For the 1Q21 results season, 41%/42% were inline with HLIB/consensu s expectations, 37%/38% below and 22%/20% above. Disappointments outpaced positive surprises, leading to a sequential decline in ratio to 0.59x from 1.87x in 4Q20 and 1.23x in 3Q20. Nonetheless, core earnings of our coverage universe still rose 20% QoQ (driven by gloves and banks) and 79% YoY (low base from 1Q20’s start of MCO1.0). While there are near term headwinds from the total lockdown, we believe “recovery sentiment” will resurface in 2H21 when vaccination gains significant traction. Maintain KLCI target at 1,660.

1Q21 results wrap up. As of 31 May, 111 out of 114 stocks under our overage have reported their quarterly results for the 1Q21 period (the remaining 3 that have yet to do so are CBIP, GKent and Serba). Of the 111 stocks that have reported, 46 (41%) were within expectations, 41 (37%) below and 24 (22%) above. When stacked against consensus estimates, the outcome didn’t differ much with 42% inline, 38% below and 20% above.

Shortfalls outpaced positive surprises. After 2 consecutive quarters (i.e. 3Q20 and 4Q20) of positive surprises exceeding disappointments, the trend reversed in 1Q21. Compared to the preceding quarter (i.e. 4Q20): (i) disappointments rose from 21% to 37% which was largely due to the onslaught of MCO2.0 (13 Jan to 5 Mar) and (ii) positive results surprises fell from 38% to 22%. Consequently from a ratio perspective (% of results above/ below), this steeply contracted from 1.87x to 0.59x.

Core earnings were still higher. Despite the onslaught of the “3rd Wave” and resulting MCO2.0, aggregate core earnings for our coverage universe still managed to show an increase of +19.7% QoQ, mainly driven by gloves (higher ASP and volume) and banks (lower impaired loan allowances & positive Jaws; this was led by widening NIM and loans growth). Given the low base from last year’s MCO1.0 which was a total lockdown (2 week impact), 1Q21 core earnings jumped +78.9% YoY.

Notable misses. This largely stemmed from Covid-19/MCO2.0 headwinds which impacted construction (sub-par work progress on sites), gaming (prolonged interstate travel ban), media (weak adex), O&G (workforce disruption, Covid-19 costs and more turbulent monsoon) and REITs (mainly the malls and hotels).

Outlook. The “3rd Wave” resurgence (since Apr) and resulting total lockdown (Phase 1: 1-14 June) has undoubtedly delayed the overall vaccine led recovery thesis. However, we reckon that “recovery sentiment” will emerge once again in 2H21 as most of the vaccine deliveries (>70%) are back loaded to then. Encouragingly, average daily jabs administered have rose from 22.2k in Mar to 25k in Apr and 50.3k in May (peak of 125k on 29 May). Also, vaccine registration on MySejahtera has surpassed half of the vaccinable population (51.2% as of 1 June).

Forecast. We project KLCI earnings to rebound 23.9% in 2021

KLCI target at 1,660. We maintain our KLCI target at 1,660 based on 16.5x (-0.5SD to 5Y mean) 2021 EPS. While there are near term headwinds from elevated Covid -19 cases and the resulting total lockdown, we believe “recovery sentiment” will resurface in 2H21 when inoculation rates gain significant traction.

Top picks review. For our top picks, 5 (42%; TM, RHB, Bursa, Armada, IJMP) were above, 4 (33%; Tenaga, Time, Axis, FocusP) inline and 3 (25%; Sunway, DRB, MBM) below expectations. To take a more defensive stand, in view of the near term lockdown headwinds, we remove RHB and DRB from our top picks, replacing them with Maybank and SentralREIT (both offer attractive yields of >7%).

Source: Hong Leong Investment Bank Research - 3 Jun 2021