The recently concluded 2QCY17 results reporting season showed signs of weakness as compared with the last two quarters. Auto, Gaming and Media sectors continued to underperform despite our low expectations. Plastic Packaging sector also surprised us after it delivered weaker-than-expected results for the first time in several quarters. Post results, we have lowered FY17E net earnings growth estimate to 0.4% (from 2.5%) but upgraded FY18E earnings growth to 4.7% (from 2.5%). As a result, we have fine-tuned our end-2017 Index Target to 1,835 (from 1,850), representing FY17E/FY18E PERs of ~18x/17x. Post results review; we maintain most of our sector/stock calls. However, sector calls for Media and Plastic Packaging are under review while our optimistic view for Gloves and MREIT sectors remains intact despite their mixed showing in 2Q17. We also remain faithful to some of our Top Picks - NOTION, PARKSON, PAVREIT, PWROOT, SLP and TOPGLOV - despite their weaker-than-expected results in 2Q17. We also continue to like PIE, TENAGA and ULICORP. Timing wise, while the FBMKLCI has yet to retrace to our ideal Buy On Weakness (B.O.W.) levels of <1,745, we have seen a tentative sign of turnaround. Hence, we believe investors should capitalise on any weaknesses to position for the next two quarters.

Slowing, as expected. The recently concluded 2QCY17 results reporting season showed signs of weakness as compared with the last two quarters. Out of 139 stocks under our core coverage, 40 of them delivered weaker-than-expected results. Hence, the “disappointment ratio” deteriorated QoQ to 28.8% as opposed to 22.6% in 1Q17. However, on a YoY basis, the ratio is still better in contrast to 33.9% in 2Q16. For this results season, 14 stocks (or 10.1%) outperformed our expectations vis-à-vis 13.4% (or 19 stocks) and 25.4% (or 34 stocks) recorded in 1Q17 and 4Q16, respectively (see Figure 1- 7 for details). Among the sectors under our coverage, again, we notice that (i) Auto, (ii) Gaming and (iii) Media sectors continued to underperform our expectations despite our “relatively conservative” view. Contrary to the previous quarter, Plastic Packaging sector also delivered weaker-than-expected results, for the first time in many quarters. These sectors saw ~25%/-26% cut in FY17E/FY18E earnings estimates, on average.

• Auto sector: BAUTO and TCHONG were hit by lower-than-expected sales due to lack of new model launches and less competitive promotional events while profitabilities of MBMR and UMWH were dragged by lower associate (Perodua) contributions and losses from O&G segment, respectively.

• Gaming sector: Dragged by casino operator Genting Group. Results of GENTING and GENM fell short of expectations owing to higher-than-expected pre-operating expenses for GITP while Genting UK was hit by lower business volume as well as poor luck factor. Ticket sales and luck factor of Number Forecasting Operators (NFOs) also remained vulnerable.

• Media sector: Remain discouraging mainly due to the prolonged weak advertising revenue (as a result of subdued adex outlook on poor consumer spending) as well as losses on new initiatives. For MEDIA, in particular, the quarterly numbers were slammed by RM133m impairment for its associate (MNI). STAR was also partially hit by start-up losses for its OverThe-Top (OTT) streaming service (Dimsum).

• Plastic Packaging sector: Mostly below expectations, save for TGUAN, due to various reasons, including higher raw material cost (for SLP), lower sales (for SLP and TOMYPAK) and lower-than-expected utilisation rates (for SCIENTX).

Besides, stocks in (i) Gloves, (ii) MREIT as well as (iii) Transport & Logistics sectors have also shown weakness in their results (see Figure 8 for details). On the contrary, banking sector showed improvements in general as impairment cost normalised. As a result, we have revised up the sector's FY17E/FY18E earnings estimates by 2.2%/0.7% on average.

