Future For Malaysia Equities Is Bright, Says Nomura

Nomura expects Malaysia equities to return 4% in 2018 and says stock picking will be of the utmost importance to outperform.

The positive view from the broker stems from a number of factors, listed in a report dated Jan 22: « 1) solid macro and consumption growth, 2) continuing foreign inflows amidst positive revisions, 3) better corporate balance sheets with dividend upside, 4) possible election rally, 5) likely net buying by local institutions, 6) Malaysia’s laggard performance vs peers, 7) key concerns on banks getting addressed, 8) an appreciation MYR. »

The brokers set a 2018 year end target of 1,900 points for KLCI index.

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Key fundamental drivers for market performance in 2018 are summed up in the following table:

Source: Nomura

Per Nomura’s report:

« We note that during the three years of relatively weaker demand and earnings, Malaysian corporates seem to have increasingly focussed on improving their cashflow generation and reducing leverage.

We believe this is a positive, especially given the environment of rising rates globally as well as in Malaysia (we forecast a 25bp Overnight Policy Rate hike in 2018F).

If we observe the operating cashflow and free cashflow trends for the past five quarters across the non-financial sectors, we note a steady improvement across quarters – in fact, 3Q17 was a particularly strong quarter, with Bursa-listed counters generating total operating cashflow (OCF) of ~MYR30bn and free cash flow (FCF) of ~MYR9bn.

Notably, the improvement in FCF has not been accompanied by any sharp slowdown in corporate capex – it remains healthy at ~MYR15-20bn quarterly.

We believe that with corporate profits expected by us to grow a further ~5% in 2018F, OCF and FCF are poised to improve further this year, and the corporates might keep capex intensity up as consumer and business sentiment indicators improve further with growing demand.

Overall, the resulting effect of the strong cashflow generation is that non-financial system net gearing, as measured by net debt-to-equity, has come down from ~33% year ago to ~31%, a trend which we think is likely to continue with rising profits. Coincidentally, the sector with the highest level of gearing, i.e., Energy, is the one which is likely to benefit most from rising commodity prices as well, in our view.

Again, due to improving balance sheets and earnings profiles, and rising cash balances, there is upside risk to dividends. »

Key stock ideas for the coming year are: CIMB Group, Public Bank (Banking sector), Axiata (Telcos), Genting, Genting Malaysia (consumer services), Malaysia Airports Holdings, Airasia (Transportation), Muhibbah Engineering, SunCon (Capital Goods),  Mynews Holdings (Retail), Dialog (Energy), Tenaga (Utilities).


Here’s the full coverage of the Malaysia market by Nomura.

Source: Nomura


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