What happened: By all counts, the current quarter’s reporting is somewhat of a letdown. While we had mentioned that the previous 4QCY17 session was a disappointing one, though not likely systemic in nature, ongoing weaknesses are starting to cast doubts. Positive surprises were not forthcoming as the country’s healthy economic growth in 2017 failed to cascade noticeably into corporate and consumer Malaysia more strongly. The commodities-related sectors of oil and gas and plantations provided the bulk of misses this round, with manufacturing also disappointing us and consensus alike, indicating that these misses are not isolated cases The current quarter’s earnings hits (above and/or in-line) are at 60%:40%, similar to the 60%:40% as at 4QCY17 though the make-up is markedly different.

With most of the current misses cost-related and showing no signs of abating, we are consequently lowering expectations on account of these yet again. Of some encouragement, if any, is that sales trends for most remain intact albeit muted. Somewhat deflating however is the absence of necessary upward revisions as compared to previous quarters while the opposite is occurring for downward adjustments, early signs of earnings stress.

What we see: While it was the larger-capitalized stocks which managed to hold fort earnings-wise in the previous reporting period, the current installment saw weakness from big and small alike. Index-based names like IOI Corporation, KL Kepong, Axiata Group and Telekom Malaysia, just to name a few, missed our and consensus estimates, with earnings of some correspondingly lowered. Reaction on the first trading day post-result reporting has been inconsequential however. The broader market is currently more pre-occupied with a post-General Election re-boot of the country. Sentiment has taken a recent knock, in part due to regional weakness on geopolitical and trade-related concerns, but just as likely due to the relatively negative news flows with regard to the nation’s finances which may or may not have spooked foreign-based investors that sparked a sell-down.

We certainly are wary of global developments, but think challenges may only manifest in late-2019 or 2020 at the earliest with the world struggling under a weight of debt amid heightened interest rates, sterilization of excess liquidity from within the financial system and peak-ish economic growth cycles. In the nearer term however (2018), ongoing stability in international trade should help sustain economic expansions. That said, a full-blown trade spat between the US and the rest of the world and/or a political-related meltdown in Europe may advance the timeline.

Consequently, our year-end 2018 index target is lowered to 1,790 points (from 1,860 points) in light of the various changes to earnings, though still tagged to a 16x multiple to earnings. We are retaining our PE multiple however, as our positive view on the market remains unchanged despite recent wobbles.

We continue to see value in the small- and mid-cap space, and retain AMMB Holdings, Hibiscus Petroleum, SKP Resources, Mega First, N2N Connect, Yong Tai and Perak Transit as core holdings in our 2018 suggested portfolio. Chin Hin Group and TRC Synergy are dropped given the less sanguine outlook on construction-related stocks. Also, Johore Tin is removed due to its inability to manage and fully pass on rising feedstock costs. In their places, we include CIMB Group, Telekom and Tenaga Nasional given recently-pronounced share price weaknesses which has made valuations attractive.

Source: PublicInvest Research - 4 Jun 2018