CY4Q16 Report Card

• In tandem with a further pick-up in real GDP growth (4Q: +4.5%; 3Q: +4.3%), CY4Q16 reporting season staged an improvement over CY3Q16. Nearly half (48%) of HLIB universe came in within expectations (CY3Q16: 43%) while a higher percentage (21%; CY3Q16: 11%) surprised on the upside. Fewer companies reported lower than expected results (31%; CY3Q16: 46%).

• Against consensus, it was almost similar trend where 38% (CY3Q16: 56%) were below but a higher percentage of companies were above (18%; CY3Q16: 13%) (Figure 4).

• Post earnings revisions, 2017 and 2018 EPS growth were revised lower to +8.0% and +5.6% respectively (vs. +10.3% and +7.9% respectively) (Figure 7). The downward revision mainly reflected cut in earnings projection for selected banks (i.e. CIMB & RHB) and telcos (i.e. Maxis & Axiata) which was partially offset by a raise in plantation earnings forecast (i.e. IOI & KLK).

• Number of sectors that disappoint reduced sharply to 4 (CY3Q16: 14) i.e. Automotive, Consumer, Healthcare and O&G. 2 sectors surprised on the upside (CY3Q16: nil) namely Building Materials and Gaming.

• Number of earnings downgrades declined to 28 (CY3Q16: 45) while earnings upgrades more than doubled to 28 (CY3Q16: 11). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) improved sharply to 1.0x (CY3Q16: 4.1x; low: 7.8x in CY2Q15).

• In terms of stock ratings, there were 7 downgrades (CY3Q16: 9) and 4 upgrades (CY3Q16: 7) (Figure 6).

Comments

• 2 successive quarters of GDP growth recovery finally trickled down to corporate earnings. With solid economic fundamental (limited damage after 2 years of adjustment), we expect firmer commodity prices and record high infra jobs to solidify corporate earnings in 2017.

• We expect market to attune to domestic growth story and walk past Trump policy jitter, focusing on positives from stronger oil prices and its spillover on the broader economy (i.e. fiscal position & current account). That said, the lining up of Euro area elections (Netherlands: 15 Mar; France: 23 Apr; and Germany: 24 Sep) could spur sporadic risk-off mode and rush to safe haven (i.e. US$).

FBM KLCI Target

• We maintain our end-2017 FBM KLCI target at 1,760 based on 16x (historical mean) one-year forward earnings.

Strategy

• Our market strategy remains unchanged. We continue to prefer stocks with earnings certainty and domestic-oriented catalysts. Despite expectation of modest GDP growth recovery and firmer commodity prices, there could be sporadic externally-induced volatility to shock the market.

• For Top Picks, we replace Matrix & HSPlant with Sunway and GKent (Figure #3).

• Other Top Picks: Big Caps: Digi, Gamuda, Genting Bhd, Sime Darby & Tenaga; Small/Mid-Caps: Pesona Metro, SunCon & Time dotCom.

Source: Hong Leong Investment Bank Research - 2 Mar 2017