For the 4Q19 results season, 50% were inline, 28% below and 22% above. Disappointments reduced QoQ (from 43% to 28%) while positive surprises rose (from 14% to 22%). Key sector shortfalls came from autos, aviation, construction and O&G. We estimate that 2019 core earnings fell -6.4% YoY for our coverage universe and -7.3% for the KLCI. Our previous top picks saw 6 inline, 3 below and 2 above. Post 4Q19 results adjustments, we forecast KLCI core earnings growth of 3.8% for 2020 and 4.2% for 2021. Our KLCI target is lowered from 1,600 to 1,590 (16.3x PE tagged to 2020 EPS; -0.5SD).

4Q19 results wrap up. For the recently concluded 4Q19 results season, of the 110 stocks under our coverage universe (excluding 3 on restriction), 55 (50%) came in within expectations, 30 (28%) were below and 24 (22%) were above. This was rather similar to consensus which saw 51% inline, 29% below and 19% above.

Fewer shortfalls. Comparing to the previous preceding quarter (i.e. 3Q19), the proportion of results disappointments reduced (from 43% to 28%) while the positive results surprises rose (from 14% to 22%). Consequently, from a ratio perspective (i.e. % of results above/below), this increased from 0.33x to 0.80x. Dissecting the 30 results disappointments show that 38% were due to revenue shortfall, 27% cost factors and 37% a combination of both.

Sector shortfalls. Sector wise, the results disappointments were more apparent for autos, aviation, construction and O&G. With the worsening Covid-19 spread outside of China, the aviation sector is at risk of another round of results shortfall. On construction, the recent shift in political scene may lead to some delays in project rollouts. On a brighter note, the plantation sector which disappointed for the past several quarters has now turned broadly inline for the 2nd consecutive quarter. With YTD CPO price averaging RM2,834/tonne (vs our assumption of RM2,550), we are hopeful for a decent showing, at least for 1Q20.

Core earnings decline. Overall we estimate that core earnings for our coverage universe in 4Q19 improved slightly by +1.3% QoQ but declined -4.0% YoY. This translated to a full year 2019 YoY decline of -6.4%. For the KLCI, we estimate that full year core earnings declined by -7.3% for 2019 (vs our initial projection of -6.0%).

Review of top picks. On our top picks, 6 came in within expectations, 3 below (GenM, KLCCSS and DRB) and 2 above (Lii Hen and FocusP). We have removed the following from our top picks: Maybank (expecting another OPR cut), GenM (Covid- 19), GenP (replaced with HSPlant) and DRB (results shortfall). Our refreshed top picks list now includes Top Glove, Bursa, Syarikat Takaful and HSPlant.

KLCI target cut to 1,590. Post 4Q19 results adjustments, we forecast KLCI core earnings growth of 3.8% for 2020 and 4.2% for 2021. Coupled with the recalibration of the KLCI’s 5-year mean and SD, our target is lowered slightly from 1,600 to 1,590. This is based on 16.3x PE (-0.5SD) tagged to 2020 EPS.

Source: Hong Leong Investment Bank Research - 3 Mar 2020