The just-concluded 1QCY18 results reporting season showed signs of weakness, as expected. Post results, we saw negative earnings revisions of 8.6%/3.9% for FY18E/FY19E, on average, for stocks under our coverage. These earnings revisions are much larger than FBMKLCI’s earnings estimates downgrade of ~1%, reinforcing the recent de-rating of smalland-mid-cap stocks. Post results, our FY18E/FY19E earnings growth estimates for FBMKLCI are lowered to 5.1%/5.4% (from 6.1%/6.0% previously). The earnings downgrades are mainly coming from (i) Plantations, (ii) Telco as well as (iii) Transportation & Logistics sectors. Coupled with weaker sentiment, we have also revised our end-2018 index target lower to 1,900 (from 1,950 previously). While we suspect 2Q18 is likely to be a weaker yet volatile quarter, the recent sell-down was somewhat stronger than expected. Nonetheless, this overcorrection situation is presenting buying opportunities. AEON (TP: RM2.60), AMBANK (TP: RM4.50), CIMB (TP: RM6.85), GAMUDA (TP: RM5.50), GENTING (TP: RM10.85), MBMR (TP: RM3.30), MRCB (TP: RM0.70), PARKSON (TP: RM0.86), TENAGA (TP: RM17.90), UEMS (TP: RM0.97) and YTLPOWR (TP: RM1.10) are worth considering, in our view.

A weak start. The just-concluded 1QCY18 results reporting season showed signs of weakness, as expected. Out of 148 stocks under our core coverage, 56 of them delivered weaker-than-expected results, implying a “disappointment ratio” of 37.8%, vis-à-vis 32.2% in 4QCY17. On a YoY basis, the ratio also deteriorated significantly from 22.6% in 1Q17. On the other end, merely 10.8% of the stocks under coverage (or 16 stocks) outperformed our expectations in this reporting season (vs. 18.1% and 13.4% seen in 4Q17 and 1Q17 respectively).

Sector wise, (i) Building Materials, (ii) Media and (iii) Plastic Packaging sectors had shown noticeable signs of weakness while (i) Consumer, (ii) Gaming, (iiI) Plantations, (iv) Property, (v) Telco, (vi) Semicon/Technology, (vii) Utilities as well as (viii) Transportation & Logistics also showed more disappointments. On another extreme, while there is no outright outperformer, we notice that Banking & Non-Bank Financials sectors had delivered more positive surprises. Other sectors are largely mixed or neutral in nature (see Figure 8).

• Building Material: The sector was, again, dragged by LAFMSIA, ULICORP and WTHORSE. While LAFMSIA and WTHORSE were hit by lower-than-expected cement and tiles demand, ULICORP was affected by higher-than-expected operating costs.
• Media: Judging from the recently reported weaker sets of results, the sector incumbents continued facing prolonged weak advertising revenue, as a result of subdued adex outlook on poor consumer spending, as well as impairment charges.
• Plastic Packaging: With the exception of SLP, the weaker-than-expected results were due to various reasons, including: (i) higher raw material cost, (ii) lower-than-expected utilization rates, and (iii) less than favorable product mix.

As for the Top Picks selected in early of this quarter (pre-GE14), MBMR was proven to be an outstanding performer. TENAGA also saw a fairly good start as well. In fact, we have upgraded our target price for TENAGA as we roll over our valuation baseyear to CY19. AIRASIA, BIMB, CMMT, HEIM, MQREIT and WCT also managed to deliver decent results. Nonetheless, we have downgraded rating for both CMMT and MQREIT as their share prices had been performing well. Post results, we have also revised down Target Prices for AIRASIA, BIMB, HEIM and WCT on various reasons (despite maintaining their Outperform ratings). PPB, SEM and TM, on other extreme, delivered weaker sets of results (see Figure 8).

Earnings revisions. Post results, we saw negative earnings revisions of 8.6%/3.9% for FY18E/FY19E, on average, for stocks under our coverage. These earnings revisions are much larger in contrast to FBMKLCI constituents. We believe this could be the driving force behind the recent de-rating of small-and-mid-cap stocks (even before the post GE14 price corrections).

Based on our FBMKLCI earnings universe, FY18E/FY19E earnings growth estimates for FBMKLCI are now lowered to 5.1%/5.4% (from 6.1%/6.0% previously) due mainly to earnings downgrades in (i) Plantations, (ii) Telco as well as (iii) Transportation & Logistics sectors (see Figure 9). Note that, post revisions, our estimates are not far from the consensus estimates of 5.4%/6.8% (vs. 5.7%/7.3% previously). However, note that, our estimate earnings growth rates could be higher, say 6.7%/7.1% for FY18E/FY19E, should DIALOG, HARTA and MAHB to be included into the list of constituents of FBMKLCI (to replace AMBANK, ASTRO and YTL).

