The recently concluded 3QCY16 results reporting season continued to be disappointing and has reinforced our earlier view that a broad-based earnings growth story is still missing. Almost 1/3 of the stocks under our coverage delivered weaker-than-expected numbers. Sector-wise, the under-performers mainly came from: (i) Power Utility, (ii) Oil & Gas, (iii) Gloves, (iv) Gaming, and (v) Media. Post results, we have revised our FBMKLCI earnings growth estimates lower again to -4.0%/6.0% (from 1.6%/7.2% earlier). Consequently, we have lowered our end-2016/17 index target to 1,682/1,732 from 1,715/1,755. Nevertheless, with a strong rebound in crude oil prices, we believe Oil & Gas sector could be a "Dark Horse" in the making. Besides, as FBMKLCI is trading near our earlier mentioned ideal "Buy On Weakness" levels of <1,625, we believe the underlying reward-to-risk consideration is getting attractive. We are reiterating our 4Q16 Top Picks namely: (i) GKENT (TB; TP: RM2.80), (ii) KIMLUN (OP; TP: RM2.51), (iii) MATRIX (OP; TP: RM2.65), (iv) PWROOT (TB; TP: RM2.56), (v) SCGM (OP; TP: RM3.81), (vi) SCIENTX (OP; TP: RM7.57), (vii) SLP (OP; TP: RM3.11), (viii) MQREIT (OP; TP: RM1.41), (ix) RCECAP (TB; TP: RM1.50), and (x) SUNCON (OP; TP: RM1.81).

Another disappointing quarter. The recently concluded 3QCY16 results reporting season continued to be disappointing. Approximately 1/3 of the stocks in our coverage, or 44 stocks, out of a total of 128, delivered weaker-than-expected results. At the same time, 72 (or 56.3%) and 12 (or 9.4%) of them performed within and above expectations (see Figure 5-7 for details). Among the sectors under our coverage, we noticed that more stocks in (i) Oil & Gas, (ii) Construction, (iii) Consumer, (iv) Gaming, and (v) Media sectors delivered weaker-than-expected results (see Figure 3). However, as a whole, we deem Construction and Consumer F&B to be within expectations. For Oil & Gas sector, we saw further cut in FY16-17 earnings by 12%-27%, on average. This was largely due to slower-than-expected pick-up in the upstream activities. Thus far, services players are still prioritising cash flow management, especially asset-heavy players, to ensure that cash flow from operations are sufficient to cover debt obligation. While Consumer F&B stocks’ results were mostly inline, Consumer Retail and Sin sub-sectors (i.e. AEON, PADINI, PARKSON, BAT and CARLSBG) somewhat delivered weaker-thanexpected results owing to subdued consumer sentiment and higher operating cost. Gaming sector, on the other hand, was dragged by GENTING (due to weak GENS numbers), BJTOTO and MAGNUM. In general, the results of NFOs were hit by poorer luck factor (for BJTOTO) as well as higher taxation and lower NFO sales growth (for MAGNUM). Media sector was hit by the prolonged weak advertising revenue (as a result of economic uncertainties and poor consumer sentiment) as well as high OPEX.

At the same time, our analysts are also somewhat disappointed with (i) Power Utility and (ii) Glove sectors. MALAKOF’s 3Q16 and YTLPOWR’s 1Q17 results came below estimates. MALAKOF was hit by higher depreciation for gas-fired plant for 9M16 coupled with higher taxation for T4. YTLPOWR was also impacted by the delay in Paka contribution. All glove makers were also hit by intense price competition in the nitrile segment, resulting in lower margins.

On the contrary, out of the 12 stocks that beat expectations, Oil & Gas as well as Plantation sectors contributed 3 stocks (or 25%) each (see Figure 2). We view this positively. Recall that we have labelled these 2 sectors as “Dark Horses” as both Crude Oil and Crude palm Oil prices have been showing signs of improvement. More importantly, the low expectations on most of the Oil & Gas stocks make the sector a perfect target for bottom fishing. 3QCY16 was a slightly better quarter for Plantation sector, as FFB yield continued to improve QoQ.

As for our quarterly Top Picks, results of MATRIX (OP↑, TP: RM2.65↔), KIMLUN (OP↔, TP: RM2.51↔), SUNCON (OP↔, TP: RM1.81↔) and SLP (OP↔, TP: RM3.11↔ ) were within expectations. However, due to the price correction, we have upgraded the rating of MATRIX with an unchanged target price.

Source: Kenanga Research - 2 Dec 2016