CY2Q14 Report Card

For the fourteenth consecutive quarter, CY2Q14 reporting season was again disappointing, especially when less than 4% of HLIB universe surprised on the upside while 42% fell short of expectations. Post results earnings downgrade coupled with our lowered CPO price assumption saw EPS growth for 2014 and 2015 cut to 2.7% (vs. 6.6%) and 7.0% (vs. 8.6%), respectively (Figure 7).

Among HLIB universe, 35 (vs. 27 in CY1Q14) were below expectations while fewer companies, 3 in total (vs. 12), surprised on the upside. Against consensus, it was similar trend where 41 (vs. 32) were below while less companies, 5 (vs. 9) came in above (Figure 4).

The number of sectors that disappoint increased from 7 to 14 (Auto, Banks, Build-Mat, Conglo, Construction, Consumer, Gaming, Gloves, Media, O&G, Plant, Power, Prop, Telco and Transport). On the other hand, only 2 sectors (Tech and Tobacco) surprised on the upside vs. 3.

HLIB had 31 (vs. 19 in CY1Q14) earnings downgrades but only 10 earnings upgrades vs. 6 (see Figure 5). Thus, the revision ratio deteriorated to 3.10x (i.e. number of downgrades for every earnings upgrade) from 3.17x.

In terms of stock ratings, there were 10 (vs. 8) rating downgrades but only 1 (vs. 6) upgrades (Figure 6). In our case, the downgrades were mostly due to the disappointing results while upgrades were more related to share price retracement which made valuations more palatable.

Historically (since HLIB started tracking the reporting season in CY2Q11), the latest quarter is among the most disappointing quarters. The 42% of stocks that missed expectations is the highest while the 4% of stocks that beat expectations is also the lowest.

In terms of number of earnings changes, it is the second highest for downgrades and fourth lowest for upgrades, resulting in the third worst revision ratio on HLIB’s record. Rating

changes also suffered similar trend whereby number of down/upgrades are second highest and lowest, respectively.

For details of earnings as well as ratings upgrades or downgrades, please refer to Figure 9.

Outlook

Given the lack of fresh catalyst(s), recent pockets of weakness in global economic data, heightened geopolitical risks and continued disappointing reporting season, we continue to expect the market to remain lackluster and trend within a tight range of 1,840-1,880 in the short term.

KLCI Target

Maintain year-end target of 1,910 or 16x 2015 earnings.

Strategy

Given expectations of consolidation in FBM KLCI and with its valuation still above historical mean, we continue to advocate stock specific with focus on growth and value.

Our top picks are Astro, KNM, Matrix, Maybank, Pharma, Quill, RHB Cap, Scomies, SKPetro and TNB.

Source: Hong Leong Investment Bank Research - 3 Sep 2014