The published results were unexciting without any surprises and acted as long-awaited rerating catalysts, mostly on the downside. Nonetheless, due to the recent sharp corrections, FBMKLCI is now being traded at a 7% discount to the consensus Index Target. As such, we reckon that a B.O.W. strategy is preferred. We reiterate that 3Q is seasonally a weak quarter, if not the weakest. However, such market behaviour provides good B.O.W. opportunities for investors to position for a stronger 4QCY13 and 1QCY14. For stock picks, we believe the weakening of the ringgit should continue to benefit glove stocks such as HARTA (OP, TP: RM7.32), KOSSAN (OP, TP: RM6.88), SUPERMX (OP, TP: RM2.39). We also believe that the subsidy rationalisation programme is inevitable; hence TENAGA (OP; TP: RM10.48) could be a perfect candidate to leverage on this expectation. We also reckon that Telco stocks i.e. DIGI (OP; TP: RM5.24), TM (OP; TP: RM5.91) and MAXIS (MP but under review; TP: RM7.32) make for attractive investing targets due to their defensive nature. We also reckon that the heavily sold down blue chips with OUTPERFORM ratings should provide good value plays such as RHBCAP (OP; TP: RM8.75), DIALOG (OP; TP: RM3.28) and GENTING (OP; TP: RM12.03).

Another disappointing quarter. In a nutshell, the recently reported results were slightly below the market and our expectations. Based on the 120 stocks under our coverage that released their results from June to August 2013, 79 results or 66% were largely within expectations, similar to the previous reporting season ratio of 66%. Also, even with some major downgrades in the last three (3) results seasons, 30 stocks or 25% (also similar to the previous quarter), delivered below-than-expected results.

Lack of re-rating catalyst. The details of various sectors’ performance are shown in Figure 4. Nonetheless, in a nutshell, (i) Auto and (ii) Plantation sectors, in general recorded weaker-than expected results while the other sectors were mostly within our expectations. (i) Construction players, (ii) Hospital operators, and (iii) Tech industry reported mixed sets of results in general. It is also worthy to note that while the Banking sector performed within our expectations; its 2QCY13 results revealed some sign of weakness. As such, since heavy weights like banking and plantation stocks reported less exciting results, corporate earnings is unlikely to see re-rating potential in the near term, hence limiting market upside potential.

Minor earnings revisions … While we see no major earnings revisions in our company earnings estimates, there are still some minor revisions in our FBMKLCI’s FY13E and FY14F core net profit growth rates following the recent post-result house-keeping exercises. Our FY13E and FY14E core net profit growth rates for FBMKLCI are now pegged at 3.8% and 9.7% respectively, in contrast to 2.8% and 10.3% in the previous results season. These estimates are pretty much in line with consensus’ estimates of 2.8% and 10.1% respectively.

… led to a minor index target adjustment. With such minor earnings estimates adjustment, we have marginally revised our 12-month Index Target down to 1,860 (from 1,850 previously), implying PERs of 19.1x and 17.3x for FY13E and FY14F. Our index target is also in line with consensus target of approximately 1,835, representing PERs of 18.4x and 16.7x for FY13 and FY14 respectively.

Source: Kenanga