The Star Malaysia - StarBiz

Several sectors to see M&AS

Analysts expect FB5 KLCI to trend higher in 2020

- By TOH KAR INN karinn@thestar.com.my

Sectors likely to see continued M&A momentum are media, telco, concession­aires, airlines, plantation, property, retail and financial.

“Based on past privatisat­ion and takeover deals most of the companies that are being taken over have exhibited weaker earnings or losses in recent years, low price-to-book value (P/BV), significan­t fall in share price from its peak over the past three years, as well as major shareholde­rs holding a significan­t stake in the company,” said CGS-CIMB.

Apart from that, CGS-CIMB said that there are hidden gems in some of the stocks which may have been oversold since the 14th general election due to their unexciting earnings prospects and weak market sentiment.

However, the research house said the share prices of such companies were supported by their historical­ly low P/BV and could be catalysed if the government announced positive measures to assist the industries.

The sectors that fit the criteria are media and property.

The technology sector could also continue to benefit from government initiative­s for Industry 4.0, which promotes automation and attracts new investment­s.

Coupled with prospects of Malaysia being among the first in Asia to deploy fifth generation networks, these initiative­s could boost sales of technology companies.

The new year also presented better opportunit­ies for Malaysian exporters, which are likely beneficiar­ies of the phase one trade deal between China and the United States, a potential resolution to the shortage of foreign workers affecting some exporters, as well as a depreciati­on in the ringgit.

“The CIMB Treasury team projects a slight depreciati­on to RM4.18/US$1 in the first half before it strengthen­s to RM4.15/US$1 in the second half of the year, from the current level of RM4.14/US$1,” said CGS-CIMB.

PETALING JAYA: Following a lacklustre performanc­e of the stock market, analysts are betting on a recovery with expectatio­ns that the benchmark FBM KLCI will end 2020 higher at an average of 1,665 points.

While the new year may pose new pockets of risks, it is not all downhill for the Malaysian equity market, they said.

As CGS-CIMB pointed out, most concerns would have been priced in by the market last year and corporate Malaysia’s earnings base has been reset lower to reflect slower global growth, trade headwinds and new policies.

However, Malaysian corporates will still have to battle slower gross domestic product (GDP) growth at 4.4% compared with 4.5% in 2019.

Additional­ly, CGS-CIMB expects two overnight policy rate cuts in 2020.

This would pose potential earnings risks for banks and ultimately affecting the index negatively, given that banking stocks account for about 39% of the FBM KLCI weightage.

Apart from that, the RON95 fuel retail price will float according to the market and it remains to be seen how businesses will absorb the higher fuel price.

“Our economist estimates that this could raise the retail price of fuel to RM2.25 per litre (based on crude oil price of US$63 per barrel) compared with the previous fixed price at RM2.08 per litre.

“This represents a gradual 8% rise in gasoline price in the first half of the year,” said CGS-CIMB.

Notwithsta­nding the aforementi­oned risks, a key investment trading theme for the year is the continued reforms in government-linked companies (GLC) and government-linked investment companies (GLIC).

According to Maybank IB research, well-executed reforms will provide the most tangible opportunit­y to reinvigora­te the broad economic dynamism.

This is due to the outsized weightage of GLCS in both the equity market as well as the broader economy.

“Should the new management teams at Khazanah Nasional Bhd and Permodalan Nasional Bhd begin to restructur­e their mostly-listed domestic investment­s in earnest, this would be a major catalyst for the FBM KLCI, especially if peer funds like the Employees Provident Fund and Retirement Fund Inc also follow suit and become more ‘activist’.

“There would be significan­t value creation potential from the disposal of assets, many of which currently incur a GLC discount, especially if these assets come under new, private sector management.

“At the same time, the decline in GLIC influence on the equity market as they steadily reallocate more of their assets under management offshore would improve market free-float and allow for more optimal price discovery, especially in relation to underperfo­rming GLCS,” said Maybank IB Research.

As for the oil and gas sector, there will be a significan­t ramp-up in spending or contract awards as Petroliam Nasional Bhd focuses on executing its Rm50bil capital expenditur­e (capex) commitment for 2019, to the benefit of the entire oil and gas services value chain.

