While we had expected a weaker quarter post GST implementation; the recently concluded corporate results season was somewhat still weaker than expected. Out of 133 stocks under our coverage, 52 of them, or 39.1% (vs. 24.6% in the previous quarter), reported lower-than-expected results. In general, (i) Automotive, (ii) Building Materials, (iii) Consumer Retail, (iv) Gaming (Casino in particular), (v) Oil & Gas, and (vi) Plantations sectors performed weaker-than-expected. As for other sectors, their reported results that were mostly within expectations or mixed in nature. The glove sector was probably the biggest winner as we saw market consensus revising their FY15E/FY16E earnings estimates higher by 3.3%/7.3%. Nonetheless, the recent results reporting season failed to provide a strong rerating catalyst to the local equity market. Zooming into our FBMKLCI Earnings Universe, we have revised our FY15E/FY16E core net profit growths to 1.4%/6.0% from 2.5%/7.8% previously. Coupled with a lower Target Fwd. PER (from 17.5x to 16.5x) as well as earnings and target price cuts, our 12-month FBMKLCI Target is lowered to 1,680 (from 1,810 in early-3Q15). Even with such aggressive cut in Index target, our target objective of 1,680 still implies PERs of 19.3x and 17.3x over our FY15E and FY16E earnings estimates. While the upside potential is lower now, we still believe it is a good time to nimble on selective stocks as we believe a temporary bottom could have been formed when the index hit the low of 1,503.68 (at 14.5x Fwd. PER, which was below the -2SD-level of 15.1x). We continue to like most of our 3Q15 Top Picks such as BJTOTO (OP, TP: RM3.72), MPI (OP, TP: RM7.45), PESTECH (OP, TP: RM6.11), SASBADI (TB, TP: RM2.68), SLP (OP, TP: RM1.76), TM (OP, TP: RM7.33) and TOPGLVE (OP, TP: RM7.90). We also reckon that DIGI (OP, TP: RM6.10), KOSSAN (OP, TP: RM8.16) and OLDTOWN (OP, TP: RM1.65) fit into our investment strategy.

Still Challenging. While we had expected a weaker quarter post GST implementation; the recently concluded corporate results season was somewhat still weaker than expected. Apart from BIMB which was granted an extension of up to 3 market days to submit its 2Q15 results by Bursa Malaysia Securities, out of the 133 stocks under our coverage, 68 and 13 of them performed within and above expectations for result announcements between June 2015 and August 2015, respectively. In other words, 52 of them, or 39.1%, still reported lower-than-expected results (see Figure 1-3 for details). As such, the “disappointment ratio” has further deteriorated compared to 24.6% in the previous quarter.  Inevitably, we saw market consensus starting to revise down net profit estimates for these 133 stocks. Based on our estimates, FY15E/FY16E numbers saw downward revisions of 6.9%/5.3% on average. Based on Bloomberg data, since the beginning of June 2015, FY15E/FY16E earnings estimates for these stocks were lowered by 8.3%/6.4%, on average, as well. Consensus target price, on the other hand, has also been revised down by 6.2%, on average (see Figure 4-6 for details).

In a nutshell, the just-concluded 2Q15 results season saw: (i) Automotive, (ii) Building Materials, (iii) Consumer Retail, (iv) Gaming (Casino in particular), (v) Oil & Gas, and (vi) Plantations sectors delivering weaker-than-expected results.

We observed that … · Automotive sector was hit by lower-than-expected profit margins, which was driven by higher vehicle and component costs as well as A&P expenses apart from the subpar vehicle sales.

• Building Materials sector disappointed. Compared to the previous quarter (which saw all 3 building materials stocks under our coverage meeting our expectations), 2 stocks dragged down the sector’s performance. ANNJOO missed expectations due to margin compression and slowdown in business post-GST implementation while LAFMSIA underperformed due to lower sales. With the earnings disappointments and partly due to gloomy commodity prices outlook, we cut our FY15E/FY16E earnings estimates by 5%/50%.
• As expected, the Consumer Retail sub-sector, which has the biggest non-discretionary exposure, took a big hit from GST implementation. Lower sales figures were seen during the quarter. At the same time, operating expenses also increased due to higher marketing activities in order to stimulate the underlying weak consumer sentiment.
• It was also a rather disappointing quarter for the Gaming Sector, which saw companies reporting decline in earnings, partly due to the GST implementation, although not totally unexpected. The underperformance of Genting Group of companies was primarily due to losses at its UK operations on bad debts written off and weaker earnings from other geographical segments as well on lower business volume and luck factors.
• Inline with the lower oil prices and lower capex by oil majors, Oil & Gas sector's results were somewhat disappointing. This is especially applicable to OSV players and Jack-up rig asset owners due to reduction in asset utilisations and charter rates amid the slump in the O&G industry.
• Several planters were hit this quarter by dry weather in parts of Sabah and Kalimantan. This resulted in average YoY FFB production increase of only 2%. Average CPO price fell 13%, resulting in average YoY core net profit (CNP) decline of 27%. In fact, 9 of 11 stocks (under our coverage) saw their CNP declining YoY.
• As for other sectors, they were mostly within expectations or mixed in nature (see Figure 1-3 for details). Worth noting that the Glove makers bucked the trend as we saw consensus revising their FY15E/FY16E earnings estimates higher by 3.3%/7.3% while Healthcare, M-REIT and Sin sectors also proved their resiliency as we only saw minor revisions in consensus forecasts (see Figure 4-6 for details). * Please refer to Figure 7 for brief results comments and outlook of sectors under our coverage.

