CY3Q16 Report Card

• Despite a recovery in real GDP growth (3Q: +4.3%; 2Q: +4.0%), CY3Q16 reporting season continued to disappoint. 46% of HLIB universe fell short of expectations (CY2Q16: 42%) while lower percentage (11%; CY2Q16: 17%) surprised on the upside.

• Against consensus, it was almost similar trend where 56% (CY2Q16: 46%) were below but a higher percentage of companies above (13%; CY2Q16: 11%) above (Figure 4).

• Post reporting season earnings revisions, 2016 EPS growth was revised lower to -7.3% (vs. -5.7%). 2017 EPS growth was, however, revised higher to +10.9% (vs. +9.5%) mainly due to lower base effect (Figure 7).

• Number of sectors that disappoint rose to 14 (CY2Q16: 8) i.e. Automotive, Building Mats, Conglo, Consumer, Education, Gaming, Healthcare, Industrial, Media, O&G, Plantation, Property, Rubber Products and Transport. None of the sectors surprised on the upside (CY2Q16: 2).

• Number of earnings downgrades increased to 45 (CY2Q16: 41) but earnings upgrades were also higher at 11 (CY2Q16: 8). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) improved further to 4.1x (CY2Q16: 5.1x; low: 7.8x in CY2Q15).

• In terms of stock ratings, there were 9 downgrades (CY2Q16: 5) and 7 upgrade (CY1Q16: 5) (Figure 6).

Comments

• Corporate earnings continued on recessionary mode despite a reversal of GDP growth to 4.3% yoy in 3Q16. In the near-term, we expect squeeze in margins to persist given rising cost pressure (wages, raw materials, energy prices, weak RM, etc.) and challenging fiscal position (government squeezing from private sector).

• We expect market to walk past weak earnings cycle and Trump policy jitter to focus on positives from stronger oil prices post OPEC decision (i.e. fiscal position & current account). We also expect market to trade firmer post Dec FOMC meeting (rate hike relief) reinforced by strong tendency of year-end rally (FBM KLCI rising by average 35pts within the last 5 trading days in 2011-15).

FBM KLCI Target

• Maintain end-2016 FBM KLCI target at 1,680. We also maintain our end-2017 FBM KLCI target at 1,760 based on 15.5x (historical mean) one-year forward earnings

Strategy

• Our market strategy remains unchanged. We continue to advocate defensive stance in stocks with earnings certainty and domestic-oriented catalysts to weather market volatility induced by Trump uncertainty (i.e. ringgit weakening bias, US trade policy jitter, etc.).

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

• Top Picks: Big Caps: Digi, Gamuda, Sime Darby, Sunway & Tenaga; Small/Mid-Caps: GKent, HSPlant, Matrix Concepts, SunCon & Time dotcom. Our recently initiated / upgraded stocks (HSPlant & Time dotCom) are now included (replacing MBMR & Tiong Nam)

Source: Hong Leong Investment Bank Research - 2 Dec 2016