Fundamental analysis
For the second week in a row, the KLCI went through a bout of heavy profit taking and ended lower. During the week, the KLCI fell 9.6 points or 0.9% to close at 1,079.72 points. Thailand's capital controls sent regional markets into a tailspin on Tuesday and the KLCI fell as much as 32 points intra-day. Malaysia underperformed the region for the week as up to Thursday, the KLCI was down 1.2% compared to the FExJ index's 0.4% rise. As expected, daily trading activity on Bursa eased to RM1.4bn, more than 20% below last week's RM1.82bn and 3% lower than the 3-month average of RM1.44bn.
For the last trading week of the year, the KLCI should again track the performance of regional markets but with a downward bias. We view the market's consolidation over the past two weeks very positively but are surprised that the composite index is still at relatively high levels. At this rate, the KLCI will likely end the year at the higher-end of our 1,030-1,050 points range. We would not be surprised if window "undressing" activities took place on the last trading day of the year as the high base effect will make a repeat of this year's performance difficult. Investors should take opportunity of any market weakness next week to accumulate positions ahead of next year's rally. We maintain our end-07 KLCI target at 1,200 points.
Technical analysis
The KLCI continued its consolidation this week, closing 9.6pts WoW lower. However, consolidation is healthy for the local bourse after experiencing a sharp rally since Oct 06. Next week, we expect the KLCI to continue its consolidation for a little longer, holding above the 1065-1070 support levels. Current consolidation would help the KLCI build its base for an expected stronger rally in 1H07.
STORIES FOR THE WEEK
MONDAY
Telecom sector update - More WiMAX spectrum to be released (Telco, Overweight, Analyst: Kelvin Goh)
We understand from the regulator that WiMAX spectrum at the 2.5Ghz spectrum will be put up for bidding in 2007 with potentially as many as six winners vs. 2-3 in the current auction at the 2.3Ghz band. This significantly reduces the risk of DiGi being left without a broadband solution if it fails to secure the 2.3Ghz spectrum. We reiterate our OUTPERFORM recommendation on DiGi with a DCF-based target price of RM16.50 (WACC 10.3%, terminal growth 2.5%). The entry of more wireless broadband players will mean greater competition for Telekom in broadband and fixed voice services. We maintain our NEUTRAL call on Telekom, with an SOP-based target price of RM10.10.
Quick takes - PLUS Expressways update - New pact brings Indon highway concession closer (Infrastructure (Tolls), Outperform, Analyst: Sharizan Rosely)
Quick takes - Proton Holdings update - RM9 per share for Proton? (Automotive, Trading Buy, Analyst: Sharifah Farah)
Results - Tanjong Plc 3QFY07 above - Powering ahead (Utilities/Gaming, Outperform, Analyst: Ivy Ng/Steven Tan)
TUESDAY
Public Bank update - Liquidity premium (Banking & Finance, Neutral, Analyst: Tan See Ping)
We have upped Public Bank's target price from RM7.10 to RM7.95 by raising our target P/BV from 2.5x to 2.8x in light of the expected liquidity-driven bull market in FY07. However, we remain NEUTRAL as the stock is short of strong re-rating catalysts. Fundamentally, we still expect a slowdown in its loan and EPS growth. We prefer Maybank (Outperform), which is also expected to generate a CY07 ROE of 19%, is less dependent on loan growth and trades at an 8% P/BV discount to Public's 2.7x. Alternatively, investors could switch to M&A plays like Affin (Trading Buy), EON Capital (Outperform) or RHB Capital (Outperform). Given its premium valuations, Public Bank is an unlikely M&A target.
