Election aftermath: Is the rally real?

By Jose Barrock

In the third of a series articles on the effects of elections on the economy and the stockmarket, KiniBiz takes a look at the factors that affect the bourse. The initial strong rally has petered off but predictions are for a stronger finish this year. Is the stock market rally a flash in the pan? Or will it be sustained? And which are the stocks to look out for?

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On Monday morning at 9am, as trading started on the local bourse, the FBM KLCI blew through the roof— surging 132 points to hit an all-time high of 1826.22 points in intraday trading. Although the initial euphoria faded, the benchmark index closed at an all-time high of 1752.02 points, gaining 57.25 points.

On Tuesday the FBMKLCI gained an additional 21.25 points to close at 1773.27 points. Today however the CI lost some of its legs closing at 1774 points, slipping 2.73 points.

The surge on Monday caught most by surprise.

“Truth be told, no domestic funds were in it (the run on Monday), they (the local funds) were staring at the screen not knowing what to do…The buying is foreign,” a head of research from a local brokerage said.

On Monday the top gainers were government linked companies UEM Land Holdings Bhd and CIMB Group Holdings Bhd— registering gains of 12.88 percent to RM2.98, and 9.72 percent to RM8.35 respectively, while Genting Bhd was up 6.71 percent to RM10.66. Other notable gainers were Tenaga Nasional Bhd, Felda Global Ventures Holdings Bhd, Genting Malaysia Bhd, Maxis Bhd, IHH Healthcare Bhd, Kuala Lumpur Kepong Bhd and Petronas Dagangan Bhd to name a few.

As for the question as to how long will the rally last, opinions are divided.

Maybank Investment Bank in a report released recently pegged a year-end target of 1815 points for the FBM KLCI, up from 1710.

BIMB Securities Research meanwhile said, “Now that the election fever has subsided, most of us may be looking to reconcile recent developments and hopefully be able to make sense of the market’s bullish uptrend.

“Post-GE13 saw the FBMKLCI flying to a high of 1,826.22 points before retracing to current levels of 1,750 points. Now that the market had far outpaced that of fundamentals, we believe common sense would prevail, hence expect the market to retrace given time.”

So how long will the rally last?   

Ang Kok Heng chief investment officer of Phillip Capital Sdn Bhd was unsure as to what to expect.

“Today there was some profit taking, but basically nobody knows how long it (the rally) will last or what will happen…It appears that there was a second wave of buying from foreign funds….the first wave was in January…. but we don’t know how much more it (the market) can go up….Regional markets are up, so there is some room (for gains),” he said. (see table)

He declined to get into specifics of his stock picks or his targets for the year.

Head of research at Mercury Securities Sdn Bhd, Edmund Tham was chattier. The surge on Monday he said, was basically a “knee jerk reaction”.

“The question is how long will the funds remain invested, one week or one month we don’t know…it all depends on the market,” he said.

Tham added that much of the buying was also attributable to pent up demand, as some of the foreign funds were waiting for the general elections to pass, before deciding whether to buy or refrain from doing so.

BIMB in its monthly review for April has it that there was a net inflow of foreign funds totalling RM5.05 billion in April, after an impressive RM4.6 billion in March, which nudges up the total net inflow from foreign funds to RM14.2 billion year to date.

A seasoned merchant banker however contends that it could be local funds such as the Employees Provident Fund rerouting its buying via foreign brokerages.

“We don’t know who the buyer is, it’s just registered as buyers from Hong Kong, or Singapore, but it could be our own pension fund,” he said.

Not an endorsement of BN

The head of research added that the surge in the FBMKLCI on Monday was not an endorsement of the Barisan Nasional, after their victory in the general elections.

“The market had actually already factored in Barisan (Nasional) winning by a smaller majority from 2008…Now most of us are looking for a good level to go back in,” the head of research added.

He attributed the surge could be due to the global liquidity rally.

The stocks, sectors to watch

The head of research has his eye on CIMB Group Holdings Bhd, Multi-Purpose Holdings Bhd, Gamuda Bhd, Perisai Petroleum Teknlogi Bhd, SapuraKencana Petroleum Bhd and AirAsia Bhd among others.

However he cautions that most of his stocks picks have already breached their respective target prices.

“We are basically looking for a good level to go back in,” he said.

He added that while banks and construction company stocks had already surged, oil and gas stocks still had legs.

“SapuraKencana (Petrolem) still has legs to run,” he added.

Tham of Mercury has a similar predicament, as his year-end target for the KLCI of about 1700 points has been breached.

“Look at selective property stocks, look at the second liners, for longterm look at CPO counters….there’s nothing much to look at actually. At 1600 there are many counters which are undervalued, at current levels, no.

“I’m advising clients to take profit,” Tham added.

A fund manager from a foreign broking house says that his sights are set on Johor stocks.

“It (promoting Johor) would be something easy for (premier) Najib (Abdul Razak) to pull off as Singapore is already very interested in Johor…and it doubles up as FDI as well, I am looking at Johor based property stocks,” he said.

He highlights that if Najib doesn’t last as PM, Johor stocks would still remain in vogue, with deputy prime minister Muhyiddin Yassin hailing from Muar, Johor.

“There is very little downside,” he added.

