We think rising risk aversion could lead to some weakness in share prices in Q307, which would present a buying opportunity. We remain positive on the near-term prospects for the market. Although valuations are no longer at value levels, we believe accelerating earnings momentum, rising dividend yields, and increasing ROE should continue to support a re-rating to our forward PE estimate of 16.5x (end-2007 KLCI target of 1,442). We expect the following themes to support a favourable environment for upward earnings estimate revisions:
Start of the property up-cycle.
We believe the residential property sector’s typical up-cycle has just begun. Based on our estimates, we think the typical property cycle in Malaysia lasts four years from trough to peak. We estimate residential property sales could reach RM40bn in 2008 (up 33% from 2006levels).
— Additional incentives to stimulate the property sector (recent incentives included the easing of foreign ownership restrictions and waiver of the real property gains tax) should further support the up-cycle. We believe these new measures could lead to a more broad-based rise in the property sector, which could potentially lead to a more balanced growth profile for the Malaysian economy.
Ninth Malaysia Plan:
financing not an issue. Although most major highimpact Ninth Malaysia Plan infrastructure projects have not yet started, the federal government registered a 148% YoY rise in development spending in Q107. We expect several high-impact Ninth Malaysia Plan infrastructure projects to break ground in H207 and support our GDP forecast of 5.6%.
— A quick look at the revenue side suggests the federal government continues to enjoy windfall profits from Petronas (the national oil company) and higher dividends from government-linked companies (GLCs).
— Although not our base-case scenario, we think this gives the Malaysian government flexibility to lower taxes to stimulate domestic consumption. We see several scenarios for tax cuts: 1) a reduction in personal income tax rates (we estimate a 100bp reduction would free up around RM600m), and 2) a reduction in the stamp duty (most likely in the property sector).
Potential earnings surprises.
We believe our FY07-09 EPS estimates could prove conservative in view of: 1) higher loan growth and lower loan loss provisions for banks; 2) higher average CPO prices; and 3) a possible tax break for PLUS Expressways. Potential earnings downside, however, could come from the energy sector because of higher fuel costs and from Proton.
— Accounting for these four items, a scenario analysis indicates our FY07
growth forecasts could increase to 25.8% (from 20%), while our FY08 and FY09 EPS growth estimates could increase to 11.8% and 9.2% (from 8.7% and 8.6%), respectively.