The Malaysian bourse has performed surprisingly well year to date, outperforming many of its regional peers. The average trading volume on Bursa Malaysia in the first four months of the year was 31% higher than that for the previous corresponding period.
Perhaps the local stock market is finally catching up after having been a laggard for years, supported by positive news flow such as its being a beneficiary of China trade diversion and increased FDI (especially in data centres), as well as the recovery in the beleaguered residential property sector.
The property market has likely bottomed after years of adjusting to an excessive supply overhang, following the Developer Interest Bearing Scheme bubble.
That said, local institutional investors have been the biggest buyers on Bursa, some likely heeding the government’s call to repatriate funds from abroad (to help shore up the value of the ringgit).
Frankly, we don’t know if the prevailing bullish sentiment is sustainable. Notably, retail investors are the big net sellers year to date, dwarfing even foreign funds.
There is no question, however, that certain stocks and sectors are being driven by increased speculative interest.
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However, we do see value in select fundamentally solid companies. Earlier this month, we added several stocks, namely KSL Holdings, IOI Properties Group, CCK Consolidated and Maybank, to the Malaysian Portfolio. The latest acquisitions have performed well on average.
KSL Holdings
KSL is a Johor property developer with over 650 acres of land bank in Johor Bahru. It also owns two commercial complexes, namely KSL City Mall in Johor Bahru and KSL Esplanade in Klang, and a few hotels under its property investment segment.
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Annual revenue and operating profit from the property development segment hit a record high in 2023 (see Chart 1) on the back of renewed interest in Johor properties. Residential property transactions in the state soared to an all-time high last year, rebounding strongly from the Covid-19 pandemic lows and surpassing the previous peak seen in 2014.
The number of housing starts, on the other hand, have not recovered in tandem with the higher demand, falling 19.7% y-o-y and far below that in 2014 (down a whopping 71.4%) (see Chart 2). The low number of housing starts amid rising demand implies a supply gap to be filled in the near term.
The Rapid Transit System (RTS), expected to be completed in 2027, and the expansion of Woodlands Checkpoint in Singapore, scheduled to be carried out in phases over the next 10 to 15 years, will reduce cross-border travel time and incentivise more Malaysians working in Singapore to reside in Johor and commute daily.
Additionally, the planned Johor-Singapore Special Economic Zone should attract more investments and boost real estate demand going forward. Despite its robust gains of almost 75% year to date, KSL’s shares are still trading at little over 0.5 times their net asset value.
Demand for residential mortgage is likely to remain healthy — unit sales rose 8.1% y-o-y in the last quarter of 2023.
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Maybank
Maybank has the fastest-growing domestic consumer mortgage book among the local banks (+10.5% y-o-y in 4Q2023). It estimates loans growth to be around 6% to 8% this year. Maybank also has the highest percentage of low-cost deposits among its peers, with a domestic current account savings account ratio of 42.7% and should therefore be better able to manage rising funding-cost pressures.
The stock is a relatively low-risk, big-cap investment with attractive dividend yields, estimated at more than 6% (at the point of writing). Maybank is currently the largest company on Bursa by market capitalisation.
IOI Properties Group
We also foresee a positive outlook for IOI Properties. We expect the company to report stronger earnings growth in the next two years driven by its hospitality and leisure, and property investment segments — as its recent investments come to fruition.
The hospitality and leisure segment, which recorded operating losses of RM5.1 million ($1.46 million) in 2H2023, should turn profitable with the expansion and reopening of two hotels (after undergoing refurbishments), namely Putrajaya Marriott Hotel and Palm Garden Hotel.
The company recently opened a new hotel next to IOI City Mall in Putrajaya, the Moxy Hotel, and completed the acquisition of W Hotel in Jalan Ampang.
IOI Properties is also in the midst of completing the acquisition of Courtyard Hotel in George Town, Penang. It is therefore poised to benefit from the projected strong double-digit growth in tourist arrivals.
Malaysia recorded 20.1 million tourist arrivals in 2023, which is 22.8% lower than 2019’s (pre-pandemic). That leaves plenty of room for growth in the coming few years.
The Ministry of Tourism, Arts and Culture targets 27.3 million tourist arrivals in 2024, equivalent to a 35.6% y-o-y increase, with further goals of 15.0% and 13.4% increases in 2025 and 2026 respectively (see Chart 3). Additionally, the government is targeting higher average spending per tourist.
Overall, tourism income is projected to double from RM71.3 billion in 2023 to RM147.1 billion in 2026. For its property investment segment, the IOI Central Boulevard project in Singapore — with a net lettable area of 1.29 million sq ft (1.26 million sq ft of premium Grade-A office space and 30,000 sq ft of retail and F&B space) — is set to receive temporary occupation permits in phases this year.
