The just-concluded 3QCY20 results season led us to raise our FY21 FBMKLCI EPS by 7.6% to 102.8 sen (from 95.5 sen) while adjusting FY20E EPS to 72.3 sen, just 1% less than 73.1 sen previously. The big upgrade to FY21E EPS were due to earnings upgrades in: the three largest banks – MAYBANK (MP; TP: RM8.60), PBBANK (OP; TP: RM20.25) and CIMB (MP; TP: RM3.90). the telcos AXIATA (MP; TP: RM4.00) and TM (OP; TP: RM5.30), as well PMETAL (OP; TP: RM7.50) and HARTA (OP; TP: RM26.22). These upgrades more than offset the downgrade in the earnings of TENAGA (OP; TP: RM12.40).Performance– wise, of the 28 component stocks we cover, 18 were within, 6 above and 4 were below, and of the 134 stocks in our research list, 39 (29%) were above, 57 (43%) were within and 38 (28%) came in below. Compared to the previous quarter, this latest quarter is an improvement in that the percentage of disappointers was lower at 28% versus 32% a quarter ago. As a result of EPS adjustments, our previous FY20 EPS growth estimate is tweaked from -23% to -24% but for FY21, raised from 31% to 42% on stronger earnings. We maintain our sector calls i.e. OVERWEIGHTs: Construction, Gaming, Rubber Gloves, Technology and Utility sectors, UNDERWEIGHTs: Healthcare and Media. Our Top Picks are: GAMUDA (OP; TP: RM4.10), GENTING(OP; TP: RM5.70), HARTA (OP; TP: RM26.22), INARI (OP; TP: RM3.14), KGB (OP; TP: RM2.30), MPI (OP; TP: RM29.00), MRCB (OP; TP: RM0.65), PBBANK (OP; TP: RM20.25), TENAGA (OP; TP: RM12.40) and TM (OP; TP: RM5.30)

Year-end FBMKLCI target remains at 1,603 points: Post-results, we adjust FBMKLCI FY20-21E EPS to 72.3-102.8 sen from 73.1-95.5 sen (vs estimated consensus EPS of 75.2- 103.7 sen). FY21 EPS upgrade is of the kind that is typical for a recovery cycle at the initial stages of a positive turn. On our current target of 1,603 points, the implied one-year forward PE on the just-raised FY21E EPS is 15.6x which is close to the 10-year mean of 15.5x. We believe this to be a fair valuation multiple at the point of the cycle.

End-2021 FBMKLCI target set at circa 1,809 points: Until we have a FY22 EPS forecast for every of our 134 stock universe (that would be available after the final 4QCY20 season closes at the end of Feb 21), we base our end-2021 target by applying the 10-year mean trailing (as opposed to the more often used forward) PER of 17.6x on FY21E EPS. This gives an estimated target of 1,809 or a price return of around 12% over a one-year investment horizon. More conservative investors concerned over risk of earnings downgrades throughout the course of 2021 may choose a multiple of 0.5 SD below mean which is at 16.6x. This would yield a target of 1,706 points.

FY21E FBMKLCI EPS raised 7.6% for the following four reasons; (i) Banks’ FY21 earnings raised on better opex discipline, slightly better loans growth and in PBBANK’s case, lower credit cost. That said, we expect 4QCY20 to be sequentially weaker on the guidance of higher credit charge, much of it pre-emptive front-loading ahead of CY21. Positive is that the results generally show tight opex control and NIM that looks to have bottomed, (ii) Telcos’ earnings upgraded on AXIATA’s faster-than-expected recovery in regional OpCos’ earnings and TM’s better internet services revenue and lower tax rates, coupled with continued improvements in cost efficiencies, (iii) PMETAL’s earnings raised in line with newly projected increase of 5% in aluminium ASP from $1,850 to $1,950/MT following a strong 3QCY20, and (iv) SUPERMX’s (OP; TP: RM12.00) entry into the FBMKLCI should likely increase EPS as its earnings contribution exceeds that of KLCCP (OP; TP: RM8.20) that it replaces. Even after accounting for the dilutive impact of a higher divisor, the rebalancing could potentially enhance EPS by around 2%.

