For the 2Q19 results season, 51% were inline, 40% below and 9% above. Disappointments were unchanged QoQ at 40% with revenue shortfall being the key culprit. Sector disappointments were construction, plantations, rubber products, tech and media. Within HLIB’s coverage, we estimate that 1H19 core earnings fell by -6.7%. Post results adjustment we project 2019 earnings growth at -3% and +5% for 2020 (amid a lower base). Our KLCI target is cut from 1,700 to 1,670 based on 16.6x (-0.5SD) tagged to 2020 EPS

2Q19 results wrap up. For the recently concluded 2Q19 results season, out of the 110 stocks under our coverage universe (excluding Gamuda on restriction), 56 (51%) came in within expectations, 44 (40%) were below and 10 (9%) were above. When compared against consensus estimates, the outcome wasn’t very different with 48% inline, 43% below and 9% above.

Disappointments stay elevated. In comparison to the previous preceding quarter (i.e. 1Q19), the proportion of results disappointments was unchanged at 40% while those with positive results surprises fell from 16% to 9%. Consequently from a ratio perspective (i.e. % of results above/ below), this deteriorated QoQ from 0.39x to 0.23x (consensus: 0.37x to 0.20x). Dissecting the 44 results disappointment reveals that 50% were due to revenue shortfall, 23% cost factors and 27% a combination of both.

Sector shortfalls. Sector wise, the results disappointment were more prominent for construction, plantations, rubber products, tech and media. On construction, the results shortfall mainly 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. For plantations, although we had previously cut our 2019 average CPO price assumption from RM2,300/mt to RM2,100/mt (YTD average: RM2,121/mt), results continued to disappoint largely due to production shortfall and other firm specific reasons. Within rubber products, results were impacted by lower sales volume (Harta and Karex) and lag in ASP revision to reflect higher natural rubber price (Top Glove). Lastly the results shortfall for tech was due to softer demand for electronics (stemming from the US-China trade war) while the media sector continues to be impacted by the digital disruption.

Core earnings decline. Overall we estimate that core earnings for our coverage universe in 2Q19 declined by -2.5% QoQ and -6.9% YoY while the cumulative sum for 1H19 fell by -6.7% YoY.

Review of top picks. Amongst our top picks, 4 reported results that were below expectations (Maybank, Top Glove, DRB and CCM), 3 inline (Sunway, Axis, Lii Hen) and 3 above (Dialog, Frontken and Revenue). For the disappointments, we retain Maybank (high yield >6%), Top Glove (weak ringgit) and DRB (Proton turnaround) as we believe their investment merits remain intact. However, we remove CCM (low caustic soda price) and replace with Pecca (continued Perodua demand, new programs with Proton, tapping the aviation segment and attractive yield >6%).

KLCI target cut to 1,670. Post 2Q19 results adjustments, we now forecast KLCI core earnings to decline by -3% in 2019 (+0.7% previously). This is projected to rebound by 5% in 2020 amid a low base from 2 consecutive years of negative growth (i.e. 2018 and 2019). Coupled with the recalibration of the KLCI’s 5-year mean and SD, our target is cut from 1,700 to 1,670. This is based on 16.6x PE (-0.5SD) tagged to 2020 EPS. We retain our strategy to bottom nibble at 1,600 and below. This level coincides with P/B valuation at -1.5SD, which has in the past, been quite a good gauge of bottomed valuations.

Source: Hong Leong Investment Bank Research - 5 Sept 2019