With the Barisan Nasional winning the election, many of the planned projects such as the Mass Rapid Transit (MRT) phase 2, Permodalan Nasional Bhd’s 108 storey (Merdeka) towers, the West Coast Expressway, and oil major Petroliam Nasional Bhd (Petronas’) huge investments among others are likely to be maintained by the ruling coalition.

Nevertheless a handful of counters will surely see some action.

Puncak Niaga Holdings Bhd

Rozali Ismail, 40 percent shareholder of water treatment and distribution concessionaire Puncak Niaga Holdings Bhd, has fended off takeover attempts by Selangor for the past five years.

Had Barisan Nasional regained Selangor—tariff hikes of 37 per cent and 25 percent which were slated to kick in, back in 2009 and 2012 for Puncak’s 70 percent water distribution unit Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) would have taken place.

Pakatan Rakyat led Selangor has opposed these tariff hikes, leading to a spate of legal wrangling, and also made as many as four offers over the past five years, the last being a RM9.65 billion offer for all the water assets in the state, of which Puncak’s portion is in excess of RM6 billion.

However with the Pakatan Rakyat retaining Selangor, whether Rozali can fend off a takeover for another five years remains to be seen.

Syabas has the mandate to supply treated water to Selangor, Kuala Lumpur and the Federal Capital Putrajaya.

Rozali is an Umno member and said to be a donor to Barisan Nasional.

Puncak closed at RM1.69, coming off its highest levels since mid 2011 of RM1.95 hit in early April.

Star Publications (M) Bhd

Star Publications (M) Bhd is 42.5 per cent owned by MCA, the second largest component party of the ruling Barisan Nasional party.

With the MCA losing support of the Chinese, winning only six Parliamentary seats in 2013 from 15 in 2008, will the party fend off takeovers for Star, or will politically connected individuals muscle in?

“Star (Publications) is a cash cow…MCA will be hard pressed to hold on to such a valuable asset if it does not do well (in the 13th General Elactions). There are bound to be many suitors,” the market watcher said.

While its financials have deteriorated, the company had cash and bank balances of RM110.16 million and short-term deposits of RM363.57 million.

For the year ended December 2012, Star Publications posted net profits of RM208.1 million from RM1.08 billion in revenue. A chunk of the profits, some RM90 million came from the disposal of property.

It is interesting to note that the EPF has been paring its stake down in Star Publications. The EPF last week had 63.05 million shares or 8.5 percent in Star Publications, down from 9.8 percent or 72.3 million shares as at end March this year and 85.7 million shares or 11.6 percent in end March 2012.

Star Publications closed at RM2.39 close to its 52 week low of RM2.34. Over the past six months Star Publications has shed about RM600 million in market capitalisation.

Media Prima Bhd

Media conglomerate Media Prima Bhd has the lion’s share of the free to air television networks, and a whole host of newspaper publications under its New Straits Times Press (M) Bhd banner. Among the publications are New Straits Times, Harian Metro and Berita Harian.

The largest shareholders of Media Prima according to its latest annual report is the EPF with 18.63 percent, Gabungan Kesturi Sdn Bhd holding 11.39 percent and Altima Inc with 8.17 percent.

Gabungan Kesturi and Altima are both Umno linked.

While Gabungan Kesturi’s sole shareholder is under trustees Amanah Raya Bhd, its directors are Abdul Rahman Ahmad and Shahril Ridza Ridzuan, who helm Equity Nasional Bhd and EPF respectively. The two restructured Malaysian Resources Corp Bhd (MRCB), a company linked to opposition leader and former Deputy Prime Minister Anwar Ibrahim, after he fell from grace in the late 90’s.

Media Prima closed at RM2.67, gaining 37 sen or 16.1 percent over the past three days.

Malaysian Resources Corp Bhd

Malaysian Resources Corp Bhd or MRCB is 42 percent controlled by the EPF. Other substantial shareholders are pilgrim fund, Lembaga Tabung Haji with about 8.8 percent.

Traditionally the company has been viewed as being Government linked, and exhibited major fluctuations when the Barisan Nasional fared badly in the last general election in March 2008.

Prior to a restructuring exercise, MRCB was controlled by individuals linked to Anwar Ibrahim. When Anwar fell from grace MRCB’s fortunes followed suit.

However it is noteworthy that MRCB has businessman Mohamad Salem Fateh Din and his son Imran at the helm of the company now, with their assets being taken over by MRCB in a RM729 million deal of cash and shares.

Thus how MRCB fares this time around remains to be seen.

MRCB’s stock closed at RM1.57, down six sen.

KUB Malaysia Bhd

Another politically connected company is KUB Malaysia Bhd which has the Minister of Finance controlling 22.55 percent of its equity.

The largest shareholder is Gaya Edisi Sdn Bhd which has 29.62 percent. Gaya Edisi is wholly owned by Temasek Padu Sdn Bhd, a company controlled by lawyer Zulkifly Rafique of legal firm Zul Rafique & Co and his partner in the legal firm Tunku Alizan RM Alias.

Zulkifly is also chairman of Umno’s other vehicle Realmild (M) Sdn Bhd.

KUB has not been faring too well. For its year ended December 2012, KUB suffered a net loss of RM17.69 million from RM826.4 million in sales.

The company’s stock closed at 42 sen, giving KUB a market capitalisation of RM233. 72 million.