While the recently concluded 4Q17 corporate earnings seasons was disappointing, the FBMKLCI 30 constituent’s EPS growth for 2017 of 5% was ahead of our earlier estimates of 4.6%, and a marked improvement from the 3 consecutive years of EPS declines over 2013-16. Importantly the FBMKLCI 30 constituents also registered better earnings quality (more positive surprises and fewer negative ones), which in our view should support further capital inflows. Ytd, the KLCI has for once moved in tandem with regional markets, largely underpinned by the strength of the RM. Our Economist, Alan Tan, raised his end-2018 RM/US$ assumption to RM3.80/US$ (from RM4.05 previously), which will likely benefit the FBMKLCI. We lift our 2018 year-end KLCI target to 1,923 (based on +1SD historical mean PE) and prefer large caps vis-à-vis the small caps to play the capital inflows. Maintain OVERWEIGHT.

Stronger GDP Growth, Commodity and Oil Prices Filtering Through

Ytd, the FBMKLCI has risen 3.57% and in tandem with the rise in global equity markets. This is in stark contrast to the performance in previous years when the FBMKLCI lagged behind peers. This positive performance has been driven predominantly by sharp capital inflows of RM2.3bn ytd. Apart from the FBMKLCI’s attractive valuations, we believe that foreign interest returning to the FBMKLCI is largely driven by a positive stance taken on the RM.

Expecting a Stronger RM and Hence Capital Inflow

Our Economist, Alan Tan, raised his 2018 year-end RM/US$ assumption to RM3.80/US$. Alan believes that the strength of the RM will be two-fold: 1) a weak US$ underpinned by concerns over a widening US fiscal deficit, and 2) improving domestic macro fundamentals.

Maintain Overweight: End-2018 KLCI Target Lifted to 1,923

In tandem with our stronger RM view and the anticipated capital flows, we raise our year-end 2018 KLCI target to 1,923 based on 18.6x 2018E KLCI EPS or +1SD above the 5-year historical mean PE (previously 1,854 based on mean PE of 17x). This is based on estimated FBMKLCI EPS growth of 7% in 2018E (previously 4.8%), after taking into account the recently concluded 4Q17 reporting season. While only 3.3% upside may seem meagre, we think that there is room for PE multiples to overshoot in the near term, should there be a sudden surge in inflows, and trading opportunities could arise. At a +2SD historical mean PE, the FBMKLCI could trade up to 2,037 points. Maintain Overweight on the FBMKLCI.

Sector Allocation and Stock Selection

We make no changes to our sector allocation and remain overweight on Rubber Products, O&G, Banking and Financial Services, Construction & Infrastructure, Insurance, Gaming, Utilities and Small-mid Caps. However, we increase our large-cap weightings in our top buy list, changing the large/small-mid cap weighting from 60/40 to 80/20. In view of this, we remove Hai-O, HSS Engineers, Apex Healthcare and Globetronics. For our large-cap top picks (all BUY-rated), IHH Healthcare (IHH MK) and Genting Malaysia (GENM MK) join Maybank (MAY MK), HL Bank (HLBK MK), Tenaga (TNB MK), Top Glove (TOPG MK), Inari (INRI MK), and Serba (SDH MK). Among small caps, we prefer Supermax (SUCB MK) and Aeon Credit (ACSM MK). Our 3 BUY-rated alpha picks: Aeon (AEON MK), UMWOG (UMWOG MK), and Scicom (SCIC MK).

Source: Affin Hwang Research - 2 Mar 2018