Far From Exciting. All in all, it is clearly seen that the recent results season has failed to provide any strong rerating catalyst to the local equity market. Zooming into our FBMKLCI Earnings Universe, we have revised our FY15E/FY16E core net profit growths to 1.4%/6.0% from 2.5%/7.8% previously (see Figure 8). Post results season, market consensus has also adjusted FBMKLCI FY15E/FY16E earnings growth estimates to 2.8%/8.3% (from 2.5%/9.6% as of end-June15) (see Figure 9).

De-rating In The Process? Thus far, on the domestic front, the market has been haunted by aggressive foreign outflow and weak ringgit. As of end-August 2015, we saw a total accumulated RM15.5b net selling in foreign equity position. This outflow substantially surpassed 2014’s total foreign outflow of RM7.4b in local equity market. Ringgit also declined 16.2% to a low of RM4.2460/USD on 26 August 2015 from the year high of RM3.5568 on 28 April 2015. We have also seen great volatility and uncertainty from the external front as well. While China has recently cut its interest rate, the concern over its slower economic growth remains. Besides, China has also allowed its currency to depreciate, dampening global export outlook and commodities demand. The fear of Fed increasing interest rate has also caused global equity markets undergoing substantial corrections. Owing to the above-mentioned negatives, we do not rule out that FBMKLCI could have undergone a de-rating since early 2Q15. For instance, FBMKLCI is now traded at ~9.6% discount to its consensus target of 1,775 (see Figure 10). While this should be considered as "oversold", as the discount to consensus has broken below the -2SD level of 8%, we, on the other hand, observe that the 3-year discount band has widened due to higher volatility. Moreover, Figure 11 also clearly shown that the 1-Year Fwd. PER has been in a declining mode and dipped below the -1SD-level of 15.7x. While the index could have formed a temporary bottom when it hit 1,503.68 (or traded at 14.5x Fwd. PER, which was below the -2SD-level of 15.1x), the upside potential could also be capped.

Lower Target. Coupled with a lower Target Fwd. PER and earnings cut, our 12-month FBMKLCI Target is now lowered to 1,680 (from 1,810 in early-3Q15). Our index target is based on the average of …

• Top-Down: 1,585 @ 16.5x FY16E PER (vs. 17.5x previously), and
• Bottom-Up: 1,775 (vs. 1,835 previously or a 3.3% downward adjustment), representing 19.0x FY16E PER. This revised Fair Value is inline with market consensus. Note that consensus’ index target has also been lowered to ~1,775 (vs. 1,835 previously) after the recent round of earnings adjustments. Even with such aggressive cut in index target, our target objective of 1,680 still implies PERs of 19.3x and 17.3x over our FY15E and FY16E earnings estimates, respectively.

Focused on Sector & Stock Picks. While the upside potential is lower now, we still believe it is a good time to nimble on selective stocks as we believe a temporary bottom was formed when index hit the low of 1,503.68. We continue to like most of our 3Q15 Top Picks. We reiterate our preference for ...

• High-yielding stocks such as BJTOTO (OP, TP: RM3.72).
• Stocks in resilient sectors such as Telco, Power, Healthcare, Education and Consumer F&B. Among these sectors, we choose TM (OP, TP: RM7.33), PESTECH (OP, TP: RM6.11), TOPGLVE (OP, TP: RM7.90) and SASBADI (TB, TP: RM2.68). We have recently upgraded KOSSAN's target price (OP, TP: RM8.16) and OLDTOWN's (OP, TP: RM1.65) rating. DIGI (OP, TP: RM6.10) is also our favourite among celcos.
•  We do see further upside for some exporters such as MPI (OP, TP: RM7.45) and SLP (OP, TP: RM1.76) despite their superb performances at the expenses of the MYR (depreciation). 

Source: Kenanga Research - 2 Sep 2015