The recently concluded 4QCY16 results reporting season has somewhat shown signs of improvement. Among the sectors under our coverage, we noticed that the Building Materials, Technology, Consumer, Property and Telco sectors did fairly well while Auto, Gloves, Construction and Plantations sectors were somewhat disappointing. We are proven to be overly conservative as FBMKLCI managed to register 8% growth in (reported) net earnings 2016. This is much stronger in contrast to our earlier growth expectation of -4%. However, post results review; our FY17E/FY18E net earnings growth rates are still estimated at -0.4%/-0.5%, vis-a-vis consensus estimates of 2.9%/6.4%, suggesting a relatively flat and uninspiring growth path ahead. We continue to believe that FBMKLCI could still be trapped in a range-bound mode despite the consensus index target showing signs of turning around. In fact, our end-2017 index target has also been revised up to 1,750 (from 1,732 previously), due to higher index target as per our Bottom-Up Approach. For now, levels at >1,720 could be a good "Sell On Strength" (S.O.S.) area while ~1,655/25 to be a decent "Buy On Weakness" (B.O.W.) zone. Post results, (i) AEONCR (OP, TP: RM17.76), (ii) HEIM (OP, TP: RM19.65↑), (iii) KLCC (MP, TP: RM7.84), (iv) OCK (OP, TP: RM0.96), (v) OLDTOWN (OP, TP: RM2.49↑), (vi) PAVREIT (OP, TP: RM1.89), (vii) PMETAL (OP, TP: RM2.60↑), (viii) PWROOT (TB, TP: RM2.56), (ix) SCGM (OP, TP: RM4.05), (x) SKPETRO (OP, TP: RM1.88), (xi) SLP (OP, TP: RM3.18), (xii) TOPGLOV (OP, TP: RM5.92), (xiii) TM (OP, TP: RM6.80↓) and (xiv) YINSON (OP, TP: RM4.08↑) remain as our Top Picks for 1Q17.

A better quarter, finally! The recently concluded 4QCY16 results reporting season has somewhat shown signs of improvement. The “disappointment ratio” improved to 27.6% in 4Q16 as opposed to 34.4% in 3Q16 and 32.5% in 4Q15. In order words, out of 134 stocks under our core coverage, 37 of them delivered weaker-than-expected results. At the same time, 34 stocks (or 25.4% vs. 9.4% in 3Q16) performed better than expected (see Figure 5-7 for details). Among the sectors under our coverage, we noticed that stocks in (i) Auto and (ii) Gloves sectors delivered weaker-than-expected results. These 2 sectors saw cut in FY17E earnings estimates by 3.5% and 5.5%, on average, respectively. We understand that BAUTO (OP↔, TP: RM2.36↓ ) fell short as a result of delay in vehicle deliveries owing to the temporary closure of a contract assembler’s plant as well as adverse forex translation. Other players also saw mounting forex pressures as well as poor consumer sentiment. Besides, UMW’ s (UP↓ , TP: RM4.68↓ ) earnings were further exacerbated by widening losses in its Oil & Gas segment. As for Gloves sector, this quarter marks the third consecutive quarterly earnings disappointment. Sales volumes across all players were largely flat-to-lower due to insufficient capacity as a result of slower-than-expected incoming capacities and plant maintenance. The bright spots from 4Q16 results, however, were the sequential improvement in average selling prices (ASPs). At the same time, our analysts are also somewhat disappointed with (i) Construction and (ii) Plantations sectors. Reasons behind the disappointments in few construction listed companies include (i) compression in margins due to higherthan-expected operating costs, (ii) slower-than-expected progressive billings, and (iii) provisioning and impairments. Plantations sector, on the other hand, saw four companies, i.e. FGV (MP↔, TP: RM1.85↑ ), SIME (MP↓ , TP: RM9.50↓ ), TAANN (MP↓ , TP: RM4.10↓ ) and TSH (MP↔, TP: RM2.00↓ ) delivering weaker-than-expected results despite positive prices momentum in 4Q16. This observation is somewhat contrary to our earlier belief that the sector could be a “Dark Horse”. On the contrary, (i) Building Materials and (ii) Technology sectors delivered stronger than expected results. We saw all three (3) Building Materials counters under our coverage – ANNJOO (OP↔, TP: RM2.65↑ ), LAFMSIA (UP↔, TP: RM6.06↔) & PMETAL (OP↔, TP: RM2.60↑ ) - coming above expectations. LAFMSIA was above due to higher tax credits from reinvestment allowances for their new plants while ANNJOO and PMETAL outperformed due to higher-than-expected steel and aluminium ASPs, respectively. OSAT players; namely MPI (OP↑ , TP: RM10.20↑ ) and UNISEM (MP↔, TP: RM2.80↑ ); reported strongerthan-expected results due to higher-than-expected forex translation. Besides, we were also pleasantly surprised by the performances of (i) Consumer, (ii) Property, and (iii) Telco sectors. For instance, the quarter saw retailers recording higher sales across the board. Property sector also experienced more positive earnings surprises despite the fact that most developers had observed either flattish to declining headline sales trends. For Telcos, MAXIS (MP↔, TP: RM5.90↑ ) and TM (OP↔, TP: RM6.80↓ ) recorded better-than-expected results due to lower OPEX (for MAXIS) and lower taxation (for TM as a result of last mile broadband incentive). Despite results coming above expectations, we still revised TM’s target price to RM6.80 (from RM6.98 previously), as we saw a 5% downward revision in FY17E earnings, while maintaining our OUTPERFORM call.

