The recently concluded corporate results season appears to be better as the “disappointment ratio” has improved to 38% (following a multi-quarter low of 40%) but is still considered uninspiring given the significant earnings adjustments in the previous quarter. Generally speaking, most of the sectors delivered either neutral or mixed sets of results. The outperformers were Technology and Sin sectors, which managed to deliver better-than-expected performance while Glove, Consumer Retail and Aviation sectors’ results were weaker-than-expected. Post-results, the FY14 earnings declined -0.2% as opposed to our estimate of 1.3% earlier. Our FY15E growth estimate was also fine-tuned to 6.5% (from 4.7%). The higher FY15E growth number is due mainly to the lower earnings base in FY14 while FY15 earnings estimates are relatively unchanged. With such revisions, our end-2015 Index is revised lower to 1,865 (from 1,905 previously). Even so, implied valuation for the revised target may not be attractive with relatively high PER multiples of 19.1x and 17.4x to consensus’ current year and next year earnings estimates, respectively. Besides, FBMKLCI is only trading at ~2% discount to its consensus target of 1,860. This suggests limited upside in the near-term, in our view. As such, we still prefer to adopt a “Buy On Weakness” (B.O.W.) strategy <1,800. Post-results, we remain convicted to our 1Q15 Top Picks of BJAUTO (OP; TP: RM4.29), GAMUDA (OP, TP: RM5.29), HARTA (OP, TP: RM8.20), MMCCORP (OP; TP: RM3.03), MPI (OP, TP: RM7.00), PHARMA (OP; TP: RM5.43), SKPETRO (OP, TP: RM3.03), SPSETIA (OP; TP: RM3.95) and SUNREIT (OP, TP: RM1.68).

Improved but still uninspiring (see Figure 1-3 for details). The recently concluded corporate results season appears to be better in contrast to the previous quarter. However, this set of results is considered uninspiring after significant revisions during the previous results reporting season. Recall that our FY14/FY15 core net profit growth estimates for FBMKLCI were revised to 1.4%/4.7% (from 4.9%/11.3%) in the previous quarter.

Based on the 129 stocks under our coverage, which released their results from December 2014 to February 2015, there were 49 and 31 of them either within or above expectations. In order words, 49 of them, or 38%, still lower than expected. Nevertheless, the “disappointment ratio” has somewhat improved to 38% after registered at a multi-quarter low of 40% in 3QCY14 (vs. 2QCY14: 37.4%, 1QCY14: 32.0%, 4QCY13: 34.4%).

Based on various sectors under our coverage, they have been showing either neutral or mixed results in nature with Technology (or Semicon sub-sector in particular) and Sin sectors delivered better-than-expected results while Glove, Consumer Retail and Aviation sectors’ results were weaker-than-expected.

Despite being one of the export-oriented sectors, glove sector was hit by higher-than-expected operating expenses arising from new recruitment of labour and start-up costs incurred for new plants in general. SUPERMX’s (OP, TP: RM2.75) results were dragged by lower-than-expected sales volume as well. As for retail sub-segment, industry players were hit by lower-than-expected gross margin and higher-than-expected opex due mainly to aggressive promotional and discounting activities to defend market share amid rising competition. Besides, we also notice that industry players have started to clear or write down inventory ahead of GST implementation. Lower crude oil price, on the other hand, did not benefit airlines such as AIRASIA (MP, TP: RM2.90) and AAX (Not Rated) as both companies were hit by lower passenger yield and higher operating costs, including finance cost. AIRPORT (UP, TP: RM6.77), on the other hand, also delivered weaker results due to lower passenger traffic.

Semicon players generally reported good set of results, underpinned by their better-yielding products amidst the overwhelming demand of new smartphones. Besides, this sector was also boosted by weaker ringgit against US dollar. We believe this sector should continue to do well in coming quarter, judging from the favourable ringgit trend. Brewers also reported earnings that were above our expectations on the back of better product mix and successful marketing campaigns.
While details of various sectors’ performances are shown in Appendix (see Figure 4 for details), some of the notable trends observed in the recent results reporting season are as follows.

