The recently concluded 4QCY17 results reporting season remains uninspiring. Almost 1/3 of the stocks under our coverage delivered weaker-than-expected results. We notice; (i) Building Materials, (ii) Plastic Packaging, and (iii) Plantations showing noticeable signs of weakness while (iv) Consumer, (v) Semicon/Technology as well as (vi) Transportation & Logistics also turned-up more disappointments. On the other hand, (i) Oil & Gas as well as (ii) Banking & Non-Bank Financials sectors delivered more positive surprises. With the conclusion of 4QCY17 results reporting season, FY17A earnings growth is seen at 8.9% (vs. our earlier estimate of 9.8%). Post results, we also raised our FY18E/FY19E earnings growth estimates for FBMKLCI to +7.4%/+6.0% (from -0.2%/+3.4% previously) due mainly to earnings upgrades in banking sector and some minor tweaks across various sectors. To better reflect the higher earnings growth as well as assigned target prices, we have also raised our end-2018 index target to 1,950 (from 1,860 previously), representing FY18E/FY19E PER of 16.5x/15.5x. As for timing of entry, while we continue to see decent upside of ~5% from here, the benchmark index is now fast approaching our “Sell On Strength” (S.O.S.) zone of 1,855-1,925. Hence, we reckon that investors should only turn more aggressive if and when the index corrects below the 1,800-level. As for our 1Q18 Top Picks, post results, we continue to maintain our OUTPERFORM calls on AMBANK (TP: RM4.90↔), AMWAY (TP: RM8.30↔), ANNJOO (TP: RM4.70↔), MITRA (TP: RM1.20↓), PIE (TP: RM2.10↓), SERBADK (TP: RM3.90↑), TAKAFUL (TP: RM4.30↑), WASEONG (TP: RM1.80↑) and WCT (TP: RM1.90↓). At the same time, we have also added AIRASIA (OP, TP: RM5.30) and MBMR (OP, TP: RM2.85) to replace F&N and TOPGLOV.

Could have been better. The just-concluded 4QCY17 results reporting season showed signs of weakness, again. Out of 149 stocks under our core coverage, 48 of them delivered weaker-thanexpected results, implying a “disappointment ratio” of 32.2%, almost flat vis-à-vis 32.0% in 3QCY17. However, on a YoY basis, the ratio obviously deteriorated y deteriorated from 27.6% in 4Q16. For this reporting season, 18.1% of the stocks under coverage (or 27 stocks) outperformed our expectations vis-à-vis 16.3%/10.1%/13.4% recorded in 3Q/2Q/1Q17. The inherent strength is in line with the underlying stronger real GDP as well as corporate earnings growth.

Sector wise, we notice; (i) Building Materials, (ii) Plastic Packaging and (iii) Plantations show noticeable signs of weakness while (iv) Consumer, (v) Semicon/Technology as well as (vi) Transportation & Logistics also showed more disappointments. On another extreme, (i) Oil & Gas as well as (ii) Banking & Non-Bank Financials sectors delivered more positive surprises (see Figure 8).

• Building Material: The sector was dragged by ULICORP, WTHORSE and LAFMSIA. Reasons for weaker results; (i) margins were compressed by higher production costs and lower selling prices for ULICORP, (ii) wider-than-expected rebates from LAFMSIA, and (iii) WTHORSE’s tiles demand was poorer than expected.

• Consumer: Despite some retailers still recording lower margins impacted by the promotion and discounting activities, most of the retailers (except for PADINI & PARKSON) posted stronger sales in 4QCY17 in general, attributed to the Christmas festive season and long school holidays' period. F&B players continued to experience high cost pressures in 4Q17 (i.e. DLADY, OLDTOWN & PWROOT), as higher cost inventories cleared the shelves. Marketing spend is also typically higher during the 4Q period as manufacturers prepared for the CNY season. In the Sin Sub-sector, tobacco stock (i.e. BAT) persistently suffered from high levels of illicit trade, which undermined sales. While cheaper offerings are made available in the market, it is expected to pull margins given its lower profitability.

• Plastic Packaging: The weaker-than-expected results were due to various reasons, including: (i) higher start-up and raw material costs, (ii) higher-than-expected repairs and maintenance, and fewer favourable product mix.

• Plantations: Despite both quarterly CPO prices and FFB production improving 4% and 5% YoY, respectively, the pace of these improvements was not fast enough to offset rising cost and also high expectations. As a result, the sector recorded the weakest showing for the year, with only 2 counters (HSPLANT and PPB) above consensus expectations but seven counters missing expectations while four (GENP, IOICORP, KLK and SIMEPLT) came within.

• Semicon/Technology: Out of our coverage, SKPRES was the only company that reported results coming in within expectations. Meanwhile, MPI, UNISEM, PIE and NOTION missed due to a combination of either higher-than-expected raw material prices, operating expenses, unfavourable forex or adverse product mixes.

• Transportation & Logistics: Logistics players, namely CENTURY, GDEX, POS and TNLOGIS, all saw poorer results due to increasing costs and margins pressure, with GDEX was also hit by higher taxes. Meanwhile, MMCCORP’s results were dragged by: (i) the absence of Senai Airport City land sale, and (ii) lower construction earnings from completion of KVMRT Line 1.