Quick takes - Gamuda update - The ball starts rolling for Laos IPP (Infrastructure, Outperform, Analyst: Sharizan Rosely)
Quick takes - Maxis update - Eyeing Hutchison-Essar? (Telecommunications, Outperform, Analyst: Kelvin Goh)
WEDNESDAY
The S.E.A. Navigator 2007 - We have lift-off (Strategy, Overweight, Analyst: Terence Wong)
We are excited about the market's prospects for 2007 and expect the KLCI to hit 1,200 points. The bullish outlook for next year is also supported by a rise in ROEs from 12% in 2005 to 14.3% and dividend yields of around 4%. For the first time in four years, Malaysia should outperform the region, thanks to the convergence of numerous domestic macro factors ahead of the general elections. We remain optimistic on most sectors and stocks and draw our top 10 stock picks from politically linked stocks (Affin and RHB Cap), contractors (Gamuda and MRCB), GLCs (Tenaga and Maybank) and tourism-related stocks (KLCC Property and AirAsia). We also think that smaller-cap stocks will make a strong comeback in 2007. Our top picks among the minnows are Wellcall and Dreamgate. Maintain OVERWEIGHT.
Quick takes - Spotlight on capital controls - No reason to follow in Thailand's footsteps (Strategy, Overweight, Analyst: Terence Wong)
THURSDAY
Property Sector update - Putting out the welcome mat for foreigners (Property, Neutral, Analyst: Terence Wong)
Foreigners will no longer need FIC approval to buy properties priced above RM250k and they can buy any number of properties that they wish. This is good news for the property sector but the near-term impact is unlikely to be very significant. Still, it is good for sentiment for both physical properties and property stocks. The main winners are developers with land bank in popular locations and specialising in upscale residences. Our stock picks among these companies are SP Setia, Mah Sing and UM Land. But we remain NEUTRAL on the sector as underlying fundamentals are still shaky.
Automotive Sector update - In reverse gear for 10 months (Automotive, Neutral, Analyst: Sharifah Farah)
UM Land update - Slow 2006 sales not a concern (Property, Buy, Analyst: Terence Wong)
Results - Island & Peninsular 3QFY07 below - Profits are down to bare bones (Property, Underperform, Analyst: Terence Wong)
Economic news - Inflation retreats further (chief economist: Lee Heng Guie & economist: Julia Goh)
FRIDAY
Spotlight on M&A activities - 2007 a year of M&A? (Strategy, Overweight, Analyst: Terence Wong)
YTD, close to RM90bn worth of deals have been proposed by Bursa-listed companies, the bulk of which are M&A and privatisation exercises. The heightened M&A activity is positive for the market as it creates a virtuous cycle since the share price of the target typically rises to reflect the purchase price. In view of the bullish stock market outlook for 2007, we expect M&A activity to gain traction as many deals that were not workable before due to low share prices may become viable. We believe that M&A activity in 2007 will be focused on banking, construction, media, oil & gas, plantations, property, telco and GLC stocks. Our top 3 picks for M&A in 2007 are MRCB, Proton and RHB Cap.
Results - Gamuda 1QFY07 in line - A decent start to FY07 (Infrastructure, Outperform, Analyst: Sharizan Rosely)
MAJOR NEWS FOR THE WEEK
MACRO NEWS
1. Parti Keadilan Rakyat (PKR) advisor Datuk Seri Anwar Ibrahim will contest in the next general election if it is held in 2008.
2. Barisan Nasional members have been told not to take for granted the open attitude of the present leadership in allowing the airing of views.
3. Inter-religious tension in Malaysia is being badly handled by the authorities to the extent that it had become 'unhealthy', said former deputy premier Anwar Ibrahim today.
4. Khazanah will inject capital and investment in strategic fields into Penang and the Northern Development Corridor.
5. Announcing that the Peoples Progressive Party (PPP) is dropping its bid to merge with Gerakan, the PPP president said Datuk Seri Dr Lim Keng Yaik should "diam saja-lah" (shut up) and give other leaders a chance to voice their opinion.
6. Prime Minister Datuk Seri Abdullah Ahmad Badawi has described his four-eye meeting with Venezuelan President Hugo Chavez as very productive and opening a new chapter in bilateral ties between Malaysia and Venezuela.
