The just-concluded 2QCY19 result season disappointed both our and market expectations. Among the key large sector components of the FBMKLCI index, none surprised pleasantly. The biggest disappointment was the Plantation sector. Other key large sectors, namely Banks, Utilities and Telecommunications came in line, with the Oil & Gas sector coming in just slightly better (shored up by MISC and DIALOG with PCHEM exceeded an already lowered expectation). The number of downgraded target prices outnumbered upgrades, which led us to revise downwards our year-end target index closing from 1,745 previously to 1,687. Target price downgrades were overwhelming in Plantation and Technology sectors were mitigated to some extent by upgrades in the Oil & Gas and Automotive sectors.

Year-end KLCI target lowered: Post review, we reduced our FBMKLCI earnings growth projection for 2019. And, as our analysts adjusted their respective stocks’ target prices, our end-2019 index target is reduced from 1,745 previously to 1,687. At the bottom-line, CNP growth for FY19E was adjusted from -2.6% to -3.1%, while FY20E growth was raised from +4.6% to +15.4%.

Plantation sector led the downgrade: 2019 FBMKLCI’s growth estimate was reduced mainly on earnings downgrades in the Plantation sector. While previously we had projected a 2.6% CNP decline for the FBMKLCI, we have cut this down further to 3.1%. From a lowered earnings base in 2019, this sector also contributes to the major uptick to FBMKLCI’s growth estimate for 2020 which we have raised from 4.6% to 15.4%. This compares with consensus growth projections of +4.0% and +6.5% for CY19 and CY20, respectively. We believe that the consensus numbers are still being adjusted downwards.

The number of pleasant surprises were few: Just 9% of stocks covered (12 out of 140) exceeded expectations, of which the largest group was from oil & gas (4), followed by automotive (3). 36% came in below expectation (50 out of 140) – the biggest disappointments were those in Plantation (10), Property (6) and Technology (5). 56% reported results within expectation, numbering 78 stocks in total.

Trend-wise, it is not encouraging: The number of stocks that exceeded our expectations fell from 18 previously (post 1Q19 results) to 12, while the number that disappointed increased from 39 to 50. In terms of performance relative to market expectations, those that exceeded fell from 11 to 7, while disappointments increased from 38 to 52.

Target Price cuts outnumbered upgrades by 2 to 1: Out of 140 stocks covered, 50 TPs were cut compared to 22 that were raised. As for Rating changes, there were 21 recommendation upgrades (but mostly on price downturns rather than improved earnings), and 16 downgrades.

Sector-wise, (i) Building Materials, (ii) Plantation, and (iii) Semicon/Technology were weaker, while (iv) Oil & Gas was marginally better and (v) Banks were mostly within expectations (see Figure 8 for details).

• Building Materials: For the second quarter running, Building Materials disappointed. All 4 counters (ANN JOO, PMETAL, ULICORP and WTHORSE) disappointed mainly due to lower-than-expected ASP, higher-thanexpected input cost and weaker demand,

• Plantation: Sector was hugely disappointing where 10 (out of 13) missed our forecasts and 11 missed consensus estimates as the average realised CPO prices were lower-than-expected, worsened by higher operating cost (mainly labour and fertiliser). Only the unloved FGV came in above.

• Semicon/Technology: 5 out of 6 counters we cover missed – the same as previous quarter. Only MPI shined. Median YoY earnings decline was 26% due to general slowdown in semiconductor demand and consumer spending.

• Oil & Gas: Mostly satisfactory this season, with just PETDAG coming below (versus 4 disappointments in the last quarter). MISC came in above on improved spot rates as did DIALOG on higher contributions from tanker storage and EPCC.

• Banks: Banks generally came in within expectations, with the exception of ABMB and MBSB, which were below due to higher-than-expected provisioning. A common thread underlying all reported earnings was NIM compression, but we were pleasantly surprised with a number of banks reporting lower cost-to-income ratio. Another common thread was significant mark-to-market and trading gains reported on debt mitigating to some extent the negative impact of NIM compression.

As for our 2Q19 Top Picks, MBMR delivered better-than expected results on the back of higher associates contribution from the hot-selling Perodua Myvi and Aruz. The stock’s massive return of over 93% YTD which has priced in much of the positives, in our view, prompts us to downgrade our call to MP. PWROOT’s 1QFY20 earnings also beat estimates on stronger domestic sales and improved distribution, which prompts us to keep the OP recommendation with total return of 23% from these levels. Among our larger cap, favourites are CIMB as we expect its domestic loans to grow above system, with Niaga’s loans to pick up in the 2H19 on demand from the consumer segment. Valuation is undemanding at just 0.8x P/B.

ABMB on the other hand, fell short due to higher-than-expected provision and NIM compression. Despite the disappointment, we kept our OP call on attractive dividend yield of 6% and a P/B of just 0.75x.

HARTA and KOSSAN were within expectations with Kossan delivering a stellar 30% net profit growth led by new added capacity. Earnings growth in coming quarters will be boosted by higher ASPs and weakening MYR against the USD.

Our Underweight Call on Plantation sector remains for now: Results this time round missed expectation on account of lower-than-expected CPO price (realised price fell 15%) masking an average FFB increase of 5% on seasonality factors. That said, we expect a better 2H19 based on higher CPO prices (currently at RM2,200) compared to RM1,800 – RM2,000 that most planters reportedly achieved in 1H19. We may look to upgrade the sector to NEUTRAL should we see signs of weaker-than-expected production or stronger-than-expected exports.

We see near term upside to 1,639: Note that our KLCI target of 1,687 is derived from a bottom-up computation of our target prices of the individual components. On the latest consensus estimates, 1,687 represents a 12-month forward PE of 17.5x which is 2-SDs above the 5-year mean. The current market level of 1,591 sits just above market mean of 16.4x. From a top-down perspective, we reckon that it would be justifiable to pay a mean PE valuation at this point of the cycle (instead of a discount favoured by pessimists). Taking an average between a top-down and bottom-up approach, a reasonable year-end target for tactical investors would be closer to 1,639 (which at 16.9x is +1-SD above mean). We feel that paying a premium over mean is justifiable given that (i) earnings projections are probably now more robust post result season downgrades, (ii) a seasonally strong quarter is ahead of us, (iii) a preference for high yielders (as policy turns accommodative) will support the Banks which is a large KLCI component, many of which are trading below book and (iv) the potential merger between Telenor and Axiata is still in the works.

Post results, we maintain OUTPERFORM call on our 3Q19 Top Picks : ABMB (TP: RM3.45 ↓), CIMB (TP: RM6.45 ↔), D&O (TP: RM0.625 ↓), HARTA (TP: RM5.85 ↔), KOSSAN (TP: RM5.25 ↔ ), PANTECH (TP: RM0.690 ↔), PWROOT (TP: RM2.30 ↔) and SAPNRG (TP: RM0.430 ↔). We downgrade only MBMR to MP after its stellar price run which led us to believe that much of the stock’s positive are already priced in.

Source: Kenanga Research - 4 Sept 2019