As for our quarterly Top Picks, AMBANK, PIE and WCT delivered weaker sets of results. However, TAKAFUL and WASEONG, on another extreme, were outstanding performers. AMWAY, ANNJOO, F&N, MITRA and SERBADK also met our earnings estimates. AMBANK’s 9M18 performance only made up 66% for both our and market full-year estimates due to higher opex and normalisation of credit costs. PIE, on the other hand, was dragged by weaker USD and high material prices despite registering record-high sales. The disappointment by WCT was caused by unexpected losses from its joint-venture. Despite the aforementioned negative variances, we continue to hold our OUTPERFORM calls on these stocks. The rationales for such commitment are as follows:-

• AMBANK: Upward momentum in loans growth maintained coupled with elevated NIM and superior dividend yield of 5%. Last but not least, valuations are undemanding.

• PIE: We remain hopeful on PIE’s mid-term prospect, premised on the existing and new orders from MNC clients. We also see better value proposition following the recent share price correction with its forward PER only trading at 12.2x vis-à-vis its EMS peers’ 14.0x PER.

• WCT: Despite the downgrade in earnings, we are still keeping our OUTPERFORM call, as we believe that the worst could be over after the impairment on its Middle East projects. We also laud the new management team for their continuous efforts in improving the company’s profitability, i.e. (i) securing more local construction jobs, (ii) re-pricing strategy to clear property inventories, and (iii) de-gearing plans through land sale, placement exercise and potential listing of investment assets. Our TP of RM1.90 implies FY18E PER of 18.3x, in line with the big boys’ range of 18.0- 20.0x which we are comfortable with, especially for concession owners.

We also raise our Target Prices and maintain our OUTPERFORM calls on SERBADK, TAKAFUL and WASEONG. Nonetheless, as share prices of some of these stocks (i.e. F&N, TOPGLOV) have reached our Target Prices, we have downgraded them to MARKET PERFORM. As for the rest, their ratings and Target Prices are largely kept unchanged.

Earnings revisions. With the conclusion of 4QCY17 results reporting season, FY17A earnings growth is seen at 8.9% (vs. our earlier estimate of 9.8%). Post results, we also raised our FY18E/FY19E earnings growth estimates for FBMKLCI to +7.4%/+6.0% (from -0.2%/+3.4% previously) due mainly to earnings upgrades in the banking sector and some minor tweaks across various sectors. Post revisions, our estimates are now getting closer to the consensus estimates of 4.8%/6.7% (vs. 8.2%/7.6% previously).

Due to our earnings upgrade for FBMKLCI constituents and higher target prices assigned, we have also raised our end- 2018 index target to 1,950 (from 1,860 previously), representing FY18E/FY19E PER of 16.5x/15.5x. Our Index Target is derived via the average of the followings:-

• Top-Down: An unchanged target PER target of 16.5x to our FY18E earnings estimate, hence index targets of 1,955 (vs. 1,855 previously); and

• Bottom-Up: 1,945 (vs. ~1,860 previously), representing 16.5x/15.5x PER to our FY18E/FY19E earnings estimate.

Our index target upgrade is also inline with the recent upgrade in consensus index target. Note that consensus has recently raised index target to 1,930 as of end-Feb 2018 from <1,850 as of end-Dec 2017.

1Q18 Market Outlook - An Interim Review. Thus far, the local equity benchmark index, FBMKLCI, has finally played catch up. As of end-Feb 2018, FBMKLCI has gone up 3.3%. Again, historical pattern study seems to be holding well for early of the quarter. However, the sell-off in the past 2 weeks has somewhat changed investment sentiment/buying interest.

Based on our Market Sentiment Study, mid-and-small-cap stocks have shown signs of cooling off as per our Valuation Gaps (between FBMKLCI vs. FBM70 & FBMSC) study. The Forward PER Gaps of FBMKLCI-FBM70 and FBMKLCI-FBMSC have converged (see Figure 10-11 for details). Recall that we have pointed out in the past few quarters, while strong valuations of mid-and-small-cap stocks indicate good investment sentiment, the valuations of mid-and-small-cap stocks have been traded at the higher end of their respective historical range. Hence, we did not rule out this is an early sign of toppishness back then.

Besides, we also notice that the Accumulated Volume-Price Indicators for FBMKLCI, FBM70 and FBMSC have crossed below their respective 30-day SMA. These technical pictures signal reversal in Buying Momentum (see Figure 12-14). In addition, Forward PER valuation of FBMKLCI is back to 10% premium against regional peers, which may not be as attractive as before (see Figure 15). Recall that the FBMKLCI historically traded at a premium of -2%-18% against its regional peers. As such, we begin to see a mild outflow of foreign capital from the local equity market (RM1.1b net outflow the equity quity market in Feb 2018).

More importantly, timing wise, the FBMKLCI was traded at a discount of 3.8% (as of end-Feb 2018) against the consensus index target of 1,930, which has surpassed its 3-year mean level of 4.4% discount and is fast approaching its +1SD-level of 2.3% discount (or implying 1,885-level) (see Figure 16). As such, we reckon that risk-reward consideration does not favour buyers at this juncture. In fact, we are more interested to advocate a “Sell On Strength” strategy (S.O.S.) as the range between +1SD (implying 1,855) and +2SD (implying 1,925) is deemed as a low-risk Selling/Profit Taking zone. On the flipside, levels <1,800 (the -1SD-level) should act as low risk buying levels.

Source: Kenanga Research - 2 Mar 2018