The recently concluded corporate results season was weaker than expected. Based on the 128 stocks under our coverage, which released results from December 2013 to February 2014, merely 57 and 27 of them were within and above our expectations. On average, we saw a 3.7% downgrade in earnings for FY13A/FY14E which is inline with the actual lower FY13A core net profit growth rate of FBMKLCI of 0.5% in contrast to our earlier 4.3% estimate. Due to lower base effect, our FY14E core net profit growth rate for FBMKLCI is now pegged at 13.3% as opposed to 9.8% previously (vs. consensus estimate of 16.5%).

Despite lacking re-rating catalysts, our FY14 Index Fair Value (FV) remains unchanged at 1,890. Sector wise, we reckon that auto sector is a clear-cut loser while plantation sector could be an outstanding performer. Our market view is also maintained and we believe 1H14 should offer better certainty in terms of monetary policy direction despite the QE tapering in the US. Hence, “Buy on Weakness” is still our preferred investment strategy. The ideal buying level should be <1,775 (6% discount to our Index FV of 1,890). However, as consensus Index target is higher at 1,930, investors may consider accumulating below 1,815 (also a 6% discount to consensus index target).

Getting weaker than expected. The recently concluded corporate results season was weaker than expected. Based on the 128 stocks under our coverage, which released their results from December 2013 to February 2014, merely 57 and 27 of them were either within or above expectations, respectively. 44 results or 34.4% of these results were below expectations in contrast to the previous reporting season’s “disappointment ratio” of merely 5%. On average, we saw a 3.7% downgrade in earnings for FY13A/FY14E despite the accumulated FY13A/FY14E net profit growth of 2.8% YoY (see Figure 1-3 for details).

Out of the various sectors under our coverage, we believe the auto sector was the clear-cut loser as all auto companies under our coverage delivered weaker-than-expected results. Hence, the sector saw downward revisions of 7.3% and 3.0%, on average, in FY13A/FY14E and FY14E/FY15E numbers. At the same time, we also saw (i) Consumer, (ii) Gaming and (iii) Healthcare sectors overshadowed by mix-to-negative tone. Sectors such as (i) Construction, (ii) Oil & Gas, (iii) Property, (iv) Consumer Sin, (v) Technology, (vi) Transport & Logistics and (vii) Utilities, on the other hand, were mixed in performance. While other sectors were mostly inline with our expectations, Plantation sector, however, was mixed-to-positive in general. The details of various sectors’ performances are shown in Appendix (see Figure 4 for details).

Post results, we gathered that the actual FY13A core net profit growth rate for FBMKLCI only grew 0.5% in contrast to our earlier estimate of 4.3%. This is inline with the above mentioned downward revision of 3.7% for FY13A/FY14E earnings. Nonetheless, due to lower base effect coupled with a marginal fine-tuning of 0.3% in our FY14E/FY15E numbers, our FY14E core net profit growth rate for FBMKLCI is now pegged at 13.3% in contrast to 9.8% previously (see Figure 5 for details).

Despite lacking of re-rating catalyst, we did not see significant revision in our Index Target. Based on our combined (i) Top-Down (@ 17x PER) and (ii) Bottom-Up (implies 18.6x and 17.9x FY14E and FY15E PERs) approaches, our FY14 Index FV remains unchanged at 1,890. Of course, we do not rule out that FBMKLCI could surpass this FV given that the FV derived from Bottom-Up approach is as high as 1,970. Nonetheless, based on this new set of numbers, we would probably downgrade our FY15 Index FV by 10 index points (from 2,020). Our FY14 Index FV is slightly below (c.2%) the consensus Index Target of 1,930, representing 19.0x and 17.3x to consensus current year and next year earnings estimates (see Figure 6 for details). This index target is also backed by current year and next year earnings growth rates of 16.5% and 9.9%.

The recent market corrections are actually within expectations. To re-cap, based on the discount trend of FBMKLCI to consensus Index Target, the FBMKLCI could become toppish if and when it trades < 3% minimum discount. From Figure 7, it is clearly shown that the FBMKLCI pulled back sharply immediately from this “overbought territory”. As for now, the index seems to have bottomed and hovering around the average discount of 6% despite the current Ukraine-Russia jitters. Should the recent “Foreign Buying” recovery be sustained, this would reinforce the afore-mentioned view. Recall that foreign investors had been net sellers since mid-2013 inline with the weakening trend of ringgit against dollar and have just turned net buyers three days ago (see Figure 8 for details).

Source: Kenanga