CY1Q15  Report  Card

• For the sixteen consecutive quarters, CY1Q15 reporting season was again disappointing with 31% of HLIB universe fell short of expectations while only 16% surprised on the upside. Post results earnings downgrades, EPS growth for 2015 cut to 4% (vs. 6.2%) but due to lower base, 2016 was higher at 7.5% (vs. 6.9%) (Figure 7).
• Among HLIB universe, 28 (vs. 27 in CY4Q14) were below expectations while 14 surprised on the upside (vs. 19). Against consensus, it was similar trend where 32 (vs. 33) were below while 11 companies (vs. 18) above (Figure 4).
• Number of sectors that disappoint increased to 11 (Auto, Bank, Brewery, Built-Mat, Conglo, Consumer, O&G, Plant, Prop, Rubber Prod and transport) vs. 8. On the other hand, 3 sectors (Education, Healthcare and Tech) surprised on the upside vs. 4.
• HLIB had 25 vs. 26 earnings downgrades while earnings upgrades were relative flat at 10 vs. 12 (see Figure 5). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) deteriorated to 2.2x from 2.5x.
• In terms of stock ratings, there were 3 (vs. 10) downgrades and 3 (vs. 2) upgrades (Figure 6).
• For details of earnings as well as ratings upgrades or downgrades, please refer to Figure 9.
• Figure 10 shows the percentage of annualized actual results vis-à-vis HLIB forecasts.

Outlook

• With sentiment subdued amid domestic issues (potential Fitch downgrade, 1MDB, uninspiring reporting season and renewed weakness in MYR), the market is likely to remain lackluster in the short-term.
• However, with the healthy correction to level where technical analysis shows that it is in a grossly oversold position, we believe there are opportunities.
• This is premised on the traditional mid-year window dressing ahead, opportunity from the volatile month of May (where the KLCI normally end the year higher vs. low and end in May), 11MP (historical performance of 17.7-20.9% in last three MPs), ample liquidity and lower foreign ownership (cumulative net inflow halved).

Strategy

• While recent volatility was within our expectations, the magnitude may have surprised but has reduced market P/E to 0.5SD below mean. We believe there is a silver lining and it is opportune time to seize the 1-in-5-year MP opportunity to positon for the year end whereby we have an unchanged KLCI target of 1,880 (based on historical average P/E of 15x 2016 earnings).
• Our top picks remained premised on: 1) benefiting from sector upturn (especially from 11MP); 2) resilient and visible growth; 3) relatively high dividend yield with defendable earnings; 4) 5) US$/raw material beneficiaries; and 5) battered stocks.
• Our top picks are Astro, Axiata, Evergreen, Edgenta, IJM, KNM, Maybank, Mitrajaya, MRCB-Quill, Sasbadi, TDC and TNB.

Source: Hong Leong Investment Bank Research - 2 Jun 2015