As for our quarterly Top Picks, PIE posted record high sales despite the prevailing issue of industry-wide components shortages while there were no surprises for TENAGA and ULICORP. NOTION, on the other hand, was hit by slower-thanexpected new sales and higher setup costs. PARKSON recorded losses following kitchen sinking exercise (such as impairment loss on PPE and intangible assets). PAVREIT missed expectations due to margin compressions from higher operating and financing costs. PWROOT was impacted by higher raw material and marketing costs. SLP underperformed due to margin compressions from: (i) higher raw material prices in 2Q, and (ii) lower export sales conversion rates, which affected margins. TOPGLOV was smacked by higher-than-expected raw material input cost as well.

Earnings revisions. Post results, we have made minor adjustments in our earnings estimates. We lowered FY17E net earnings growth estimate for FBMKLCI to 0.4% (from 2.5% previously) but upgraded FY18E earnings growth to 4.7%

(from 2.5% previously). We suppose the higher growth rate for FY18E is partly due to lower base in FY17E and we have also revised up our banking sector earnings marginally.

Post revisions, our estimates are still more conservative in contrast to consensus estimates of 5.9%/7.2% (vs. 4.8%/7.2%

previously). We are fairly comfortable with our conservative view. We strongly believe that our estimates could stay ahead of the curve judging from our observation between quarterly corporate earnings growth and real GDP growth. From Figure 9, it is obvious that FBMKLCI earnings growth has been leading real GDP growth by one quarter. And, based on Bloomberg data, we have seen FBMKLCI earnings growth registering a peak in 1Q17, which is in line with the high 2Q17 real GDP growth of 5.8%. Based on our in-house real GDP forecasts, we reckon that the domestic economic growth should be lower, say 5.0-5.2%, in 2H17 (vs. 5.7% in 1H17). As such, we expect a fairly flat/low corporate earnings growth rate in 3QCY17. Already, FBMKLCI earnings only grew by a marginal 1% YoY for the quarter of Apr17-Jun17 (vs. 35.9% YoY growth for 1Q17 and 9.4% for 4Q16). Consensus also forecasted FBMKLCI to grow at a rate of 2.9% in 3Q17 and -11.3% for 4Q17.

Post earnings revisions and cut in target prices, we have also revised down up our end-2017 index target to 1,835 (from 1,850 previously), representing FY17E/FY18E PERs of 17.8x/17.0x. Our index target is derived from the average of …

• Top-Down: An unchanged PER target of 16.5x to our FY18E earnings estimate, hence index targets of 1,800 (vs. 1,810 previously), and

• Bottom-Up: 1,870 (vs. ~1,890 previously), representing 18.2x/17.4x PERs to our FY17E/FY18E earnings estimates. Our revised index target of 1,835 is slightly more conservative as compared to the consensus index target of ~1,860 as of endAug17.

Preview of 4Q17 Sector Outlook Generally speaking, we maintain most of our sector/stock calls post results. However, sector calls for Media and Plastic Packaging are under reviewed while our optimistic view over Gloves and MREIT sectors remains intact despite their mixed showing in 2Q17. As for our 3Q17 Top Picks, while we may review the list of Top Picks for 4Q17, we remain faithful in some of them (NOTION, PARKSON, PAVREIT, PWROOT, SLP and TOPGLOV) and continue to assign OUTPERFORM ratings despite delivered weaker than expected results in 2Q17.

• For NOTION, we understand that the stack-up orders of Automotive EBS components from a new customer - being the key driver for the Automotive segment, is still intact. Recall that the total volume growth for Automotive related components could at least see a 2-year CAGR of 30% with at least another 20 CNC machines to be invested next year.

• As for PARKSON, we believe the worst could be over. In fact, we expect it to start on a clean slate in FY18 following a kitchen sinking exercise and swift improvement in its China operations. Already 2Q17 has marked the 2nd successive quarter of improvement in operating profit for its China operations.

• We also believe fundamentals of PAVREIT are mostly intact with minimal earnings risk going forward as we have accounted for the higher cost and delayed acquisitions.

