CY2Q15  Report  Card

• For the seventeenth consecutive quarters, CY2Q15 reporting season was again disappointing with 54% of HLIB universe fell short of expectations while only 9% surprised on the upside. Both this and earnings revision ratio are the worst since we started tracking in CY2Q11.
• Post reporting season earnings revisions, 2015 EPS is now expected to contract by 1.6% (vs. +2.6%), second consecutive year of contraction. However, due to lower base, 2016 EPS growth has been revised higher to 8.3% (vs. 7%) (Figure 16).

Outlook

• The rebound of the local bourse from recent low of 1504 (on 24 Aug) in tandem with the recovery in MYR and oil price as well as world bourses may have signaled market capitulation. However, we believe the headwinds have not blown over and investors may have to continue endure volatility, at least in the short-term.
• External factors like timing of Fed rate hike, oil price and China slowdown as well as internal factors like 1MDB, political glitches and slower economic growth to linger.
• Weakness in MYR and persistent foreign outflow has resulted in concerns about falling foreign reserve. Low commodities prices, if persist, would rekindle concerns about current account and fiscal position while significant China slowdown would have impact on the economy.
• The formation of a Special Economic Committee to arrest the issues is positive given a more concerted effort and holistic approach. The call for repatriation of foreign assets in exchange for MYR could help arrest the issues but will take time.
• Despite the headwinds, a repeat of 97-98 AFC is unlikely at this juncture given much stronger banking system, relatively low corporate gearing (with limited timing mismatch between assets and liabilities) and initial policy response (no aggressive interest hike that will chock domestic growth).
• In terms of valuation, FBM KLCI’s P/E is at circa 0.8SD below mean (Figure 4) and P/B circa 1.7SD below mean (Figure 7). Meanwhile, when compared with regional and ASEAN peers, both P/E and P/B premium valuations are also near 1SD below mean. Figures 4-9 show that FBM KLCI valuations are only worst off during time of crisis and would rebound upon clarity.
• Thus, despite short-term volatility and headwinds, a modest normalization of valuation closer to mean, towards yearend upon more clarity about these issues, is attainable, especially when foreign shareholding level and cumulative inflow are well off their peaks (Figures 10-12).

FBM KLCI Target

• With contraction in 2015 EPS as well as lingering external and internal uncertainties, FBM KLCI year-end target has been lowered to 1,710, based on lowered 15x (or circa 0.5SD below mean) 2016 earnings.

Strategy

• Given expectations of modest valuation recovery towards year-end (when issues have more clarity) and correction from peak, we have slightly changed our focus themes to: 1) big caps which has corrected to attractive valuation (Axiata, Digi, IJM, Maybank and TNB); 2) 11MP including RAPID which has high earnings growth visibility (Edgenta, KNM and Mitrajaya); and 3) exporters which will benefit from the strong US$ (Evergreen, Homeritz and Inari).

CY2Q15 Report Card Details

• Among HLIB universe, 49 (vs. 28 in CY1Q15) or 54% were below expectations while only 8 or 9% surprised on the upside (vs. 14). Against consensus, it was similar trend where 45 or 51% (vs. 32) were below while 7 or 7% companies (vs. 7) above (Figure 13).
• Number of sectors that disappoint increased to 15 (Auto, Bank, Brewery, Built-Mat, Conglo, Consumer, Media, O&G, Plant, Prop, REIT, Rubber Prod, Tech and Transport) vs. 11. On the other hand, only 2 sectors (Healthcare and Tobacco) surprised on the upside vs. 3.
• HLIB had 47 vs. 25 earnings downgrades while earnings upgrades were lower at 6 vs. 10 (see Figure 14). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) deteriorated to 7.8x from 2.5x, worst since we started tracking CY2Q11.
• In terms of stock ratings, there were 6 (vs. 3) downgrades and 8 (vs. 3) upgrades (Figure 15).
• For details of earnings as well as ratings upgrades or downgrades, please refer to Figure 18.
• Figure 19 shows the percentage of annualized actual results vis-à-vis HLIB forecasts.

Source: Hong Leong Investment Bank Research - 2 Sep 2015