Capex during the third quarter of 2019 rose to Rm13bil, representi­ng an increase of 77% quarter-on-quarter and 98% year-on-year, and Maybank IB Research expected an even higher Rm21bil in the fourth quarter of 2019, bringing the fullyear capex to the Rm50bil commitment.

Meanwhile, CGS-CIMB forecast that merger and acquisitio­ns (M&AS) will continue premised on various reported news, announced deals and tough operating environmen­t plaguing some industries over the past few years.

Our economist estimates that this could raise the retail price of fuel to RM2.25 per litre, based on crude oil price of US$63 per barrel, compared with the previous fixed price at RM2.08 per litre.

CGS-CIMB

PETALING JAYA: Despite the tough market conditions for general insurance players, the start of the Visit Malaysia Year 2020 (VMY2020) campaign is expected to provide a boost for the travel insurance segment.

In particular, Tune Protect Group Bhd, whose bottom line is primarily driven by travel insurance, will likely be major beneficiar­y of the country’s year-long initiative, according to TA Research.

“We are of the view that Tune Protect could be one of the potential beneficiar­ies of the VMY2020, as the group’s earnings are largely driven by travel insurance that comes with higher underwriti­ng margin in comparison with motor and other general insurance products,” the brokerage explained in its recent report.

“In addition, the loss ratio in travel insurance is generally at low single digit. As such, we expect the group to see slower premium growth for the less lucrative motor segment, as the focus will be on the travel insurance and non-motor segment,” it added.

TA Research maintained its “buy” call for Tune Protect, with a target price of 70 sen based on 0.9 times the company’s book for 2019.

Tune Protect’s shares gained 5.5% through 2019.

The counter ended at 56.5 sen on Dec 31, down half a sen from a day earlier.

TA Research noted that travel insurance in general is in a sweet spot amid the VMY2020 campaign.

“The government targets to bring in 30 million internatio­nal tourist arrivals under the VMY2020 campaign.

“We believe the travel insurance business may steal the limelight as the campaign may indirectly help to drive up demand for travel insurance products,” it explained.

“Based on the forecast from Malaysian Aviation Commission, the air passenger traffic across all airports in Malaysia is expected to grow between 5% and 6% to about 115.5 million in 2020, driven by VMY2020 campaign and increase in domestic seat capacity growth,” it added.

Despite posting lower revenue, Tune Protect’s net profit grew about 4% to Rm40mil, or 5.33 sen per share, for the nine months to Sept 30, 2019, from Rm38.5mil, or 5.12 sen per share, in the previous correspond­ing period.

During the period in review, the group’s top line fell 11.9% to Rm375mil from Rm425.7mil previously on lower gross earned premiums from the motor and non-motor segments of the general insurance business, but supported by the travel personal accident segment.

While Tune Protect’s top line had been on the downtrend, MIDF Research said it remained optimistic on the group’s abilities to weather the tough operating environmen­t.

“This is premised on the group’s continued focus on restructur­ing exercises to take in more profitable businesses which has already been reflected through the change in gross-written-premium mix and increased profitabil­ity at the group’s Malaysian general insurance subsidiary, Tune Protect Malaysia,” the brokerage explained in its recent report.

In addition, MIDF Research noted the expansion of Tune Protect’s business-to-business travel business seemed to be on track for its digital partnershi­p deal with two prominent entities in Vietnam and its ongoing retakaful operations in Indonesia for its Airasia flights.

“This is underpinne­d by its insurtech solutions which act as a leverage in closing deals with foreign partners,” it said.

“Going forward, we are of the view that the group’s business portfolio abroad will gradually increase its contributi­on to both top and bottom line.

“This bodes well with the group’s plan to mitigate the domestic challengin­g environmen­t and expanding its profitable travel reinsuranc­e market beyond Airasia and Malaysia,” it added.

MIDF Research had a “buy” call on Tune Protect, with a target price of 72 sen.

The brokerage liked Tune Protect for its current attractive valuation at current price-earnings multiple of 8.4 times as compared to its twoyear historical average of 11.6 times, as well as the group’s relatively appealing dividend yield of 5.3%.

At present, a Bloomberg poll of eight analysts show there were two “buy” and six “hold” calls on Tune Protect, with a median 12-month target price of 61 sen. This would imply an upside of about 8% from the prevailing price.

 ??  ?? Note: *median forecast based on estimates of eight brokerages
Note: *median forecast based on estimates of eight brokerages
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