1Q18 results season was rocked by the 14th general election (GE14) which was held on 9 May; there were some nasty earnings surprises and Pakatan Harapan’s surprising win in GE14 has forced significant earnings downgrades in the construction sector. We cut our 2018-19 earnings forecasts by 2.6% and 2.4% respectively for FBMKLCI. Remain defensive but we expect a relief rally following the Finance Minister’s comments which touched on honouring government contracts and deferring talks with toll road concessionaires until federal finances improve.

WHAT’S NEW

• Especially rocky for government-reliant companies. For 1Q18, only 8.5% of companies in our universe beat expectations while 26.4% disappointed (see RHS). While the disappointments were fairly across the board, some prominent earnings disappointments were presumably linked to the general election (particularly in the telecommunications sector), and weak US dollar losers (E&E and furniture). Among the large caps, Axiata and TM significantly disappointed but banks mildly beat expectations. Prominent beaters are a handful of banks and automobile companies.
• 2018-19 earnings forecasts cut. Following our 2018F and 2019F earnings cut of 2.6% and 2.4% for FBMKLCI, and 3.3% and 2.1% for our coverage universe, we now expect the FBMKLCI’s and our universe’s earnings to grow 2.9% and 5.2% in 2018. Sartorially, 12 sectors suffered significant downward earnings revisions (particularly aviation, O&G offshore and plantation, shipping subsectors, technology, telecommunications and utility), while only two sectors (automobile and gaming) had notable upgrades (refer to overleaf table).
• Relief rally in sight. Over the weekend, The Edge’s interview with Finance Minister (FM) Lim Guan Eng revealed that the federal government will: a) defer discussing with tolled expressway concessionaires until federal finances improve, b) honour government contracts, c) review and renegotiate unusual public-private partnership (PPP) projects, and d) possibly revisit/revive HSR and Bandar Malaysia in the future. The FM’s comments in particular should allay undue fears that the tolled expressway concessionaires would be unfairly compensated to stop tolling.

ACTION

• Trimming our end-18 FBMKLCI forecast of 1,800, which still pegs the market at 15.3x above historical mean PE multiple. While we expect the domestic political risk premium to ease from hereon, which suggests near-term upside, we continue to be defensive in our 2H18 outlook in expectation of continuing global liquidity contraction. Meanwhile foreign equity investment has steadily flowed out post GE14, offloading RM4.4b which brings the ytd amount to a net sell position of RM1.9b vs a net buy of RM2.5b pre GE14.
• Trading opportunities in heavily sold-down BUY-rated stocks include: a) construction stocks including Gamuda, IJM and MRCB, b) high yielders including Astro and YTL Power, c) selected mid-caps MyEG (refer to RHS). Some of these companies are also featured in the P/B and PE valuation screens at the last page of our report.
• Our top picks include large-caps Bumi Armada, CIMB Group, DiGi.com, Genting Malaysia and Inari, and mid-caps Serba Dinamik, VS Industry and Yong Tai. Defensive high yielders like Berjaya Sports Toto and Magnum should also appeal.

Source: UOB Kay Hian Research - 4 Jun 2018