For the 1Q18 results season, 47% came in below expectations, 42% inline and 11% above. This proportion of results disappointment was the highest since 2Q15 with cost being the key reason. Sectorial wise, the disappointments came from plantation, construction, O&G and wood based manufacturers. Post GE14, May witnessed net foreign selling of RM5.6bn, the highest since Aug 2013. In the short term, investors are expected to stay out of Malaysian equities until more concrete policy clarity is unveiled by the new administration. We cut our FBMKLCI 2018 earnings growth from 7.8% to 6.6% and also lower our P/E target from 16.5x to 15.5x. Our FBMKLCI target is reduced from 1,880 to 1,770.

1Q18 results wrap up. With the 1Q18 results season recently concluded, out of the 111 stocks under our coverage universe, 52 (47%) came in below expectations, 47 (42%) were inline and 12 (11%) were above. When the results were compared against consensus, 49% were below, 41% inline and 10% above.

Off to a poor start. The proportion of results that disappointed (47%) was the highest since 2Q15. From a ratio perspective (i.e. % of results above/ below), this stood at 0.23x, falling significantly from the previous quarter (4Q17: 0.7x). Of the 52 companies that reported result disappointments, 27 (52%) were due to cost factors, 11 (21%) due to revenue factors and 14 (27%) resulted from a combination of both.

Key sector disappointments. Sectorial wise, the key disappointments came from plantations (higher production cost), construction (margin erosion from higher material price and labour cost), oil & gas (weak upstream capex) and wood based manufacturers (stronger MYR, lower ASP from particleboard oversupply, foreign labour levy and higher adhesive price).

Waiting for more clarity. Despite the unprecedented GE14 outcome, the transition of power was smooth with 15 key ministerial posts filled up by the new Pakatan Harapan (PH) government. Several PH manifesto pledges have been implemented which include (i) GST “zerorisation”, (ii) fixing petrol prices and (iii) re-opening investigations on 1MDB and (iv) review of mega projects. We note that PH has been relatively open in communicating itself with almost daily press conferences and media releases by either the Prime Minister (Tun Mahathir) or Finance Minister (Lim Guan Eng). Nevertheless, we feel that investors are still waiting for more concrete clarity on certain policy measures. At the top of the list would be how the shortfall from GST “zerorisation” would be sustainably covered. However, we do take comfort from the recent statement by the Finance Minister that the administration is committed to meeting the budget deficit to GDP target of 2.8% for 2018.

Heavy foreign selling. The month of May witnessed net foreign selling of RM5.6bn, the highest since Aug 2013 (2nd highest since 2011). Foreigners are likely to stay out of Malaysian equities until more clarity by the new administration is unveiled which we expect once it hits the 100-days in office timeline (i.e. by mid-Aug).

Cut FBMKLCI target to 1,770. Following the 1Q18 results disappointment and subsequent earnings cut, our FBMKLCI earnings growth reduces from 7.8% to 6.6% for 2018. In view of the short term uncertainty post GE14, we lower our FBMKLCI P/E target from 16.5x to 15.5x (0.5 SD below mean), tagged to 2018 earnings. This reduces our FBMKLCI target from 1,880 to 1,770.

Changes to top picks. Our top picks are largely unchanged with the exception of Gamuda which is replaced with BAT. The former is removed following our downgrade of the construction sector from Overweight to NEUTRAL. We include BAT into our top picks as we believe the new administration will ramp up controls over illicit cigarettes.

Source: Hong Leong Investment Bank Research - 5 Jun 2018