As for our quarterly Top Picks, OLDTOWN recorded stronger-than-expected FMCG exports backed by wider margins from forex gains and lower marketing expenses. In addition, its efforts to penetrate new foreign markets in the Café Chain segment may strengthen regional brand awareness. Hence, we reiterate our OUTPERFORM rating with a higher Target Price of RM2.49 (from RM2.11). PMETAL also beat our earnings forecasts on better-than-expected margins thanks to higher aluminium prices and stronger US dollar. We have also revised up our earnings forecasts on updated margin assumptions while maintain OUTPERFORM call with a higher Target of RM2.60 (from RM2.15). 18M16 net profit of HEIM also beat our expectation underpinned by better margins from improvements in group operating processes. We continue to like HEIM with a higher price objective of RM19.65 (from RM18.48). On the flipside, PRTASCO (TB, TP: RM1.52) reported a disappointing set of performance with its FY16 NP making up 85% of our expectations, due to one-off costs of RM15.0m incurred for data collection works. TAANN also saw the sharpest cut in our earnings estimate (-18%) and downgrade to MARKET PERFORM (from OUTPERFORM) as we turned more conservative on its timber outlook. Price Target was also revised down to RM4.10 (from RM5.00). TOPGLVE's results were also slightly below expectations due to lower-than-expected ASPs. However, as we are encouraged by the sequential earnings and margins improvement, hence we continue to keep our OUTPERFORM call while maintaining an unchanged Target Price of RM5.92.

Stronger earnings growth for 2016, but … Post results reporting season, we are surprised to see 2016 net earnings growth of FBMKLCI actually registered at 8.0% based on our earnings model (or 7.6% based on Bloomberg Data). This growth rate is far higher than our earlier estimate of -4.0%. Apart from stronger-than-expected results, the stronger growth number was also partially attributed to some house-keeping updates done to our earnings model. Note that we did not include HSPLANT (OP, TP: RM3.00) and IJM (MP, TP: RM3.51) in our earnings model earlier. Besides, we still had FGV (MP, TP: RM1.85), UEMS (MP, TP: RM1.25) and SKPETRO (OP, TP: RM1.88) in our earnings model previously. Should we compare the 2016 earnings growth with the similar sample and weighting, the FBMKLCI would have grown at a lower rate of 5.8%. Post results review, the FY17E/FY18E, net earnings growth rates of FBMKLCI are now estimated at -0.4%/-0.5%. The lower growth rate for FY17E as compared with our previous number of 6.0% is due largely to higher base in 2016 and the abovementioned reasons. Our FBMKLCI’s FY17E/FY18E earnings growth estimates are more conservative vis-à-vis consensus numbers of 2.9%/6.4%. This is due to our flat-to-negative growth forecasts for some of the heavy weights such as CIMB (MP↓, TP: RM5.29↑), GENM (MP↓, TP: RM5.66↔), GENTING (OP↔, TP: RM10.19↑), MAYBANK (MP↔, TP: RM8.70↑), PBBANK (MP↔, TP: RM20.05↔), RHBBANK (MP↔, TP: RM5.08↓), SIME (MP↓, TP: RM9.50↓) and TENAGA (OP↔, TP: RM17.50).

