Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Thu, 29 Jul 2021, 10:13 AM


1QCY21 Results Review - Within Expectation

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The closing of 1QCY21 results season saw us cutting the FBMKLCI’s FY21E/FY22E EPS from 112.8/111.8 sen to 110.2/111.5 sen. However, the drop in earnings estimates was mainly due to the impact of the upcoming FBMKLCI rebalancing, where we expect MRDIY to replace SUPERMX effective 21st June. Were it not for this rebalancing, EPS estimates would have been raised to 114.9/113.6 sen – not surprisingly so, as of 28 out of the existing 30 FBMKLCI components that we cover; 15 came within, 9 above, and only 4 were below, expectations. Seen in that light, it has been an encouraging conclusion for the basket of key bell-weathers to have net EPS upgrades. However, the broader picture sees only 22 out of our 128 covered stocks that reported results beating our estimates, while 39 missed. Despite a higher number of disappointers versus outperformers, 67 stocks or more than half met expectations. For this reason, we deem the 1QCY21 season to have delivered a “Within Expectation” performance. Leading the misses were the Construction, Media and Gaming sectors. The sector which surprised pleasantly was Building Materials. Our year-end FBMKLCI target remains at 1,710 based on an unchanged forward multiple of 15.3x (10-year mean) on FY22E EPS. Our Top Picks are: AXREIT (OP; TP: RM2.30), GAMUDA (OP; TP: RM4.17), GENTING (OP; TP: RM5.58), INARI (OP; TP: RM4.00), KLCC (OP; RM8.15), MAYBANK (OP; TP: RM10.75), PTRANS (OP; TP: RM1.15), RHBBANK (OP; TP: RM6.25), TENAGA (OP; TP: RM11.76), TGUAN (OP; TP: RM3.80).

Year-end FBMKLCI target remains at 1,710: Post results, we adjust FY21E/FY22E EPS to 110.2/111.5 sen from 112.8/111.8 sen (vs. estimated consensus EPS of 107.4/108.8 sen). On our year-end target of 1,710 points, the implied forward PE multiple on our FY22E EPS estimate is 15.3x (at 10-year mean).

Underlying earnings trend of KLCI components are generally positive: Of the 28 out of the existing 30 FBMKLCI components that we cover, 15 came within, 9 above, and only 4 were below, expectations (GENT, GENM, HARTA, SUPERMX). Based on the current FBMKLCI components and weights, FY21E/FY22E EPS would have been raised from 112.8/111.8 sen to 114.9/113.6 sen due mainly to huge upgrades in the EPS of PETDAG (+51%/+13%), PCHEM (+51%/+16%), SIMEPLT (+12%/+12%), KLK (+13%/+7%), DIGI (+22%/+20%) and material upgrades in the two large banks MAYBANK (+9%/+5%) and CIMB (+10%/+7%), overwhelming sharp downgrades in GENTING (-40%/-7%) and GENM (-140%/-15%). The only components for which our projections were previously far below consensus were PETDAG and DIGI. For the rest, we were within the packs’ estimates and believe the street to have upgraded estimates along with us.

Banks’ results were within expectations – Maintain OVERWEIGHT: Bell-weather MAYBANK stood out for exceeding both our and consensus expectations, making up 32% of full-year estimates. CIMB also exceeded. Both banks’ TPs were raised on bumped-up book values following earnings upgrades. Small-cap bank Alliance was upgraded to MP on share price weakness and valuation roll-over to CY22. Except for AMBANK’s FY22E EPS trimmed 5%, there were no other notable cuts in estimates. Among general observable trends noted, NIMs expanded YoY with most also reporting QoQ expansions thanks to stabilising OPR and uptrending CASA-to deposit ratios. All reported credit costs that were sequentially lower due to frontloading provisions in the 4QCY20, with MAYBANK and HLBANK even reporting YoY declines. The absence of dividends was no surprise given that banks typically do not declare payout in a March quarter. The challenges posed by the pandemic appear to have succeeded in containing costs as evidenced by pedestrian increases in operating expenses, with HLBANK and MAYBANK even reporting lower YoY expenses. With improved top-line, the CIR ratios for almost all banks reflected YoY improvements. Going forward, the guidances generally carried a positive tone despite renewed challenges posed by the return to lockdown mode which we believe will likely be shortlived.

