers such as Allianz (OP.7 29. Kurnia.2 Neutral No significant impact to the sector The new Private Pension Fund (PPF) could pose competition for the life insurance segment Maintain Neutral Valuations Of Insurance Stocks EPS (sen) FY12 99.8 22. while the other toll concessionaires remain unaffected.9 51. For life insurance.2 14.8 16.9 70.1 EV/EBITDA (x) FY11 -5.8 2.9 EPS Gwth (%) FY11 FY12 19.2 19. Besides that. we believe that the insurance sector will benefit from the various budget measures for other sectors to boost economic activity.1 9.8 49. However. no details on the form of compensation to PLUS were forthcoming.32 2.8 GDY (%) FY11 0.5 3.3 7.0 8. we note that on the very same day itself. 7 1.9 4.46 Fair Value (RM/s) 3.6 FY12 4.9 11. FV=11.40) and Kurnia (MP.0 8.1 7.60 per share. Given that the measures introduced have limited impact for the sector.2 10.7 9.Infrastructure : Government Measures Introduces Populist Neutral Measure: To reduce transportation costs in the country.5 -35.98 0. no new measures were introduced that would boost the segment.0 6.98).5 P/CF (x) FY11 5.8 18.0 82.1 99.5 12.76 (10% premium to NPV of RM4. FV=RM5. The sector will also benefit from the government policy to make it mandatory for employers to procure health insurance for their foreign workers as it would provide another avenue of premium growth. there was no update on the reform of the existing Third Party Bodily Injury and Death (TPBID) policy.7 P/NTA (x) FY11 0.1 4.70 Fair Value (RM/s) 5. aviation and transit insurance. While the announcement at first appears negative to PLUS.43 11.44 11. LPI. Table 12 FYE Price (RM/s) Allianz MNRB^ Kurnia Asia LPI Capital Sector Avg ^ FY11-12valuations refer to those of FY12-FY13 Dec Mar Dec Dec 4.2 P/CF (x) FY11 2.01 4. The PPF is an equivalent of the EPF and the RM6k tax incentive for EPF contribution is also extended for the PPF. to grow their other business segments such as workmen compensation and marine. Impact: We note that the toll hike freeze applies only to PLUS.44). we are maintaining our current forecasts and assumptions for all four insurance companies under our coverage.6 1.0 21.6 2.e. LPI (UP.4 38.8 14. which will be borne by UEM and EPF. although we believe the new Private Pension Fund (PPF) that was introduced for the private sector and self-employed workers could provide competition for life insurance existing products.5 37. We think the takeover offer is fair though not very compelling given our fair value of RM4.0 EPS Gwth (%) FY11 FY12 14.9 27.8 12.5 4.9 0. For motor insurance.3 5.7 15.40 FY11 86.60 Toll hike freeze for next five years Valuations Of Infrastructure Stocks EPS (sen) FY11 FY12 36. and MNRB (MP. UEM and EPF together made a joint offer to buy all the assets and liabilities of PLUS at an aggregate purchase consideration of RM23bn or RM4. FV=RM0. indirectly.5 6. Allianz.9 OP MP MP UP Rec THE 2011 16 BUDGET .7 8.0 9.3 72.7 GDY (%) FY11 2.8 3.8 P/NTA (x) FY11 0.11 2.7 5 2 .7 8.5 1.2 11.0 PER (x) FY11 4. i. the proposed takeover will essentially put aside any concern about the potential adverse earnings impact of the toll hike freeze.6 10.74 0. Table 11 FYE Price (RM/s) 2.0 PER EV/EBITDA (x) (x) FY11 FY12 FY11 7.7 11. the Government announced that the toll rates in the four highways owned by PLUS Expressways Berhad will not be raised for the next five years.60).
