Maybank's Warning That KL Market May Start To Falter And Some Comments On Kinsteel

On Business Times: KL market may start to falter: Maybank Investment

• KL market may start to falter: Maybank Investment
  Published: 2009/05/27
  
  A 'recession in corporate profits' may have just begun as 63 per cent of companies under Maybank's coverage had reported lower sequential quarterly net profits.
  
  THE Malaysian stock market rally has reached a point where it may start to falter, says Maybank Investment Bank.
  
  "We believe this market rally has pushed valuations to the point where growth expectations have reached implausible levels. In fact, (corporate) profits have just begun to turn down," its analyst Andrew Lee said in a report yesterday.
  
  A "recession in corporate profits" may have just begun, he said, pointing out that 63 per cent of companies under Maybank's coverage that had released their first quarter financial results had reported lower sequential quarterly net profits.
  
  "History tells us the bear market isn't over," Lee remarked.
  
  Still, Maybank isn't overly bearish on the market. It has more "buy" recommendations on companies than "sells".
  
  "We are not overly bearish but we caution that optimism over growth can disappear as quickly as it appeared," he said.
  
  The Kuala Lumpur Composite Index (KLCI), which rose at an eighth-month high of 1053.14 on Monday, may fall to 990 by the year-end, he said. Yesterday, it eased 1.51 points to 1051.63.
  
  The market had risen in recent weeks, fuelled by liquidity and optimism that the worst of the global recession is over.
  
  It currently trades at 15.2 times this year's estimated earnings, up from 12 times earlier in the year, which Lee considers too expensive seeing as corporate profits may contract by 7.7 per cent this year.
  
  "While we recognise this rally may well have room to run, we believe it is beginning to look expensive relative to growth," he said.
  
  He noted that two previous bear cycles, from 1981-1985 and 1993-1998, lasted 57 and 58 months, respectively.
  
  It has now been 17 months since the present bear market began in January last year.
  
  "Those bear markets had 22 to 38 trend reversals of 5 per cent or more; we have now seen 12 since January 2008. These comparisons suggest we are, at best, half way through this bear market," Lee said.
  
  Maybank's strategy is to go for stocks in the construction and building materials sector, as well as selected consumer and high-yield stocks.
  
  Its top picks include Resorts World, Telekom Malaysia, Berjaya Sports Toto, WCT, Kinsteel and Hock Seng Lee.

I am confused.

Let's see...

• "We believe this market rally has pushed valuations to the point where growth expectations have reached implausible levels. In fact, (corporate) profits have just begun to turn down,"

Would you agree?

Don't you think a lot of stocks had rallied far too much? And what was the basis of the rally? Wasn't it the 'there are signs that the worst is over'?

And some of these companies, there are STILL recording losses for the current reported quarterly earnings.

So earnings should improve.... but when? by how much?

Let's take a random stock, Kinsteel.

Aug 2008. Quarterly rpt on consolidated results for the financial period ended 30/6/2008

Kinsteel made some 103 million. ( Good times! :D )

Nov 2008. Quarterly rpt on consolidated results for the financial period ended 30/9/2008

Kinsteel made only 57.9 million. (Bad times... coming! )

Feb 2009. Quarterly rpt on consolidated results for the financial period ended 31/12/2008

Kinsteel lost some 185 million! ( Due to falling steel prices, Kinsteel said it wrote down their inventory to reflect the plunging steel prices)

May 2009. Kinsteel announced it lost some 34.8 million. Note that there is no inventory writedown mentioned.

How?

Here we have a company that is still losing money.

Signs are there 'that the worst could be over'.

Here are some comments from a research report.

• Offer prices of inputs such as scrap and iron ore have crept up by 7-8% in the past month, alongside a slight 5% increase billet prices to USD430/t, arising from expectations of demand trickling in. While pockets of development exist in the region, particularly Vietnam, a definite road to recovery remains to be seen, given that most regional steel mills are still underutilized and saddled with high inventory levels. Price elasticity remains high and resistance from steel buyers makes the steel market intensely competitive for now.

Sounds reasonable that the worst could be over, yes?

So how is Kinsteel the stock doing?

From that screen shot, I see that back in March 20th 2009, Kinsteel traded as low as 36 sen.

Yesterday, the stock closed at 89 sen!!!!!!!!!

oO

So would you agree now with what was stated?

• "We believe this market rally has pushed valuations to the point where growth expectations have reached implausible levels. In fact, (corporate) profits have just begun to turn down,"

And would you agree..

• "While we recognise this rally may well have room to run, we believe it is beginning to look expensive relative to growth," he said.

And this is where I am confused.

Must be my flawed mindset.

Kinsteel looked like a stock that reflected what the research analyst, Andrew Lee is saying here.

And if that is so, why is Kinsteel one of its TOP PICKS?

Incredible yeah?

And the comments earlier on Kinsteel were taken from Maybank's reports. Here's the rest.

• Buy, with TP of RM1.30. There are no changes to our forecasts, which incorporate strong earnings recovery in 2010. The group’s diversified range of products will benefit from the spectrum of steel demand, starting with the construction sector recovery post-2009. Our TP of RM1.30 is based on 8x 2010 PER. Valuations continue to look attractive. Currently trading at 4.9x 2010 PER, the stock is at a discount to its domestic sector average of 5.4x and regional average of 6x.

For a stock that FLEW from 0.36 sen to 89 sen in just two months, Maybank's target price for Kinsteel is 1.30????

Ok.. all the valuations is based on 2010 earnings.

It's Maybank's research projected earnings for Kinsteel. Their estimated earnings.

And what's Maybank's estimate?

Only some 152 million!

So from my flawed understanding, Kinsteel valuation looks cheap because based on 2010 earnings (that's a 2 year estimate), Kinsteel is trading at 4.9x 2010 PER.

Of course, I guess I have to determine if the 2010 earnings is achievable or not. Let's look at Maybank's estimate.

2008, Kinsteel made some 32 million.

2009, Kinsteel is ESTIMATED to be able to make 55 million.

2010, Kinsteel earnings should FLY to 152.6 million!!!

How now my dearest beloved Brown Cow?

You reckon it is possible under current business economics? ( see Would You Have A Punt On The Steel Stocks? for reference too )

Can mah?

If possible, then Kinsteel surely has to be the TOP buy!

*whistle*

Oh... remember this is my flawed view.