Following the conclusion of 1QCY20 results last week, we raised our year-end FBMKLCI target to 1,422 based on a raised forward PE multiple of 16.2x (from 15.9x previously). Directionally, we were right. But not quite enough. On deeper reflection, we have used too broad a brush (from a top-down perspective) on valuation that misses the point that two significant components – glove makersTOPGLOVand HARTA – are at the cusp of an extraordinary growth phase. Modelling a new style of valuation, we apply a finer brush: 16.2x to FBMKLCI EPS ex-glovesand 36x to TOPGLOVand 43x to HARTA’s,thesum of which yields a target level of 1,531. The implied target forward PE multiple is thus 17.4x FY21 EPS. We caution that the path from here to 1,531 will be volatile, not least because the market’s implied optimistic, but questionable assumptions about the containment of the pandemic’s second wave and robust earnings recovery will be tested in the months ahead. The higher 16.2x PE multipleapplied to FY21 EPS (ex-gloves) versus 15.9x previously, was mainly to account for an extended period of low interest rates, coupled with abundant liquidity. However, as the equity market risk premium remains elevated – a reflection of the volatile path ahead moving towards next year’s recovery – we recommend a barbell strategy by sticking with the defensives that can be found in dividend yielders, utilities and beaten down consumers names to anchor portfolios, while also selectively overweight cyclicals in the technology and construction space. Our top picks for 3QCY20 are BJTOTO (OP; TP: RM2.55), GAMUDA (OP, TP: RM4.30), JHM (OP; TP: RM2.00), MALAKOF (OP, TP: RM1.02), MPI (OP; TP: RM13.30), PWROOT (OP, TP: RM2.45); RHBBANK (OP; TP: RM6.00), SUNCON (OP; TP: RM2.45), TENAGA (OP, TP: RM13.95) and TOPGLOV (OP; RM25.00).

FBMKLCI 2020E and 2021E EPS lowered: A review of 1QCY20 results and guidance led us to cut FBMKLCI 2020 and 2021 EPS expectations for a second consecutive quarter. Earnings were also tweaked to account for rebalancing adjustments where TM (MP; TP: RM4.20) and KLCCP (MP; TP: RM8.10) replaced AMBANK (OP; TP: RM3.60) and AIRPORT (OP; TP: RM5.45). Overall, FY20/21 EPS were reduced to 77.2/87.8 sen from 84.5/96.6 sen. These revised EPS pale in comparison with FY19’s 95.2 sen. The FBMKLCI EPS for FY20 represents 18.9% annual contraction before recovering 13.8% in FY21, off a much lowered base. Consensus EPS according to Bloomberg as at 30th June stood at 75.9 sen for FY20 and 90.7 sen for FY21 (see Chart 1). Given that consensus EPS for FY21 is some 4% higher than ours, we expect the market to continue adjusting expectations downwards in the months ahead

Source: Kenanga Research - 8 Jul 2020