For the 3Q19 results season, 43% were inline, 43% below and 14% above. Disappointments rose QoQ but so did positive surprises. Construction, consumer, media and rubber products were the key sector shortfalls. Within HLIB’s coverage, we estimate that 9M19 core earnings fell by -7.1% YoY. On a brighter note, none of our 4Q19 top picks disappointed, all of which also outperformed QTD. Post results adjustment, we project 2019 earnings growth at -6% and +6.4% for 2020 (amid a lower base). Our KLCI target is cut from 1,660 to 1,640 based on 16.3x (-0.5SD) tagged to 2020 EPS.

3Q19 results wrap up. For the recently concluded 3Q19 results season, of the 112 stocks under our coverage universe (excluding 2 on restriction), 48 (43%) came in within expectations, 48 (43%) were below and 16 (14%) were above. This was just slightly better than consensus which saw 41% inline, 45% below and 14% above.

Disappointments rose. In comparison to the previous preceding quarter (i.e. 2Q19), the proportion of results disappointments increased from 40% to 43% but so did the positive results surprises from 9% to 14%. Consequently, from a ratio perspective (i.e. % of results above/ below), this notched up from 0.23x to 0.33x (consensus: 0.20x to 0.31x). Dissecting the 48 results disappointments reveals that 42% were due to revenue shortfall, 23% cost factors and 35% a combination of both.

Sector shortfalls. Sector wise, the results disappointments were more prominent for construction, consumer, media and rubber products. For construction, the results shortfall mainly came from (i) slower-than-expected progress billings; LRT3 has yet to move back to full swing while works have slowed down for Pan Borneo and (ii) impact from lower orderbook replenishment post GE14. Within the consumer space, higher raw material price (partially from weak ringgit vs USD) was the common reason for the results disappointment. For rubber products, their results were also hit by higher raw material price (mainly natural rubber and butadiene), coupled with overcapacity weighing down on ASP. Lastly, the media sector which is still largely traditional based, continues to be impacted by the digital disruption. On a brighter note, the plantation sector which disappointed for the past several quarters has now turned broadly inline. With CPO price on an uptrend since Oct, we are hopeful for a decent showing in 4Q19.

Core earnings decline. Overall we estimate that core earnings for our coverage universe in 3Q19 declined by -4.0% QoQ and -9.5% YoY while the cumulative sum for 9M19 fell by -7.1% YoY.

Review of top picks. All our top picks for 4Q19 reported results that came in within our expectations, with the exception of TM which exceeded (resulting from effective cost rationalisation initiatives). In terms of share price performance, 9/10 registered positive absolute QTD returns with an average of 4.5%. On a relative performance basis QTD (vs KLCI: -0.8%), all our top picks outperformed. Pending the release of our 2020 Market Outlook & Strategy sometime this month, we keep our top picks unchanged.

KLCI target cut to 1,640. Post 3Q19 results adjustments, we now forecast KLCI core earnings to decline by -6% in 2019 (-3% previously). This is projected to rebound by 6.4% in 2020 amid a lower 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 1,660 to 1,640. This is based on 16.3x PE (-0.5SD) tagged to 2020 EPS. Despite the cut in our 1-year KLCI target, we are hopeful for positive returns in Dec, backed by the traditional year-end window dressing phenomenon; Dec has been a “green month” for the KLCI 90% of the time in the past decade.

Source: Hong Leong Investment Bank Research - 3 Dec 2019