The just-concluded 2QCY20 results season had us reducing our FY20 FBMKLCI’s EPS by 12.3% to 68.7 sen and for FY21 by 1.9% to 91.4 sen. Largely to blame were big earnings downgrades for CIMB (MP; TP: RM3.45), GENM (OP; TP: RM2.75), GENTING (OP; TP: RM5.10), PETDAG (UP; TP: RM17.95), PCHEM (MP; TP: RM5.75) and TENAGA (OP; TP: RM13.90). Of the 28 component stocks we cover, 13 were within, 6 above and 9 were below. And of the 139 stocks in our research list, 26 (19%) were above, 68 (49%) were within and 45 (32%) came in below. Compared to the previous quarter, this latest quarter is an improvement in that the percentage of disappointers were lower at 32% versus 47% a quarter ago. Nevertheless, as a result of reduced EPS estimates, our previous FY20 EPS growth expectation is reduced from -17.8% to -27.8% but for FY21, raised from 19.0% to 33.0% on a lowered base. Applying our unchanged 17.4x target PE multiple on the reduced FY21 EPS of 91.4 sen yields a year-end target of 1,590 for the FBMKLCI versus our previous target of 1,618. We maintain our sector calls i.e. OVERWEIGHTs: Construction, Gaming, Property, Rubber Gloves and Technology sectors, UNDERWEIGHTs: Automotive, Building Materials, Healthcare and Media. Our 3QCY20 Top Picks are: BJTOTO (OP; TP: RM2.40), D&O (OP; TP: RM1.20), GENM (OP; TP: RM2.75), HARTA (OP; TP: RM26.22), HLBANK (OP; TP: RM17.00), MPI (OP; TP: RM18.80), PWROOT (OP; TP: RM2.75), RHBBANK (OP; TP: RM5.75), SUNCON (OP; TP: RM245) and TENAGA (OP; TP: RM13.90).

Reduced year end KLCI target by 2% to 1,590 points: Post review, we reduce our FBMKLCI EPS estimate for FY20 from 78.3 sen to 68.7 sen and for FY21 EPS from 93.2 sen to 91.4. EPS upgrades were marginal (there were 10 components which FY20E EPS were raised by 6% on a simple average basis) but the cuts were deep (11 lowered by an average of 57%). And, skewed up by the gloves – TOPGLOV (OP; TP:RM32.00) and HARTA at their respective 22x and 38x FY21E target PE multiples - we continue applying a 12-month forward PE multiple of 17.4x (2-standard deviation above the 10-year mean) to FY21E EPS, which gives a year end target of 1,590. At the core net profit level, CNP and EPS growth for FY20E were adjusted from -17.8% to -27.8%, while FY21E EPS represents growth of 33.0%, on low based effect. Currently, consensus EPS projections are at 71.8 and 93.5 for CY20 and CY21 respectively, which we believe are prone to downgrades in the coming weeks.

2HFY20 earnings are expected to do better: Sequentially, our full year forecast of 68.7 sen implies a delivery of 38.7 sen in 2HFY20 versus an estimated 30.0 sen achieved in the 1HFY20. We see strong sequential growth in HARTA and TOPGLOV as well as sharp rebounds in PETDAG (UP; TP: RM15.60), TENAGA (OP; TP: RM13.90) and SIMEPLT (MP; TP: RM5.10) contributing to this upside in the 2H.

Five sectors’ results came in below, only one above: The five sectors that disappointed were Building Materials (1 within, 3 below), Gaming (all 4 below), Healthcare (ex-Gloves) (1 within, 2 below), Oil & Gas (4 above, 3 within, 7 below) and Property (1 above, 4 within, 6 below). The only sector that came above expectation was Plastic & Packaging where 4 came in above and 1 within. Due to low resin cost and to better product mix, this sector’s margins improved significantly leading us to increase TPs and/or calls for most plastic packagers by 40-90% on better earnings and valuation multiples.

Covid-19 disrupted victims continued to suffer further earnings downgrades: The most severe cuts continued to impact the tourism/leisure, airlines, consumer and selected retail sectors. The gaming sector’s GENM and GENT are projected to end FY20 with losses and their FY21E EPS reduced by about 40% each. NFOs BJTOTO (OP; TP: RM2.40) and MAGNUM (MP; TP: RM2.20), too posted losses in the latest quarter and leading to cuts in EPS on lower ticket sales assumptions. For BJTOTO FY21E EPS was cut 13% and 16% for MAGNUM. Despite these revisions, values have emerged from the heavy sell-down especially for GENTING, BJTOTO and GENM, such that the risk-reward balance looks favourable. 2HCY20 is expected to improve for both casino and NFOs as businesses have resumed with volumes picking up gradually although it is unlikely to recover to pre-MCO levels sooner. KLCC (OP; TP: RM8.55) saw its EPS FY20E and FY21E EPS reduced 9% and 7% respectively mainly to reflect poorer outlook for the Mandarin Oriental. For AIRASIA (UP; TP: RM0.38), losses are projected to widen from RM1.8b in 1HCY20 to RM2b for the full-year, with visibility very much lacking as it struggles to fund stressed operating cashflows.

