2Q18 is likely to be a weaker yet volatile quarter. As current market sentiment is not in favour of mid-to-small-cap stocks, we believe it is time to switch focus to the big caps, especially those with resilient earnings as well as heavily bashed-down counters. The ideal “Buy on Weakness” zone is <1,830. Meanwhile, our OR tracker portfolio underperformed the benchmark index with average monthly return of -8.5% in March against FBMKLCI’s 0.39% but was in-line with the FBM Small Cap index of -11.1%. On the other hand, average total return between realised OR portfolio and unrealised OR tracker since inception of 25.3% is trailing behind the index for the 4th consecutive month with barometer index registering total returns of 35.5% for the same period.

Prefer bigger cap stocks during an uncertain quarter. We believe 2Q18 is likely to be a weaker yet volatile quarter in view of the upcoming General Election with lacklustre trading volume and market interest amid the Muslim fasting month in May 2018. Besides, the current mid-and-small caps de-rating process may likely continue in the months ahead as valuation has yet to fall to the lower end of their historical ranges as per our Valuation Gaps (between FBMKLCI vs. FBM70 & FBMSC) study. Having said that, the Buying Momentum of FBMKLCI seems sustainable as per our Accumulated Volume-Price Study, thus suggesting that bigger cap could be relatively stronger and outperform the mid-and-small cap stocks, based on our observations. Timing wise, the ideal “Buy on Weakness” zone is <1,830. Nonetheless, for stocks that have been bashed down heavily, buying opportunities could have emerged as valuations for these stocks have reached or fast-approaching their respective trough valuations.

Recommended two trading ideas in March. We issued two On Our Radar (OR) report in March where we recommended a “Trading Buy” with a fair value of RM0.260 on a new semiconductor player - QES, which debuted on 8-March in the ACE Market. We are projecting the group to record a 2-year CNP CAGR of 15%, underpinned by: (i) strategic exposure to highgrowth segments as well as its wide customers and installed base, and (ii) incremental sales with new products from highermargin manufacturing division. Besides, we also reiterated our “Trading Buy” call on LAYHONG with a fair value of RM1.20, underpinned by the turnaround in egg prices and investment to improve capacity that are positives for the medium term. In addition, we also believe the completion of a new processing plant would boost earnings of the joint-venture with NH Foods Ltd, driving expected 85%/34% YoY core earnings growth in FY18/FY19.

A stable month in March but…March was a good month for the FBMKLCI as the index gained 0.4% MoM to close at 1,863.46 level. PBBANK (+5.91%), NESTLE (+26.54%) and TENAGA (+3.05%) continued to draw interests last month as investors looked for resilient-earnings stocks. On the other hand, our OR Tracker Portfolio posted an average monthly decline of 8.46%, which underperformed the benchmark index’s total returns of +0.39% but was aligned with the FBMSC index’s performance (- 11.1% MoM to 14,856.33). This is not a surprise given that our OR Tracker Portfolio mainly comprised mid-and-small cap companies which valuations are currently in a de-rating process. The overall tracker portfolio performance was negatively impacted by the decline in SASBADI (-34.0%), SUPERLN (-29.1%) and SALUTE (-20.7%) but partially mitigated by a better performance of SCICOM (+10.4%) MYEG (+7.8%) and ELSOFT (+1.2%).

…..swung negatively in April. The relatively stable market sentiment, however, swung negatively in early April on continued fears of a full-blown trade war between the US and China. The FBMKLCI plunged as low as 51.9 point to 1,811.56 (an intra-day low) since the beginning of April before regaining some grounds as fears subsided when the US appeared willing to discuss with China and fix their trade divergences. The trading sentiment, however, turned south again last Friday when as US-China trade fears intensify coupled with the Fed reiterating its intension to hike interest rates and keep inflation under control.

Tracker underperformed the index for the 4th consecutive months. With additional one new stock into our OR tracker list, the Trading Buy list has increased to 32 stocks. Together with 104 stocks in the realised portfolio, the average total return for the tracker stocks (+16.9%) and realised portfolio (+27.8%) since inception in August 2012 is 25.33%, which underperformed the FBMKLCI’s 35.5% for the same period. VITROX (+238.4%) remains as the top performer under our OR unrealised tracker list followed by GKENT (+231.0%) and ELSOFT (+117.3%) while REACH (-58.5%), SASBADI (-55.2%), and SALUTE (-49.0%) are the top three losers. On the other hand, VS (306.02%), PESTECH (+225.92%) and CAB (+166.74%) remain as the top three realised gainers. On the flip side, EATECH (-68.29%) and K1 (-60.39%) and KNM (-45.45%) remained as the top three losers under the realised portfolio.

Source: Kenanga Research - 9 Apr 2018