Despite our higher earnings growth estimates and index target, we remain NEUTRAL on 3Q17 market prospect as the 3Q is normally the weakest quarter and we have also seen a reversal in buying interest. As such, we prefer to adopt a more conservative approach or defensive mode ahead. Timing wise, we prefer to only employ a "Buy on Weakness" approach, if and when the index corrected to our B.O.W. zone of 1,750/20.

Latest Numbers. Post results reporting season and our house-keeping, we have revised up our FY17E/FY18E net earnings growth estimates of FBMKLCI to 2.5%/2.5% (vs. -0.4%/-0.5% in the previous quarter). Despite such earnings revisions, we believe our estimates are still conservative in contrast to consensus estimates of 6.6%/7.3% (vs. 2.9%/6.4% previously). In line with higher earnings estimates, we have also revised up our end-2017 index target to 1,850 (from 1,775 in the previous quarter and 1,845 post results review), representing FY17E/FY18E PERs of 17.5x/17.1x. Our revised index target of 1,850 is also in line with the consensus index target of ~1,865 as of end-June17.

3Q the weakest quarter, downside risks mounting? However, even with the upwards revisions of earnings and index target, we only saw an uninspiring upside potential of <5%, hence our Neutral stance. Coupled with the seasonally weakest quarter in 3Q and the reversal in Buying Interest as per our “Accumulated VolumePrice Study”, we are not surprise if the market undergoes a correction in coming months.

For sector ratings, we have OVERWEIGHT calls on (i) Aviation, (ii) Gloves, (iii) MREIT, (iv) Plastic Packaging, (v) Power Utilities, and (vi) Technology. At the same time, we maintain our UNDERWEIGHT calls on (i) Auto, and (ii) Healthcare (Hospital) while the other sectors under our coverage are rated as NEUTRAL. Apart from focusing in resilient and defensive sectors such as MREIT and Power Utilities, we also introduce a “Smart Beta” Investment Strategy by investing into a pool of ~15 highest index weighting stocks for passive investing style. Based on our back-testing on this idea for the last 7½ years, including 1H17, this strategy has been consistently outperforming FBMKLCI in terms of total return. For a more active alpha-seeking approach, we have also looked into stocks that indicate deep value in terms of “Sum of Parts” for this quarter. This is because we observe that there is a number of stocks, which show high value but yet, still trading at a deep discount despite the broader market has been enjoying a good runup earlier. While we agree that some of these stocks could be temporary fallen into "value-traps" as there could be lacking of price catalysts, we believe some of them have started to show signs of reaching their respective inflection points.

3Q17 Top Picks. (i) NOTION (OP, TP: RM1.66), (ii) PAVREIT (OP, TP: RM2.02), (iii) PIE (OP, TP: RM2.87), (iv) SLP (OP, TP: RM3.72), (v) TENAGA (OP, TP: RM17.17) and (vi) TOPGLOV (OP, TP: RM6.10) are featured as Top Picks from the OVERWEIGHT sectors. We believe (i) A&M (OP, TP: RM3.00), (ii) ATLAN (TB, TP: RM5.60), (iii) AZRB (TB, TP: RM1.35) and (iv) PARKSON (OP, TP: RM0.88) fit well into our "deep-value" theme. While names like (i) PWROOT (OP, TP: RM2.95) and (ii) ULICORP (OP, TP: RM5.60) are our BUY calls among our Bursa MidS coverage. Of late, we have also issued a piece of Trading Idea on LUXCHEM (TB, TP: RM2.30), which worth considering as well, due to its strong earnings growth from a newly acquired subsidiary and expansion in manufacturing capacity.

Source: Kenanga Research - 4 Jul 2017