For the 1Q19 results season, 40% came in below expectations, 44% inline and 16% above. Versus 4Q18, results misses rose (from 35% to 40%), with revenue shortfall being the key reason. Notable sector disappointments were plantations (low CPO and palm kernel price), construction (post GE14 impact), O&G (lower margin on newer projects) and tech (global inventory adjustment and weaker smartphone sales). We now project flat KLCI earnings growth for 2019 at 0.8% and 4.6% for 2020. KLCI target cut slightly to 1,700 (from 1,710). Remove IGBREIT, BAuto, Taliworks and Frontken from our top picks and replace with Tenaga, Dialog, AirAsia and CCM.

1Q19 results wrap up. During the recently concluded 1Q19 results season, out of the 109 stocks under our coverage universe (excluding Gamuda on restricted list), 44 (40%) came in below expectations, 48 (44%) were inline and 17 (16%) were above. When compared against consensus forecast, the outcome wasn’t very different, with 40% below, 45% inline and 15% above.

Not an encouraging start. In comparison to the previous preceding quarter (i.e. 4Q18), (i) the proportion of results disappointments rose from 35% to 40% and (ii) those with positive results surprises declined from 20% to 16%. Consequently, from a ratio perspective, (i.e. % of results above/ below), this deteriorated QoQ from 0.56x to 0.39x (consensus: 0.59x to 0.37x). Dissecting the 44 results disappointments reveal that 68% were due to revenue shortfall, 14% due to cost factors and the balance 18% from both. The disappointments stemming from revenue shortfall was most prominent for plantations and construction.

Key sector disappointments. From a sectorial perspective, results disappointments were more prominent for plantations, construction, O&G and technology. For plantations, weaker realised CPO price as well as palm kernel price was the key culprits. To recap, in 1Q19, CPO price averaged 2,195/mt vs 2,491 in 1Q18. On construction, the results shortfall mostly came from lower than expected construction progress billings given that (i) reviewed projects post GE14 have yet to kick back into full swing and (ii) impact from lower orderbook replenishment post GE14. Within the O&G space, margins of projects executed were lower than anticipated. Lastly, the disappointment from the technology sector resulted from (i) major global inventory adjustment, (ii) weaker smartphone shipment and (ii) weaker USD (vs MYR) QoQ; average 1Q19: 4.0914 vs 4Q18: 4.1705.

Review of top picks. For our top picks, 4 reported results that were within expectations (Maybank, Top Glove, Sunway and TIME), 4 were above (DRB, BAuto, Frontken and Lii Hen) and 2 were below (IGBREIT and Taliworks). Apart from the 2 results disappointments, we remove Frontken (call downgrade after narrowed upside) and BAuto (interest in auto stocks likely to be focused on DRB following strong results) from our top picks list. Note that all our previous top picks have chalked positive returns (both absolute and relative to the KLCI) thus far into 2Q19. New additions to our revised top picks are Tenaga (index heavyweight), AirAsia (falling oil price and special dividend), Dialog (volume growth from Pengerang Phase 2) and CCM (RAPID proxy via supply of caustic soda).

KLCI target cut slightly to 1,700. Post 1Q19 results adjustments, we now project flattish KLCI earnings growth of 0.8% (from 2.1%) for 2019 and 4.6% for 2020. Coupled with the recalibration of the KLCI’s 5-year mean and SD, our KLCI target is reduced slightly to 1,700 (from 1,710). This is based on 15.5x PE (-1SD) tagged to mid-2020 EPS. Given the lacklustre earnings outlook (below post GFC CAGR of 6.5%) coupled with continued external headwinds (US-China trade war and Brexit), we retain our broad based strategy to bottom nibble below 1,620.

Source: Hong Leong Investment Bank Research - 7 Jun 2019