For the 2Q18 results season, 35% came in below expectations, 53% inline and 13% above. Compared to 1Q18, the proportion of disappointments reduced whiles those inline and above increased. Sectors that saw results shortfall include construction, plantations, property and telco. Foreign selling eased in July and Aug and we feel the exodus could be over. We now forecast flattish KLCI earnings growth of 2% for 2018 and 5.7% for 2019 (from 6% and 6.5% previously). Raise KLCI target slightly from 1,770 to 1,810 as we roll forward valuation horizon from 2018 to mid-2019 at 16x P/E (-1SD from mean).

2Q18 results wrap up. With the 2Q18 results season recently concluded, out of the 112 stocks under our coverage universe, 39 (35%) came in below expectations, 59 (53%) were inline and 14 (13%) were above. When the results were compared against consensus, 38% were below, 52% inline and 10% above.

Slightly better. In comparison to the previous quarter (i.e. 1Q18), the proportion of results disappointment reduced from 47% to 35%. From a ratio standpoint, (i.e. % of results above/ below), this came in at 0.36x, improving from 0.23x in 1Q18. For the 39 companies that posted disappointing results, 36% were due to revenue factors, 33% cost related and 31% from both.

Key sector disappointments. Sectorial wise, the key disappointments stemmed from construction, plantations, property and telco. For construction, lower than expected margin was the key culprit, which may have resulted from contractors being more prudent in their margin recognition following several projects being put under review post GE14 coupled with higher material price and labour cost. The plantations player’s disappointing results were largely due to higher than expected production cost. On property, the results shortfall mainly came from (i) slower recognition on newer developments which are still at the early stage of construction and (ii) “wait and see” approach adopted by buyers due to GE14 factors. Lastly, the results disappointment for telco was attributed to higher than expected cost related factors (although there was no broad general theme that contributed to this).

Needing more clarity. We reckon that investors are still waiting for more concrete clarity on certain policy measures from the new Pakatan Harapan government. Topping the list would be (i) how the revenue shortfall from GST-SST migration would be sustainably covered, (ii) reimbursement of prior GST input tax credits and tax refunds and (iii) status of mega projects, particularly those that involve China’s participation. We expect more clarity to emerge during the 11MP mid-term review (18 Oct) and Budget 2019 (2 Nov).

End of the exodus? We note that net foreign selling has eased to RM1.7bn in July and RM97m in Aug (vs RM5.6bn in May and RM4.9bn in June). With foreigners exiting Malaysian equities to the tune of RM12.3bn since May (GE14), we are inclined to believe that the exodus could be over. To anecdotally support this view, in the past, cumulative net foreign selling over a 4 month period tends to peak at RM12-13bn.

KLCI target of 1,810. Following the earnings cut post 2Q18 results, we now project flattish KLCI earnings growth of 2% for 2018 and 5.7% for 2019 (previously 6% and 6.5%). Despite the earnings cut, this is offset by the rolling forward of valuation horizon from 2018 to mid-2019 earnings tagged to 16x P/E (roughly 1 SD below mean) to derive our revised target of 1,810 (from 1,770).

Top picks. All our top picks posted results that were inline with the exception of Heineken and Rohas which came in below. We drop the former from our top pick list following our rating downgrade from Buy to HOLD.

Source: Hong Leong Investment Bank Research - 5 Sept 2018