For the 2Q20 results season, 41%/40% of stocks under coverage was within HLIB/consensus expectations, 35%/36% below and 24% above. The proportion of disappointments reduced QoQ from 61% to 35% while positive surprises doubled from 12% to 24%. It goes without saying that most of the results disappointments were due to the MCO. Overall, we estimate that core earnings for our coverage universe in 2Q20 declined by -41.7% QoQ and -59.8% YoY, while the cumulative 1H20 sum fell by -46%. Our 2020/2021 KLCI earnings growth is revised to -20%/+16% (from -18.7%/+17.9%). KLCI target is lowered from 1,640 to 1,590 (18.5x PE on 2021 EPS). Genting and Axis REIT are removed from our top picks while FocusP and MQREIT are included.

2Q20 results wrap up. For the recently concluded 2Q20 results season, out of the 109 stocks under coverage (excluding Gamuda on “restriction”), 45 (41%) were within expectations, 38 (35%) below and 26 (24%) above. This pretty much mirrored the outcome against consensus at 40% inline, 36% below and 24% above.

Fewer disappointments, more positive surprises. Compared to the preceding quarter (i.e. 1Q20), (i) the proportion of disappointments reduced from 61% to 35% partly due to more realistic lowered expectations imputed while (ii) positive results surprises doubled from 12% to 24%; largely due to a less profound MCO impact than initially thought to be. Consequently, from a ratio perspective (% of results above/ below), this increased from 0.20x to 0.68x QoQ.

MCO induced shortfalls. Dissecting the 38 results disappointments indicate that 61% were due to revenue shortfall (mainly due to MCO impact), 18% cost factors (largely from additional health/safety costs incurred due to Covid -19) and 21% a combination of both. Sectorial wise, it is no surprise that disappointments came from those that were most vulnerable to Covid-19/MCO: brewers, construction, consumer, gaming, healthcare (i.e. hospitals) and REITs (i.e. retail). Gloves and to a lesser extent telco, were the only sectors that showed positive results surprises.

Aggregate numbers were not pretty. Overall, we estimate that core earnings for our coverage universe in 2Q20 declined by -41.7% QoQ and -59.8% YoY, while the cumulative sum for 1H20 fell by -46%. We reckon that 2Q20 is the trough for corporate earnings as most sectors of the economy have reopened during the RMCO stage (started 10 June).

Forecast. Post 2Q20 results season, our 2020/2021 KLCI earnings growth is revised to -20%/+16% (from -18.7%/+17.9%).

Top picks review. All of our top picks reported results that were either inline or above expectations, except for Tenaga (lower power demand during MCO) and Genting (closures during MCO). After reviewing our top picks, we remove Genting and Axis REIT and replace with Focus Point (expected to see strong post-MCO recovery) and MQREIT (highest REIT yielder in our coverage).

KLCI target revised to 1,590. Following the post 2Q20 results season adjustments, our KLCI target is lowered to 1,590 (from 1,640) based on an unchanged 18.5x PE tagged to 2021 EPS. The ascribed PE target corresponds with (i) the peak level witnessed during QE3 to reflect a liquidity premium and (ii) roughly +1SD from long term mean (measured since 2007). With the worst of corporate results likely over, alongside decade low foreign shareholding (Aug: 20.8%; almost at GFC low of 20.7%), we reckon that the market bias is tilted to the upside.

Source: Hong Leong Investment Bank Research - 3 Sept 2020