For the “partial 1Q20 results season” (only 69% under coverage have reported), 64% came in below, 26% within and 9% above. With the onslaught of Covid-19 and initial stage of MCO, disappointments rose QoQ (from 28% to 64%) while positive surprises fell (22% to 9%). Safe for rubber gloves, the results shortfall was rather widespread across most sectors. Post results adjustment, we now forecast KLCI core earnings to contract -18.6% in 2020 before recovering 19.2% in 2021 (post Covid-19 amid a low base). While 2Q20 re sults will likely worsen, the unlimited Fed QE along with high retail participation domestically may help cushion the downside. With this, we revise our PE target from 14.6x (GFC mean) to 16.1x (LT mean) tagged to 2021 EPS to derive our year-end KLCI target of 1,450.

1Q20 results wrap up. As of end-May, 77 stocks (including 1 on “restriction”, i.e. Gamuda) out of 111 under our coverage have reported their quarterly results for the 1Q20 period (i.e. 69% reported with the balance 31% by end-June). Of the 76 stocks (i.e. not including Gamuda), 49 (64%) came in below expectations, 20 (26%) within and 7 (9%) above. This was pretty similar to consensus at 64% below, 27% inline and 9% above.

Highest proportion of shortfall. Comparing to the preceding quarter (i.e. 4Q19), the proportion of results disappointments rose significantly (from 28% to 64%) while the positive results surprises fell from 22% to 9%. With 64% of results shortfall, this was the highest proportion of disappointments in the past decade. Consequently from a ratio perspective (i.e. % of results above/below), this showed a steep decline from 0.80x to 0.14x.

Widespread disappointments. Dissecting the 49 results disappointments indicate that 67% were due to revenue shortfall, 14% cost factors and 18% a combination of both. It is no surprise that topline shortfall was the main contributing factor to the results disappointments, given the onslaught of Covid-19 and initial impact from the MCO (started 18 Mar) hitting. Safe for rubber gloves, the results disappointments was rather widespread across most sectors.

Forecast. Post partial 1Q20 results season, our 2020 KLCI earnings growth forecast is cut from -4.0% to -18.6%. To give some perspective, during the 2008-2009 GFC, KLCI earnings contracted by -16.9% and -13.5% respectively. For 2021, we project KLCI earnings to rebound 19.2% (previously 7.7%) from (i) post Covid-19 recovery and (ii) low base effect. Note that in the post-GFC recovery of 2010, earnings rose 32.2%.

Revise KLCI target to 1,450. While corporate earnings will inevitably worsen in the subsequent 2Q20 results reporting season (in Aug), we reckon that factors such as (i) unlimited QE by the Fed and (ii) higher retail participation in Bursa (YTD: 30.4% vs 2019: 24.7%) will cushion the downside. Taking this into account, alongside rolling over our valuation horizon from mid-2021 to end-2021, we raise our PE target from 14.6x (2008-2009 GFC mean) to 16.1x (long term mean, measured since 2007). All in, our end-2020 KLCI target is revised from 1,350 to 1,450.

Source: Hong Leong Investment Bank Research - 2 Jun 2020