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

• We are maintaining our end-2019 FBM KLCI target of 1,820pts. While there have been downward revisions in earnings following the generally disappointing 4Q2018 reporting season, we believe the earnings cuts are not significant enough to warrant an adjustment to our end-2019 FBM KLCI target.

• We hold the view that for 2019, the FBM KLCI will be driven primarily by multiple expansions (as against earnings growth), thanks to the return of global liquidity to the emerging markets (EM), on growing consensus of a pause in the US rate hike cycle, and hence a peak in the USD strength, making it more compelling to hold EM assets from a riskand-return standpoint.

• We acknowledge that foreign inflows to the Malaysian equity market in recent months have been less consistent as compared with global inflows into EM equity funds. We believe this is “transitional” on heightened market risk premium as the new administration rolls out various policy changes that result in short-term pain (including the disappointing 4Q2018 corporate performance) but long-term gain to Corporate Malaysia. With the economy being put on a more sustainable footing via financial prudence and it being slowly but surely cleansed of rampant corruption, we believe Corporate Malaysia will stand a much better chance of realising its full potential over the long run.

FBM KLCI earnings growth in 2019F lowered to 2.9% from 4.0%

• Following the earnings cuts during the 4Q2018 reporting season, we have revised down our FBM KLCI earnings growth projections for 2019F and 2020F to 2.9% and 6.0% respectively, from 4.0% and 6.9% previously. Meanwhile, the actual FBM KLCI earnings growth in 2018 came in at 2.6% vs. our forecast of 3.3% (Exhibit 1).

• If we were to comply strictly to our basis for our end-2019 FBM KLCI target, i.e. 18.5x our projected 2019 FBM KLCI earnings, our end-2019 FBM KLCI target should drop to 1,798pts following the earnings cuts. By maintaining our end- 2019 FBM KLCI target at 1,820pts despite the earnings cuts, we are effectively raising our multiple to 18.7x, which we still consider it to be “at about 18.5x”.

• Recall, at 18.5x, our target multiple for FBM KLCI is a 1.5x multiple premium to the 5-year historical average of about 17x, largely to reflect the introduction of largely high P/E stocks during the recent rounds of changes to the FBM KLCI constituents, i.e. Press Metal, Nestle, Dialog, Hartalega, Malaysia Airports and Top Glove.

Source: AmInvest Research - 6 Mar 2019