For the 3Q18 results season, 45% came in below expectations, 39% inline and 16% above. Compared to 2Q18, the proportion of results that were above and below both increased, resulting to an unchanged ratio QoQ of 0.36x. Sector disappointments were plantations (lower CPO price), media (traditional segment drag), construction (post GE14 slowdown) and consumer (weaker than expected tax holiday boost). We continue to project subpar earnings growth of 1% for 2018 and 3.3% for 2019, below its post-GFC CAGR of 7%. Lower KLCI target to 1,770 (from 1,780) post results adjustment based on 15.5x P/E (-1SD) tagged to 2019 EPS.

3Q18 results wrap up. With the 3Q18 results season recently concluded, out of the 111 stocks (excluding 1 on restricted list) under our coverage universe, 50 (45%) came in below expectations, 43 (39%) were inline and 18 (16%) were above. When the results were compared against consensus, 50% were below, 37% inline and 13% above.

Disappointments return. Compared to the previous quarter (i.e. 2Q18), the proportion of results disappointment increased from 35% to 45%. However, there was also a slight increase in those that came in above from 13% to 16%. From a ratio standpoint, (i.e. % of results above/ below), this remained unchanged QoQ at 0.36x. For the 50 companies that posted disappointing results, 48% were due to revenue factors, 30% cost related and 22% from both.

Key sector disappointments. Sectorial wise, the key disappointment stemmed from plantations, media, construction and consumer. For plantations, lower CPO price (as well as a widened discount between Indonesia’s pricing vs Malaysia) caused the disappointment. The media sector was impacted by continued drag from the traditional segment (lower adex), workforce restructuring and for Astro, higher content cost for FIFA World Cup. On construction, the disappointment resulted from slower orderbook execution as projects were reviewed post GE14 as well as drag from their property divisions. While 3Q witnessed 2 months impact of the tax holiday, this failed to significantly boost sales for some of the consumer stocks within our coverage (e.g. AEON and Panasonic).

Cautious mode. The cut in headline economic targets during the 11MP MTR (namely GDP and budget deficit) reflects Malaysia’s challenges as it walks a thin rope, balancing between growth and fiscal prudence against an uncertain external backdrop (US-China trade war and falling oil price). We see 2 risk factors that may heighten risk aversion towards Malaysia: (i) 2019 GDP falling short of MoF’s 4.9% target (our forecast is lower at 4.6%) and (ii) weaker oil price averaging below USD72/bbl (MoF’s assumption) which could cause the 2019 budget deficit target (-3.4%) to be unattainable.

KLCI target of 1,770. Following the earnings cut post 3Q18 results, we now project KLCI earnings to be flat for 2018 at 1% and a subpar growth of 3.3% for 2019. This remains below its post-GFC CAGR of 7%. Our revised TP of 1,770 (from 1,780) continues to be based on -1SD P/E (15.5x) tagged to 2019 EPS.

Top picks. With the exception of Tenaga, all our top picks reported results that were either inline or above expectations. The disappointment for Tenaga came from run-up in generation cost for LPL (Pakistan) and Sabah Electricity which was not covered under the ICPT mechanism as well as accounting change for MFRS117.

Source: Hong Leong Investment Bank Research - 5 Dec 2018