Prominent tenants such as Amazon and Morgan Stanley have already pre-leased 40% of the office space. The office tower, where the asking monthly rental rate is $14 psf, can potentially double the revenue of IOI Properties’s property investment segment (see Chart 4).
CCK Consolidated
CCK is a large integrated poultry supplier and retail operator based in Sarawak. The company currently operates 66 retail stores, three supermarkets and six wholesale stores in East Malaysia, mostly in Sarawak.
The bulk of the poultry is sold through its own retail network, which also sells frozen products, seafood products, fresh fruits and vegetables. While earnings for the poultry business can be volatile, the retail segment generates relatively stable earnings.
The latter contributed more than 60% of the company’s operating profits in 2023 (see Chart 5).
CCK is trading at an undemanding price-earnings ratio of less than 11 times, making it an attractive investment opportunity within the consumer sector.
Meanwhile, UOA Development is another relatively low-risk, high-yield stock. The company generates steady income from rents and should benefit from the anticipated recovery in the property development segment.
Rental income rose 18.3% y-o-y to an all-time high of RM165.7 million in 2023 (see Chart 6), thanks to yield improvements across most of its rental assets, particularly in the office segment.
Meanwhile, new sales from the property development segment increased by 29.6% y-o-y, surpassing 2019’s figure by 5.2%. This increase in property sales has bolstered unbilled sales and provides good earnings visibility in the forthcoming years.
UOA Development raised dividends to 20 sen per share in 2023, after cutting it to 10 sen per share in 2021-2022. Given its improved prospects, we believe that it could easily maintain dividends of 10 sen per share at least, going forward, translating to a yield of about 5% based on its current share price. The company is sitting on net cash totalling over RM1.8 billion.
The Malaysian Portfolio, once again, outperformed the FBM KLCI for the week ended May 22, up 3.8% versus the FBM KLCI’s 1.2% gain. All seven stocks in our portfolio ended higher for the week with sentiment for the Bursa remaining upbeat.
The biggest gainers were CCK Consolidated Holdings (+23.0%), Insas-WC (+5.6%) and KSL Holdings (+3.7%). Last week’s gains lifted total portfolio returns to 213.5% since inception.
It goes without saying that this portfolio is outperforming the benchmark index, which is down 11.3% over the same period, by a long, long way.
The Absolute Returns Portfolio also finished higher last week, up 1% and lifting total returns since inception to 5.2%. The top gainers were SHK Properties (+2.4%), Microsoft (+1.8%) and Itochu (+1.4%), while shares for Swire Properties were down 0.6%.
Rubber gloves stock price — stretching and snapping back
Last week we saw, once again, how sentiment drove share prices for glove makers sharply higher — and, we think, well beyond gains that were justifiable based on rational analysis. It reminded us a little of the buying mania that transpired during the Covid-19 pandemic, a short-lived rally that ultimately fell painfully back to earth for some investors.
The latest rally was triggered by the US announcement of higher import taxes for a range of products made in China, reflecting the continued widening of the former’s web of protectionist policies. Specifically, the import tax on Chinese medical and surgical gloves (under the personal protective equipment category) is expected to rise from the current 7.5% to 25% in 2026.
Share prices for the four largest glove makers listed on Bursa Malaysia surged by an average of 26% on May 15, the day after the news release. That’s equivalent to an increase of some RM6.8 billion ($1.95 billion) in market cap (see Table 1).
For some perspective, the Malaysian Rubber Glove Manufacturers Association (MARGMA) estimates total glove sales to the US was RM4 billion in 2023.
The higher tax rate is seen to benefit Malaysian glove makers, making them more competitive by raising selling prices for the Chinese glove manufacturers, assuming they do not absorb any of the additional taxes.
This will eat into their current selling price advantage, which the market estimates at US$1 ($1.35) to US$2 per 1,000 pieces lower. In the interest of clarity for our readers, we did some simple maths to show the potential gain in price advantage for Malaysian glove makers once the higher tax rate comes into effect.
The average selling price for Chinese glove makers will rise from US$16 to US$18 per 1,000 pieces to US$18.60 to US$20.93 — meaning they will be about US$0.60 to US$0.93 (or 3% to 5%) more expensive than the current average selling prices for Malaysian manufacturers.
That’s hardly a huge disadvantage and could quickly be whittled away if, say, the Chinese become just a little bit more efficient or choose to absorb part of the additional costs or Malaysian production costs rise at a slightly faster rate (after all, Malaysia is reporting higher inflation while China is grappling with deflationary pressures).
In short, the latest rally is unjustified based solely on this piece of news, certainly not to the extent of the price surge we saw on May 15 (the stocks have since given back some of the gains).
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