Overweight Full exemption of import and excise duties till 31 December 2011 Table 13 Duties And Taxes On Motor Vehicles CBU & CKD Excise Duties (%) 75 80 90 105 Sales Tax (%) 10 10 10 10 Engine Capacity (cc) <1.2 9.5 0.2 8.4 8.2 16.800-1. while the incentive is a big plus for interested hybrid car buyers.0 11.0 3.68 Fair Value (RM/s) 5. We gather that current on-the-road prices for the Toyota Prius and Honda Civic stand at RM175k and RM130k respectively.6 11.7 1. With this incentive. the Government proposed that full exemption of import and excise duties be given on new CBU hybrid cars.75 5.7 66.0 11.50 5.3 9.999 2.3 10.3 75. Previously.8 5.3 50.53 5.3 P/NTA (x) FY11 1.0 P/CF (x) FY11 5. it will have minimal impact on the total TIV of the industry.m 14.4 12.5 6.500 Source: MAA In the current Budget.8 7.85 4. electric cars as well as hybrid and electric motorcycles which applied with the Ministry of Finance from 1 January until 31 December 2011. YTD TIV units for the Prius and Honda Civic Hybrid stand at 169 and 107 respectively.2 80.499 Above 2.0 7.2 48.01 FY12 8.27 6.1 EV/EBITDA (x) FY11 3.3 Hybrid car prices could potentially be priced 14-19% lower However. We reiterate our Overweight stance for the sector and maintain APM Automotive as our top pick.17 6.1 6.2 0. The incentive was limited to new CBU hybrid passenger cars with engine capacity below 2.2 59.000 -2.2 n.6 5.6 2. prices could drop to RM141k and RM111k respectively based on the Labuan prices (RM128k and RM101k respectively) inclusive of the sales tax of 10%. franchised holders of hybrid cars are given 100% exemption of import duty and 50% exemption of excise duty on new completely-built-up (CBU) hybrid cars until December 2010.2 20.3 67. hybrid car unit movements do little to change total TIV Maintain Overweight call on the sector Valuations Of Motor Stocks EPS (sen) FY12 57. At present.3 EPS Gwth (%) FY11 FY12 7.7 0.30 7.2 10.8 11.000cc.7 6.6 17.2 45. Table 14 FYE Price (RM/s) APM Proton^ MBM UMW Tan Chong Sector Avg Sector Avg(ex-Proton) ^ FY11-12valuations refer to those of FY12-FY13 Dec Mar Dec Dec Dec 4.4 9.16 FY11 50.Motor : Enticing Hybrid Car Buyers There was no mention of any incentives for the conventional passenger and commercial car segments but the Government proposed to make do with the excise duty that is currently being imposed for the hybrid cars.3 7.87 3.3 5.8 6.9 48. This meant that hybrid car users previously paid no import duty and around 40% of excise duty.7 2.5 6.8 GDY (%) FY11 2.2 14.1 OP OP OP MP MP Rec THE 2011 17 BUDGET . we understand there are only two hybrid car models in Malaysia – the Toyota Prius and the Honda Civic.800 1.9 10.8 PER (x) FY11 9.8 3.5 9. given its immaterial numbers thus far.69 13. Overall.
