Our view remains unchanged. While we still believe that the local equity market is expected to potentially register a turning point between Dec 2018 and Sep 2019, absence of re-rating catalysts has generally clamped investment sentiment and capped the upside. Despite the uninspiring growth numbers, we are not giving up, as we begin to see improvements in market data and statistics. Besides, the comeback of a multi-year bull cycle is not entirely impossible as per our Cycle Study. However, timing wise, as the FBMKLCI is now only traded at a mere 3.1% discount against Consensus Target, we believe the upside could be limited until we see a major upgrade in index target. As such, we prefer to adopt a Buy on Weakness (B.O.W.) approach within the index range of 1,635-1,595. Based on our investment Strategy, we have selected ABMB (OP, TP: RM4.25), CIMB (OP, TP: RM6.25), D&O (OP, TP: RM0.675), HARTA (OP, TP: RM5.85), KOSSAN (OP, TP: RM5.25), MBMR (OP, TP: RM3.45), MYNEWS (OP, TP: RM1.55) , PANTECH (OP, TP: RM0.690), PWROOT (OP, TP: RM1.75) and SAPNRG (OP, TP: RM0.430) as our 3Q19 Top Picks.

Fundamentally speaking, the FY19E/FY20E earnings growth rates for FBMKLCI remain uninspiring at 14.7%/3.6% (from 17.6%/2.4% in the previous quarter). Post results and house-keeping in our earnings numbers and target prices, we have finetuned our end-2019 index target to 1,745 (from 1,750 previously), representing FY19E/FY20E PERs of 19.0x/18.0x.

A step closer to our turnaround dream? While the growth numbers may not be exciting, market data and statistics are getting stronger. For instance, on the charts, the monthly slow stochastic has tentatively shown a sign of turnaround. Buying momentum has turned stronger as per our Volume-Price Study. Besides, our Modern Portfolio Theory (“MPT”) Study suggests that the capital allocation to Malaysia equity market should improve while the Simulation Study also suggests better reward-to-risk ratio for the upside. Even for the mid-and-small-cap stocks, with the Forward PER of both FBMSC and FBM70 just overcoming their respective mean and -1SD levels, we reckon that there are more upside spaces for these indices.

M&As: The waiting game is over? The domestic market has been languishing at current levels for quite a while and is certainly in need of a massive boost to blast out of its doldrums. Therefore, we reckon what the market really needed is some sort of corporate transformation within the domestic players; namely some M&As, resulting in the emergence of new solid entities. In fact, we are excited over the Telenor/Axiata proposal and view it as a potential catalyst to boost the sentiment of the local bourse. We also believe that such merger talks may not only be limited to the telco sector and we could probably see the emergence of M&A talks in the banking sector as well, which may act as a major market catalyst. Recall that prior to the consolidation of the banking sector in 2006/07, the valuations for the banking sector, as per the KLFIN Index, were trapped at ~16x PER or ~1.6x PBV. During the height of the banking consolidation activities, these valuations charged to >20x or ~2.5x respectively. Likewise, the valuations of FBMKLCI also recorded multi-year highs of 16.1x and >2.2x for its PER and PBV, from 12.2x and <2.0x.

3Q19 Sector Outlook. Compared with the previous quarter, we have downgraded Construction and Plantations sectors to UNDERWEIGHT from NEUTRAL. On the contrary, we upgraded a few NEUTRAL sectors to OVERWEIGHT namely Aviations, Banks & Non-Bank Financials, Gloves and Technology/Semicon sectors. The others are rated NEUTRAL.

Source: Kenanga Research - 2 Jul 2019