CLSA: It has been bad, now looking ugly

November 25, 2008 at 8:07 am Leave a comment

Alpha and beta
After four rounds of market earnings cuts this year, we are finally confident that our 2009 earnings growth of -18.7% yoy is a fair reflection of the bleak outlook ahead. In this situation, we are sellers of banks and
plantations stocks, and companies which will be adversely affected by rising credit spreads and tightening domestic liquidity. On the other hand, we would hang on to dominators who will outperform their peers during the downturn. For investors with some risk appetite, we would buy high beta stocks which have large war chests for fire sale acquistions or those benefiting from the government’s fiscal stimulus package.

It has been bad, but now its looking ugly
After four rounds of market earnings cuts this year, we are finally confident that our 2009 earnings growth of -18.7% yoy is a fair reflection of the bleak outlook ahead.

Imputing these earnings forecast changes into our Gordon Growth Model, we derive an implied P/B 2009 target of 1.2x, translating into theoretical downside of 11.9% on the KLCI or 776 pts.

To double check, we also used a bottom-up approach which takes into account the CLSA target prices and this implies a KLCI target of 790 pts.

Top SELL ideas
Maybank and Bumi-Comm are proxies to slower GDP growth ahead, and will be hit by rising NPLs, slower loans growth and lower trading income.

Companies like TMI, TM, UMW and SP Setia will also be adversely affected by rising credit spreads and tightening domestic liquidity.

We are also sellers of Sime Darby, IOI and KLK, as CPO prices of RM1,000/tonne in 2009 is barely sufficient to cover upstream production costs.

Alpha ideas for outperformance
Alpha ideas are basically must-have stocks to ride through the current downturn, as these are dominators in their respective sectors and will outperform their peers.

These stocks are Public Bank, Resorts, Digi, BAT and KLCCP.

Beta ideas for the brave High beta stocks will deliver absolute returns for investors as these are situational
plays which have higher risk reward ratios vis-à-vis the alpha ideas.

Genting and YTL Power have large war chests for fire sale acquisitions, whilst IJM, Lafarge and WCT will benefit from the government’s RM7bn fiscal stimulus package.

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November 19, 2008 Daily Highlights 20 November 2008 Newz Bits

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