8 3.5 15.9 15.0 3. on the basis of US$1m per MW.5 5.80 2.4 46.79 0.43 2.4 2.41 1. and Petronas Gas Bhd constructing a 300-megawatt Combined-Cycle Gas Power Plant in Kimanis.2 9.1 EPS Gwth (%) FY11 FY12 50.5 EV/EBITDA (x) FY11 7.0 10.7 7.7 75.6 1.2 P/CF (x) FY11 12.6 9. Again.7 22.9 2.23 11.Oil & Gas : Reiterating Key Measures Key points highlighted were: 1) The listing of Petronas Chemicals Group (PCG) and Malaysia Marine & Heavy Engineering (MMHE) to offer higher public shareholding this year.88 2.5 11.63 2.8 THE 2011 18 BUDGET . We look to better contract flows in the coming two months. the bookbuilding exercise for MMHE was closed on 14 Oct with final retail and institutional prices set at RM3. Overall.6 13. 4 16.50 Fair Value (RM/s) 1.7 11. were mentioned previously in the Economic Transformation Programme Open Day as key projects and measures that the private sector (in tandem with the Government) would undertake for the sector.6 46.9 20.0 18.6 13.9 13.30 11.8 5.2 15.0 11.1 10.3 9.2 2.1 3. The listing of Petronas Chemicals Group is expected to be in Nov. This is expected to be operational in 2012.1 1. Projects to be implemented include the establishment of the Oil Field Services and Equipment Centre in Johor with private investment of RM6bn over a period of 10 years.7 14.5 13.7 FY12 11.37 FY11 8.0 9.3 3.82 0.5 4.17 0.50 0.1 7.1 12.6 22.1 15.61 1.8 19.2 PER (x) FY11 13.7 15.5 15. Petronas Gas is currently undertaking the feasibility study on the RM3bn regasification project while we expect the Kimanis Combined-Cycle Gas Power Plant to cost at least RM1bn.7 12.5 13. We keep Dialog (OP.9 P/NTA (x) FY11 4.7 4.0 14.0 3. The Government would allocate RM146 million to support the sector.0 9.30) as our top pick. longer-term earnings visibility for O&G service providers remains intact on the back of reserve replenishment activities.9 13.80 respectively.3 14. 3 +>100 n. Sabah to increase electricity generation capacity to meet rising demand. FV= RM1. To meet the increase in gas demand by industries.8 2. we reiterate our short-term Neutral call on the sector given that most of the projects have been mentioned before.8 72.m +>100 3 7 .5 21.2 8.61-3. Neutral Key highlights were previously projects mentioned 2) 3) 4) 5) In regards to the two Petronas listings.9 15.5 13.5 13.38 1.4 13.8 4.0 62.7 0.7 MMHE listing is completed.7 GDY (%) FY11 3.5 5. The rest of the projects above.5 2.8 18.9 5.0 OP OP OP MP MP UP UP UP Rec 1 1 . Table 15 FYE Price (RM/s) Dialog P Gas^ Dayang Kencana SapuraCrest^ Wah Seong Petra Perdana KNM Sector Avg Sector Avg (EX P Gas) ^ FY11-12valuations refer to those of FY12-FY13 Jun Mar Dec July Jan Dec Dec Dec 1.9 6.8 6. for now Petronas Chemicals Group listing tentatively set for Nov Neutral call maintained Valuations Of Oil & Gas Stocks EPS (sen) FY12 10.9 8.5 0. Petronas will implement a regasification project in Melaka with an investment of RM3bn.7 11.4 2.2 9.42 2.
Port Dickson. while the implementation deadline was pushed back to June 2011 back in March 2010.05) and Sime Darby (MP. again there is no clarity on how the sum of RM127m is to be distributed to oleo derivatives companies. This is not a new policy. through a fund of RM297m. As there were no details as to how the funds allocated will be distributed. and the rule that the costs of installing the blending terminals are to be borne by the petroleum companies.75). demand may not be too strong for the B5 blend. Selangor. with initial plans to commence nationwide implementation in 2010. If this is the case and pricing is based on market prices of CPO. we note that under incentive (1). this would likely benefit Carotech (Not Rated) and KLK. Malacca. is the mandatory implementation of the B5 biodiesel programme in Putrajaya. Assuming it is in the form of a tax incentive. B5 biodiesel programme mentioned again… … but issue of pricing still outstanding ◆ Other non-plantation related measures introduced in the Budget which would affect some of the plantation companies include: Pioneer status and Investment Tax Allowance for the generation of energy from renewable sources and energy efficiency activities for own consumption and for sale be extended to 31 Dec 2015 (from 31 Dec 2010). which could be classified as a form of vitamin. including: (1) The encouragement of replanting activity to replace aged trees with high quality new clones. The only mention of pricing made by the Agriculture Minister earlier in the year was to say that the price of biofuel under the plan will not be fixed as it will oscillate depending