By Khairie Hisyam
While the local bourse has seen a strong post-GE13 surge as the FBMKLCI hit a closing high of 1,788.43, there may be aspects overlooked amid the prevalent bullishness in the market at the moment, says BIMB Securities.
Valuation mismatch
“Recent upgrades of the FBMKLCI do not commensurate with the target prices of the index constituents,” says Kenny Yee, Head of Research at BIMB Securities Sdn Bhd. “A valuation gulf has emerged between the top-down and bottom-up approach.”
While researchers are targeting a range between 1,850 and 2,000 for FBMKLCI this year, analysis through the bottom-up approach values it at just 1,800.
“It seems that many of us are torn between sentiments and fundamentals,” commented Yee, adding that, statistically, at 1,900 the market price-earnings (PE) ratio is valued at 17.5 times 2013 estimates and 16 times 2014 estimates whereas at 2,000 the market PE ratio is valued at 18.3 times and 17 times respectively for 2013 and 2014 estimates.
It is worth noting that the local PE band has averaged between 15 and 16 times, which Yee says represents a fair valuation of the local bourse. However, he added that in 2009, the PE surpassed the 20 times mark during the post-subprime crisis uptrend, “outpacing that of the fundamentals albeit temporarily”.
“This can be also due to the fact that corporate earnings for 2008 and 2009 were actually negative by 19% and 7% thus explaining the surge in PE before normalising,” commented Tee.
Noting that at present “price is far outpacing the fundamentals”, Yee said that at the moment many analysts are looking towards their FY2014 forecasts to justify their target prices, even though the reporting season for the 1Q of this year is yet to finish.
Table 1
To connect the discrepancy in valuation, BIMB Research devised two levels of higher target prices for index-linked counters premised at 1,900 and 2,000 respectively (see Table 1) using the Capital Asset Pricing Model (CAPM) method to conduct a stocks sensitivity analysis. The simulation uses 3.5% as the risk-free rate and the stock’s respective beta.
“(However), our valuation matrix is utilise only as an indicative value and by no means reflects our actual valuations,” notes See.
Will foreign influx post-GE13 stay?
Foreign shareholding increased by 1.4% since April 2013 from 18.5% at April 2013 to 19.4% at present (see Table 2). The increase is apparently in tandem with the recent surge of net foreign inflow, which from December 2012 until year-to-date (TD) is a just below the RM19 billion mark.
Table 2
“Risk appetite from the foreign funds keeps expanding … PE expansion, +1 StdDev and reducing risk premium seemed to be the norm nowadays,” said Yee.
While acknowledging that foreign shareholding may continue increasing, Yee is sceptical whether such shareholdings are here to stay and warned that any exodus would adversely impact the local bourse. As such, BIMB Securities will only revisit its current sell-into-strength strategy once the 1Q earnings season is concluded.
“We are weighing the possibility of potential funds outflow that may catch everyone by surprise when the music stops,” said Yee.
However, despite his caution Yee also acknowledges the possibility that BIMB Securities “inadvertently may be forced to upgrade our target for the FBMKLCI” which at present still stands at 1,700.
“Let us enjoy the uptrend while it lasts,” he concluded.
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