Investment Highlights

We downgrade our end-2019 FBM KLCI target to 1,570pts

• We downgrade our end-2019 FBM KLCI target to 1,570pts based on 16.5x our revised 2020F earnings projection, from 1,680pts based on 17x our 2020F earnings projection previously.

• The just-concluded 3Q2019 quarterly results showed marginal improvement over the previous quarter. While none of the FBM KLCI component stocks under our coverage actually beat our projections (as in the previous quarter), those that missed our forecasts were actually reduced to seven (from eight previously) (Exhibit 4). Having reflected earnings changes, we revise down our projected FBM KLCI growth rate in 2019F to -5.5% (from -4.9% prior to the results) and in 2020F to 7.5% (from 7.9% previously).

• Having said that, we acknowledge that, historically, December has been a good month for the local stock market with the FBM KLCI rising during nine occasions over the last 10 years with gains ranging from 0.6% to 4.8% (Exhibit 1). However, this time around, we believe year-end window dressing activities, if any at all, are likely to be weighed down by the subdued sentiment towards the local stock market, which has been made worse by the recent de-rating of the national utility company Tenaga (that carries close of a 10% weighting in FBM KLCI) on the heels of an additional RM4bil tax assessments received from the Inland Revenue Board. At 16.5x, the FBM KLCI’s valuation is at a 1.5x multiple discount to its 5-year historical average of about 18x.

• We believe the market will do better in 2020 amidst low expectations. We are projecting an end-2020 FBM KLCI target of 1,670pts based on 17.5x our revised 2020F earnings projection (which is still at a 0.5x multiple discount to its 5-year historical average of about 18x). The catalysts for a market rerating in 2020 could potentially come from:
   

1. Increased appetite for risk assets, particularly, emerging market (EM) equities including Malaysian equities (EM equities have already attracted net inflows over the last four weeks, although this has yet to spill over to Malaysian equities, see Exhibits 2 & 3), conditional upon:

• the US Fed is to maintain its narrative of not tightening monetary policy anytime soon (which shall keep the dollar’s strength in check);
   
• the sustained high equity valuations in developed markets (DM) (as manifested in repeat record closing for major indices such as the Dow Jones, S&P 500 and Nasdaq), prompting investors to look elsewhere for opportunities, including EM equities;

• the US-China trade tensions are to ease, or de-escalate at the least; and

• the global recession risk is to continue to moderate;

2.  A change in Malaysia’s perceived country risk premium following significant political events;

3. A play on the ringgit, driven by events such as:

• FTSE Russell is to retain Malaysia in the World Government Bond Index during its next half-yearly review in March 2020;
• a steep rise in crude oil prices (Malaysia is a net exporter of oil & gas); and

• an end to the easing cycle with only another 25bps cut in the overnight policy rate by Bank Negara in 2020

No excitement in 3Q2019 results

• FBM KLCI component stocks delivered a set of unexciting 3Q2019 results, with 0%, 70% and 30% beating, meeting and missing our projections respectively. This compares with 0%, 62% and 38% for "above", "within" and "below" respectively in 2Q2019.

• As against the market consensus, the numbers looked similarly subdued, with "above", "within" and "below" at 3%, 69% and 28% respectively, vs. 10%, 52% and 38% in 2Q2019 (Exhibit 4).

• None of the FBM KLCI component stocks under our coverage actually beat our projections. If there was any bright spot at all, it was that all the FBM KLCI weighted banks actually met expectations.

• On the other hand, margin compression resulted in earnings disappointments from: (1) planters, i.e. Sime Darby Plantation and KL Kepong (weak CPO prices but rising production cost); (2) glove producers, i.e. Top Glove and Hartalega (heightened competition on the heels of increased capacity in the industry); and (3) aluminium smelter, i.e. Press Metal (weak aluminium selling price but high cost of input alumina).

• Meanwhile, regional telco Axiata missed forecasts due to heavier subscriber loss and higher operation cost, while IHH disappointed due to higher depreciation and finance cost, largely arising from the adoption of the MFRS 16

Source: AmInvest Research - 2 Dec 2019