Lead Story: Finding shelter from the political and economic storms

TheEdge Mon, Mar 16, 2020 02:00pm - 4 years View Original


AT 5pm last Monday, the benchmark FBM KLCI closed at 1,466.94 points — the lowest since 2011.

A few hours later, newly appointed Prime Minister Tan Sri Muhyiddin Yassin addressed the nation, urging Malaysians to “give him the opportunity to leverage his experience in politics and service in the government to steer Malaysia to new heights”.

His call did little to move the spooked market, which stubbornly stayed below the psychological 1,500 mark to finish at 1,491.03 points last Thursday. Year to date, the local bourse is already 6% down.

As expected, former prime minister Tun Dr Mahathir Mohamad has said Pakatan Harapan and parties allied to him will move a vote of no confidence against Muhyiddin when parliament convenes — initially scheduled for March 9 but now delayed to May 18 on Muhyiddin’s instructions, resulting in a longer wait for investors looking for policy direction.

As though the week of political machinations, which culminated in a change in government, was not enough, the Covid-19 outbreak — that had butchered financial markets across the globe in the last week of February — also unleashed its wrath on Malaysia. Last Wednesday, 14 new cases were confirmed, raising the number of infected people to 50 at the time of writing.

The impact of Covid-19, which has disrupted production and travel in the region, led Bank Negara Malaysia to cut the overnight policy rate by 25 basis points last Tuesday, to a nine-year low of 2.5%.

 

Fundamentally strong companies at a bargain

Given the potent combination of political and economic risks, what kind of strategy should investors adopt to ride out the storm? The answer is obvious — it is time to play defensive.

TA Investment Management chief investment officer Choo Swee Kee advises investors to be defensive and cautious in investing, given the uncertainty in the market now.

“We recognise that in every crisis there are both risks and opportunities. We would adopt a strategy of cautious investing with a focus on value and fundamentals. Only during a crisis would you get the opportunity to buy fundamentally strong stocks at bargain prices,” he tells The Edge.

“At this point, we feel that it is not appropriate to invest based on sectoral selection. We believe it is better to be stock-specific and cherry-pick based on individual companies’ fundamentals and future prospects.”

Choo’s pick of fundamentally strong stocks includes Malaysia Airports Holdings Bhd (MAHB) and Syarikat Takaful Malaysia Keluarga Bhd as they appear to have corrected significantly, and the key banking stocks. However, he qualifies that he is not recommending a “buy” on the counters.

MAHB, an FBM KLCI component stock, has shed 18% year to date to close at RM6.22 last Thursday while Syarikat Takaful’s share price has declined 19% in the same period to close at RM4.60 last Thursday.

Kenanga Research, in a March 2 note on MAHB, reiterates its “outperform” call on the stock with a target price of RM7.20 even though the airport operator posted a 26.2% year-on-year decline in FY2019 net profit to RM537.04 million.

“We continue to like MAHB as an attractive proxy play on the propensity for air travel due to rising per-capita income and its well-entrenched monopolistic position,” the firm says.

In a Feb 26 note, Hong Leong Investment Bank upgraded its call on Syarikat Takaful from a “hold” to a “buy” with a target price of RM5.55. “Overall, we turned positive on Syarikat Takaful as valuations became inexpensive versus historical levels, suggesting most of the negatives dragging on its short-term growth have been priced in. Also, the stock’s dividend yield of 4% to 5% is decent,” it says.

Choo advocates avoiding stocks that rise and fall according to the political wind as “the risk could be huge”.

Last week, two counters linked to Muhyiddin — Eden Inc Bhd and Thriven Global Bhd — spiked sharply.

From Feb 28 to March 5, Eden’s share price rose 23% to 24 sen apiece while Thriven Global surged 20% to 26.5 sen. Muhyiddin’s son, Datuk Fakhri Yassin Mahiaddin, is the chairman of Thriven Global while Fakhri’s father-in law, Tan Sri Abd Rahim Mohamad, is the executive chairman of Eden.

Bharat Joshi, an investment director at Aberdeen Standard Investments in Indonesia, takes the view that in the short term, investors can cherry-pick sectors that look appealing.

“Defensive sectors, such as healthcare and telecommunications, look attractive, with some cyclical names that should rebound once things start to normalise, such as MAHB. Crude palm oil-related stocks should also be interesting once prices start to recover.

“On the flip side, we are cautious on the financial sector, in lieu of further rate cuts to spur credit demand that has been languishing for the past few years,” he tells The Edge.

AllianceDBS Research advises investors in a March 4 note to stick to quality names with resilient earnings and yields in light of concerns over an economic downturn, despite the accommodative monetary policy.

“Balancing the needs between fiscal prudence and unfettered stimulus spending may be a Herculean task for the new federal government, given our continuous fiscal deficit and elevated government debt. Nevertheless, we believe undervalued stocks with a strong track record will still be able to outperform, despite the largely muted earnings growth outlook. Our top picks are RHB Bank Bhd, MAHB, Westports Holdings Bhd, Gamuda Bhd, Sunway Bhd, Time dotCom Bhd and Bermaz Auto Bhd,” the research house says.

 

Attractive dividend yields

Stocks of which dividend yields have started to look attractive in a low-interest rate environment include Taliworks Corp Bhd — its share price of 82 sen gives a gross indicative yield of 6.4%.

In a Feb 28 note on Taliworks, CGS-CIMB Research says the issue of receivable claims from Syarikat Pengeluar Air Sungai Selangor Sdn Bhd has been resolved. It adds that for FY2019, Taliworks’ total dividend per share of 5.25 sen was bumped up by a higher fourth single interim dividend per share (DPS) of 1.65 sen, 38% higher than the previous quarterly dividend of 1.2 sen.

“This forms a new level of quarterly dividend payments, delivering on the group’s promise of higher dividends post the recovery of receivables,” says the research house.

“We raise FY2020 to FY2022F DPS by 10% from 6 sen to 6.6 sen, supported by the improvement in operating cash flow stemming from Sungai Harmoni Sdn Bhd’s operating and maintenance contract under the new Bulk Water Supply Agreement.”

In this low-interest rate environment, real estate investment trusts would also be an obvious dividend play, such as YTL Hospitality REIT, which has a yield of 5.7%, based on its unit price of RM1.32 last Wednesday. Maybank IB Research, in a Feb 21 note, maintains its “buy” call on YTL REIT with a target price of RM1.50 per unit.

“We remain positive on YTL REIT’s Malaysian and Japanese assets’ resilient rental income, which is backed by master leases. YTL REIT still has a strong pipeline of hospitality assets from its parent, YTL Corp,” the firm says.

Another popular dividend yield play is Bermaz Auto, which has a yield of 8% based on its share price of RM1.76 last Wednesday. Kenanga Research has an “outperform” call on Bermaz Auto with a target price of RM2.65.

“We like the stock for its expected earnings recovery from the stream of all-new models, especially its popular face-lifted/turbo Mazda CX-5; superior margins, which are above industry peers’ (average profit margin of 9% versus peers of 2%); and its steady dividend yield,” the firm says.

With news reports that the US Federal Reserve may have to cut interest rates all the way to zero, following its emergency 50-basis-point rate cut last week due to the Covid-19 outbreak, it remains to be seen whether this will help bolster stocks in emerging markets such as Malaysia.

Till then, investors are advised to play it safe with their investment strategy.

 

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