SECTOR NEWS
1. There will be no extension for the prepaid registration exercise which ends Friday, said Minister of Energy, Water and Communication, Datuk Seri Dr Lim Keng Yaik.
2. The government could not spread the burden of imposing higher toll rates over a much longer toll concession period as it did not want toll collection to be a permanent feature in Malaysia, Datuk Seri S. Samy Vellu said.
3. The property market is expected to grow in the next three months boosted by the implementation of the Ninth Malaysia Plan (9MP), a better stock market outlook and the manageable interest rate, says Deputy Prime Minister Datuk Seri Najib Razak.
4. Malaysia's government Wednesday further relaxed rules for foreign ownership of property by removing restrictions on the usage of high-end properties.
5. Motor vehicle sales in November fell by 7.2% to 36,047 yoy according to Malaysian Automotive Association (MAA).
6. The RM1.7bn Senai-Desaru Expressway will be completed in 2008.
7. The Malaysian National Shippers' Council (MNSC) and the SMI Association Malaysia (Smiam) have joined in the protest against the "single box-rate" tariff proposed by two container haulier associations.
COMPANY - M&A / RESTRUCTURING
1. DRB-Hicom has made a firm bid to take over Proton Holdings, proposing to buy more than half of the Government's 59% stake for possibly more than RM1.6bn.
2. Sime Darby and Kumpulan Guthrie have accepted a merger offer that will create the world's biggest publicly traded plantations company.
3. Wilmar's US$4.3bn proposed takeover of the Malaysian agribusinesses of tycoon Robert Kuok will further consolidate the global palm oil industry.
4. The Boustead Group has set up the Al-Hadharah Boustead REIT, the first Islamic oil palm plantation real estate investments trust (REIT), which will acquire plantation assets totalling RM472m.
5. AMMB said Bank Negara Malaysia has given its approval for AMMB and IAG International Pty Ltd to commence discussions with PanGlobal for the proposed acquisition of 99.9% stake in PanGlobal Insurance.
6. Kurnia Asia is scouting to acquire insurers in Asia and hopes to close deals with some targeted insurance players in the region in the next 12 months, said its director for operations and investor relations, James Tee.
7. Bernas stated that it is not aware of a proposed exercise to take the company private.
8. Kuala Lumpur Kepong (KLK) has acquired Switzerland's Kolb Group AG for 135m Swiss francs (RM393m). KLK said the acquisition is a strategic fit for its resource-based manufacturing activities.
9. UMW Holdings has confirmed its listing for Wuxi Seamless in the Hong Kong Exchange. Eastar Group Holdings (EGH) is the listing vehicle jointly set up by UMW China Ventures (L) Ltd (UMWCV), a 100%-owned subsidiary of UMW Petropipe (L) Ltd.
10. MRCB has completed the disposal of 11m shares of Media Prima via a direct placement at RM2.44 per share.
11. Datuk Mukhriz Mahathir said NSTP should not merge with Utusan as the country requires different editorial views from the two media organisations. Umno Supreme Council member Datuk Ahmad Zahid Hamidi is not in favour of the proposed merger between Utusan and NSTP as each newspaper has its own entity.
12. Goldman Sachs International has emerged as a substantial shareholder of property developer Eastern & Oriental (E&O) after it acquired 19.42 million shares.
COMPANY - OTHERS
1. The race for acquiring India's third largest mobile services provider Hutchinson Essar, has hotted up with Reliance Communications backed by an US equity funder, Egyptian telecom giant Orascom and Maxis believed to have thrown their hats into the ring.
2. Las Vegas Sands says it looks forward to working with Genting International to promote Singapore's upcoming integrated resorts, after Genting International chairman Lim Kok Thay made the first overture earlier this week.
3. Cahya Mata Sarawak's subsidiary company, CMS Works International (China) Limited (CWICL) has entered into a JV Contract with China Yunnan Highway Construction Group (CYHCG) for a proposed toll road development project in Kunming.