• i. Banks' profitability still hunted by higher credit cost or provisioning amid moderating in top-lines growth and lower interest margin,
• ii. Plantation sector still bored as most of the players only registered average CPO selling price of RM2,150-RM2,250/tonne, which is within our assumption of RM2,200/tonne. However, GENP (UP, TP: RM9.57) and TAANN (OP, TP: RM4.44) saw better earnings. Nonetheless, profitability of GENP was boosted by one-off land sales gains while TAANN gotten an earnings boost from its timber division.
• iii. As for Oil & Gas Sector, it is clear-cut that asset owners experienced challenging time. For instance, OSV players,
• i.e. ALAM (UP, TP: RM0.44) & PERDANA (UP, TP: RM1.10), posted weaker-than-expected 4Q14 results due to lower-than-expected utilisation and higher dry docking activities. Meanwhile, results of PERISAI (UP, TP: RM0.45), and MHB (UP, TP: RM1.04) continued to disappoint due to idling of assets and weak orderbook replenishment.

Stock wise, the strong earnings turnaround in MMCCORP (OP, TP: RM3.03) and good showing in PHARMA (OP, TP: RM5.43) earnings have reinforced their Top Pick positions. Besides, the reasonably strong results in MPI (OP, TP: RM7.00) has also reaffirmed our bullish call.

As for other blue-chips, TENAGA (MP; TP: RM13.94) actually delivered an electrifying set of quarterly results. The stronger-than-expected results were attributed to (i) lower fuel cost and (ii) lower effective tax rate. However, we have revised down our earnings estimate after the announcement of 5.8% tariff cut. As its current valuation does not appear to be attractive at CY15 14x PER, we have downgraded its rating to MARKET PERFORM (from OUTPERFORM previously). CIMB (MP; TP: RM6.21) was hit by its massive spring cleaning, SIME’s (MP, TP: RM9.64) results were also below expectations due to weakened Industrial segment owed to slow down in global economic, which especially affected the Australian mining industry. Meanwhile, it Plantations segment declined as well due to lower CPO prices and weaker FFB production.

Another round of earnings downgrade. Post-results, the actual accumulative earnings of stock under our core coverage declined 0.8% on average while FY15 estimates were revised down by 2.2% on average. As for our FBMKLCI earnings universe, we have estimated an actual FY14 growth rate of -0.2% (vs. our earlier expectation of 1.3%). At the same time, our FY15/FY16 growth estimates were fine-tuned to 6.5%/5.4% from 4.7%/7.4% previously. The higher FY15 growth number is due mainly to the lower earnings base in FY14 and analysts have yet to trim FY15 numbers in a significant way. However, our numbers appear more conservative as compared to consensus estimates of 7.6%/9.2% (see Figure 5-6 for details).

Upside is getting limited? With such revisions, our end-2015 Index is revised lower to 1,865 (from 1,905 previously). Our Index Target could represent an optimistic scenario. This is because this valuation still suggests 19.1x and 17.4x to consensus’ current year and next year earnings estimates respectively. Recall that we have highlighted earlier that Forward PER of FBMKLCI tends to peak at ~17.5x (see Figure 7). Besides, FBMKLCI is only traded at ~2% discount to its consensus target of 1,860. Furthermore, the discount could have peaked in the near-term as it is fast approaching its +2SD level of the 3-year discount band (see Figure 8).

Only be brave at lower levels? While market sentiment could improve from here, as the small cap PER multiple discount (against FBMKLCI PER) has bottomed (see Figure 9), we still prefer to adopt a “Buy On Weakness” (B.O.W.) strategy <1,800 given that (i) the above-mentioned discount between FBMKLCI and its consensus target is still not attractive and (ii) lacking of catalysts.

On a positive note, the excess liquidity in the banking system remains supportive. As at end-Jan15, the excess liquidity stood at ~RM300bn, which is only RM20bn off its peak (see Figure 10). At the same time, we also believe Brent Crude Oil has found a bottom and is poised to stage a consolidation judging from our Historical Volatility Study. Note that the volatility of Brent Crude Oil has registered a 3-year high. Statistically speaking, this high volatility is not sustainable and is poised to stage a reversion back to its mean. Should this process materialise, Brent Crude Oil is likely to reverse its previous downtrend in our view (see Figure 11), which could be a piece of good news for Oil & Gas stocks.

Source: Kenanga