The recently concluded corporate results season showed some improvements. However, it was yet another uninspiring season with 24.6% (out of 134 stocks) delivering weaker-than-expected results. Generally, performances were either mixed or largely within expectations without any significant surprises. On the flipside, (i) Auto, (ii) Consumer Retail & MLM as well as (iii) Oil & Gas sectors were weaker-than-expected. Post-results, we have lowered our FBMKLCI FY15E/FY16E earnings growth to 2.9%/7.5% (from 5.2%/4.5%). This is inline with consensus' growth estimates of 3.4%/9.5% (vs. 6.1%/8.7% as of end-March15). Consequently, we have revised down our end-2015 Index target to 1,845 (from 1,855), implying 18.8x FY16E PER. Again, this is inline with the consensus as well (lowered from 1,860 to 1,855 @ 17.9x FY16E PER). However, FBMKLCI is still traded at 16.8x FY16E PER as per consensus numbers or 17.7x to our more conservative FY16E estimate. These valuations do not appear exciting even after the recent market correction. Nonetheless, as the benchmark index is now traded at ~5.5% discount (to its consensus target of 1,850), which could be a temporary low as it is quite near the -1SD level of the 3-year discount band, we believe it is a good time to nimble on selective stocks, especially those in resilient sectors such as Telco, MREITs, Healthcare (i.e. pharmaceutical & gloves) and Consumer F&B. Among these sectors, we have OUTPERFORM calls on DIGI (TP: RM6.87), SUNREIT (TP: RM1.76), HARTA (TP: RM9.50), KOSSAN (TP: RM7.06) and OLDTOWN (TP: RM1.79). At the same time, we believe our earlier focus on exporters is still valid given that ringgit is back on a downtrend again. Under this investment theme, we continue to like MPI (OP, TP: RM8.90) and SLP (OP, TP: RM1.27) apart from glove makers.

Uninspiring, as expected. While the recently concluded corporate results season showed improvement, it is, however, still produced less-exciting results in general. Based on the 134 stocks under our coverage, 90 and 11 of them were within and above expectations for result announcements between March 2015 and May 2015, respectively. In other words, 33 of them, or 24.6%, still reported lower than expected results (see Figure 1-3 for details). Nevertheless, the “disappointment ratio” has somewhat improved. In fact, this ratio marks a significant improvement vis-à-vis the past 5 previous reporting seasons.

Minor downward revisions. Having said that, we still saw another round of downgrades in earnings even after the few sessions of earnings (downward) revisions in the last few quarters. For instance, we have we reduced our FY15E/FY16E earnings estimates by 6.9%/12.1%, on average, for all stocks under our coverage. Zooming into our FBMKLCI Earnings Universe, we have revised our FY15E core net profit growth to 2.9% from 5.2% previously. As for our FY16E growth, it has been re-estimated to 7.5% (vs. 4.5% previously). Note that the higher earnings growth rate for FY16E was solely due to lower base effect as the aggregate estimated earnings of FY16 are relatively unchanged. Furthermore, as analysts reviewed their target prices, we also see a slight adjustment in our FBMKLCI year-end target to 1,845 (from 1,855 in early-2Q15) (see Figure 4).

Not too far off from the consensus. Post results season, consensus has also adjusted its FBMKLCI FY15E/FY16E earnings growth estimates to 3.4%/9.5% (from 6.1%/8.7% as of end-March15). Inline with the earnings downgrade, index target has also been lowered to ~1,855 as opposed to 1,860 previously (see Figure 5). For the similar pool of 134 stocks, we saw street consensus downgrading their current and next financial years' earnings estimates by 6.0% and 4.1%, on average.

On a broader picture (all securities listed on Bursa); while we saw mild positive earnings surprises in basic materials, including PCHEM (OP, TP: RM6.37), and utilities sectors, there were more negative earnings surprises in: (i) Consumer Goods & Services, (ii) Oil & Gas, (iii) Industrial, (iv) Telco, and (v) Financial as per Bloomberg Data (see Figure 6-7).

