Further Election Indications. With the Star reporting that the PM has called on UMNO party members to get ready for the general election, we believe our long held view of an early 2011 polls will indeed become reality. Given the history of pre-election rallies, we maintain our year-end KLCI target of 1496 pts and 2011 KLCI fair value of 1648 pts even as we caution on the 3Q results to be announced in November. We are particularly positive on the Construction, Property and O&G sectors as part of the election theme. With the Sarawakian state election possibly being held in 2010 and the general election before June 2011, any weakness in the local bourse in November is a cue to Buy.
Within expectations. OSK Research has been expecting a 2011 general election since March this year and as such, we are not surprised by the PM’s latest remarks. We had also expected positive pre-election sentiment to help drive the KLCI to an all-time high in 2011. As indicated in our 14 Oct 2010 report, which we reiterate in Figures 1 and 2, three out of the last four general elections had been held within the first 4 months of the year. With fresh rumours that the Sarawak state election might be pushed earlier to end 2010, we believe there is a strong possibility of the general election being held within 1H2011.
Pre-election rallies likely. Historically, in 6 out of the last 8 general elections, there had been a rally in the KLCI within 6 months prior to the polls. This could be because the general elections had generally been held, where possible, during times of strong economic growth and positive market sentiment. News flow in relation to new infrastructure investments is also usually prominent in the months prior to the election. With the Economic Transformation Programme (ETP to be launched today and various infrastructure projects already highlighted in the ETP, including the KL Mass Rapid Transit system, the KL-Singapore high speed rail and the development of the Rubber Research Institute land, the Construction and Property sectors should do well during such pre-election rallies. Similarly, the O&G sector should also see positive sentiment from the listing of Petronas’ subsidiaries and contract-related news flow. We are Overweight on all three sectors.
Earnings growth should also provide support. Although we continue to caution that the 3Q2010 earnings to be reported in November could potentially disappoint, 2011 earnings growth continues to be strong. We still see 16% growth in KLCI component earnings for 2011, with blue chip sectors such as Banking, Gaming and Telecoms all likely to record above average profit growth.
Maintaining 2011 KLCI fair value at 1648pts. We had raised our PER multiple for 2011 KLCI from 15x to 16x, which bumps up our KLCI fair value to 1648 pts. We continue to think this fair value is achievable ahead of the general election. The stocks to look out for in line with the election theme are construction players, property and O&G.
Below are the stocks to look out.
|Stock||Target Price (RM)||Rating|
|Hock Seng Lee||1.92||Buy|
Source : OSK research