The recently concluded 3QCY17 results season showed signs of weakness. The “disappointment ratio” surged to 32.0% (from 28.8% and 22.6% in the last 2 quarters). We noticed that Building Materials and Healthcare delivered outright disappointment while Auto, Consumer, Plastics Packaging, Plantations and Technology also showed earnings weakness. Post results, despite cuts in current year and next year earnings estimates by 3.7% and 3.5%, respectively, across the board on average, earnings estimates for FBMKLCI surprisingly saw upward adjustment due to earnings upgrades from: (i) banking as well as (ii) oil & gas sectors. As such, we have revised FY17E net earnings growth for FBMKLCI to 2.6% (from 0.4% previously) but fine-tuned FY18E earnings growth to 3.6% (from 4.6% previously). To better reflect the underlying market condition, we have lowered our end-2017 index target to 1,765 (from 1,830 previously), representing FY17E/FY18E PERs of 16.7x/16.1x. We also continue to advocate a “Buy On Weakness” strategy as the 1,705/45 range is deemed as a low-risk buying zone. We are also fairly comfortable with some of our 4Q17 Top Picks: - ANNJOO (OP, TP: RM4.70), DIALOG (OP, TP: RM2.55), OLDTOWN (OP, TP: RM3.15), PARKSON (OP, TP: RM0.88), PPB (OP, TP: RM19.00), SEM (OP, TP: RM1.70), TAKAFUL (OP, TP: RM4.27), TENAGA (OP, TP: RM17.17) and TGUAN (OP, TP: RM5.67). At the same time, we also added TOPGLOV (OP, TP: RM7.60) as a replacement to HARTA.

Slowing, as expected. The just-concluded 3QCY17 results reporting season showed signs of weakness, as expected. Out of 147 stocks under our core coverage, 47 of them delivered weakerthan-expected results, implying a “disappointment ratio” of 32.0%, which deteriorated from 28.8% in 2Q17 and 22.6% in 1Q17. However, on a YoY basis, the ratio is still better in contrast to 34.4% in 3Q16, in line with the strengthening trend in domestic economic growth. For the reporting season, 24 stocks (or 16.3%) outperformed our expectations vis-à-vis 10.1% (or 14 stocks) and 13.4% (or 19 stocks) recorded in 2Q17 and 1Q17, respectively.

Sector wise, we notice (i) Building Materials and (ii) Healthcare delivered outright disappointment while (iii) Auto, (iv) Consumer, (v) Plastics Packaging, (vi) Plantations and (vii) Technology also showed weakness in their results (see Figure 8 for details).

• Building Material: Apart from ANNJOO which results came broadly in line, LAFMSIA, ULICORP, PMETAL fell short of estimates. LAFMSIA’s profitability was dragged by lower demand for cement. PMETAL’s earnings were hit by higher carbon anode costs while ULICORP saw slower sales.

• Healthcare: Both PHARMA and IHH came in below expectations. IHH’s results marked the third consecutive quarterly earnings disappointment, hit by ramp-up of hiring and pre-operating costs to prepare Gleneagles Hong Kong Hospital and Acibadem Altunizade Hospital. Besides, there was unrealised foreign exchange loss from non-Turkish Lira borrowings. PHARMA was hit by higher-than-expected operating cost.

As for our quarterly Top Picks, most of them (ANNJOO, DIALOG, KESM, MPI, OLDTOWN, PARKSON, PPB, SEM, TAKAFUL, TENAGA, TGUAN) met our earnings estimates. The only outstanding performer was HARTA which announced yet another record quarterly earnings due to higher-than-expected sales volume. Nonetheless, as share prices of some of these stocks have reached our Target Prices, we have downgraded them of late such as HARTA, KESM and MPI.

On a separate note, 1Q18 PATAMI of BAUTO appeared to be below both our/consensus expectations at 11%, but we consider the results to be within expectation as we expect a much stronger upcoming quarter with the launch of the new Mazda CX-5. AFFIN was hit by VSS costs. PIE was depressed by impairment losses on receivables due to technical glitches on new system adoption by one of the clients. PWROOT also saw higher production costs (likely stemming from prolonged, unfavourable hedging policies) and marketing expenses. As for ULICORP, negative deviations were from slowing project deliveries as well as lower margins from higher production and operating costs.

Earnings revisions. Post results, despite we notice that analysts have cut their current year and next year earnings estimates by 3.7% and 3.5%, respectively, across the board on average. However, for FBMKLCI per se, earnings estimates saw an upward adjustment due to earnings upgrades from (i) banking as well as (ii) oil & gas sectors. We have revised FY17E net earnings growth for FBMKLCI to 2.6% (from 0.4% previously) but fine-tuned FY18E earnings growth to 3.6% (from 4.6% previously). Post revisions, our estimates are still more conservative in contrast to consensus estimates of 5.1%/5.5% (from 6.2%/5.7% previously).

Source: Kenanga Research - 5 Dec 2017