CY4Q15  Report  Card

• CY4Q15 reporting season recorded a further improvement, with 35% (CY3Q15: 42%) of HLIB universe falling short of expectations while 27% (CY3Q15: 12%) surprised on the upside.
• Post reporting season earnings revisions, 2016 EPS growth remains in the positive territory, albeit at a slower pace of 3.9% (vs. +5.3%), after two consecutive years of contraction. As for 2017 EPS growth, it has also been revised higher to 7.2% (vs. 6.3%) partly due to lower base effect (Figure 7).
• Among HLIB universe, 32 (CY3Q15: 38) or 35% were below expectations while 25 (CY3Q15: 11) or 27% surprised on the upside. Against consensus, it was similar trend where 34 or 38% (CY3Q15: 39 or 45%) were below while 20 or 22% companies (CY3Q15: 11 or 13%) above (Figure 4).
• Number of sectors that disappoint remained at 12 (CY2Q15: 15) i.e. Automotive, Bank, Building Mats, Conglo, Consumer, Healthcare, O&G, Plantation, REIT, Rubber Products, Tech and Telco. On a positive note, 6 sectors (Brewery, Construction, Media, Power, Property and Tobacco) surprised on the upside (CY3Q15: 1).
• Number of earnings downgrades was, however, higher at 43 (CY3Q15: 39) while earnings upgrades were also higher at 16 (CY3Q15: 13). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) improved further to 2.7x (CY3Q15: 3.0x; CY2Q15: 7.8x).
• In terms of stock ratings, there were 7 (CY3Q15: 7) downgrades and 2 (CY3Q15: 5) upgrades (Figure 6).
• For details of earnings / ratings upgrades or downgrades as well as variation of annualized actual results vis-à-vis HLIB forecasts, please refer to Figure 8 and 9.

Comments

• The reporting season has shown further signs of improvement, indicating that earnings deterioration has eased while forecasts have also become more realistic.
• The removal of macro risks after Budget recalibration, potentially better oil dynamics in 2H16 and the ongoing search for yields will make Malaysian equities attractive from foreign investors’ point of view.

FBM KLCI Target

• FBM KLCI year-end target is maintained at 1,760 (15.0x 2017 earnings).

Strategy

• Both Evergreen and Inari are out from our Top Picks as strong USD catalyst may diminish in 2H16. MYR is poised to maintain its strength given resilient macro fundamental.
• Include Digi (under-leveraged balance sheet capable of supporting spectrum fee with steady dividend payout) and AirAsia (recovery in passenger traffics and yield amid low jet fuel price) as Top Picks.
• Other Top Picks among big caps are Gamuda, IJM, Maybank, TNB and Westports. For the small/mid cap space, our picks are Edgenta, Mitrajaya and SunCon.

Source: Hong Leong Investment Bank Research - 2 Mar 2016