AmInvest Research Reports

Author: AmInvest   |   Latest post: Fri, 20 Sep 2019, 9:04 AM


Strategy - Malaysia: A ‘Pass’ for 1Q2019 results

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Investment Highlights

We maintain our end-2019 FBM KLCI target of 1,820pts

  • We award a grade of “Pass” to the just concluded 1Q2019 quarterly results with 62% of FBM KLCI component stocks under our coverage beating or meeting our forecasts (Exhibit 1). Having reflected earnings changes, we revise down our projected FBM KLCI growth rate in 2019F to 1.7% (from 2.7% prior to the results), but raise 2020F to 7.4% (from 6.3% previously) largely due to a lower base in FY19F.
  • Despite the recent weakness in the global stock markets on escalating trade tensions between the US and China, the FBM KLCI has managed to hold up, we believe, as value has emerged after the major underperformance of the market against its peers during the first 4–5 months of the year.
  • At last traded 1,651pts, the FBM KLCI traded at about 17.3x our projected 2019F earnings. This is at a discount to its 5-year historical average of about 18x. We maintain our end-2019 FBM KLCI target of 1,820pts, which is based on about 19x FY19F earnings (+1.7%) and 18x FY20F earnings (+7.4%), in line with its 5-year historical average of about 18x.

A ‘Pass’ in 1Q2019

  • FBM KLCI component stocks delivered a set of 1Q2019 results that was generally uneventful, with 8%, 54% and 38% beating, meeting and missing our projections respectively. This compares with 4%, 58% and 38% for "above", "within" and "below" respectively in 4Q2018.
  • Against the market consensus, the numbers were equally muted, with "above", "within" and "below" at 7%, 55% and 38% respectively, which represent a slight improvement against 14%, 41% and 45% in 4Q2018.
  • Only two FBM KLCI heavyweights surprised to the upside, namely, Sime Darby thanks to the better-than-expected showing from its heavy equipment distribution business in Australia, and Dialog Group due to the write-back of contingency cost from its RM6.3bil Pengerang Deepwater Terminal (PDT) Phase 2.
  • On the other hand, plantation giants Sime Darby Plantation, KL Kepong and IOI Corp disappointed due to lower-thanexpected CPO selling prices realised, while glove makers Top Glove and Hartalega missed forecasts due to margin erosion from heightened competition on the heels of increased capacity in the industry. Earnings disappointments also came from Press Metal (a double whammy of weak aluminium selling price and high input cost of alumina), Petronas Chemicals (low plant utilisation and product prices) and Digi.Com (lower prepaid subscribers and the negative impact from the MRFS 16).

Potential near-term supports/catalysts for the local market

  • Looking past the 1Q2019 results, we believe near-term supports/catalysts for the market could come from:

1. The low valuations the FBM KLCI from a historical stand point, as mentioned;

2. Market-friendly policies, such as the government’s blessing for the consolidation of the local telco sector (both Axiata and Digi.Com are component stocks of the FBM KLCI, carrying weighting of 4% and 3.4% respectively) and further easing of forex rules to mitigate the risk of Malaysia being removed by stock market indices provider FTSE Russell from the FTSE World Government Bond Index during its upcoming September 2019 review; 3. The pendulum of the US-China trade tension is to swing from escalating to easing; and

4. The US Federal Reserve is to drop hints on an interest rate cut.

  • However, we are mindful of the following headwinds: (1) The “risk-off” trade on global growth concerns, prompting the continued flow of funds from equities to bonds globally, as well as out of the emerging markets; and (2) A prolonged trade war between the US and China.
  • Our top picks are Maybank, Telekom Malaysia, RHB Bank, Dialog Group, Top Glove, Serba Dinamik, Bermaz Auto, MPI, Malayan Flour Mills and Berjaya Food (Exhibit 2).

Source: AmInvest Research - 3 Jun 2019

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