• PWROOT may also benefit from the softening in global commodities uptrend; hence, a potential ease in raw material cost for the coming quarters.

• SLP should also see normalisation in production cost as resin prices are likely to trend downwards by end-2017 on ample supply of resin due to excess capacity from China and India. Meanwhile, US shale-based resin is also expected to come onstream in the next 1-2 years.

• On a separate note, post wintering months lasting from Dec till April, input cost of latex has trended downwards and hence, we expect re-stocking activities to pick up again. This should argue well for TOPGLOV’s earnings. Other notable observations/views are as follows:

• Steel/Metal: Prospect sounds bright with (i) Reduction in China imports due to the Chinese Government’s initiative to cut output coupled with safeguard measures into Malaysian shores, which will provide sustainable steel priced of >RM2,000/t for local steel manufacturers, and (ii) higher demand of steel products when major infrastructure projects pick up in 2H17. Within the sector, we have OUTPERFORM calls on ANNJOO, PMETAL and ULICORP.

• Plantations: Despite expecting supportive CPO prices and rising production, hence the potential continued YoY earnings improvement in 3Q17, we reiterate our NEUTRAL call on the sector with OUTPERFORM calls on downstream players like IOICORP and PPB. We also like some smaller players with inexpensive valuations such as IJMPLNT, TSH, HSPLANT, UMCCA and CBIP.

• Property: Potential seeing a round of rotational play ahead of Budget 2018. We understand that market expects to hear more affordable housing initiatives by the government. However, we believe the speculation of affordable housing initiatives is unlikely to be overly beneficial to most of the listed developers under our coverage.

• For OSAT space, overall industry continued to show improvement as the global semiconductor sales in June 2017 increased by 23.6%, marking the eleventh consecutive YoY growth which is still showing uptrend momentum. In fact, management teams of MPI, UNISEM and KESM also expect stronger growth in 2H17.

• TENAGA’s 4Q17 performance is expected to be stronger with the expected ICPT under-recovery to boost top-line with flowthrough to its bottom-line as well.

• Transport & Logistics: We see further value emerging from MMCCORP if talks for a stake in Sabah Ports go through. However, minimal catalysts are seen on other port-operators (WPRTS and BIPORT) which are awaiting gradual recovery from post-reshuffling of global shipping alliances and Samalaju Port in the longer run.

Preview of 4Q17 Market Outlook

Thus far, our seasonal study has been proven right. We have seen the rise of external uncertainties as well as an unexciting 3Q to date. However, things should be getting better henceforth, especially a meaningful correction materialised, as normally 4Q and 1Q are relatively stronger (see Figure 10 & 11). Furthermore, as the domestic equity market valuation seems undemanding vis-a-vis the regional peers, we could see milder foreign capital outflow going forward unless the US Fed raise interest rate more aggressively than expected. In fact, the domestic equity market is still enjoying QTD and YTD foreign net inflow of RM523.2m and RM10.3b, respectively, with a mild net outflow of RM242.1m recorded in Aug 2017. As of end-Aug 2017, the Fwd. PER of FBMKLCI only registered a 6% premium over its selected regional peers. This "valuation premium" is considered to be at the lower end of its historical range of ~4%-18% (see Figure 12). Timing wise, the FBMKLCI is still trading at a marginal discount of 4.6% against consensus index target of 1,860, which is slightly below its 3-year mean of 4.3%. While it has yet to retrace to our ideal Buy On Weakness (B.O.W.) levels of <-1SD-level (or >6.2% discount or <1,745), it has somewhat shown early signs of turnaround (see Figure 13). As such, despite the mixed signs as per our Accumulated Price-Volume Study (APVS) (see Figure 14) and Market Sentiment Study (see Figure 15 & 16), we believe investors should capitalise on any weaknesses to position for the next two quarters.

Source: Kenanga Research - 6 Sept 2017