Investment Highlights

We upgrade our end-2020 FBM KLCI target to 1,530 pts

• We upgrade our end-2020 FBM KLCI target to 1,530 pts based on 18x our revised 2021F earnings projection, from 1,300 pts based on 15x our previous 2020F earnings projection. At 18x, our basis is consistent with the 5-year historical average.

• The just-concluded 1Q2020 quarterly results showed significant deterioration over the preceding quarter which was not surprising given the impact of the movement control order (MCO) on businesses. Only two FBM KLCI component stocks under our coverage actually beat our projections (vs. two in the previous quarter), and those that missed our forecasts rose to eight (from six previously) (Exhibit 1).

• Having reflected the weaker earnings outlook due to the pandemic, we now project FBM KLCI earnings to contract by 13.7% in 2020F (vs. an 1.8% growth we previously forecast) but we expect a stronger rebound of 16.3% in 2021F (from +7.9% previously) due to the low base effect.

• The upgrade in our end-2020 FBM KLCI target is to reflect a 3x higher multiple of 18x (from 15x previously) on the following considerations:

1. The robust domestic liquidity (from both institutional and retail investors) that has effectively neutralised the persistent selling by foreign investors (net foreign outflow stood at RM13.3bil in the first five months of 2020, already surpassing RM11.1bil and RM11.7bil recorded during the whole of 2019 and 2018 respectively). We believe the ferocity of the domestic liquidity has been driven by: (i) the risk-on sentiment globally triggered by the massive monetary and fiscal stimulus packages put in place by central banks and governments around the globe (and in the case of the US Fed, the monetary stimulus promised is an “unlimited” one), optimism on the economy reopening and the news flow on vaccine development; and (ii) the reality that risk-free assets, i.e. cash and Malaysian Government Securities (MGS), are hardly generating any positive inflation-adjusted yield, following a series of cuts in the overnight policy rate (OPR) by Bank Negara Malaysia to 2.00%, a level last seen during the global financial crisis in 2008/2009;

2. The recent massive re-rating of the already high P/E glove sector (now with a 9% weighting in the FBM KLCI) due to the strong demand for personal protective equipment amidst the Covid-19 pandemic, and it will probably go beyond the pandemic as a result of stronger hygiene awareness and practices of the entire world population;

3. The political situation that does not seem to be weighing on the market risk premium as the dominant players in the market, i.e. local investors, are calm in the face of it (while the view and action of foreign investors are less relevant given their low participation in the market); and

4. The local economy that is on the verge of being reopened in a more extensive way, thanks to the relatively successful containment of the spread of the Covid-19 virus via the MCO and conditional MCO over the last 2–3 months.

Source: AmInvest Research - 1 Jun 2020