For the 3Q20 results season, 37%/30% of stocks were within HLIB/consensus expectations, 35%/36% above and 28%/35% below. As positive surprises trumped disappointments, the ratio rose to 1.23x (first time exceeding 1x in the past 5 years). We estimate that core earnings in our coverage universe rebounded strongly by +126% QoQ (coming out of MCO) while the cumulative 9M20 sum fell by -32% YoY. Sectors that disappointed were construction and healthcare while positive surprises came from furniture, media, plantation and gloves. We revise 2020/2021 KLCI earnings growth to -17.9/+20.4% (from - 19.0%/+18.5%). Our end-2021 KLCI target stands at 1,690 based on 18.5x PE (+0.5SD above 5Y mean; reflecting a slight “recovery premium”) tagged to CY21 EPS, while our near term end-2020 target is 1,620 (17.7x 5Y mean PE).

3Q20 results wrap up. For the recently concluded 3Q20 results season, out of the 109 stocks under coverage (excluding Gamuda on “restriction”), 40 were within expectations (37%), 38 above (35%) and 31 below (28%). When stacking the results outcome against consensus estimates, 30% was inline (below ours), 36% above (similar to ours) and 35% below (more than ours).

Positive surprises outpace disappointments. Compared to the preceding quarter (i.e. 2Q20), (i) the proportion of disappointments reduced from 35% to 28% partly due to more realistic lowered expectations imputed with a better gauge of the MCO impact and (ii) positive results surprises rose from 24% to 35%, largely due to a strongerthan-expected post-MCO recovery. Consequently, from a ratio perspective (% of results above/ below), this increased from 0.68x to 1.23x; this is the first time the ratio exceeded 1x in the past 5 years.

Sectorial positive and negative results surprises. Dissecting the 31 results disappointments indicate that 71% were due to revenue shortfall (slow post-MCO recovery and Covid-19 demand impact), 16% cost (largely from additional health/safety costs incurred) and 13% a combination of both. Sectorial wise, the more prominent disappointments stemmed from construction (suboptimal work levels due to Covid-19 SOPs) and healthcare (slower-than-expected post MCO patient flows coupled with additional healt h/safety cost). The positive sector surprises were from furniture (strong US home sales and WFH culture), media (adex recovery), plantation (higher CPO price in 3Q; +21.4% QoQ), gloves (higher-than-projected ASP) and to a lesser extent O&G.

Improving numbers. Overall, we estimate that core earnings for our coverage universe in 3Q20 recovered 126.4% QoQ (amid a low base from 2Q20’s MCO effect) but were still down -4.6% YoY, while the cumulative 9M20 sum fell by -32.3% YoY. The proportion of companies within our coverage that reported core losses reduced to 10.1% in 3Q20 (vs 32.1% in 2Q and 15.7% in 1Q). Given the onslaught of CMCO2.0, we reckon that 4Q20 may show some sequential weakness (vs 3Q), but will still be better than 2Q.

Outlook and strategy. We are optimistic on a vaccine driven recovery in 2021; based on our estimates from agreements signed, Malaysia has secured vaccine supply for 29.5% of its population (9.9% from COVAX and 19.6% from Pfizer) to be delivered in stages throughout next year. That said, we are also mindful that the path to normalcy will be a gradual one rather than a swift 180 degree turn given potential hiccups from (i) vaccine supply as high income nations have booked a large chunk of it and (ii) holdback in demand as people may take a “wait and see” approach before getting jabbed. As such, we take a more balanced approach in our top picks with a combination of plays involving recovery (Tenaga, AMMB, MBM, Media Prima and Focus Point), volatility (Bursa), defensives (TM, MQREIT), value (IJM, Sunway, Armada) and sold down pandemic beneficiaries (Top Glove).

Forecast. Post 3Q20 results season, our 2020/2021 KLCI earnings growth is revised to -17.9/+20.4% (from -19.0%/+18.5%).

KLCI target at 1,690. Our end-2021 KLCI target stands at 1,690 based on 18.5x PE (+0.5SD above 5Y mean; reflecting a slight “recovery premium”) tagged to CY21 EPS, while our near term end-2020 target is 1,620 (17.7x 5Y mean PE).

Source: Hong Leong Investment Bank Research - 3 Dec 2020