For the 4Q20 results season, 44% were within HLIB/consensus expectations, 41%/38% above and 15%/18% below. Positive surprises continued to trump shortfalls, leading to a sequential rise in ratio from 1.23x to 2.73x. Despite “3rd Wave” and CMCO2.0 headwinds, coverage core earnings rose 15% QoQ and 17% YoY in 4Q20, testament that the recovery thesis is in motion. Positive surprises came from consumer, healthcare, media, plantation, property, gloves and tech. Maintain KLCI target at 1,740 (17.3x PE on CY21 EPS).

4Q20 results wrap up. As of 1-Mar, 100 stocks out of 113 under our coverage have reported their quarterly results for the 4Q20 period (i.e. 88% reported with the balance 12% by end-Mar). Of the 100 stocks that have reported, 44 (44%) were within expectations, 41 above (41%) and 15 (15%) below. When stacking the results outcome against consensus estimates, 44% were inline (similar to ours), 38% above (lower than us) and 18% below (higher than us).

Positive surprises outpaced shortfalls. Compared to the preceding quarter (i.e. 3Q20): (i) the proportion of disappointments reduced from 28% to 15% partly due to more realistic lowered expectations imputed given a better gauge of the MCO/CMCO and pandemic impact and (ii) positive results surprises rose from 35% to 41%, largely due to less profound negative ramifications from the “3rd Wave” and CMCO2.0 than initially thought to be. Consequently from a ratio perspective, (% of results above/ below), this increased from 1.23x to 2.73x; prior to 2H20, the ratio had been below 1x over the past 5 years (similar trend when compared against consensus too).

Recovery despite headwinds. Despite the onslaught of the “3rd Wave” and CMCO2.0 in 4Q20, aggregate core earnings for our coverage universe (ex those that have not reported) actually recovered +14.9% QoQ and +16.8% YoY. This was in contrast to the sequential weakness seen in GDP (4Q20: -3.4% vs 3Q20: -2.6%). On a full year basis, we estimate that core earnings of our coverage universe declined by -14.3% YoY in CY20 (KLCI constituents: -10%). By our estimates, KLCI constituent core earnings accounted for 103% of our CY20 forecast.

Sectorial positive and negative surprises. From a sectorial standpoint, the positive results surprises came from consumer, healthcare (less profound impact of CMCO2.0 than expected), media (adex recovery), plantation (higher CPO price by +21.5% QoQ in 4Q20), property (recovery in construction site progress), gloves (higher ASPs) and tech (recovery outlook drove sales). On the flipside, disappointments seemed to be more stock specific rather than sector driven.

Outlook. The positive showing in 4Q20 results (despite CMCO2.0 and “3rd Wave” headwinds) is testament that the recovery thesis is very much in motion. We acknowledge that there could be possible “speed bumps” in 1Q21 results due to MCO2.0; nonetheless we take some comfort in (i) its less restrictive nature vs MCO1.0 and (ii) down trending cases since Feb. Malaysia’s ongoing vaccine rollout should provide some reassurance on its recovery trajectory. However on the other side of the coin, a low take up could be the black swan; while it is still premature to ascertain, Minister of Science “KJ”, revealed earlier this week that registrations for the vaccine remains low at 6.1% out of the 80% target set for the country.

Top picks review. For our top picks (ex. Sunway which delayed its results), 5 (46%) were above (Tenaga, Top Glove, Time, Armada, MBM), 3 (27%) inline (RHB, Bursa, Axis) and 3 (27%) below (DRB, Aeon, GDB). We remove Aeon (narrowed upside given share price performance) and GDB (weak construction sentiment) from our top picks and replace with UWC (stronger chip demand and test handlers) and FocusP (“reopening” play and F&B division growth).

Forecast. CY21 KLCI earnings growth recalibrated to 23.9% (from 26.5%), mainly on revised base effect of CY20.

KLCI target at 1,740. Our end-2021 KLCI target stands at 1,740 based on 17.3x PE (5Y mean) tagged to CY21 EPS.

Source: Hong Leong Investment Bank Research - 4 Mar 2021