As we are march on to the traditionally tougher third quarter (based upon our seasonality study), we should take a more cautious view and adopt a Buy on Weakness strategy on laggard and defensive stocks when the key index dips below 1,735. Having said that, the local equity market is still expected to remain buoyant, at least in the near term. We have revised our year-end FBMKLCI target to 1,845 (from 1,775 previously) post the 1QCY17 earnings review. Technically speaking, the underlying market is set to remain upside-bias after staging a breakout form its consolidation channel recently with key overhead resistance/support set at 1,800/1,760. Meanwhile, our OR tracker portfolio is underperforming the broader market with total returns of -1.9% in May vs. FBMKLCI’s +0.52%. The average returns between realised OR portfolio and unrealised OR tracker since inception of 29.4% still better than the FBMKLCI’s total return of 25.1% for the same period.

A busy month. We had a busy month in May as we released a total of eight Mid-andSmall Cap pieces, of which four were featured under the Bursa’s Mid-and-Small (“MidS”) scheme. VITROX (FV: RM7.16) and GBGAQRS (FV: RM1.51) were the only two Trading Buy reports recommended under our traditional On Our Radar series in May while we downplayed MMSV and KIM LOONG after they already recorded handsome 154%/18% total returns resulting in limited capital upside. Meanwhile, on top of A&M (TP: RM3.00), we also reshuffled KESM (TP: RM15.20), ULICORP (TP: RM5.60) and PWROOT (TP: RM2.90) out from the tracker list to the full-fledge coverage universe under the MidS scheme. In view of the potential 14%- 79% total returns over the next 12-month, we have assigned OUTPERFORM call to all the stocks under the MidS scheme.

Decent quarterly results but momentum slowing. The local market recorded its first MoM decline for the year in May with FBMKLCI declining 2.05 pts or -0.12% MoM to settle at 1,765.87 as the softer performance of Telco's stocks were not offset by the better banking counters’ performance, mainly driven by the latest decent quarterly result as well as M&A news. On the other hand, the recent concluded 1QCY17 results reporting season continued to show signs of improvement given that the ‘disappointment ratio’ has narrowed to 22.6% (vs. 27.6% in 4Q16 and 34.4% in 3Q16). However, the momentum of this improving trend is showing sign of weakness as merely 13.4% (or 19 stocks) reported better-than-expected report cards in contrast to 25.4% (or 34 stocks) in the preceding quarter. Foreign funds flow-wise; while foreigners continued to be upbeat on Malaysia's market for the 5th consecutive month with net inflows totalling RM1.47b (-44% MoM), the momentum has somehow softened, as witnessed by the 3rd consecutive MoM decrease. On Wall-Street, stocks finished higher for the month with DJIA (+0.33% MoM) continuing to stay above 21,000-mark, fuelled by optimism that growth in both the economy and corporate earnings will continue to gain positive momentum.

Overall tracker performance remains decent. With the removal of two stocks mentioned above from the tracker list, our OR tracker list with Trading Buy recommendation is now reduced to 30 stocks. Together with 94 stocks in the realised portfolio, the average total return for the tracker stocks (+27.1%) and realised portfolio (+29.0%) since inception in Aug 2012 is 28.6%, which is higher than the total returns of 25.1% from the FBMKLCI for the same period. Xin Hwa (+121%) is the top performer under our OR unrealised tracker list followed by GKENT (+109%) and ELSOFT (+108%) while the top three losers, on the other hand, are EATECH (-62%), KNM (-43%) and REACH (-28%). Meanwhile, PESTECH (+226%), VS (+205%), CAB (+167%) are the top three performers under the realised stocks while K1 (-60%), SAPRES (-36%) and HOHUP (-33%) are the top three losers.

Source: Kenanga Research - 8 Jun 2017