• Corporate earnings performance for 2Q17 was mixed

• FBM KLCI aggregate net earnings for FY17 marginally revised downward to 7.6% from 8.3% previously

• Expected earnings turnaround in key sectors, i.e banking and plantation, remained on track

• Sectoral price performance moderated the past month, suggesting market’s concerns on earnings may continue in near term.

• We retain our KLCI target for 2017.

Earnings for 2Q17 were mixed but not disappointing

On balance, we rate the second quarter earnings reporting season which ended last week, as neutral for the market. Net earnings were generally mixed to in-line against our expectations as well as consensus forecast. This is the third straight quarter that corporate earnings have been neutral to positive from expectation perspective – based on our estimate.

There were several adjustments in large sectors’ earnings for 2017, notably in banking and consumer. Growth expectations for these sectors moderated post-2Q17 as opposed to early-June 2017.

Although banks generally performed to market’s expectations during the 2Q17 earnings season, the impact of this performance is lesser compared to the April-May 2017 period. With banks’ share prices rising by an average 12.6% YTD versus the KLCI’s 8.0%, the superior earnings growth and price outperformance suggest banks may find it difficult to continue their strong performance in the next 2- 3 months. Nonetheless, we estimate that the impact of the stronger-than-expected second quarter GDP of 5.8% will begin to translate into continued loan recovery this year. We are still estimating for loan growth to rise by 6-7%% in 2017 versus 5.3% in 2016. Loans growth for the banking sector for July 2017 remained stable at 5.6% yoy compared to 5.7% in the previous month. This was mainly due to higher loans extended to the corporate sector.

We see several positives underpinning the growth in earnings over the next 12 months. An increasingly better economic backdrop, higher commodity prices, robust semiconductor sales, and improving consumer confidence are the key drivers for earnings in 2H17. We retain rising cost factor – as the key risk to earnings this year. The rise in cost has negatively affected several sectors in recent quarters – and continued to be felt in 2Q17 earnings. Increase in overheads, plus raw materials, have resulted in margin pressure on several sectors, while the impact of the ringgit weakness against USD has also come into play this year.

Expect the KLCI to consolidate in the near term as the index has already risen by 8% YTD – matching the expected earnings growth of 7-8% this year. From sectoral perspective, several sectors have risen well ahead of the KLCI – reflecting the broader market’s more positive tone this year. We continue to like earnings plays in selected sectors, i.e. consumer-oriented, plantation, technology and export-based companies. Foreign flows have turned negative in August – albeit a small amount of RM247m versus inflows of RM420m in July and RM344 in June. The total YTD August net inflow was still a robust RM10.6bn.

We retain our year-end target of 1,800. Our base-case equity view for 2017 takes into account an earnings growth of 7% in 2017, which is supportive for a fair value multiple of 17.5x. This multiple is slightly above the KLCI’s long-term trend average of 16.7x since 2010. Our top 5 picks for the remaining half of the year are Timedotcom (TP: RM11.00), MyEg (TP: RM2.45), TNB (TP: RM18.80), Padini (TP: RM4.70), Kossan (TP: RM8.18).

Source: BIMB Securities Research - 5 Sept 2017