Around Asia's markets: Embracing unloved equities in Malaysia
International Herald Tribune
MARCH 16, 2006
Darren Boey 

Malaysia's stock market, Southeast Asia's second- worst performing this year, may "surprise" investors as the local currency strengthens, corporate earnings grow and shares become cheaper, Deutsche Bank said.

Corporate governance has also improved, Teoh Su-Yin, the bank's head of Malaysia research, wrote in a report released Wednesday.

The Kuala Lumpur Composite index has gained 2.7 percent this year. In Southeast Asia, only the Philippine stock benchmark has turned in a worse performance, with a 2.5 percent advance. The Jakarta Composite index has climbed 8.4 percent, making it the region's top performer.

Malaysia "is much ignored by most foreign institutional investors," Teoh said. "This unloved market might just surprise you."

Investors should hold stocks including Genting and the lender Bumiputra-Commerce, Teoh wrote. Bumiputra-Commerce on Wednesday raised its offer for Southern Bank to 6.7 billion ringgit, or $1.8 billion, in the nation's largest banking takeover.

Teoh estimates total returns in dollar terms of 13 percent to 18 percent this year from Malaysian equities. The Kuala Lumpur Composite has returned 2.9 percent including reinvested dividends in local currency terms. In dollars, the index has returned 5 percent.

The ringgit has gained 2 percent this year against the U.S. dollar as the prospect of an end to interest-rate increases in the United States draws investors away from dollar-denominated assets.

Former Prime Minister Mahathir bin Mohamad said Wednesday that the government should allow the ringgit to strengthen to reduce the amount the country has to pay for oil and to limit fuel price increases. The government raised gasoline and diesel prices by 30 sen a liter this month to reduce the amount it has to pay to subsidize fuel, the state-owned Bernama news agency said.

Companies with dollar-denominated costs, including Malaysia Airlines System, may benefit, Teoh's report said. A stronger ringgit lowers the cost of jet fuel, which is typically sold in dollars.

Earnings growth may support stocks. More than half of the Malaysian companies covered by Deutsche Bank reported fourth-quarter earnings that met analysts' expectations, compared with 38 percent in the previous quarter, Teoh said.

Genting, Asia's biggest publicly traded casino group, said fourth- quarter profit surged 45 percent, pushing full-year net income to a record. Proton, Malaysia's largest automaker, reported its first net income in three quarters.

"The good news is that 2006 earnings-per-share growth momentum has been stable so far," Teoh wrote. Fourth-quarter earnings reported were "far better than the previous quarter."

Deutsche Bank analysts expect Malaysian companies' earnings per share to grow 10 percent, better than the 9.7 percent projected for the region outside Japan, said Teoh.

In a Feb. 24 report, Teoh and Rachman Koeswanto, a Jakarta-based Deutsche Bank analyst, raised their call on Astra Agro Lestari, Indonesia's largest publicly traded plantation company, to "buy" from "sell." The stock has gained 4.2 percent since then, more than the Jakarta Composite's 3.6 percent increase.

Malaysian stocks are also set to become cheaper relative to earnings growth, Teoh reckons. The Kuala Lumpur Composite is now valued at 15.5 estimated earnings, lower than the Morgan Stanley Capital International Asia-Pacific index's 18 times.

Efforts by Malaysian companies and the government to improve corporate governance and transparency are another positive for the country's equities, Teoh said. 

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