The extended 1QCY20 reporting season concluded yesterday on a downbeat note as the number of earnings disappointments increased over the previous quarter. 136 out of 137 stocks that we cover released results and guidance that led to earnings downgrades overwhelming upgrades by a ratio of about 4 to 1 for FY20 and 3 to 1 for FY21. 59 (44%) came in within, 14 (10%) above and 63 (46%) below our expectations. Sectors that disappointed the most - with over half in number coming in below our and consensus expectation - were Media, Plantations, Property, Sin (a.k.a Brewery & Tobacco) and Technology. No sector surprised pleasantly, while the sin sector, traditionally counted on to deliver dividends consistently, all disappointed with the reduced or absence of interim dividends. Of the 28 FBMKLCI component stocks we cover, 13 were within, 12 below and only 3 were above. We trim FY20/21 EPS of the FBMKLCI (post earnings review and housekeeping adjustments for inclusion of TM and KLCC) from 78.5/88.4 sen (updated on 1st June) to 77.2/87.8 sen versus the currently available Bloomberg consensus of 75.9/90.7 sen. With the FBMKLCI at 1,514 currently, we see 6% downside risk as we place our year-end FBMKLCI target at 1,422 – arrived at by applying 16.2x on FY21 EPS of 87.8 sen. Overweight - Construction, Gaming, Property, Rubber Gloves, Technology and Utility sectors. Underweight - Automotive, Building Materials, Healthcare, Media and Sin (Tobacco & Brewery). Our Top Picks for 3QCY20: BJTOTO (OP; TP: RM2.55), D&O (OP; TP: RM0.860), F&N (OP; TP: RM36.20), GAMUDA (OP; TP: RM4.10), MALAKOF (OP; TP: RM1.02), MPI (OP; TP: RM13.30), RHBBANK (OP; TP: RM6.00), TOPGLOV (OP; TP: RM25.00), SUNCON (OP; TP: RM2.45) and TENAGA (OP; TP: RM13.95)

Tweaked up FBMKLCI year-end target to 1,422: Despite further reducing FY20/21 EPS estimates since 1st June of 78.5/88.4 sen to 77.2/87.8 sen, post this just concluded results season, we bump up our year-end target from 1,406 to 1,422 as we apply a higher PE multiple of 16.2x on FY21 EPS of 87.8 sen (versus 15.9x on 88.4 sen previously). We justify the application of a higher PE multiple on the grounds that 10- year MGS yield – a proxy for the risk free rate - is now lower (which we believe will remain low for an extended period) which we pegged at 2.90%. Coupled with an equity market risk premium of 3.28% (which is +1SD above 10-year mean to reflect mounting concerns over recovery uncertainties, increased political and governance risks), the applicable expected earnings yield is 6.18%, the reciprocal of which is our forward PE multiple of 16.2x.

Those that disappointed outnumbered those that exceeded expectations by a ratio of 3 to 1: Of the 137 stocks that we research, only AIRASIA has yet to announce results. And of this 136, earnings from 59 (44%) came in within, 63 (46%) below and just 14 (10%) exceeded lowered expectations. Among the FBMKLCI heavyweights, notable FY20 earnings downgrades were CIMB (-28%), AXIATA (-25%), SIMEPLT (-34%), PETDAG (-48%), GENTING (-40%), and GENM (-39%) which outweighed upgrades in MISC (+32%), HARTA (+56%) and TOPGLOV (+103%).

Within our research universe, FY20 earnings downgrades overwhelmed upgrades 4 to 1: All in, the team has cut forecasts for 73 stocks with just 13 upgrades (where rubber gloves stood out as the only one sector where all stocks’ earnings were raised). Sectors for which results disappointed in a big way with earnings expectations cut were plantation, gaming, media, property and sin where CARLSBG, HEIM and BAT came in short on earnings as well as dividends. Lowered dividends were a common trend across the board even for sectors traditionally counted on for yields as most corporates guided for cash preservation as a priority to ride out this challenging period

Source: Kenanga Research - 2 Jul 2020