In a nutshell, the recently reported results were slightly below market and our expectations. While we do not expect these results to cause any major sell‐downs to the market, we do not rule out a potential pullback in the near‐term. Based on the consensus index target and the FBMKLCI index movement, we note that the FBMKLCI is only trading at a mere 2.6% discount to its consensus target level, which is not an attractive discount to capitalise on. Based on its historical range, the current discount  is slightly lower than the +1SD‐level of 2.8%. Besides, we have also seen slow outflows of foreign capital of late, which is amounted to RM870.4m since 22/05/13. While we downplay “Sell on Strength” (S.O.S.) investment strategy and prefer “Buy on Weakness” (B.O.W.) currently, the risk‐to‐reward seems favoring the former. This is because the potential upside from here is less than 5% as per ours and consensus index targets. As such, we believe “Sell Leaders and Buy Laggards” should be an appropriate investment strategy. The Top 5 big cap leaders with only MARKET PERFORM or UNDERPERFORM calls are UOADEV (MP; TP:RM2.60), AEONCR (MP; TP:RM15.90), CARLSBG (UP; TP:RM15.53), BURSA (MP; TP:RM7.20) and MEDIA (MP; TP:RM2.72) while DIGI (OP; TP:RM5.60), TM (OP; TP:RM6.48), MAXIS (OP; TP:RM7.17), IJMP (OP; TP:RM3.38) and PCHEM (OP; TP:RM6.97) are the Top 5 laggards with OUTPERFORM calls.

Slightly weaker than expected. Based on the 115 stocks under our coverage which had released their results recently, 76 stocks results or 66% were largely within expectations. However, even with some major downgrades in the last two (2) results seasons, we still saw as high as 29 stocks or 25%, delivering below‐than‐expected results. This was quite a surprise to us although this could probably be due to the weaker‐than‐expected YoY real GDP growth rate of 4.1% in 1Q13. 

In terms of sector, the (i) Building Material, (ii) Construction and (iii) Technology sectors registered weaker‐than‐expected results while the others were mostly within our expectations. However, while the plantation sector was within our expectations, the sector’s 1Q13 results were weaker than the market expectation.

Minor earnings and index target revisions. In line with the revisions in some of the company earnings estimates, our FY13E core net earnings growth rate has now been revised slightly lower. However, our FY14F core net earnings growth rate is higher due mainly to a low base effect. The FBMKLCI’s FY13E and FY14F core net profit growth rates are now estimated at 2.8% and 10.3% vis‐à‐vis 3.2% and 9.4% respectively in the previous results season. These estimates are pretty much in line with the consensus numbers (FY13: 2.4% and FY14: 9.3%). While we expect a lower FY13E core net earnings growth, we are still maintaining our year‐end FBMKLCI Target Index at 1,800. This is because we have rolled over our valuation base year to FY14. At the same time, we have also fine‐tuned our 12‐month index target to 1,845 (from 1,850).

1QCY2013 Results Review

Slightly weaker than expected. In a nutshell, the recently reported results were slightly below the market and our expectations. Based on the 116 stocks under our coverage that had released their results recently, 76 stocks results or 66% were largely within expectations. However, even with some major downgrades in the last two (2) results seasons, we still saw as high as 29 stocks or 25%, delivering below‐than‐expected results. This was quite a surprise to us although this could probably be due to the weaker‐than‐expected YoY real GDP growth rate of 4.1% in 1Q13. Only 11 stocks or 9% performed better than expected (please refer to Figure 1‐3 for details).

In terms of sector, the (i) Building Material, (ii) Construction and (iii) Technology sectors registered weaker‐than‐expected results while the others were mostly within our expectations (see Figure 4). However, while the plantation sector was within our expectations, its 1QCY13 results were weaker than the market expectation.

- Building materials stocks, particularly the steel stocks under our coverage i.e. ANNJOO (UP; TP: RM1.31) & MASTEEL (MP; TP: RM0.91) saw some improvements in their earnings where both the players managed to turn around their losses in the first quarter. However, their results still came in below ours and the street’s expectations due to higher than expected input costs coupled with the challenging operating environment due to the slow demand growth in China.

- Generally, the small cap contractors like FAJAR (OP; TP: RM0.82), BPURI (MP; TP: RM0.78), EVERSENDAI (TP: RM1.71), BENALEC (OP; TP: RM2.08) and TRC’s (OP; TP: RM0.75) results were below expectations as they were hit by (i) squeezed margins, (ii) lower than expected construction activities and (iii) delay in their billings progress.

- Owing to the sluggish recovery momentum amid the frail global economic condition, the technology players under our coverage also delivered weaker‐than‐expected results. Major weaknesses were seen in NOTION (MP; TP: RM0.77) and JCY’s (UP; TP: RM0.54) results as their HDD segments continued to drag on their earnings prospects.

Earnings Estimates & Index Target

In line with the revisions in some of the company earnings estimates, our FY13E core net earnings growth rate has now been revised slightly lower. However, FY14F core net earnings growth rate was higher due to low base effect. 

Our FBMKLCI’s FY13E and FY14F core net profit growth rates are now estimated at 2.8% and 10.3% vis-a-vis 3.2% and 9.4%, respectively, in the previous results season. 

These estimates are pretty much in‐line with consensus numbers. The consensus FBMKLCI’s current and next year growth rates are seen at 2.4% and 9.3%, respectively. 

Major sectors that see better growth prospects are (i) Banking and (ii) Oil & Gas. These sectors are expected to see 9.6% and 8.4% core earnings growth in FY13E. In FY14F, the growth is still be quite decent for Banking at 8.2% but a much stronger growth is expected for Oil & Gas. 

Other high beta sectors such as (i) Building Material & Construction, as well as (ii) Property sectors are expected to deliver double‐digit earnings growth rates for FY13E and FY14F while Building Materials & Construction sectors delivered weaker‐than‐expected 1QCY13 results.

In Summary

In conclusion, while we do not expect these results to cause any major sell‐downs to the market, we do not rule out a potential pullback in the near‐term. 

Based on the consensus index target and the FBMKLCI index movement, we note that the FBMKLCI is only trading at a mere 2.6% discount to its consensus target level, which is not an attractive discount to capitalize on. Based on its historical range, the current discount is slightly lower than the +1SD‐level of 2.8%. Coupled with the slow outflow of foreign capital of late, we do not rule out a potential pullback in the near term. 

While we are downplaying our “Sell on Strength” (S.O.S.) investment strategy and prefer a “Buy onWeakness” (B.O.W.) strategy currently, the risk‐to‐reward ratio seems to favour the former at this juncture. This is because the potential upside from here is less than 5% as per ours and the consensus index targets. Besides, we have also seen slow outflows of foreign capital of late, which is amounted to RM870.4m since22/05/13 (see Figure 10).

As such, we believe “Sell Leaders and Buy Laggards” should be an appropriate investment strategy. The Top 5 big cap leaders with only MARKET PERFORM or UNDERPERFORM calls are UOADEV (MP; TP:RM2.60), AEONCR (MP; TP:RM15.90), CARLSBG (UP; TP:RM15.53), BURSA (MP; TP:RM7.20) and MEDIA (MP; TP:RM2.72) while DIGI (OP; TP:RM5.60), TM (OP; TP:RM6.48), MAXIS (OP; TP:RM7.17), IJMP (OP; TP:RM3.38) and PCHEM (OP; TP:RM6.97) are the Top 5 laggards with OUTPERFORM calls.

Source: Kenanga