on the price of palm oil and diesel. given the high price of CPO currently at RM2. THE 2011 19 BUDGET Non-plantation measures like… … tax related incentives energy for and renewable extended… sale of carbon credits . Although the Government has since come up with a plan which includes the RM43m instigation of depots with inline blending facilities to be placed in Port Klang. it still has not come out with any details on the B5 pricing issue. we believe.Plantation : No Exciting News ◆ There are not many new measures affecting the palm oil plantation sector in the 2011 Budget.890/tonne. the fund of RM297m to encourage replanting activity is different from the previous replanting incentive. Only two new proposals were made. Neutral Two sector new measures plantation affecting - Encouragement replanting activity of to replace aged trees with high quality new clones… - … and RM127m to be allocated companies to support domestic oleo derivatives ◆ One measure which is not new. FV = RM6. Most of the companies under our coverage have their own research centres and already develop their own high quality clones which would be used for their new planting and replanting activities. would mainly benefit smaller companies and smallholders. This time. as the Government first set out its Biofuel Policy 2006. KLK (OP. it would benefit companies like IOIC (OP. This. and (2) A sum of RM127m to be allocated to support domestic oleo derivatives companies as well as a sum of RM23. FV = RM9.3m incentive to produce vitamins. Negeri Sembilan and Melaka. it is hard to gauge the impact of these measures. Kuala Lumpur. Under incentive (2). who do not have their own R&D division. as they all have oleochemical manufacturing operations. as they produce nutraceuticals. where a sum of money is given to planters for each hectare of land which is replanted.40). although we would not be able to quantify the impact given the lack of details. the Klang Valley Distribution Terminal (KVDT) in Selangor. As for the RM23. FV = RM22. the fund is targeted to encourage replanting with high quality new clones. Firstly. starting from June 2011. which could mean that planters may get a subsidy for buying new clone seedlings from government-backed research centres like MPOB. Negri Sembilan and in Tangga Batu. which was mentioned in the Budget.3m to expand downstream palm oil industries including production of vitamins.
5 19.40 7.3 6.5 15.1 16. … which could be positive for CBIP in the long term - ◆ Overall.60).0 10.6 30.0 10.4 1. who is in the midst of developing and testing its zero discharge “green palm oil mill”.1 48.0 FY12 14.5 16.9 5.9 4.8 2.25 ^ FY11-12valuations refer to those of FY12-FY13 THE 2011 20 BUDGET .9 1.7 8.3 12.0 3.2 GDY (%) FY11 3.8 49.5 10.7 P/CF (x) FY11 14.8 16.7 2. which comes together with a biogas plant.6 52.1 3.9 55. we believe once it is able to do so.5 1.6 -4.2 14.4 15. four of these CPO mills are being tested. KLK (FV=RM22.75 4.8 P/NTA (x) FY11 3.3 FY12 131.56) and our Underperform recommendation on Genting Plantations (FV = RM7.1 28.8 4.56 2.56 9.1 2. but not significant Table 16 FYE Price (RM/s) KLK IOI Corp CBIP IJMP^ Sime Darby Genting Plant Sector Avg Sep Jun Dec Mar Jun Dec 19. although the impact is not expected to be significant. including IOIC (FV = RM6.5 9. but also for the sale of CERs. We maintain our Market Perform recommendations on Sime Darby (FV = RM9. we believe the 2011 Budget is a slight positive for the plantation sector.0 PER (x) FY11 15.0 17. Overall.7 18.37 Fair Value (RM/s) 22.3 13. We believe this is positive for CBIP (OP.7 11.9 44.40 Valuations Of Plantation Stocks EPS (sen) FY11 124.84 8.3 21.0 6.8 16.3 6.2 17.4 33.05 6.8 14.6 OP OP OP OP MP MP UP Rec First Resources D e c S$1.80 3.1 2.05). We maintain our Neutral stance on the sector.4 34.4 2. two for Felda and two on its own premises. slight positive impact on sector.6 6.8 12.1 17.5 18.40) and CBIP (FV = RM4.6 3.4 2.3 2.- Extension of tax incentive for reduction of greenhouse gas emission via the sale of Certified Emission Reductions (CERs) to year of assessment 2012 (from YA 2010).5 EPS Gwth (%) FY11 FY12 42.40).60).68 8.7 18.2 18.6 7.40 2.00 5.40) and IJMP (FV = RM2.2 2. it will be able to enjoy the tax incentives given not only for generating renewable energy.1 -8.0 9.6 46. Although the mill has not been commercialised yet.5 10. although we highlight selective stock picks which we have Outperform recommendations on.75).1 10.2 3.60 S$1.3 17.0 16.5 EV/EBITDA (x) FY11 9.3 1. Currently. First Resources (FV = S$1. FV = RM4.