Higher target, inline with consensus. Despite a relatively flat and uninspiring growth, we still revise up our end-2017 index target to 1,750 from 1,732 previously, due to higher index target as per Bottom-Up Approach. Our index target is derived from the average of …

• Top-Down: An unchanged PER target of 16.0x to our FY18E earnings estimate, hence index targets of 1,715 (vs. 1,735 previously due to declining growth) for end-2017, and

• Bottom-Up: 1,785 (vs. ~1,730 previously), representing ~17.0x PER to our FY17E/FY18E earnings estimates. From FBMKLCI-Market-Cap-to-GDP ratio perspective, based on the Index Target of 1,750, it only implies a market cap of RM1,070b. Together with 2016/17/18 real GDP growth forecasts of 4.5%/4.7%/4.9%, the estimated FBMKLCI market cap will only be traded at 0.92x/0.88x to 2017/18 real GDP. These market-cap-to-GDP ratios are not excessive, judging from the historical track records. Recall that for the period 2010-2015, the ratio was registered at 0.92x-1.09x. Note that this ratio was even higher at 0.99x-1.09x in 2012-2014, which were one year before and after the previous General Election (GE) year. Besides, our year-end target is not far out from consensus index target of 1,765/70.

Continue to be range-bound? While the recently concluded results reporting season showed a stronger set of reported net profit, the flat-to-negative growth outlook in 2017/18 may limit the potential upside from here. Nonetheless, we have to admit that the local equity market is likely to remain supportive ahead of the forthcoming General Election on "feel-good" sentiment. Apart from the undemanding market-cap-to-GDP ratio, we have started seeing consensus gradually re-rates FBMKLCI as per the strong turnaround in consensus target price to end its 2-year downtrend (see Figure 9). Besides, vis-à-vis regional markets, the Fwd. PER valuation of FBMKLCI (@ 16.0x as per Bloomberg) only traded <10% premium above regional average (of 14.8x) as opposed to the historical range of 4%-18% (see Figure 10). Against this backdrop, it is not a surprise to see the return of foreign investors back to the local equity market inline with the improved suggested weighting by Modern Portfolio Theory (MPT) (see Figure 11). Year-to-date, we saw RM1.37b net foreign equity inflow. Nonetheless, the expectation of US Fed to raise interest rate and Trump's domestic driven economic growth model could result in unfavourable forex movement causing pressure to regional currencies and Ringgit.

All told, our NEUTRAL view remains unchanged, as we believe the underlying reward-to-risk consideration is yet to turn attractive. FBMKLCI is currently traded 4% discount against its consensus, which is slightly above the 3-year Mean of 4.3% (see Figure 12). Historically, the discount is possible to swing towards the +1SD and +2SD levels of 2.6% and 0.8% discount, implying index levels of ~1,720 and ~1,750 based on consensus target of ~1,765. As such, we believe >1,720 could be a good "Sell On Strength" (S.O.S.) area. On the downside, we reckon that an ideal "Buy On Weakness" (B.O.W.) index zone is between ~1,625 and ~1,655, which are the -1SD and -2SD levels of 7.8% and 6.1% discounts. Post results review; we have taken out PRTASCO and TAANN from our list of 1Q17 Top Picks. As both of them delivered weaker than expected results. Nonetheless, we reiterate other 1Q17 Top Picks such as (i) AEONCR (OP, TP: RM17.76), (ii) HEIM (OP, TP: RM19.65↑ ), (iii) KLCC (MP, TP: RM7.84), (iv) OCK (OP, TP: RM0.96), (v) OLDTOWN (OP, TP: RM2.49↑ ), (vi) PAVREIT (OP, TP: RM1.89), (vii) PMETAL (OP, TP: RM2.60↑ ), (viii) PWROOT (TB, TP: RM2.56), (ix) SCGM (OP, TP: RM4.05), (x) SKPETRO (OP, TP: RM1.88), (xi) SLP (OP, TP: RM3.18), (xii) TOPGLOV (OP, TP: RM5.92), (xiii) TM (OP, TP: RM6.80↓ ) and (xiv) YINSON (OP, TP: RM4.08↑ ).

Source: Kenanga Research - 2 Mar 2017