4. Gamuda signed a tariff agreement with Electricity Generating Authority of Thailand (EGAT) on Dec 18 on the future purchase of hydroelectric power from the Nam Theun 1 (NT1) hydropower project in Laos.
5. MMC Corporation is reviewing several options with regards to the funding required for the US$30bn Jizan Economic City (JEC) project in Saudi Arabia. It expects to list its Middle East joint-venture unit on the Saudi Arabian stock market in 2007.
6. Cement Industries of Malaysia (CIMA) announced that the validity period of an offer by French cement maker VICAT SA for equity in the Malaysian company's subsidiaries had been extended until January 30.
7. Puncak Niaga sold 250,000 more of its outstanding 18m treasury shares on 13 Dec 06 at an average price of RM3.08.
8. Scomi Group, confident of being in the billion-dollar business league in 3 years, has identified gas separation as a strong growth area.
9. Kencana Petroleum will concentrate on strengthening its local presence before pursuing overseas projects, said executive chairman Datuk Mokhzani Mahathir. Tan Sri Quek Leng Chan may emerge as a substantial shareholder of Kencana Petroleum by buying 12-15% of the company's shares worth some RM133m.
10. Bank Negara has no objection in principle for Utama Banking Group to commence negotiations with a consortium of investors to be formed and led by Kuwait Finance in relation to the proposed sale of its equity interest in RHB. Kuwait Finance House is keen on the Islamic banking assets of RHB Bank and RHB Islamic Bank.
11. BIMB Holdings, which has returned to profitability in its first quarter ended Sept 30, wants to venture into Indonesian's Islamic banking business within the next two years. (Bernama)
12. Sime Darby said the Malaysian government hasn't told the company it can take ownership of the state's RM9bn Bakun dam project, following a media report that permission had been granted.
13. AT&T Inc. is in talks with Telekom Malaysia and Starhub to build a cable line linking Southeast Asia and the U.S., according to people familiar with the matter.
14. Thai AirAsia expects to double its number of passengers to six million next year aided by additional capacity and frequencies as well as new destinations to be introduced starting mid-year.
15. Malaysia Airports will commence charging passengers for security from 15 Jan 07 at all Malaysian airports operated by the company (which excludes Senai in Johor Bahru) at a rate of RM3 for domestic flights and RM6 for international flights.
16. Quill Capita Management Sdn Bhd's (QCM) Real Estate Investment Trust (REIT) - Quill Capita Trust - institutional offering has been oversubscribed 12.41 times under a book building exercise.
17. Sunway City, a property firm, said the Securities Commission has approved its proposal to raise RM600m from the sale of Islamic bonds.
18. YNH Property and Singapore's CapitaLand Ltd will jointly develop a 131,000sq ft site in Kuala Lumpur's Golden Triangle to build an office tower cum retail centre.
19. AmFIRST Real Estate Investment Trust (AmFIRST REIT) wants to grow its asset size by more than fourfold to RM2bn over the next 2-3 years from its current RM487m, said AmMerchant Bank Bhd managing director, T C Kok.
20. Centrio, YTL Land & Development's latest mixed development of Soho suites, retail stores and boutique offices has achieved 75% sales after a month-long preview.
21. Glomac via its wholly owned subsidiary, Glomac Damansara Sdn Bhd, is acquiring a 2.76-ha freehold land in Sungai Penchala, Kuala Lumpur from Yong Tiam Fook for RM42.51m, for a proposed mixed development project.
22. More channels will be made available for Astro subscribers from 28 Dec 06.
23. Proton Holdings offered special price discounts on spare parts to owners of Proton vehicles damaged by the recent floods in the states.
24. Honda Malaysia expects to maintain its 30% market share in the non-national passenger car segment this year.
25. UMW Holdings's wholly owned unit UMW Auto Parts Sdn (APSB) Bhd will be transferring all its business and assets including land and building except investment assets to another of its unit, UMW Advantech Sdn Bhd, as part of an ongoing internal restructuring exercise.
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