CY2Q16 Report Card

• CY2Q16 reporting season remained a disappointing one, albeit recording slight improvement over the previous quarter, with the same 42% (CY1Q16: 42%) of HLIB universe falling short of expectations while higher percentage (17%; CY1Q16: 9%) surprised on the upside.

• Against consensus, it was almost similar trend where 46% (CY1Q16: 44%) were below while 11% companies (CY1Q16: 7%) above (Figure 4).

• Post reporting season earnings revisions, 2016 EPS growth was revised slightly lower to -5.7% (vs. -5.4%). 2017 EPS growth was, however, revised higher to 9.5% (vs. 7.5%) mainly due to lower base effect (Figure 7).

• Number of sectors that disappoint further reduced to 8 (CY1Q16: 10) i.e. Building Mats, Education, Healthcare, Media, O&G, Plantation, Rubber Products and Tobacco. Only 2 sectors surprised on the upside (CY1Q16: 3), i.e. Gaming and Technology.

• Number of earnings downgrades increased slightly to 41 (CY1Q16: 39) while earnings upgrades were also higher at 8 (CY1Q16: 6). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) improved to 5.1x after a significant deterioration to 6.5x in CY1Q16 (low: 7.8x in CY2Q15).

• In terms of stock ratings, there were 5 (CY1Q16: 7) downgrades and 5 (CY1Q16: 1) upgrade (Figure 6).

Comments

• Corporate earnings continued on recessionary mode despite resilient GDP growth at 4.0% yoy in 2Q16. In the near-term, squeeze in margins could still persist given cost pressure (wages, energy prices, weak RM, etc.) and challenging fiscal position (government squeezing from private sector).

• Notwithstanding the cautious earnings outlook, we expect market to walk past weak earnings cycle to focus on upcoming Budget on 21 Oct and potential turnaround in corporate profitability in tandem with bottoming of GDP growth.

FBM KLCI Target

• End-2016 FBM KLCI target is maintained at 1,730 based on 15.8x (slightly above historical mean) 1-yr forward earnings.

Strategy

• Our market strategy remains unchanged. The readiness of BNM to support economic growth via easing is overall positive for the market. Coupled with improved fiscal position, low foreign shareholding and possibility of snap election, there is potential for the market to recharge to a higher level despite still lacklustre earnings outlook.

• Still prefer stocks / sectors with earnings certainty and yield in an environment of lacklustre earnings outlook.

• Top Picks remain unchanged: Big Caps: Digi, Gamuda, IOI Prop, PavREIT & Tenaga; Small/Mid-Caps: Matrix Concepts, Mitrajaya, SunCon, Tiong Nam & Unisem.

Source: Hong Leong Investment Bank Research - 2 Sep 2016