5 17.2 FY12 10. tax incentives in the form of pioneer status and investment tax allowances will be extended until end-2015 for the generation of renewable energy (RE). among others.2 12. Overweight Positive measures for first-time home buyers ii) iii) iv) THE 2011 21 BUDGET . a 100% loan can be obtained without any down payment.30 2. a sum of RM568m is provided to build a total of 87.20 FY11 75. A guarantee on downpayment of 10% for houses below RM220k will be provided for first-time house buyers with household income less than RM3k per month. effective for SPA executed from 30 Aug 2008 – 31 Dec 2010. Previously.0 9.8 P/CF (x) FY11 4. Table 17 FYE Price (RM/s) Tenaga YTL Power Sector Avg ^ FY11-12 valuations refer to those of FY12-FY13 Aug Jun 8.3 12. much would depend on the Government’s will power especially in tackling issues such as the need for electricity tariffs to be raised under the FiT mechanism.3 1.3 GDY (%) FY11 3.5 OP MP Rec Property : Friendly Measures……First… Measure: Increasing house ownership i) To promote home ownership.3 15. Firstly. Previously.8 7.7 P/NTA (x) FY11 1. Skim Pembiayaan Perumahan Kos Rendah with an allocation of RM50m will be open to all Malaysian permanent estate workers to assist them to obtain housing loans with a maximum of RM60k for the purchase of low-cost houses at 4% interest rate and a repayment period of up to 40 years extending to the second generations.33 Fair Value (RM/s) 10.7 10. The Government will introduce Skim Rumah Pertamaku through Cagamas Berhad. First time home buyers will also be given stamp duty exemption of 50% on loan agreement instruments for residential properties priced less than RM350k. While the move towards RE should be a long-term positive in terms of.e.93 2.7 3. i. Finally. Apart from the above. the Government will also implement the Feed-in Tariff (FiT) mechanism under the RE Act to help promote the generation of electricity from renewable resources. effective for SPA executed from 8 Sept 2007 – 31 Dec 2010.Power : Emphasis On Green Technology The Government appears to have reaffirmed its commitment towards the development and adoption of green technology. the Government will continue to provide a rebate to households that incur monthly electricity bills of RM20 or less. the exemption is granted for residential property priced less than RM250k. effective for SPA executed from 1 Jan 2011 – 31 Dec 2012.300 units of low cost houses. it is unclear when the Government plans to implement the FiT mechanism.8 13. At this stage. First-time home buyers will be given stamp duty exemption of 50% on instruments of transfer on a house priced not more than RM350k.8 Overweight Going green … … but much would still depend on Government’s willpower to implement changes Valuations Of Power Stocks EPS (sen) FY12 87.9 EV/EBITDA (x) FY11 7. energy security. effective for sales and purchase agreements executed from 1 Jan 2011 – 31 Dec 2012.2 3. which we think would be a key support mechanism in helping the country meet the target of increasing the availability of RE to around 2.3 PER (x) FY11 11. Secondly.4 7. energy conservation equipment will enjoy exemption from import duty and sales tax. the budget did not hold any significant surprises for the sector. in our opinion.3 18.3 12.1 12. On the whole.3 EPS Gwth (%) FY11 FY12 16.000MW by 2020 (currently around 55MW). the exemption is granted for residential property priced less than RM250k.
