HLIB Research Summary - 13 Oct 2014

BUDGET 2015: Neutral to Slight Positive, Chiefly Construction

• Downside protection to growth and build future capacity.
• Wider GDP range forecast of 5–6% with lower point estimate of 5.2%.
• Mildly expansionary with bigger DE while keep OE in check.
• Deficit reduction on track, bulk of financing still domestic.
• Measures collectively erosion in consumer spending but sustain construction momentum.
• Reform commitment positive long-term, to provide assurance rather than boost sentiment.
• Significant rise in DE and start of several major projects positive to Construction (under review with upward bias).
• No sector hit while few others also benefit albeit marginally.
• On balance, neutral to slightly positive.
• Market retraced to oversold territory, rebound imminent though may not be smooth given overseas gyration.
• Valuation more palatable, P/E premium vs. regional and ASEAN peers at mean or well below, amply account for earnings risk.
• Opportune bargain hunt time and maintain end-2014 target of 1,910 as well as top picks (Astro, Dayang, IOIP, KNM, Maybank, Pharma, QCT, RHB Cap, Scomies and TNB).

Plantation (UNDERWEIGHT  çè)

 Inventory remains above 2m tonnes

• Inventory increased by 1.8% mom to 2.09m tonnes (higher than consensus median estimate of 2.05m tonnes), as higher exports and lower output were slightly more than offset by imports.
• Although production will likely be flattish in Oct (looking at the production in Sep), we believe stockpile will still likely increase further, as exports to India could weaken in the absence of seasonal replenishing activities. Not helping either is the falling Brent crude, which will continue to diminish interest on biodiesel. According to cargo surveyor Intertek Testing Services, palm oil exports fell 18.9% mom fir the first 10 days of Oct, on weaken demand from the EU and China .
• Maintain our average CPO price projection of RM2,400/tonne and RM2,300/tonne for 2014 and 2015 respectively.
• Maintain UNDERWEIGHT stance on the sector.

SP Setia (HOLD çè)

To Merger with I&P?

• NST today reported on the merger possibility between SP Setia and I&P Group Sdn Bhd, with aim to revive the former.
• We are not surprised as there were already several circulations of such news.
• Should this is true, we believe the merger would benefit both property developers as there will be synergistic values in the merger exercise through combination of business model as well as landbank.
• It allow the enlarged entity to reach out to wider target market as it would then have a larger offerings of both premium and medium-to-low-end properties.
• Given that I&P is doing well and has a strong brand name, we believe it would rebuild the confidence in both investors and consumers in SP Setia.
• Maintain HOLD. TP remained unchanged at RM3.45 (maintain 35% discount to RNAV), which values SPSB at 14.8x FY15E P/E, vs. 18x for IOIPG and UEMS.

Economics

Performance of IPI (August 2014)

• IPI growth rebounded to 6.5% yoy in August after dipping to a 17-month low of 0.6% yoy in July, beating consensus ' s +5.1% yoy. The stronger-than-expected IPI growth was driven by improvement across all sectors.
• Overall IPI growth outlook remains moderate in the near term, judging by (i) weaker PMI readings in global and regional manufacturing PMI in September; (ii) continued growth in imports of intermediate goods; and (iii) resilient input demand from ongoing O&G, infrastructure & property projects.
• A milder IPI growth of 3.6% in Jul-Aug versus +5.9% in 2Q14 (1Q14: +4.6%) reaffirms our expectations of GDP growth moderation in 2H to 5.6% (1H: +6.3%). We keep our 2014 ' s full-year GDP growth forecast at 6.0%.
• On policy rate, we expect BNM to keep OPR unchanged at 3.25% on 6 Nov as economic growth is now on a more moderate path while demand-driven inflation is largely absent. The softer global outlook and moderate domestic financial activities will also prompt BNM to remain cautious in its policy action.

Traders Brief

Bargain hunting for risk takers amid oversold positions  

• Technically, KLCI had retraced 4.6% from all time high and rebound is imminent (reflected by grossly oversold daily and weekly oscillators) though may not be smooth given gyration in overseas markets. Thus we are advocating investors to start bargain hunting for fundamentally strong stocks (please refer our Budget 2015 review today for further details).
• Immediate rebound targets are 1835 (10-d SMA), 1841 (20-d SMA) and 1852 (200-d SMA). Only a strong breakout above 200-d SMA will lift the market from current downward consolidation. Conversely, a breakdown below 1800 psychological support will likely trigger more downside towards 1794 (90-w SMA) and 1780 (100-w SMA) supports.