CY4Q14 Report Card

• For the 16th consecutive quarter, CY4Q14 results disappointed again with only 21.3% of HLIB universe recorded positive surprises but 30.3% below expectations. Post results earnings downgrade, EPS growth for 2014 cut to -3.9% (vs. -1.1%). Given the lower base, forward EPS growth was largely unchanged at 7.2% (vs. 7.3%) for 2015 and 6.6% (vs. 6.8%) for 2016 (Figure 7).
• Among HLIB universe, 27 (vs. 32 in CY3Q14) were below expectations while 19 above (vs. 8). Against consensus, it was similar trend where 33 (vs. 39) were below while 18 companies (vs. 7) above (Figure 4).
• However, the number of sectors that disappoint decreased to 7 (Auto, Build-Mat, Construction, Education, O&G, Rubber Products and Transportation) vs. 12. On the other hand, 5 sectors (Brewery, Consumer, Gaming, Healthcare and Power) surprised on the upside vs. 2.
• Despite the disappointment, HLIB had 26 (vs. 36 in CY3Q14) earnings downgrades and 12 earnings upgrades vs. 11 (see Figure 5). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) continued improved slightly to 2.17x from 3.27x.
• In terms of stock ratings, there were 10 (vs. 9) rating downgrades and 2 (vs. 9) upgrades (Figure 6).
• For details of earnings as well as ratings upgrades or downgrades, please refer to Figure 9 while Figure 10 shows the percentage of disappointment or surprise (on annualized basis) by stocks to provide indications of the magnitude of differences vis-à-vis HLIB forecasts.

Outlook

• Overall, despite the continued disappointment, we took some positives from the reporting season i.e. more companies and sectors above expectations, lesser sectors disappointed and improvement in revision ratio.
• With low 2014 base, we still expect positive EPS growth in 2015, underpinned by economic growth (albeit slower), lower cost pressure (from electricity and oil prices) as well as corporate tax cut.
• The market is expected to remain volatile and subdued in the short to medium term given continued earnings disappointments and low commodities prices without catalysts as well as failure of FBM KLCI to penetrate the 1,820 (downtrend line turned resistant) and 1,830 (200-day SMA) levels.

Strategy

• Thus, we continued to advocate buy on weakness with stock specific focus on those: 1) benefiting from sector upturn (Construction and Technology); 2) with resilient and visible growth; 3) relatively high dividend yield with defendable earnings; 4) M&A play; and 5) US$ and/or raw material beneficiaries.
• Our top picks are Air Asia, Astro, Gamuda, IJM, Maybank, RHB Cap and TNB for big caps as well as Inari, Mitrajaya, Pharma, QCT and TDC.

Source: Hong Leong Investment Bank Research - 3 Mar 2015