Our view on the sector. for their housing projects in Johor pricing at below RM350k. industrial and infrastructure facilities of the Malaysian Rubber Board land in Sungai Buloh. even if a 70% or 80% cap on LTV ratio is implemented. at 20% or 30% of the house value. which is worth RM26bn. will kick off next year. The EPF will undertake the mixed development comprising affordable houses. Credit measures tightening are still in Government’s agenda? Sector will be hit badly if incentives developers discontinued offered by are THE 2011 22 BUDGET . Mid-end housing developers to benefit Measure: Mega developments i) The development of the Kuala Lumpur International Financial District (KLIFD). we expect the current property sales momentum to continue as we believe that developers will still continue with their aggressive home ownership campaign. but it is only for houses priced below RM350k. over the intermediate term. Another landmark named Warisan Merdeka will be developed by Permodalan Nasional Berhad. 1% is imposed on the first RM100k. has yet to be absorbed by the market. The total project cost is RM5bn. We highlight that the story would be different if (i) The Government is to stop developers from offering innovative scheme in addition to a 70% or 80% cap on LTV ratio. such as LBS and Hua Yang in the Klang Valley. Under the existing tax structure. The project is jointly developed by 1Malaysia Development Berhad (1MDB) with Mubadala Development Company. covering an area of 2. The 50% exemption will also benefit the secondary housing market as the stamp duty paid by the first-time home buyers who purchase a second-hand house is now cheaper. We note that the measures introduced during the Budget 2011 are targeted at only the middle-end housing and first-time home buyers. buying power of property buyers/ investors will be dampened due to lower leverage ability. we believe the development will contribute to another oversupply wave of office space in future considering the scale of the projects. commercial. offering attractive rebates that lower the downpayment. and to some extent SP Setia. Nevertheless. particularly office towers. and a threshold at above RM350k could be set to target the mid to high-end properties. and the entire project to be completed by 2020. to be in line with the tightening measures implemented in the regional markets. Property sales will be adversely affected as the upfront “entry cost” (downpayment) for property buyers will be much higher. Mah Sing. We believe the direct beneficiaries under these measures will be the mass housing developers. In any of these two scenarios. As such. KSL.680 acres. 2% on the next RM400k and 3% on the remaining amount. or (ii) The commercial banks are instructed to adjust the house price for the rebates (offered by developers) as the “real” house price for the application of mortgage loan. The development is estimated to worth RM10bn and is expected to be completed by 2025. we note that the oversupply of commercial properties. This is an integrated development project comprising a 100storey tower. The project will retain Stadium Merdeka and Stadium Negara as national heritage. Still waiting for more details on RRI land… ii) iii) Impact: We remain upbeat on the development plan for the RRI land in Sungai Buloh. While we believe demand for residential properties will remain strong. and we believe the Government is still keeping its agenda to target the “overheating” property market. Although the development of KLIFD and Warisan Merdeka will only be completed in 2015-2020. which will be the tallest in Malaysia. especially in the current property upcycle. IJM Land. we think the Government or Bank Negara Malaysia will still announce some new credit tightening measures to address the issue. etc. such as the imposition of cap on loan-to-value (LTV) ratio. as participating developers will be able to enlarge their development landbank and GDV with this JV project. with the tower expected to be completed by 2015.Impact: The 50% discount on stamp duty is encouraging for first-time home buyers. stamp duty would cost only RM3k (from RM6k) for a house valued at RM350k. With the exemption.