Building Materials – the star, maintain OVERWEIGHT: Two (ANNJOO and ULICORP) of three stocks in this space exceeded expectations riding on the commodity price boom which saw steel prices staying elevated longer than expected. We believe steel prices have already peaked as China has recently put measures to curb its rise. Hence, our UP call on ANNJOO, but we keep OP call on ULICORP given its dominance in the cable support system market where the competition is weak. Being a user of steel, it benefits from expectations of steel prices correcting, and its incoming new plant capacity in FY22. PMETAL’s 1QFY21 earnings met our and consensus expectations at 18% of full-year estimate each. We expect subsequent quarters to exceed even this record 1Q profit as aluminium prices should remain elevated in the near term from a combination of tight supply and increased demand as economies re-open. Maintain OP on PMETAL and ULICORP and OW this sector.

Construction – disappointed, in need of catalysts but maintain OVERWEIGHT: An overwhelming seven out of 10 covered stocks that reported results came in below target, with Gamuda and GKENT meeting expectations and only IJM exceeding (helped by better-than-expected result of IJMPLT). This is the highest in terms of number and percentage of stocks within a particular sector that reported below expectations leading to huge EPS cuts almost across the board. We were not alone in overestimating prospects as the sector’s earnings generally missed consensus expectations too. Largely to blame for the underperformance were slower billings, weaker-than expected margins, lower-than-expected on-site productivity due to COVID-related disruptions and adverse impact of elevated steel prices. Despite the estimates cuts and target price downgrades for a few, we keep the OVERWEIGHT call on the sector due to the deep value that this sector presents. We maintained all our calls where the same eight stocks are still rated OP with only GKENT and MITRA rated UP.

Gaming – double down on misses, maintain OVERWEIGHT: Overwhelmingly disappointing, three (GENM, GENTING and MAGNUM) out of the four covered stocks missed expectations. We had underestimated the impact of MCO 2.0 closures for casino operator GENM while GENTING was also dampened by uneven recovery of GENS’ patronage. As a result, losses for the quarter hit worse than expected. Lowered expectation for 2QFY21 from impact of MCO 3.0 and now, FMCO prompting further cuts. Despite these, we maintain OP for both on expectations of a delayed recovery, pushed towards late 2021 on easing of movement restrictions. A silver lining here is that the pandemic situation has been improving in the UK and the US where operations are set to resume. Both GENM and GENTING are deeply undervalued as is BJTOTO.

Media - Below expectations, maintain NEUTRAL: This sector disappointed as MEDIA, STAR and MEDIAC performed weaker than expected whereas Astro was the only media player that met expectations. Despite performing weaker than our more bullish advertising revenue assumptions, MEDIA still remained profitable for a third consecutive quarter. On the other hand, our UNDERPERFORM call on STAR remains as the group continued to post losses with 1QFY21 reporting a loss of RM13.7m which is almost 50% of losses the group made back in MCO 1.0 in 2020. With MCO 3.0 and FMCO in 2QCY21, we believe the adex industry will be adversely impacted in the near term as businesses shut down and marketing expenditures curtailed as well as consumers holding back on spending in times of crises. However, with more widespread vaccine deployment, 2HCY21 holds promise of a better outlook for the media players.

Technology did not disappoint – Maintain OVERWEIGHT: Most reports were within expectations with many reporting impressive profits in a seasonally weak quarter, thanks to robust demand for semiconductors as web computing activities are surging due to pervasive WFH practices and recovery of automotive markets in China and Europe for which electronic contents in cars are rising which bode well for the likes of MPI, UNISEM, D&O, KESM and JHM. OSATS like INARI and MPI continued to benefit from development of new 5G-enabled smartphones and infrastructures that require more RF testing and packaging.

