• We lowered our end-2020E KLCI target to 1540 (from 1,660) based on a 5-year mean PER of 17x applied to our 2020E EPS.
• In tandem, we also lower our fair value to RM1.66 from RM1.75 for the FBM KLCI ETF. Maintain HOLD on the ETF.
• We remain cautious on the market amidst the Covid-19 threat and political uncertainties.

The Fund and Its Objective

FBM KLCI ETF aims to achieve a price and yield performance, before fees, expenses and tax, that is similar to that of the FTSE Bursa Malaysia Large 30 Index. The Fund manager, AmFunds Management Berhad, aims to achieve performance, over time, with a correlation of 95% or better between the Fund’s Net Asset Value (NAV) and the Benchmark. It will have an asset allocation of at least 95% in Index Shares and options and warrants referencing the Index Shares and no more than 5% in cash or cash equivalents. Income distribution is expected to be made semi-annually. The NAV per unit was RM1.5195 as of 2nd March 2020, a decline of 7.8% ytd. This is in line with the KLCI index which declined 7.7% ytd. As such, the benchmark outperformed the fund by 0.1 ppt. With a 3-year tracking error of 0.90%, we believe the fund is tracking the benchmark sufficiently. In 2019, the fund recorded a negative return of 4.12%, comprising of 6.00% capital growth and 1.88% income distribution. Meanwhile, the benchmark recorded a lower negative return of 2.89%, larger than our expected 1.6% decline. The KLCI however outperformed the fund by 1.23 ppt. Sequentially, the ETF recorded a net investment loss of RM119,480, lower than the RM138,893 loss in 2018.

Stronger 4Q19, Unlikely to Continue

The 4Q19 corporate earnings under our coverage grew 1.8% yoy, which broke the negative growth trend over the past 6 quarters. The better performance was attributable to the Telecoms (accelerated depreciation in Axiata in 4Q18), Plantations (higher ASPs) and Banks (higher noninterest income), more than offset weaker performance in the Oil & Gas, Gaming and Utility sectors. Key companies that resulted in the earnings drag were Petronas Chemicals, Tenaga and Genting. However, we believe the stronger performance is unlikely to continue in 1Q20 given the onset of Covid-19 and also partially due to the higher base in 1Q19.

Covid-19 Poses a Threat to Economic Growth

We have taken a more cautious stance on corporate earnings post the Covid-19 outbreak. Our Economics team has also downgraded 2020E GDP growth to 4% from 4.5% previously in tandem with this. We believe the Covid-19 may cause a disruption in supply chain, weaker consumer sentiment, lower number of tourist arrivals and hence affect consumption spending in the long-term. We have also taken into account a possible 50 bps cut in OPR for the full year of 2020, an additional 25 bps to the January cut for our banks’ earnings.

Source: Affin Hwang Research - 6 Mar 2020