Although fairly disappointing in that earnings projections had to be reduced, it is less disappointing than 1QCY20: The percentage of stocks that exceeded our expectation increased from 10% previously (post 1QCY20 results) to 19% – it was 21% post 4QCY19. The percentage that disappointed declined, from 47% to 32% – it was 33% post 4QCY19. In terms of performance relative to market expectations, those that exceeded exectations increased from 9% to 16% (it was 15% in 4QCY19), while disappointments fell from 47% to 38% (it was 32% in 4QCY19) (see tables in Appendix 1).

Banking sector’s FY20E EPS downgraded marginally. Neutral call maintained: Banks’earnings generally were in line, although we revised down FY20E EPS marginally by an average of 3.2% for the sector, while raising FY21E EPS by 2.8%. The sector was impacted by higher credit costs and squeezed NIMs due to OPR cuts and to modification losses. On lowered earnings and adoption of a prudence forward stance, the lack of dividends (nil or deferred) was a disappointment but probably necessary. Earnings squeeze from generally unfavourable factors were offset by the positive impact of 100bps lowered SRR, which also allowed for investments in MGS and GII to count towards reserves. A positive then was higher non-interest income due to trading and investment gains riding on buoyant capital markets. Moving into 2HCY20, the sector’s earnings should see a sequential improvement on much lowered modification losses. Banks have guided that post-moratorium, further assistance will be rendered to deserving, selective accounts. For this, additional modification losses will be necessary in 4QCY20 but on a much reduced scale. The question is when do loans that receive targeted assistance need to be staged. Hence, there is still some lack of clarity on the outlook on credit impairments at this stage although it is comforting to note that banks have continued to add management and macro overlays to boost pre-emptive loan provisionings.

For Rubber Gloves, results were mix and the OW call remains for there are no signs yet that the pandemic is easing globally to suggest that easing ASP is on the horizon. This sector’s results were mixed, with KOSSAN (OP; TP: RM17.10) and SUPERMX (OP; TP: RM25.45) coming in above expecations while HARTA and TOPGLOV, which earlier reported for the May quarter, came in within expectations. With ASP hikes kicking in from July, we expect them to deliver record earnings in the second half of this calendar year with momentum likely to extend into next year, considering that the order pipeline extends well into mid-2021.

Plantation were broadly within, Neutral call maintained: Only 1 out of 13 companies covered missed our forecast, while 3 exceeded. YoY figures were strong – 2QCY20 saw average CPO price rising 18% with average 6% increase in FFB output for the industry. As a result median earnings improved 53%. QoQ, CPO price decline of 12% was more than offset by higher average FFB output of 21%, leading to 60% median earnings improvement. Moving into 3QCY20, earnings are expected to improve sequentially on the back of higher average CPO prices and FFB output during the typical peak Sep-Oct period. However, of concern is that stockpiling by major buyers China and India may have reached an end for now and the wide POGO spread may slow the implementation of biodiesel mandates.

Utilities, where yields can be found: Although this sector’s results came in mix, there were pleasant surprises on dividends. GASMSIA (UP, TP: RM2.85), PETGAS (MP; TO: RM16.85) and MALAKOF (OP; TP: RM1.15) outperformed expectations with PETGAS surprised pleasantly with a 50.0 sen special dividend and MALAKOF declaring a higher interim dividend. TENAGA disappointed due to what we see as one-off Covid-19 impact but earnings should normalise in FY21 with the bulk of it covered by the IBR framework. We see this sector as a safe harbour for yields where GASMSIA, MALAKOF, PETGAS, TENAGA and YTLPOWER potentially are providing dividend yields of between 4-7%.

Oil & Gas – disappointing with half of 14 stocks covered reported results below expectations: Disappointments were attributable to MCO-disrupting operations or impacts of declined oil prices. PCHEM and PETDAG earnings were badly impacted by narrowed spreads as low oil price suppressed product prices. In line with disappointing earnings, so too were dividends which more than halved compared to a year ago. Low oil prices were disincentives to upstream activities especially green fields which impacted upstream operators such as DAYANG (MP; TP: RM1.20), MHB (MP; TP: RM0.39), UZMA (MP; TP: RM0.57), VELESTO (UP; TP: RM0.13) and WASEONG (UP; TP: RM0.43). Only DIALOG (OP; TP: RM4.25) and YINSON (OP; TP: RM7.10) stood out as praiseworthy deliverers of earnings and although ARMADA (OP; TP: RM0.30) too surprised positively, we caution that with net gearing at 2.8x, it has elevated balance sheet risks, hence our “trading” OP call.

Remain positive on Technology, OW call maintained: Sector results came in broadly within expectations. 2 stocks that outperformed MPI and INARI (OP; TP: RM2.50) while only KESM (MP, TP: RM7.40) disappointed among our expanded universe of 8 covered stocks. Most reported 1HCY20 CNP that were below 50% of our full year forecasts but forward guidance were overwhelmingly bullish. Where they disappointed in the 2QCY20, it was not so much due to idle capacity (as this was well expected and guided earlier) as it was due to unforeseen cost escalations to cope with safety issues and MCO adherence procedures. MPI stood out, beating our and consensus estimates resoundingly, registering annual record sales value of RM1.56b for FY20 (YE-June). With orders deferred and not cancelled, we expect a strong 2H on the back of the 5G Apple iPhone launch. Recovery in the China’s automotive market and EU and the US showing encouraging early signs of recovering bodes well for D&O, KESM and JHM especially.

Source: Kenanga Research - 2 Sept 2020