PublicInvest Research

Author: PublicInvest   |   Latest post: Mon, 6 Jul 2020, 10:13 AM


4Q 2019 Result Round-Up - Caution Ahead

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What happened: The current reporting cycle appears to have shown some improvements given the relatively higher number of earnings surprises, though it can also be surmised that it’s been a result of overt pessimism in quarters past. Cyclical sectors, oil and gas (6 of 10 under coverage) and plantations (5 of 8 under coverage) saw earnings hits weighted toward the positive, a welcome sight amid 2019’s challenges. 2020 has started off on similarly challenging footing with Covid-19 casting a gloom on global growth prospects. Though companies opine that it is still too early to tell the extent of damage which could be inflicted on earnings, most (if not all) are expecting some impact, and are heightening levels of vigilance.

Earnings cuts (23) mirrored the number of disappointments (23), though downward revisions this time round also included lower growth expectations in addition to higher operating costs. We caution for further downside to earnings expectations, depending on the length and depth of the Covid-19 outbreak and its negative impacts to growth. Current expectations, by and large, are factoring in a 1H 2020 slowdown with gradual recoveries seen in 2H 2020 onwards.

What we see: With the completion of 2019, the reported earnings of FBM KLCI component stocks contracted 5.2% (versus the 1.9% drop expected as 3QCY19), reflective of the significant loss in earnings momentum in the last quarter of the year. This is not anticipated to ease any time soon, particularly with the Covid-19 outbreak wreaking havoc on global growth prospects and recent domestic political upheavals throwing up uncertainties on policy and growth. The current reporting cycle has seen sharp earnings cuts to stocks in the heavily-weighted index sectors like banking and plantations, resulting in earnings growth for 2020 now only expected to expand by 4.2% (vs 6.6% @ 3QCY19). On that note, we cut our end-2020 FBM KLCI target to 1,595 points, corresponding to a 16x multiple to forward earnings.

In addition to global growth concerns arising from the Covid-19 outbreak and its eventual impact on earnings, Malaysia has an added specter of uncertainty to deal with. Heightened levels of volatility are likely to be the order of the day, with the ousted Pakatan Harapan government not likely to rest easy until all hope of regaining control is lost. While some measure of calm has returned with Tan Sri Muhyiddin Yassin being appointed the 8th Prime Minister, the absence of a single bloc with an overwhelming majority may still leave the ruling coalition in a relatively fragile state. What is patently clear however is the fact that Malaysia’s past political stability (rightly or wrongly) can no longer be counted as a key investment consideration.

All else being equal and purely from a fundamental standpoint, the earnings revision momentum chart (Figure 4, pg 17) suggests that the FBM KLCI should trade nearer the 1,550 to 1,580 levels in the near to medium term.

The FBM KLCI has tumbled to 14.9x 1-year forward price-earnings multiple, one (1) standard deviation below its long-term average of 16.5x, now deeming it relatively inexpensive. From a technical standpoint, the FBM KLCI is also in the oversold region on a weekly basis, which could suggest possible near-term bounces. Support levels are at 1455, 1430 and 1400 points, with resistance at 1,485, 1500 and 1515 points.

For stocks, we still like AMMB Holdings, Genting, Hibiscus Petroleum, Johore Tin, Magni-Tech Industries, Mega First, Sarawak Plantations, Serba Dinamik, SKP Resources and Ta Ann Holdings

Source: PublicInvest Research - 3 Mar 2020

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