We have fine-tuned our FY13E and FY14E core net profit growth rates to 4.3% and 9.8%, respectively, from 3.8% and 9.7% in the previous results season. Despite lacking of rerating catalyst, we still see slightly higher revision in our Index Target. Our 12-month Index Target is now pegged at 1,880 (vs. 1,855 previously). While the announcement of the long awaited new tariff structure yesterday might not be a piece of good news for consumers, this is a definite clear-cut beneficiary for TENAGA (OP↔, TP: RM12.07↑), which is one of our Top picks since the past few quarters and will continue to be one of our Top Picks in coming quarterly strategy. To recap, we are optimistic over the next 2 quarters as 4Q & 1Q are seasonally strong. To capitalise on this favourable seasonal pattern, we believe bluechip laggards and small-and-mid-cap stocks are worth considering.

3QCY13 results review within expectations. The recently concluded corporate results were pretty much within our expectations. Based on the 123 stocks under our coverage that released their results from September to November 2013, merely 2 results were below expectations and 4 were above expectations. In other words, 177 results or 95% of these results were within expectations in contrast to the previous reporting season ratio of 66%. We believe the within expected results were due mainly to a few of rounds of downgrades in previous quarters. Post results, our FY13E and FY14E core net profit growth rates for FBMKLCI are now pegged at 4.3% and 9.8%, respectively, in contrast to 3.8% and 9.7% in the previous results season.

Despite lacking of re-rating catalyst, we still see slightly higher revision in our Index Target by assigning higher valuation multiples and rolling forward valuation base years for most of the companies under our coverage. Hence, our 12-month Index Target is now pegged at 1,880 (an upward revision from 1,855 previously). Again, our 12-month index target is derived via both the (i) Bottom-Up (1,900 @ FY14-FY15 PER of 17.4x-16.2x) and (ii) Top-Down (1,860 @ 17.0x FY14 PER or 15.8x FY15 PER) methods. Our revised Index Target is also in-line with the consensus target of 1,878, representing 19.4x and 17.5x to consensus current year and next year earnings estimates. However, based on the trend of discount of FBMKLCI to consensus Index Target, the FBMKLCI could become toppish if and when it is traded >1820 (based on 3% minimum discount).

The long-awaited tariff revisions. On a separate note, the government finally announced the long-awaited new tariff structure yesterday, the first time in two years. We believe TENAGA is a clear-cut beneficiary. As for other sectors, we are mixed in general due to potentially high inflationary pressure. However, in a nutshell, consumer-related sectors could be affected by the higher cost-push inflationary pressure, i.e. Auto; while for industrial players, the hike in electricity & gas tariffs could hurt their margins if they do not employ a cost-plus pricing mechanism such as E&E sector vs. Glove sector.

We understand that potential margin compression for E&E sector is likely given that industry players will absorb the additional cost by keeping Average Selling Price (ASP) of its products unchanged in the short term. Rubber gloves players are generally able to pass on the cost increase. As for the auto sector, this could be a piece of bad news as the news could raise the expectation of cut in petrol subsidies, hence further dampen consumer sentiment.

CPI still manageable. Nonetheless, at a macro level, we are not changing our overall CPI outlook for 2014 as a tariff hike come early 2014 was already taken into consideration. We are more concerned on any increases in petrol prices up ahead as that impact tends to be greater. The last time there was a tariff hike (Jun11 by around 7.1%), the housing, water, electricity, gas & fuels component of the CPI edged up by a mere 0.1% MoM and the impact of just electricity is negligible at best, and relatively minute.

Source: Kenanga