Automotive drove in mostly within expectation, downgraded to NEUTRAL: Except for BAUTO which disappointed, the remaining five auto stocks came in within our expectations. However, the implementation of lockdown and re-assessment of sales prospects for the rest of the year impacted by fragile consumer sentiment have prompted cuts in EPS estimates of all stocks (i.e. 10% for MBMR and 40% for TCHONG, for CY21). As a result, the sector call was downgraded from OW to NEUTRAL. The just announced extension of SST exemption by six months to 31 Dec 2021 is a balm to current industry woes, but we see this more as a supportive policy than one that will boost sales in a big way.

Telecommunications – maintain NEUTRAL: Sector came in within expectations amidst an increasingly competitive cellular segment. Evident were the declines in postpaid ARPUs across all three cellcos due to a slew of entry-level postpaid plans introduced last year which helped maintain marginal growth in subscribers for all. The prepaid front looks just as competitive with the unlimited data prepaid plans offered by Maxis and Celcom keeping subscriber base up at the expense of declining ARPUs. Beside the impact of competition, Digi’s prepaid subscriber numbers declined off a high base that was dominated by outflowing migrant subscribers. Amidst the competitive cellular space, the Big 3 are increasingly turning to: (i) enterprise offerings for growth, and (ii) FTTH to push their convergence offerings. With customers opting for more “value” offerings and a competitive cellular space, we favor TM, where we have an OP call for it being best placed to benefit from the national push for digitalisation via: (i) leasing of its extensive fibre network for 5G deployment and 4G expansion, (ii) growth in data centre and cloud businesses, and (iii) strong Unifi subscriber growth.

Plantation – Maintain NEUTRAL: While no way a resounding beat, the plantations sector performed fairly well in that the numbers that exceeded and those that met expectations were even while none disappointed. It is worthy to note that bell-weather large caps Sime Plantation and KLK led the way among the outperformers where SIMEPLT’s 1QFY21 made up 33% of our FY estimates and KLK’s 1HFY21 at 56%. For the former, the boost came from higher-than-expected realised CPO selling prices and for the latter, better-than-expected downstream margins.

Rubber Gloves – mixed results, maintain OVERWEIGHT: The gloves sector reported mixed results, as TOPGLOV and KOSSAN outperformed while HARTA and SUPERMX underperformed. Except for SUPERMX, up trending quarterly sequential ASPs were strong enough to more than offset falls in sales volume disrupted by Covid-19 outbreaks at factories across the entire industry, leading to continued rise in revenue. The common key message underlying management guidance from the four leading manufacturers suggests that ASP has peaked in 1QCY21 and should soften, albeit gradually, in the face of still healthy demand even as lead time has fallen from 300 days in January to about 150 days currently. Compared to pre-COVID days when 20-30 days were the norm, the current demand is no doubt firm by historical standards. Even as the pandemic is easing in developed markets with rapid deployment of vaccines, the world will in our view, settle into a situation where observance of higher hygiene standards will be the new norm. Hence the usage of masks, rubber gloves and such will remain elevated. We continue to OVERWEIGHT the sector.

Oil & Gas – Maintain NEUTRAL: Overall a satisfactory quarter. Results-wise, we deem the quarter to be overall satisfactory, although SERBADK’s issue with its auditors was a huge negative surprise. Many of the downstream and E&P players (e.g. PCHEM, PETDAG, HIBISCS, LCTITAN) posted outstanding results, benefiting from the surge in crude oil prices during the quarter, which resulted in super-normal product margins and spreads. Nonetheless, with oil prices stabilising, we believe margin spreads will become more normalised in the next quarter, especially for names with floating feedstock costs (e.g. LCTITAN, PETDAG). Meanwhile, local contractors (e.g. DIALOG, DAYANG, UZMA, VELESTO) suffered from slower activity levels during the quarter. We believe that with suppressed Petronas capex spending and stricter movement restrictions, many local contractors could still suffer from a momentary jobs drought.

Source: Kenanga Research - 2 Jun 2021

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