Besides having to endure the effects of Covid-19 like everyone else, Malaysian equities also bore the brunt of the collapse in oil price during a brutal 1QCY20 sell-off and uncertainties that come with a changed political landscape. We had previously been expecting corporate earnings to turn around in 2020, leading to a positive re-rating of the stock market valuation. But that is now impossible. Still, the point must be made that this overwhelming pessimism and fear may have been largely priced into the sharp sell-off in just about everywhere. Under these circumstances, we find 1,220 to be a solid fundamental support based on a market price-to-book ratio of 1.2x – a level last seen during the 2008 GFC. When the market recovers, the upside to this battered market on a 6 - 12 months investment time horizon is 1,463, applying a 2 standard deviations below-mean multiple on reduced EPS expectations. While the market risk premium remains elevated, stick with the defensive yielders to anchor portfolios but for alphas, remember to overweight tech as supply chain recovery plays and selected consumer plays for eventual earnings recovery. Our top picks for 2QCY20 are D&O (OP; TP: RM0.90), F&N (OP, TP: RM35.20), HARTA (OP; TP: RM8.00), KESM (OP; TP: RM10.20), MEDIAC (OP, TP: RM0.245), MPI (OP; TP: RM13.30), PADINI (OP, TP: RM2.40), PWROOT (OP; TP: RM2.65), QL (OP; TP: RM8.30) and TM (OP, TP: RM4.30).

FBMKLCI’s 2020 and 2021 EPS lowered: The recent oil price collapse and a relook at the Covid-19 impacted sectors led us to cut EPS for 2020 from 102.4 sen a quarter ago to 87.2 sen. This cuts the FY20 EPS growth estimated previously at +7.5% to -8.4%. Sectors for which EPS were downgraded most were tourism related – GENT, GENM and MAHB were cut 27%, 29% and 28%, respectively. So too were Banks (sector earnings reduced 13% from a quarter ago) and those in the oil & gas sector. The FBMKLCI EPS estimate for FY21 now stands at 98.2 sen - reduced from 107.5 sen a quarter ago - which represents 12.6% recovery over FY20, off a much lower base.

For the FBMKLCI in 2020, we see banks, utilities, oil & gas and gaming sectors’ earnings decline. Offsetting these are growth in plantation’s earnings on better CPO price, rubber gloves on near-term Covid-19 led demand upside and telecommunications on defensive organic demand growth. However, building materials component Press Metal’s earnings should likely come in negative-to-flat despite new capacity coming on stream end-3Q20 on weaker ASP. And there are risks to the downside for the automotive sector despite low interest rates given disruptions to employment and wage growth due to economic weakness.

Source: Kenanga Research - 31 Mar 2020