The 3QCY19 result season turned out to be not bad at all. While not exactly a rip roaring performance either, at least no one sector disappointed hugely by our account. Given the extreme negative sentiment and expectations around large caps all this year, this must have come as a relief. If we must point to something negative, it is that rubber glove makers came in short due to labour issues and delayed cost pass-throughs and the improvement in CPO price since mid-year has yet to translate into stellar earnings for the plantation sector. Among large cap KLCI components, those that surpassed our expectations were TENAGA, CIMB, GENM, GENTING and AIRPORT while the three planters SIMEPLT, KLK and IOICORP missed meeting our earlier raised expectations. Post-results, we raised our FY19/FY20 EPS estimates marginally from 94.7/100.9 to 95.2/101.6 and revise our year-end target for the FBMKLCI from 1,642 to 1,615. These revisions represent EPS growth of -2.6% and +6.7% versus our previous -3.1% and +6.5% estimates for FY19 and 20 respectively. Our thesis of an earnings turnaround remains intact.

Reduced year-end KLCI target to 1,615 points: Post review, we tweaked up our FBMKLCI EPS estimate for FY19 from 94.7 to 95.2 and for FY20 from 100.9 to 101.6. And, applying a 12-month forward PE of 15.9x (5-year mean) to 2020 EPS of 101.6 gives a year end target of 1,615. At the core net profit level, CNP and EPS growths for FY19E were adjusted from -3.1% to -2.6%, while FY20E growth was raised from +6.5% previously to +6.7%. Currently, consensus EPS projections are 95.6 and 102.9 for CY19 and CY20 respectively.

Plantation sector missed our raised expectations. Post results, we raise FY20 EPS growth due mainly to a reduced current year base on lower-than-expected realised CPO prices and in certain cases, higher than expected production costs.

FBMKLCI EPS for FY19/FY20 raised by 0.5%/0.7%: EPS were marginally raised on positive revisions in AIRPORT, GENM, GENT, TENAGA and CIMB. EPS growth for plantation stocks were also raised from levels estimated at the end of August at the conclusion of the previous 2QFY19 reporting season.

Trendwise looking encouraging: The number of stocks that exceeded our expectation increased from 12 previously (post 2QCY19 results) to 25 – it was 18 post 1QCY19. The numbers that disappointed fell from 50 to 42 – it was 39 post 1QCY19. In terms of performance relative to market expectations, those that exceeded expectation increased from 7 to 21 (it was 11 in 1QCY19), while disappointments fell from 52 to 48 (it was 38 in 1QCY19) (see tables in Appendix1).

Four sectors contributed to the increase in number of pleasant surprises: 3 (SCGM, TGUAN and SCIENTX ) from Plastic and Packaging came in above compared to none previously, CARLSBG and HEIM exceeded expectations among those in the Sin sector (there were none previously). Property sector contributed 5 pleasant surprises versus 2 previously and Plantation saw the unloved FGV and TAAN beating expectations (versus just one previously).

Our Overweight Sectors – Rubber Gloves and Banks/Non-bank Financials came in mix and within our expectations, respectively. We maintained CY20E growth for the Banking sector at 3.1% but raised that for the Rubber Glove sector from 10.9% to 22.3% mainly due to a lowered base for KOSSAN and TOPGLOV (reported end Sept) in the current year, while maintaining forecast for the next FY. KOSSAN’s current year estimates were reduced to account for labour issues and TOPGLOV for lower-than-expected margins for latex gloves. For the Banks, we noted that NIMs remained compressed YoY but recovering on a sequential basis which would likely mean positive NII growth momentum in the 4QCY19. Credit costs were generally steady with the exception ofAFFIN, ABMB and AMBANK. Domestic loan is gaining traction. Overseas segments were mixed, with CIMB and HLBANK reporting robust offshore earnings while MAYBANK reported rise in NPLs in Indonesia and Singapore. Although none exceeded expectations, the Technology Sector saw 3 (MPI, KESM, PIE) of the 6 companies we cover reporting earnings that came in line – an improvement over 5 misses in the last quarter.

Source: Kenanga Research - 3 Dec 2019