Highlights

• Quick assessment of sectors under HLIB universe.
• On economy, government to rake in extra RM6.6bn revenue.
• Stocking up only apparent two weeks before GST but sentiment already weak. Thus, expect subdued 2Q before rebound in 2H. Maintain slower private consumption growth of 5.5% in 2015 vs. 7.1% in 2014.
• Inflation to spike 1ppt and 0.5ppt in Apr and May, respectively. Maintain forecasted 2.5% for 2015.
• Feedbacks from companies under HLIB universe show that most are passing through the GST. Despite that, some sectors have difficulty (property and Consumer), not allowed to (Gaming) and chose not to (competitive pressure – Tobacco) passing through.

Implication to the market

• Overall impact on earnings should be muted. Despite quarterly fluctuation as consumers adjust, full year impact to reflect the already weak consumer sentiment.
• Further mitigated by our already conservative assumptions HLIB’s 2015 EPS growth of 6.5% vs. Bloomberg consensus of 8.4%), cost cutting efforts, lower commodities as well as fuel and electricity prices and corporate tax rate cut.
• Overall impact on market also muted.

Outlook & Strategy

• Contrary to earlier fears about GST, the FBM KLCI has appreciated 11.5% from recent low to breakout from previous downtrend line (1,816) and the 200-day SMA (now 1,819). Momentum could carry it to test next resistance of 1,878 and all-time-high of 1,896.
• Despite potential of overshoot on the upside, we are maintaining our year-end target of 1,880 (15x 2016 earnings) which implies prospective upside of only 0.9%.
• Coupled with P/E already at mean and P/E premium valuation vs. regional peers no longer at favourable 1SD below mean, risk-reward profile has been tilted, especially in view of several risks ahead.
• Potential risks from Fed rate hike (although delayed to 3Q), recent weak PMIs, 1MDB, oil price, traditional volatile month of May and potential Fitch downgrade of rating.
• However, any downside unlikely to see repeat of mid-13 and end-14 selldown given cumulative net foreign inflow already halved, ample liquidity, Fitch rating downgrade somewhat factored and 11 MP. Technical pullback of 1,816-1,919.
• Still advocating defensive and value proposition with focus on sector upturn or 11 MP, resilient/visible earning growth, high yield and defendable earnings, US$ or raw material beneficiaries and battered stocks.
• Top picks - drop SKPetro and Unisem as both appreciated since our 2Q Outlook & Strategy report dated 9 Apr and hit our target prices. Replace with KNM, Sasbadi and TDC (one more additional due to relatively small market capitalization).

Source: Hong Leong Investment Bank Research - 27 Apr 2015