CY3Q17 Report Card

• CY3Q17 reporting season staged an improvement over CY2Q17 but remained a disappointing one. A higher majority of HLIB universe (51%) came in within expectations (CY2Q17: 47%), while a lower percentage of companies reported lower than expected results (35%; CY2Q17: 43%). A higher percentage surprised on the upside (14%; CY2Q17: 10%).

• Against consensus, it was almost similar trend where a lower percentage came in below (37%; CY2Q17: 47%); a higher percentage came in within (51%; CY2Q17: 47%) and above (12%; CY2Q17: 6%) (Figure 4).

• Post earnings revisions and a rejig in KLCI constituents post semi-annual review, 2017 and 2018 KLCI EPS growth is now estimated at +8.6% and +7.3% respectively (Figure 7). While earnings revision to our KLCI coverage was minimal, our EPS forecasts are now not comparable due to changes in KLCI components.

• Sectors that disappoint include building materials, education, healthcare, manufacturing and media.

• Number of earnings downgrades reduced slightly to 42 (CY2Q17: 44) while earnings upgrades up ticked to 17 (CY2Q17: 16). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) improved slightly to 2.5x (CY2Q17: 2.7x; CY1Q17: 1.6x).

• In terms of stock ratings, there were 7 downgrades (CY2Q17: 11) and 11 upgrades (CY2Q17: 5) (Figure 5).

Comments

• Corporate earnings continued on a subdued mode despite a further pick-up in GDP growth to 6.2% yoy in 3Q17. Nevertheless, we are turning positive that corporate margin squeeze may start to ease in early 2018 as the benefit of ringgit appreciation begins to trickle down to domestic earnings while fiscal position improves further (lesser squeeze from government on the private sector). Despite the lack of forceful theme that will cap market’s upside move, downside is protected by ample domestic liquidity with lesser risk of abrupt foreign selling.

• In the near term, we expect overall market sentiment to remain edgy, underpinned largely by unexcited earnings outlook amid GE14 uncertainty. That said, we do not rule out a strong tendency of year-end rally as happened in the past (FBM KLCI rose by average 32pts within the last 5 trading days in 2011-16).

FBM KLCI Target

• We maintain our end-2017 FBM KLCI target at 1,760. We introduce our end-2018 FBM KLCI target at 1,880 based on 16.0x (historical mean) one-year forward earnings.

Strategy

• We advocate stocks that are exposed to (i) consumer/domestic demand proxy, (ii) construction/infra boom (iii) tourism.

• Our Top Picks: Big Caps: Airport, Genting Bhd, Maybank, Sunway and TNB; Small/Mid-Caps: DRB, GKent, LayHong, Pecca and Rohas.

Source: Hong Leong Investment Bank Research - 5 Dec 2017