CY3Q15  Report  Card

• For the eighteenth consecutive quarters, CY3Q15 reporting season was again disappointing with 42% (vs. 54% for CY2Q15) of HLIB universe fell short of expectations while only 12% (vs. 9%) surprised on the upside.
• Post reporting season earnings revisions, 2015 EPS is now expected to contract by 2.4% (vs. -1.3%), second consecutive year of contraction. As for 2016 EPS growth, it has also been revised lower to 6% (vs. 6.4%). However, given the lower base, 2017 EPS growth has been revised upward to 5.9% (vs. 5.5%) (Figure 7).
• Among HLIB universe, 38 (vs. 48 in CY2Q15) or 42% were below expectations while only 11 (vs. 8) or 12% surprised on the upside. Against consensus, it was similar trend where 39 or 45% (vs. 45 or 51%) were below while 11 or 13% companies (vs. 7 or 7%) above (Figure 4).
• Number of sectors that disappoint decreased to 12 (vs. 15) i.e. Automotive, Brewery, Conglomerates, Construction, Consumer, O&G, Plantation, Power, Property, REIT, Telecommunication and Transport. On the other hand, only one sector (Rubber Products) surprised on the upside vs. two.
• HLIB had lower number of earnings downgrades at 39 (vs. 47) while earnings upgrades were higher at 13 (vs. 6 - see Figure 5). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) improved to 3x from 7.8x.
• In terms of stock ratings, there were 7 (vs. 6) downgrades and 5 (vs. 8) upgrades (Figure 6).
• For details of earnings as well as ratings upgrades or downgrades, please refer to Figure 8.
• Figure 9 shows the percentage of annualized actual results vis-à-vis HLIB forecasts.

Comment

• While the reporting season continued to be disappointing, we take heart from four observations that could signal gradual improvement ahead.
• These are: 1) percentage of stocks that disappointed has declined while percentage of stocks that surprised on the upside has increased; 2) number of sectors that disappointed also declined; 3) EPS growth revision was not as drastic as before; and 4) most importantly, earnings revision ration has improved.

FBM KLCI Target

• FBM KLCI year-end target maintained at 1,710 (15.5x 2016 earnings).

Strategy

• Maintain focus themes of: 1) big caps which has attractive valuation (Axiata, IJM, Maybank and TNB); 2) 11MP which has high earnings growth visibility (Edgenta, IJM, Mitrajaya and SCable); and 3) TPPA beneficiaries (Westport).

Source: Hong Leong Investment Bank Research - 2 Dec 2015