The 1Q18 corporate earnings season was fairly decent with earnings growing 1.2% yoy and appears on track to achieve our lowered yearend 2018E growth target of 9% (from 10% previously). With the removal of concerns over earnings delivery and any political overhang, we expect the market to trend higher in 2H2018 once favourable policies and measures executed by the new government gain traction. Maintain Overweight and with an unchanged 2018 year end target of 1,923 (based on 18.6x 2018E earnings).

A Decent Quarter But Larger Caps Still Performing Better

Of the 117 companies under Affin coverage, a higher number of companies reported earnings that were within expectations (48.7% vs 45.7% in 4Q17). However, the number of companies falling below expectations also widened to 37.4% vs 30.2% in 4Q17. Nevertheless the larger-capitalisation stocks represented by the KLCI constituents fared better during the quarter with a larger subset of 72% (4Q17: 68%) of companies having results that fell within expectations compared to 20% (4Q17: 20%) that fell below.

1Q18 Earnings Grew 1.2%, on Track for 9% Yoy Growth in 2018E

On the whole, market earnings grew 1.2% yoy in 1Q18 after the 5.4% yoy decline in 4Q17. This was led by robust earnings for Utilities (+12% yoy) and Banks (+10% yoy), which combined account for 50% of our market earnings estimates. The Rubber Product manufacturers also registered an impressive 24% yoy growth despite the RM appreciation. Except for the Media, Oil & Gas, Plantations, Property, Technology and Telcos, all the other 18 sectors under coverage registered positive yoy growth. Our 2018E market earnings growth is adjusted lower to 9% from 10% previously, post the 1Q18 results season.

Airlines and Gaming Did Well, Telco and Plantations Disappointed

Other notable positive sectors included the Airlines due to better-thanexpected passenger growth and cost controls and the Gaming sector as visitation to Genting Highland increased, driving stronger growth in the VIP and mass-market segments. Sectors that largely disappointed included the Construction, Telco, Plantations, Property, Media and Building Materials. The impact on Telcos and Plantations was more significant not only because they have a larger market weighting but also because both sectors registered a yoy decline in growth in 1Q18 (-11% and -35% respectively). Telco earnings were weaker, dragged down by higher costs at TM and larger associate losses at Axiata, which also correspondingly led to a selldown in both. For Plantations, earnings were dragged down by lower CPO prices (1Q18: RM2,462/MT vs 1Q17: RM3126/MT) and higher production costs driven by fertilizer costs.

More Rating Upgrades Than Downgrades

We made 12 rating upgrades (largely on valuation pullbacks) compared to 9 rating downgrades this quarter, the latter due largely to earnings disappointments as well as to take into account the Construction sector de-rating post the cancellation of mega infrastructure projects by the new government. Notable upgrades to BUY ratings include BAT, which we in our view will benefit from the government’s move to reduce cigarette smuggling, and YTL Power, whose share price has taken a beating despite results falling within our expectations. We also upgraded ratings for Harta and Kossan in tandem with our favourable outlook on the sector.

Source: Affin Hwang Research - 4 Jun 2018