Market likely to see rangebound trading in the first quarter
KUCHING: The equities market could see volatility in the first quarter of 2017 (1Q17) as a consequence of an aggressive rate hike decision in the US, said researchers with Kenanga Investment Bank Bhd (Kenanga Research).
“Besides, policy and direction of the Trump’s presidency could spark more uncertainties. The good news, however, could be the emergence of General Election ( GE) theme play, which could uphold local equity market investment sentiment,” the team said in a special report yesterday.
“As such, we reckon that 2017 could be another range- bound year.”
Despite the relatively uninspiring investment sentiment, Kenanga Research could see pockets of investment or trading opportunities arising from the anticipated trends of general elections, higher inflation, detariffication in the Malaysian general insurance sector, as well as the rise of dark horses.
It is very likely for inflation to become the buzz word for 2017 as the research firm expect living cost to be fuelled by the weak ringgit hence imported inflation, and potential rise in general prices with the end of antiprofiteering mechanism and higher commodity prices.
“Consumption goods have been accounting for about 10 per cent of the total imports and 11.5 per cent of private consumption. Naturally, with weaker ringgit against US dollar, the cost of imports will escalate,” it added. “Hence, we will not be surprised to see this additional cost eventually passed on to consumers.”
Recall that with the introduction of GST in April 1, 2015, the government has enforced an anti- profiteering mechanism, which aims to deter traders from indiscriminately raising prices of goods until December 31, 2016.
“While there are talks that this measure could be extended further, the end of anti-profiteering mechanism could see retailers and producers adjusting their selling prices of goods and services,” it explained.
At the current share price of RM0.66, market seemed to have only price in long term oil price of US$62 per bbl (for 20-year time frame) – based on HLIB Research’s backward calculation of assuming other variables being constant.
The research arm was of the view that oil prices would eventually recover to US$57 per bbl beyond the implied level as oil market rebalances while cost of oil production is expected to rise in the long run.
Overall, HLIB Research had a ‘buy’ rating on Reach Energy while its discounted free cash flow to equity (FCFE) (10 per cent discount rate) approach has yielded a target price of RM0.83 per share at fully diluted level (assuming dilution from potential placement and full exercise of warrants).
“Near term exercise of warrants is unlikely as the expiry date has been extended for another five years to 2022 post acceptance of “QA by its shareholders,” the research arm said.
To illustrate, excluding dilution impact from warrants, HLIB Research’s target price would be at RM0.91 per share.
The research arm opined that there is minimal downside risk at this price point while the company is expected to escalate to the next level by tapping into the reserves of a young oilfield with limited risk of straining balance sheet.