4 P/NTA (x) FY11 0. as the fundamental demand will still be driven by the growing young population group. Having some good news on the mid-end housing.3 PER (x) FY11 6.8 16.9 8.4 5.3 53.6 4.6 12.6 13.9 1.7 12.88 2.8 15.48 2.1 3.6 22.9 7. 6 5 Dec 4.3 6.79 Mar 3. as reduction or removal of withholding tax was not mentioned. Overall.88 Dec 1.6 11.1 7.7 6.8 3.4 17.80 1.9 2.1 11.4 11.9 27. Although regulatory risk still exists.7 7. FV = RM2.1 3.8 0.8 2.0 0.3 16.04 Jun Jun 0. Remain positive.7 11.23 1.4 8.1 FY12 18.2 1.6 1.8 8. we are hopeful that the recent two additions – Sunway REIT and CapitaMalls Malaysia Trust into the MREITS will boost the liquidity and investibility of MREITs.8 6.8 11.8 17.8 23.86 3.3 21.8 12.17 Mar 2 .8 9.7 1. the Budget 2011 is rather disappointing for the REIT sector.4 14.1 9. (ii) Aggressive incentives provided by developers. and Axis REIT (OP.22 Dec 2. We remain positive on the property sector.Still positive.3 21.8 1.3 2.00 Jun 2.6 7. FV = RM5.2 33.4 4.3 6.4 FY12 28.95 1. FV = RM3.6 P/CF (x) FY11 8. (iii) Strengthening in ringgit and low interest rates in the region that encourage foreigners participation and liquidity flow.33) and Suncity (OP. Yields remained attractive for MREITs at around 7-8%.32 ^ FY11-12valuations refer to those of FY12-FY13 THE 2011 23 BUDGET .0 22.87 Dec 4.7 10.6 7.9 0.1 39.48).7 11. we believe the Government would not want to badly hit the property sector.6 26.0 EV/EBITDA (x) FY11 6.85 Dec 1.0 0.4 20.3 27.2 13.6 12.9 21.2 3. we continue to like IJM Land (OP.2 19. We still see a few strong supports for the sector.7 GDY (%) FY11 8. Although the current withholding tax structure will still somewhat shy away foreign investors (especially). as Government is unlikely to implement sector harsh measures on the property Budget MREITs 2011 – a for disappointment Table 18 FYE Price Fair Value (RM/s) (RM/s) Glomac^ Suncity Sunrise Axis REIT IJM Land^ Mah Sing Paramount Quil Capita Sunway REIT Hunza Prop SP Setia YNHB KLCC^ Sector Avg Apr 1 . 6 7 Dec 1.2 11. We continue to like Sunway REIT (OP.72 5. and these include: (i) Low mortgage rate as commercial banks continue to offer discount to BLR.05) for its asset size and liquidity.3 20.3 41.7 27.2 10.5 5.2 12.80 FY11 24. FV = RM2.8 11.8 12.0 21.33 5.5 12.6 -24.5 8.8 13.1 0.58 4. FV = RM1.18 2.2 71.9 2.9 17.4 10.8 10. and (vi) Good news flow on the Government’s development plans.1 14.9 3. (iv) Property is a preferred vehicle to hedge against inflation.4 8.67 3.4 6.8 9.8 9.3 18.7 5.0 19.8 10.9 48. suitable for investors who are looking for defensive investments.3 29.6 2.9 2.3 6.8 11.2 3.98 1.67) for its strong acquisition track record.2 0.18).05 1.1 1.3 EPS (sen) Valuations Of Property Stocks EPS Gwth (%) FY11 23.9 5. Incentives for REITs are missing.45 1.8 0.8 9.2 63.7 9.6 1.7 -36.6 10.5 8.7 19.2 18.9 7. Mah Sing (OP.3 6.7 8.9 16.5 8.3 FY12 5.3 OP OP OP OP OP OP OP OP OP TB MP MP MP Rec O c t 4.5 3.9 18.5 16.
