PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 7 Apr 2020, 9:30 AM


2Q 2019 Result Round-Up - Another Forgettable Quarter

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What happened: While we had anticipated some measure of weakness given challenging external conditions and thought that we had possibly seen near-bottom in 1Q CY19, the current 2Q CY19 reporting cycle is disappointing to say the least, with numbers looking decidedly worse somewhat. From a macro standpoint, the current quarter’s earnings hits (above and/or in-line) at 57%:43% is a letdown versus the 70%:30% as at 1QCY19 (Figure/Table 1). We saw “repeat offenders”, sector-wise, in the likes of property, plantations and airlines, weighed by a combination of weak sales, margin compressions and/or higher finance costs. This time round, we also had the consumer sector and manufacturing in the fray amongst the disappointments.

Consensus disappointments were similar, with plantations, properties and manufacturing most dire. Oil and gas and construction reported steadier numbers, a welcome sight as any significant weaknesses to these cyclically-important sectors would have called to question economic growth prospects.

In line with the large numbers of earnings disappointments, downward revisions were also made to reflect as such. If any consolation, cuts were mostly to account for cost and other unexpected (weather-related, for plantations) issues rather than on concerns over business growth. This is however tempered by less-than-sanguine outlooks for FY20 as earnings cuts for some (property and consumer) are just as deep, though this could very easily be reversed should some government-sponsored initiative be revealed in the Budget 2020 announcement. The airlines sector saw another round of downward adjustments for MFRS16-related effects which has ballooned finance costs though this current cycle also saw revisions due to lower average fares, a slightly disconcerting development.

What we see: While the current reporting cycle did see a greater number of earnings cuts, and for some, by a relatively large quantum, most were not on significant market moving sectors in the benchmark index. As such, our year-end 2019 FBM KLCI target is kept unchanged at 1,690 points. Earnings growth assumption for 2019 and 2020 are 1.1% (@ 1QCY19: 2.5%) and 6.6% (@ 1QCY19: 6.2%) respectively.

We hold to our view of a better 2H CY19 going into 2020, this underpinned by some form of piece-meal resolution to the US-China trade tiff despite both countries’ current posturing and bravado. While China may have the wherewithal to withstand the associated slowdowns as a result of lessened economic output from this trade spat, the country’s transition into a consumer-driven economy which can fully take up any slack will still take some time. And as much as there may be deep-rooted or certain underlying issues that the US has grievances over with China, higher tariffs imposed on the latter will almost certainly impact consumers in the former from higher product costs, leading to curtailed consumer spending and slower economic growth – a negative self-perpetuating cycle and detrimental to a consumer-driven (70% of GDP) economy.

The market appears to be struggling to break from its lull. We remain positive over its near to medium-term market outlook however, and see the earnings cycle improving with the FBM KLCI trading higher correspondingly barring any significant economic downturns, as investors buy into the improving investment merits (and earnings) of corporate Malaysia. For stocks, we still like EA Technique, Sapura Energy, D&O Green Technologies, Mega First, Ta Ann Holdings, CIMB Group and Serba Dinamik. We also include Genting and IJM Corporation in place of Alliance Bank.

Source: PublicInvest Research - 4 Sept 2019

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Callmejholow this should be the trend going ahead
05/09/2019 9:50 AM

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