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Author: PublicInvest   |   Latest post: Thu, 12 Dec 2019, 9:19 AM

 

3Q 2018 Result Round-Up - Worrying Signs

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What happened: The appearance of some stability at face value belies certain undercurrents that may well be a portend of things to come. While the current quarter’s earnings hits (above and/or in-line) are at 66%:34% versus the 68%:32% as at 2QCY18, underlying weaknesses were seen in sectors key to the economy – plantation, property and construction. There was also a rash of impairments afflicting notable larger-cap names like Bumi Armada, Sapura Energy and Genting Malaysia, amongst others. Consolations are that no one sector was routed in terms of earning misses, evident in previous quarters, while banking asset quality continues to show no worse for wear despite slowing economic growth.

Positive surprises were seen in the oil and gas sector which driven by stronger revenue recognition, though this was largely anticipated given the stability of crude oil prices at USD60/bbl which we reckoned would encourage resumptions in activity. Sluggish conditions in the property space are starting to weigh on the sector, as are decidedly weak commodities prices on the plantation sector. The media sector continues to underperform, and will likely continue so in the near to medium term as it faces structural issues.

We had previously mentioned that most earlier bouts of earnings weaknesses had been cost-related in nature to which we believed revisions had finally been adequately accounted for, and that we were recently starting to be a little wary of external considerations (ie. negative repercussions on intra-Asian trade and economic growth prospects from the US-China trade tensions) putting revenue growth at risk. This is now starting to play out, and has necessitated earnings cuts to some extent.

What we see: The current result reporting cycle saw notable cuts to the plantation sector which carries fairly heavy weightage in the benchmark FBM KLCI, this coming on account of our less sanguine CPO price outlook for 2019. Reaction to this has been muted thus far however, likely due to market anticipation of a recovery in prices. With the telecommunications and gaming sector continuing to come under regulatory pressure, earnings outlook may also remain challenged amid clouded sentiment. A mitigating factor could still be the banking sector, which by all accounts, has exhibited the most stable earnings picture amongst the key sectors of the economy.

Our earnings growth assumptions for 2018, 2019 and 2020 are 0.4% (@ 2QCY18: 3.2%), 1.5% (@ 2QCY18: 5.9%) and 6.4% (@ 2QCY18: 6.5%) respectively. On this note, we think the optimistic levels the FBM KLCI could trade toward in 2019 range between 1,750 and 1,800 points.

All is not doom and gloom however, as we still see trading opportunities in the market. We retain our OVERWEIGHT stance on the Oil and Gas and Manufacturing sectors despite weakness seen in earnings, and still suggest selective exposure in the Banking sector.

We still see value in the small- and mid-cap space despite the pronounced weakness seen this year, and think some of these stocks are poised for rebounds underpinned by their unchanged fundamentals. Going into 2019, we like EA Technique, Perak Transit, D&O Green Technologies, Mega First, Ta Ann Holdings, Uzma, Dayang Enterprise and Alliance Bank.

3Q CY18 Earnings vs. PIVB Estimates

OVERVIEW: The appearance of some stability at face value belies certain undercurrents that may well be a portend of things to come. While the current quarter’s earnings hits (above and/or in-line) are at 66%:34% versus the 68%:32% as at 2QCY18 (Figure/Table 1), underlying weaknesses were seen in sectors key to the economy – plantation, property and construction. There was also a rash of impairments afflicting notable larger-cap names like Bumi Armada, Sapura Energy and Genting Malaysia, amongst others. Consolations are that no one sector was routed in terms of earning misses, evident in previous quarters, while banking asset quality continues to show no worse for wear despite slowing economic growth.

Positive surprises were seen in the oil and gas sector which driven by stronger revenue recognition, though this was largely anticipated given the stability of crude oil prices at USD60/bbl which we reckoned would encourage resumptions in activity. Sluggish conditions in the property space are starting to weigh on the sector, as are decidedly weak commodities prices on the plantation sector. The media sector continues to underperform, and will likely continue so in the near to medium term as it faces structural issues.

 

Source: PublicInvest Research - 4 Dec 2018

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