The FBMKLCI fell ≈50 points to retest its recent low of ≈1,765 yesterday after the just concluded corporate results season. While we have no doubt that this latest string of quarterly results showed great disappointment across the board, we also believe other unfavourable external factors such as: (i) sharp decline in crude oil prices, (ii) lacklustre CPO prices, and (iii) rapid weakening in Ringgit, were also the complicit culprits.
During the quarter, we saw the highest number of companies so far under our coverage delivering results, which were below expectations, amounting to 40% of the stocks under our coverage universe. Transportation & Logistics, Consumer MLM, Consumer Retail, Oil & Gas, Plantations, Gloves and Aviation saw significant downgrades (>5%) in our current financial year’s earnings estimates.
Consequently, our FY14E-FY15F core net profit growth estimates for FBMKLCI were revised to 1.4%-4.8% (from 4.9%-11.3% previously). In tandem with the weaker results and less bullish earnings growth prospect, our end-2015 Index Target has also been revised lower to 1,950 (from 1,980 previously) while end-2014 Index Target was lowered to 1,870 (from 1,910 previously). At 1,870, the FBMKLCI is expected to trade at 21.1x FY15 PER while it is valued at 20.5x FY16 PER should we peg our index target at 1,950.
As market sentiment has turned weaker, we reckon investors should lower their “Buy On Weakness” (B.O.W.) zone to 1,775/60, representing c.8.5% discount to Consensus Index Target of 1,925/40. Note that this support zone represents -1SD-level below the 5-year average discount of 5.5%. This support zone has proven resilient during the recent market selldown.
While we like construction and building materials as well as export-orientated sectors to leverage on the domestic economic growth, we prefer heavily sold down Oil & Gas stocks to capitalise on the recent sharp decline in their stock prices, as we believe certain Oil & Gas stocks still offer good bottom-fishing opportunities as values have started to emerge (even after earnings downgrades). We like (i) DAYANG (OP, TP: RM3.40), (ii) BARAKAH (OP, TP: RM1.62), (iii) PERDANA (OP, TP: RM1.61) and SKPETRO (OP, TP: RM4.24) to a certain extent. On the flip side, AIRASIA (OP, TP: RM2.802) could be a natural hedge against oil price weakness. For conservative investors, they may consider resilient sectors such as Telco, Power and Water Utilities. Our OUTPERFORM calls in these sectors are PESTECH (TP: RM4.36), TENAGA (TP: RM14.65), YTLPOWR (TP: RM1.70) and PUNCAK (TP: RM3.99).
Another disappointing weak quarter (see Figure 1-3 for details). The recently concluded corporate results season was again much weaker-than-expected despite few rounds of downgrades earlier. Based on the 135 stocks under our coverage, which released their results from September 2014 to November 2014, merely 66 and 15 of them were either within and/or above expectations. In order words, 54 results or 40.0% were below expectations, resulting in the “disappointment ratio” deteriorating to the “highest” point for the past few quarters (vs. 37.4% in 2QCY14, 32.0% in 1QCY14 and 34.4% in 4QCY13). On average, with the exception of Semicon sector, we saw 3.6%-4.0% earnings forecast downgrades for current and next financial years.
Out of the various sectors under our coverage, Transportation & Logistics, Consumer MLM, Consumer Retail, Plantations, Oil & Gas, Gloves and Aviation saw significant downgrades (>5%) in our current financial year’s earnings estimates. The details of various sectors’ performances are shown in Appendix (see Figure 4 for details).
In a nutshell, the downgrade in Transportation & Logistics was due to earnings revisions in MAYBULK (OP, TP: RM2.50) and NCB (Under Review). The overall disappointment was mainly due: to (i) slower-than-expected throughput growth for port players, and (ii) weaker-than-expected margins for shippers.
Despite our conservative stance in private consumption sectors, i.e. consumer related, the profitability of MLM and Retail sub-segments in consumer sector were still weaker-than-expected. Nonetheless, the trends of:
(i) weaker demand/sales, and
(ii) higher cost or lower margin have been unfolding as per our expectations ahead of GST implementation and higher living cost due to subsidies cut.
Both Oil & Gas as well as Plantations sectors were the victims of lower oil/commodities prices. So far, we have downgraded our 2014 average CPO price assumption to RM2,400/tonne from RM2,500 previously. While we are maintaining our 2015 average CPO price assumption of RM2,500/tonne, we are likely to revise it down to c.RM2,350. As such, we may see further downgrades in planters’ next year earnings estimates.
Source: Kenanga
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