The recently concluded corporate results season was mixed in nature. Based on the 128 stocks under our coverage which released results from December 2013 to February 2014, merely 84 and 8 of them were within and above our expectations. On average, we saw a 6%-7% downgrade in earnings for FY14E/FY15E which is inline with marginal accumulated FY14 net profit growth of 2.3%, on average. Post results, our FY14E core net profit growth rate for FBMKLCI is now pegged at 11.8% (vs. 13.3% previously). However, due to lower base, FY15E earnings growth is now higher at 10.2% (vs. 8.7% previously). Despite lacking re-rating catalysts, our end-2014 Index Fair Value is higher at 1,915 (+1.3% from 1,890 previously) as analysts have started to peg their valuations to FY15 forecasts. Sector-wise, we did not see any outstanding sectors. However, Plantations, Technology and Shipping Logistics sectors have somewhat improved due to higher average CPO price, weaker ringgit Malaysia and better exports number. On the flipside, most of the auto players delivered weaker-than-expected results. In general, we also notice cost of doing business has increased as per the slower YoY accumulative growth in net profit as opposed to revenue. All in all, we believe in the absent of strong re-rating catalyst, the market is probably due for a short-term correction, especially (i) in the seasonal weaker month of August and (ii) potential uncertainties arising from indecisive direction of monetary policy. Nonetheless, we still believe the strong underlying excess liquidity condition should limit downside from here. Hence, “Buy on Weakness” is still our preferred investment strategy. The ideal buying level should be <1,835 (6% discount to consensus Index Target of 1,950).

Results Still Mixed In Nature (see Figure 1-3 for details). The recently concluded corporate results season was again mixed-to-negative in nature. Based on the 128 stocks under our coverage, which released their results from March 2014 to May 2014, merely 84 and 8 of them were either within or above expectations, respectively. 41 results or 32.0% were below expectations. While this “disappointment ratio” has improved compared with 4QCY13’s ratio 34.4%, it was still a long way to go as opposed to a mere 5% in 3QCY13.

On average, we saw 6.0%-7.0% downgrades in current and next financial years’ earnings as the accumulated FY14 net profit merely grew 2.3% YoY, on average. Post-results, our FY14EFY15E core net profit growth estimates for FBMKLCI were revised to 11.8%-10.2% in contrast to our earlier estimate of 13.3%-8.7%. Note that the earnings downgrade is inline with the abovementioned downward revisions (see Figure 5 for details). However, growth rate for FY15E is higher due to lower earnings base. In terms of absolute FY15E forecast, the earnings number is actually c.1% lower as compared with the previous quarter forecast.

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. This underperformance trend was somewhat similar to previous reporting season (during 4QCY13). The sector saw downward revisions of 9.5% and 4.8%, on average, in FY14E and FY15E estimates after being downgraded 7.3% and 3.0% in previous quarter. At the same time, (i) Plantations, (ii) Transportation & Logistics as well as (iii) Utilities sector were largely/broadly inline with our expectations. As for other sectors, they were mostly inline with our expectations; however, we saw (i) Construction, (ii) Consumer (F&B, Retail and Sin sub-sectors), (iii) Gaming (iv) Oil & Gas, (v) Property and (vi) Technology sectors overshadowed by mix-to-negative tone. The details of various sectors’ performances are shown in Appendix (see Figure 4 for details).

Despite lacking re-rating catalyst, we still see higher Index Target as analysts have started to roll over their valuations base year to FY15E. Hence, based on our combined (i) Top-Down (~1,830 @ 17.8x FY14E PER) and (ii) Bottom-Up (~2,000 @ 19.5x FY14 PER) approaches, our FY14 Index FV has now revised to 1,915 (from 1,890 previously), implying FY14E & FY15F PERs of 18.7x & 16.9x, respectively. Our FY14E Index FV is slightly below (c.2%) the consensus Index Target of ~1,950, 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 22.0% and 9.6%.

While we do not rule out that FBMKLCI could surpass this FV and to form a potential year-high of 1,970 given that the FV of the index could be as high as 2,020-2,055 should we employ FY15 numbers in forecasting model, the short-term upside could be capped. In fact, the recent market corrections from the high of 1,889.5 are actually within expectations. To recap, 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 entered into a correction and could be in the midst of swing towards 1,835/30-level, which is the average discount of 6% to Consensus Target despite the improved net “Foreign Buying” position. Recall that foreign investors had been net sellers since mid-2013, inline with the weakening trend of ringgit against dollar. However, they have just turned into net buyers since end-Apr14/early-May14 (see Figure 9 for details). Having said that we still believe the downside will still be limited as liquidity in the domestic financial system remains robust (see Figure 10 for details).

Source: Kenanga