Despite adverse impacts from external uncertainties (such as Fed’s rate hike and trade tension) and domestic concerns (arising from the government’s revenue shortfall post zerorated GST, uninspiring corporate results and net foreign funds' outflow), the local equity market had remained resilient. As such, we believe the market could have bottomed out at ~1,775 and downside could be limited from this point onwards due to the favourable seasonal pattern. Coupled with strong oil prices and launching of two new funds by PNB, tactically speaking, reward-to-risk consideration favours the upside. Our end-2018/19 index targets are pegged at 1,870/1,920, implying respective FY19E PERs of 14.8x/15.2x. The less excited upside is somewhat inline with the rather flattish earnings growth estimates of +4.2%/+1.4%. Top Picks for the quarter are: (i) AEON (OP; TP: RM2.60), (ii) AIRASIA (OP; TP: RM4.05), (iii) BIMB (OP; TP: RM4.90), (iv) D&O (OP; TP: RM1.000), (v) GAMUDA (OP; TP: RM4.30), (vi) MAYBANK (MP; TP: RM10.00), (vii) PESTECH (OP; TP: RM1.95), (viii) PPB (OP; TP: RM18.60), (ix) SERBADK (OP; TP: RM4.45), (x) TAKAFUL (OP; TP: RM4.75), and (xi) TENAGA (OP; TP: RM17.90).

Remains resilient. Despite overshadowed by external uncertainties and domestic concerns, the local equity market is expected to remain resilient given that …

• 4Q and 1Q are seasonally stronger quarters in terms of market performance.

• Strong oil prices could act as a short-term supporting factor.

• Launching of two new funds by PNB will inject the much-needed liquidity.

• Foreign funds outflow could become manageable due to low beta nature.

• Market sentiment has improved (as per upticks in Fwd. PERs of FBM70 and FBMSC).

Latest Numbers and Index Target. We have further fine-tuned our FY18E/FY19E earnings growth for FBMKLCI to 4.2%/1.4% (from 4.3%/3.5% post results review update) due mainly to earnings downgrades in the telco sector. Note that, our latest estimates are not far from the consensus.

Despite minor revisions in our earnings estimates, our end-2018 index target is still kept at 1,870 (due to rounding effect), representing FY18E/FY19E PERs of 15.5x/14.8x. For 2019, we tentatively peg our end-2009 index target at 1,920, representing FY19E PER of ~15.2x.

Consensus, on the other hand, has also lowered its index target to ~1,900 as of end-Sep 2018 (from ~1,925 as of end-Jun 2018) backed by earnings growth estimates of 3.6%/2.4% (vs. 4.1%/2.7% previously).

4Q18 Sector Outlook. Generally speaking, our various sector ratings remain pretty much unchanged except for the downgraded rating for Telco sector to Neutral on weaker-than-expected numbers.

• Overweight - Aviation, Gaming and Power Utility.
• Neutral - Automotive, Banks & Non-Bank Financials, Building Materials, Construction, Consumer, Media, MREITs, Oil & Gas, Plantation, Property, Technology/Semicon, Telco ↓ as well as Transportations & Logistics.
• Underweight - Healthcare, Gloves and Plastic Packaging.

4Q18 Investment Strategy. We make a bold stance that the local market could have bottomed. Downside could be limited judging from: (i) the favourable seasonal pattern, (ii) stronger oil price, and (iii) launching of two new funds by PNB, which could boost liquidity of the domestic equity market, offsetting potential foreign funds outflow. Timing-wise, we see <1,765 as ideal buying levels, representing the 1SD-level below the 3-year Band of Discount between FBMKLCI and consensus target albeit this level may not materialise in the near term.

4Q18 Top Picks. To capitalize on these expectations, we opt to select: (i) big cap stocks (i.e. MAYBANK & TENAGA), (ii) heavily sold-down stocks (i.e. AEON, AIRASIA, GAMUDA & PESTECH), and (iii) selected stocks with sweet-spot in niche positioning (i.e. BIMB, D&O, PPB, SERBADK & TAKAFUL) as our 4Q18 Top Picks.

Risks to our view include (i) aggressive rate hikes in US and eventually in Malaysia, (ii) completion of “Head-and-Shoulder” formation, and (iii) relatively high valuation premium over its regional peers.

Source: Kenanga Research - 2 Oct 2018