4 7.6 14.2 53. We highlight that these plants will focus on higher technology nodes i. and 3) the fab facility are small vs.2 1.3 8.1 GDY (%) FY11 2.2 61.35 1.95 1.7 PER (x) FY12 8. Therefore. 2) wafer fabs are a highly cyclical industry.000 wafers (200mm) a month. MPI and Unisem given that IC design companies require these services.1 11. The investment is expected to drive the local industry up the value chain and improve its international competitiveness.8 21.1 8. and 2) reduction of logistics costs and lead time given that the majority of wafer fabs are sourced from Taiwanese players.5 7.1 3.0 5.6 6. While we are positive on these developments.1 7. Penang and Kulim High-Tech Park.e.1 8.5 4. Impact: We believe the allocation would support the establishment of five wafer fab plants in Kulim High-Tech Park. this augurs well for the industry mainly due to: 1) further business opportunities for packing assembly.8 EPS Gwth (%) FY11 FY12 11.69 2.4 3. Already.4 FY11 9.6 5.6 7.32 6.e.5 9. in our view.4 7.2 3. we believe the risks include: 1) capacity glut of wafers that could potentially cause wafer prices to fall as the industry is highly competitive.Semiconductor & IT : Upping The Ante Upgrade Mode Measure: A total of RM857m will be allocated to local industry players in order to enhance the electrical and electronics (E&E) sector. a JV between QT Hightech Malaysia Sdn Bhd and Lfoundry Gmbh has been established to develop a wafer fab plant in Kulim. major foundry players and hence may lack similar economies of scale. the development is expected to attract around 50 integrated circuit (IC) design companies.6 22.8 OP OP MP UP Rec Sector Avg ^ FY11-12valuations refer to those of FY12-FY13 * Fully Diluted THE 2011 24 BUDGET .0 1. Kedah.4 14. The investment will be mainly in key strategic areas i. and testing (PAT) players i.8 P/NTA (x) FY11 1.06 5.54 FY11 21.31 1. Table 19 FYE Price Fair Value (RM/s) (RM/s) Unisem* Dec JCY MPI^ Notion Sep Jun Sep 1.9 7.4 2.7 4.0 Neutral Valuations Of Semiconductor/IT Stocks EPS (sen) FY12 23. With these facilities.8 2.e.7 2. analogue (power applications) and mixed signals (wireless applications).96 1.3 P/CF (x) FY11 4.8 3.7 7.9 EV/EBITDA (x) FY11 4.9 9. Note that the plant is expected to have a production capacity of 60.0 13.4 10.
Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/ or its associated persons may from time to time have an interest in the securities mentioned by this report. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months. Facts and views presented in this report have not been reviewed by. for its own account or the accounts of customers.IMPORTANT DISCLOSURES This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). investor client feedback. officers. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice. Industry/Sector Ratings Overweight = Industry expected to outperform the FBM KLCI benchmark. over the next 6-12 months. but fundamentals are not strong enough to warrant an Outperform call. RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports. in debt or equity securities or loans of any company that may be involved in this transaction. weighted by market capitalisation. and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. In the ordinary course of its trading. Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/. The recommendation framework for stocks and sectors are as follows :- Stock Ratings Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months. brokerage. This report has been prepared by the research personnel of RHBRI. weighted by market capitalisation. The securities discussed in this report may not be suitable for all investors. weighted by market capitalisation. over the next 6-12 months Neutral = Industry expected to perform in line with the FBM KLCI benchmark. over the next 6-12 months.five percentage points) over the next 6-12 months. the subsidiaries and subsidiary undertaking of such a holding company and the respective directors. invitation or solicitation to buy or sell the securities covered herein. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. including quality of research.” including investment banking personnel. “Connected Persons” means any holding company of RHBRI. and may trade or otherwise effect transactions. stock picking. banking and financing activities as well as providing investment banking and financial advisory services. employees and agents of each of them. This report is not to be construed as an offer. THE 2011 25 BUDGET . and may not reflect information known to. It is for distribution only under such circumstances as may be permitted by applicable law. The research analysts. It is generally for investors who are willing to take on higher risks. This report does not provide individually tailored investment advice. banking and financing activities. RHBRI recommends that investors independently evaluate particular investments and strategies. Underweight = Industry expected to underperform the FBM KLCI benchmark. any member of the RHB Group may at any time hold positions. RHB Group nor any of its affiliates. Neither RHBRI. economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors. competitive factors and firm revenues. securities brokerage. professionals in other business areas of the “Connected Persons. and encourages investors to seek the advice of a financial adviser. employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.
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