KUALA LUMPUR: AmInvestment Bank Research is maintaining its end-2019 FBM KLCI target of 1,820 and sees the market already at the bottom.
In its strategy report issued on Monday, its top picks are Maybank, Petronas Chemicals, RHB Bank, Dialog Group
“We view positively the revival of the Bandar Malaysia project that we believe signifies the return to normalcy of Malaysia-China relations.
“This follows the recent revival of another Chinese-led project, i.e. the East Coast Rail Link (ECRL) project, after the project turnkey contractor China Communications Construction Company Ltd agreed to cut the project cost by RM21.5bil to RM44bil from RM65.5bil,” it said.
AmInvest Research pointed out the key difference between the two is that in the ECRL’s instance, the government was held hostage by a termination penalty amounting to RM21.8bil, while in the case of Bandar Malaysia, the government was under no pressure whatsoever as the question of compensation never arose.
To recap, in 2015, a 60:40 JV between Iskandar Waterfront Holdings (IWH) and China Railway Engineering Corp (CREC) entered into an agreement with 1Malaysia Development Bhd (1MDB) for the purchase of a 60% stake in the 468-acre Bandar Malaysia project in Sungai Besi, Kuala Lumpur, for RM7.41bil.
The deal was subsequently cancelled in 2017. IWH is the parent company of the listed Iskandar Waterfront City.
“We believe the market is caught by surprise (and caught short) by Putrajaya’s sudden departure from its more ‘restrictive’ views towards Chinese businesses following the change in power post-14th general election (GE14),” it said.
AmInvest Research believes the Malaysia-China relations already hit the bottom in August 2018 when Prime Minister Tun Dr Mahathir Mohamad proposed a ban on foreign purchases of properties in Forest City, a US$100bil (RM410bil) property project comprising four man-made islands with a total area of 3,425 acres at the southern tip of Johor, developed by Chinese property giant Country Garden.
“We believe accelerated foreign direct investment (FDI) from Chinese businesses (or the expectations of this happening at some point alone) shall stabilise the stock market, ringgit and business/consumer sentiments, and hence the economy, if not lifting them out of the doldrums at present.
“The latest development could not have come at a more critical time,” it said.
The research house said there have been concerns on capital flight from Malaysia following the recent decision by the Norwegian sovereign wealth fund to reduce its exposure to emerging market bonds (which could result in an outflow from Malaysian bonds estimated at US$1.9bil or RM7.8bil).
There was also apprehension and the news on the FTSE Russell putting Malaysia on the watch list with a view to excluding it from the FTSE World Government Bond Index (which could trigger an outflow of Malaysian Government Securities to the tune of US$8bil or RM32.8bil).
“The revival of Bandar Malaysia alone could immediately bolster the government’s coffers by RM1.24bil, being RM7.41bil deposit plus RM500mil advance payment. The full settlement of the purchase consideration (of which the time frame is still unknown at present) could bring in another RM6.17bil,” it said.
The key sectors that will be impacted by the Bandar Malaysia revival are:
1. Property (Negative): This massive integrated development will add more floor space to the already over-supplied residential, commercial, office and retail segments in the Klang Valley.
The saving grace is Bandar Malaysia may stimulate new demand if it is able to, as advertised, “draw major international financial institutions, multi-national corporations and Fortune 500 Companies to locate their regional headquarters” there, including “(Chinese) tech giants such as Alibaba and Huawei”. Private developers may face tremendous competition from the proposed 10,000 affordable homes in Bandar Malaysia given the units’ strategic location, public transport connectivity and potentially subsidised pricing;
2. Building Materials (Positive): The project will stimulate demand for cement and steel, of which the extent will depend on how aggressive Bandar Malaysia rolls out its launches; and
3. Construction (Positive): The local participation requirements will ensure that Malaysian construction companies get a fair share of Bandar Malaysia’s construction works.
However, it wasmindful that not many local contractors have worked with Chinese main contractors before, and if their experience in time will be a fruitful one.
AmInvest Research said it was more inclined to want to look beyond the sectors in its analysis for the revival of Bandar Malaysia. It believes investors should instead focus on how the improved Malaysia-China ties could help bring down the market risk premium, resulting in multiple expansion for the market.
On the KLCI, it said at last traded 1,622, the FBM KLCI traded at about 16.9 times its projected 2019F earnings.
This was at a one time multiple discount to its five-year historical average of 17.9 times.
“We maintain our end-2019 KLCI target of 1,820pts, which was initially (in December 2018) based on 18.5 times our earnings forecast but has since risen to about 19 times as we trim our 2019F earnings growth projection to 2.7% from 4%.
“Fast forward to next year, at 1,820, the KLCI only trades at 17.9 times our 2020F earnings forecast (backed by a 6.3% earnings growth), which is in line with its historical average.
“We are calling the bottom of the market. Our top picks are Maybank, Petronas Chemicals, RHB Bank, Dialog Group, Top Glove, Serba Dinamik, Bermaz Auto, MPI, Malayan Flour Mills and Berjaya Food,” AmInvest Research said.