Due to our earnings and target price downgrades, and coupled with weaker investment sentiment, we have also revised our end-2018 index target lower to 1,900 (from 1,950 previously), representing FY18E/FY19E PER of 16.3x/15.5x. Our Index Target is derived via the average of the followings:-

• Top-Down: Owing to weaker market sentiment, we lower our target PER marginally to 16.0x (from of 16.5x previously). And, based on our revised FY18E earnings estimate, we derive an index target of 1,860 (vs. 1,955 previously); and
• Bottom-Up: 1,940 (vs. ~1,945 previously), representing 16.7x/15.8x PER to our FY18E/FY19E earnings estimate.

Our index target downgrade is also in line with the recent cut in consensus index target. Note that consensus has recently lowered index target to ~1,940 as of end-May 2018 from ~1,970 as of end-Apr 2018. 

Market overcorrected? The local equity benchmark index, FBMKLCI, tested its 52-week low of ~1,708 of late due to concerns over the fiscal and national debt positions. The month of May had seen a strong outflow of foreign capital (amounting to RM5.6b) from the local equity market. The volatility of the local market is somewhat not surprising. Recall that in our 2Q18 Investment Strategy Report dated 3 April 2018, we highlighted that 2Q18 is likely to be a weaker yet volatile quarter. Apart from facing uncertainty over GE14, we also suspect trading volume or market interest could be lacklustre due to the Muslim fasting month and FIFA World Cup 2018 around the corner.

Nonetheless, the recent sell-down was somewhat heavier than expected. FBMKLCI is now trading at a discount of ~10% against the consensus index target of ~1,940, which is way below the -2SD-level of its 3-year mean level of 4.7% discount (see Figure 10). As such, we reckon that the underlying market’s over-reaction presents buying opportunities.

The mean reversion (snap-back) rally is in the progress? For investors who wish to position for a “Mean Reversion” strategy, levels below 1,765 offer excellent reward-to-risk. We believe a reversion back to the mean, implying 1850-level, is highly probable. Based on our Monte Carlo Simulation Study, with 68% confidence interval or the near-equilibrium range, FBMKLCI is like to oscillate between 1,670 and 1,875 with higher probability at the top end (see Figure 11). In fact, technically speaking, the FBMKLCI has yet to violate its long-term uptrend convincingly.

From a technical perspective, the FBMKLCI is proven resilient as it still stands firmly above the long-term uptrend channel support line. For the immediate term, FBMKLCI is poised to swing upwards to close a gap between 1,760 and 1,770. Over a slightly longer-period, we are not surprise to see the index reverting back to 1,825, which is the long-term mean since 3Q15 (see Figure 12).

What to buy? In terms of stock picks, we believe some of the heavily bashed down stocks, especially those that still delivered good numbers are worth considering.

For instance, the recent sell-down in banking stocks such as AMBANK (OP, TP: RM4.50) and CIMB (OP, TP: RM6.85) offer good value. We also see more value buys in the construction space. Name like GAMUDA (OP, TP: RM5.50) is one of them.

TENAGA (OP, TP: RM17.90) and YTLPOWR (OP, TP: RM1.10) also seen strong sell-down with the change of government. We reckon that the ICPT framework is an efficient and transparent mechanism. Hence, it is likely to be kept. As for YTLPOWR, while its earnings outlook remains challenging in the immediate term before its two new green-field projects come on-stream after 2020, the selling could be overdone with a YTD decline of >40% probably because the YTL Group is one of the consortium members building the KL-Singapore High-Speed Rail (HSR) which is now being scrapped by the new government. Based on our estimate, its Wessex Water minus the group’s net debt is already worth RM0.83/share.

While Gaming stocks have seen a fast recovery in their share prices, we still believe GENTING (OP, TP: RM10.85) has more legs to go as we believe the earnings recovery of GENS (OP, TP: RM5.75) is sustainable and the GITP expansion program is also starting to bear fruit.

Despite having a Neutral-to-Cautious view on the property sector, we do see value emerging as valuations for most property stocks are reaching, if not already touched, their trough levels. Among stocks under our coverage, we prefer MRCB (OP, TP: RM0.70) and UEMS (OP, TP: RM0.97) for their deep values (coupled with their earnings/sales trajectories) and extremely bashed-down share prices.

Last but not least, attention should also be given to retail-related industries. Auto players such as MBMR (OP, TP: RM3.30) should benefit from stronger car sales in 3Q18 (i.e. post GST abolishment but prior to reintroduction of SST). The potential improvement in consumer sentiment is also expected to benefit retailers like AEON (OP, TP: RM2.60) and PARKSON (OP, TP: RM0.86).

Source: Kenanga Research - 4 Jun 2018