Stocks picks for 2009

Stocks picked for 2009 include IOI, Tan Chong, AirAsia, PPB Group, Petronas Dagangan, Fraser & Neave, Resorts, Petronas Gas and Public Bank.

IOI Corp Bhd

For exposure to one of the best managed conglomerates in Malaysia and a proxy to a recovery in crude palm oil (CPO) prices, there are few better stocks than IOI Corp Bhd.

The catalysts for a recovery in this include CPO prices increasing to a more reasonable range of between RM2,000 to RM2,500 per tonne, and the launch of its Sentosa Cove projects.

IOI was the worst casualty during the recent sell-off in the plantation sector due to its high level of foreign shareholding, recent foreign exchange losses and departure of key management personnel. It is trading some 20% lower than early 2007 but given the estimates that this plantation heavyweight is due to earn 25.2 sen, it is trading above the forecast price/earnings ratio for Bursa Malaysia in 2009 but that could be pinned to the premium the stock has commanded of late.

Tan Chong

Motor Bhd

Tan Chong’s nine months to September 2008 net profit of RM217.6mil beat the market’s estimates and its performance among motor firms is to be admired.

Its third-quarter revenue also hit the RM1bil mark for the first time in a single quarter, or a 69% increase to RM1bil, thanks to higher car sales driven by more launches of new models.

Despite a more challenging year, Tan Chong is expected to guard its margins in the range of 8% to 10% underpinned by higher efficiencies in production and yearly increase in autoparts localisation (from 20% now to a targeted 50% by 2012).

This will lead to further improvement in costs which will also be the company’s competitive edge to hedge against the strengthening of yen against the ringgit moving forward.

Tan Chong will continue to launch three new models every year for the next three to four years given its strategy to garner more market share going forward. And while its profit for 2009 is projected to be lower – it is expected to earn 26.2 sen a share – Tan Chong’s valuations will be at a deep, and somewhat unwarranted, discount.

AirAsia Bhd

Airline shares have had a rough few years as one woe after another has hit this sector. From sky-high oil prices to cut-throat competition, airlines have had to manoeuvre to stay aflot during these trying times.

AirAsia has not been spared as it, too, took a financial hit in 2008 but clearer skies might be just over the horizon for this counter.

A merger between Qantas Airways Ltd’s Jetstar and AirAsia Bhd, if talks end up with the airlines having some form of cooperation, will be a positive for AirAsia.

The other benefit for AirAsia is that despite the economic slowdown, demand for short-haul services remains resilient and low-cost travel is benefiting from downtrading from full-service carriers.

Costs will also be much lower for AirAsia as fuel prices have collapsed. AirAsia will be paying spot prices – US$40 – from January.

The risk of a cash call has also dissipated with the successful financing for a further 37 aircraft, and the airline is projected to post a profit to the tune of 10.2 sen a share in 2009.

PPB Group Bhd

In times of uncertainty, it is always good to look at a company that goes back to basics and PPB Group, a diversified palm oil-based company, offers investors exposure to a number of industries that would benefit in this downturn. This is a steady consumer-oriented stock maybe well known for its exposure to plantation giant Wilmar International Ltd but its other less glamorous businesses will be pulling in the profits as crude palm oil prices remain depressed.

PPB has a sizeable operations in flour milling, sugar refining and feedmills to go with an increasingly profitable cinema operations. These commodity processing businesses will see margins improve as commodity prices remain low and would offset a decline in CPO-related earnings from associate company Wilmar.

Estimates have this stock earning 81.3 sen a share this year and the dividend is forecast to be a healthy 30.3 sen a share.

Petronas Dagangan Bhd

It’s not a sexy stock but its steady earnings and rock-solid business model is something investors might want to have a look at during a period of economic uncertainty.

Petronas Dagangan is the leading petrol station operator in the country and its margins, even though they fluctuate, and its nature of business give investors the security of investing in a profitable business.

Its gross profit may take a hit with the decline in pump prices but volume growth, from an ever growing number of petrol stations in the country and lower fuel prices, will offer stability of earnings.

For its 2010 financial year (its 2009 year ends in March), the company is forecast to post higher profit of 75 sen a share and dividend of 44 sen a share.

Petronas

Gas Bhd

This is another stock that has a boring label tattooed onto itself but its defensive nature will offer investors protection during times of market and economic volatility. Deriving earnings from the volume of gas sold, the risk to its earnings is small even though an economic slowdown may lead to lower a consumption of gas. That is because there is already a shortage of gas in the country.

The shuttering of petrochemical plants in the east coast may see lower demand for industrial gasses from its centralised utility facilities but the impact is expected to be small. Helping future earnings will be the company’s foray into the power generation business via its maiden power plant in Sabah.

The steady nature of Petronas Gas’s business is reflected in its forecast earnings, as estimates derived from Bloomberg has pegged the company earning 54.5 sen a share for its 2010 financial year and declaring a dividend of 47.7 sen a share.

Public Bank Bhd

It may be among the most expensive banking stocks in the world but that does not mean the stock should be ignored. The fact that it has attained such a status when banking stocks around the world are looked at with more suspicion means there is something worth looking out for in this bank. The high valuation is also a sign of confidence in this counter, signalling the market is putting a high degree of certainty that this bank will survive.

The strength of Public Bank makes it a stock worth watching out for. Its business is deeply consumer and small business centric and it has ridden the wave of lending activity in those two segments for nearly the past decade, chalking up strong double-digit growth rates and super low non-performing loans along the way.

Whether this will continue bears watching but it will be tough picking against the most defensive-natured banking stock heading into 2009. It has a forecast earnings of 72.2 sen a share for 2009 and a dividend of 69.5 sen a share.

Fraser & Neave Holdings Bhd

One look at the stock chart of this counter and it’s almost a no-brainer pick. This stock has gained year-on-year for the past five years and the company’s profits continued to rise during the time.

It has without much fanfare done the business of giving growth while maintaining the hallmarks of good management. Expansion into neighbouring countries plus the steady defensive nature of its business - the company is a major bottler of soft drinks in the country - augur well for shareholders of this company.

As one analyst remarked, the major shareholders of this company are long-term investors and for good reason. The company is forecast to post earnings of 51.6 sen a share for its 2009 financial year ending Sept 30 while dividends are strong at 50.8 sen a share.

Resorts

World Bhd

With a net cash per share of 78 sen, Resorts World Bhd will still be viewed by investors as a safe stock to own during troubled times.

Resorts’ image was recently blemished by related-party transaction issues when it acquired 10% of Walker Digital Gaming (WDG) and 100% of Digital Tree (which earns royalties from WDG) for RM250.5mil.

If investors are willing to see beyond this “dishonour”, Resorts actually offers a cheap exposure to the solid domestic gaming operations, which continue to do well even in trying times.

It is also for this reason, that during market upturns, the stock tends to outperform the broader market, rendering it a firm favourite among foreign investors.

One broker said Resorts’ net cash hoard of more than RM4.3bil could be used for more acquisitions and capital management initiatives.

A check showed that 66% of analysts polled by Bloomberg have a buy call on the stock and have forecast the company earning 22 sen a share and declaring a dividend of 7.2 sen a share.

Thestar