The above-mentioned observations are inline with our findings based on various sectors under our coverage. The just-concluded 1Q15 results season is mixed in nature or largely within expectations with no significant sweet surprises. On the flipside, (i) Auto, (ii) Consumer Retail & MLM as well as (iii) Oil & Gas sectors were weaker-than-expected (see Figure 8).

We observed that … · Auto sector was hit by subpar vehicle sales coupled with lower-than-expected margins from the vehicles and components price pressures and higher operating costs. · Consumer Retail sub-sector was hit by weaker consumer sentiment ahead of GST implementation and higher promotional and marketing expenses. Stronger USD has translated into higher product sourcing costs for some MLM players as well. · We have also started seeing the lagged effect of low oil prices in the latest results season. SKPETRO (MP, TP: RM2.24) saw its earnings falling short of estimates due to weaker upstream business. Earnings of OSV players, i.e. ALAM (UP, TP: RM0.61) and PERDANA (MP, TP: RM1.55) were dragged by lower vessel utilisation. PERISAI (MP, TP: RM0.59) continued to disappoint, underpinned by idling of its major assets as well.

Lacking of catalysts. All in all, we believe the recent results season could have a muted impact to local equity market. Coupled with the well-expected 11MP announcement, there is a need for fresh factors and earnings catalysts to reverse the weak underlying market/investment sentiment. From Figure 9, we clearly see the PER Discount between FBMSC and FBMKLCI trending downwards. Despite a temporary bottom formed near the -1SD-level, we do not rule out further retreat to the -2SD-level. On the other hand, the uncertainties over both external (i.e. US interest rate direction, Greece's debt concern, etc) and domestic (i.e. 1MDB saga, sovereign rating review) kept haunting the local equity market. Thus far, we have seen a total of RM5.5b net foreign outflow YTD from the local equity market (see Figure 10). Apart from causing selling pressure on the equity market, the ringgit also been experiencing the same pressure. YTD, ringgit has depreciated by >5% (from RM3.4973/USD to RM3.6862/USD).

Valuations still unattractive despite correction? Even after the recent correction in the local equity market, FBMKLCI is still traded at 16.8x FY16E PER as per consensus numbers (see Figure 5), which is approaching the 3-year Forward PER average of 16.3x (see Figure 11). This may not be the bottom as FBMKLCI tends to test the -1SD-level (of 15.5x) before forming a bottom. Furthermore, comparing to our more conservative estimates, the FBMKLCI is forecasted to trade at 17.7x FY16E PER currently (see Figure 4). As such, our fine-tuned end-2015 Index Target of 1,845 could represent an optimistic scenario. This is because this valuation still suggests 20.4x and 17.7x PER multiples to our FY15E and FY16E earnings estimates.

Having said that, FBMKLCI is now traded at ~5.5% discount to its consensus target of 1,850. This discount could have seen a temporary low as it is quite near the -1SD level of the 3-year discount band (see Figure 12). In fact, at yesterday low of 1,732.27, the discount has widened to 6.4%. While this discount could widen to 7.5%, at -2SD level, suggesting an index level of 1,715/10, we believe it is a good time to nimble on selective stocks, especially those in resilient sectors such as Telco, MREITs, Healthcare (i.e. pharmaceutical & gloves) and Consumer F&B. Among these sectors, we have OUTPERFORM calls on DIGI (TP: RM6.87), SUNREIT (TP: RM1.76), HARTA (TP: RM9.50), KOSSAN (TP: RM7.06) and OLDTOWN (TP: RM1.79). At the same time, we also believe that our earlier focus on exporters is still valid given that ringgit is back on a downtrend again. Apart from glove makers, we continue to like MPI (OP, TP: RM8.90) and SLP (OP, TP: RM1.27) in this space. 

Source: Kenanga Research - 2 Jun 2015