The latest 3QCY20 results mark the second straight quarter of improvement: The percentage of stocks that exceeded our expectation increased from 19% previously (post 2QCY20 results) to 29% – it was 10% post 1QCY20. The percentage that disappointed declined, from 32% to 28% – it was 47% post 1QCY20. In terms of performance relative to market expectations, those that exceeded expectations increased from 16% to 25% (it was just 9% in 1QCY20), while disappointments fell from 38% to 33% (it was 47% in 1QCY20) (see tables in Appendix 1).

A few positive surprises on the dividend front. 3QCYs are not usually dividend paying quarters, and expectations were certainly lower this year. Against lowered expectation, there were a few notable surprises among the big caps, namely from MAYBANK (interim 13.5 sen), PGAS (3 rd interim 18.0 sen brings 9MFY20 DPS to 100.0 sen, exceeding 82.0 sen for FY19) and PETDAG (interim 11.0 sen). Given the improving economic landscape next year, we see raised chances of normalisation of dividends for most companies in 4QCY20 especially from among those largely held by GLICs to help fund the Federal budget as well as from Rubber Gloves on the back of bumper profits.

Two sectors’ results – Rubber Gloves and O&G - came in above, none below: Rubber Gloves (3 above, 1 within) beat expectations on the back of continuous rise in ASP that kept surprising while O&G (8 above, 5 within, 1 below) beat lowered expectations. Oil & Gas appears to have bottomed out in the 2QCY20 marred as it was then by plummeting share prices to record lows and peak lockdowns. Despite the sequential improvement, most of the segment players continued to post markedly weaker YoY YTD numbers. Barring FPSO names, most are still far from pre-pandemic business conditions, hence our NEUTRAL call on the sector. The September quarter (or August in the case of TOPG) marks the first full quarter during which glove manufacturers enjoyed a first full quarter of higher ASP and raised volumes. This is only the beginning of what we believe to be sales momentum building up into at least the 1H of 2021 as we maintain OVERWEIGHT for this sector.

Technology saw a number of record high quarterly net profit being posted: Although the sector came in mixed, with 4 above, 4 within and just 1 below, INARI, MPI, KGB and D&O posted record high quarterly net profit. OSATS such as INARI and MPI rode on the successful iPhone 12 launch in the 3Q which is 5G enabled that require more RF testing and packaging. We remain OVERWEIGHT on this sector on iPhone 12 driven demand, so robust that the world’s largest OSAT, ASE is experiencing orders exceeding capacity that raises ASP with trickle-down effects benefiting smaller players. Rising web computing due to pervasive WFH practices and recovery in automotive markets in China and Europe for which electronic contents in cars are rising bode well for the likes of MPI, UNISEM, D&O, KESM and JHM.

Banking sector’s FY20E EPS downgraded marginally, but raised for FY21E. Neutral call maintained: Banks’ earnings generally were within, although we revised down FY20E EPS very marginally by an average of 0.4% for the sector, while raising FY21E EPS by 1.7%. During the quarter, the sector was impacted by higher credit costs and squeezed NIMs due to OPR cuts but without the previous quarter’s modification losses. However, as banks have guided that post-moratorium, further assistance will be rendered to selective accounts, additional modification losses may be necessary in 4QCY20 but on a much reduced scale. On the adoption of a prudent forward stance, credit cost guidance were raised which meant more pre-emptive front loading of provisions are likely in the 4Q (which are not due to any specific asset quality issues). But this should pave the way for lower credit charge in the coming financial year which led us to raise sector FY21E EPS. Post results, we have upgraded the target prices of most banks for two reasons. Our GGM-derived target FY21E PBVs were raised on: (i) lowered risk-free rate assumption from 3.0% to 2.7%, and (ii) 25 bps reduction in market risk premium to reflect improved economic conditions with increasingly positive news on the development of Covid19 vaccines.

Plantation were broadly within, Neutral call maintained: Generally a good quarter where of the 11 stocks covered, none disappointed while two exceeded expectations. YoY figures were strong – 3QCY20 saw median earnings improvement of 52% on the back of average CPO price rising 28% with average 1% increase in FFB output. Moving into 4QCY20, we expect higher CPO prices to offset a decline in FFB output as peak production season is over in Malaysia. Planters with Indonesian assets however could benefit from the current peak production and high CPO prices. That said, slower implementation of biodiesel mandates due to wide POGO spread remain risks to the sector. Neutral stance maintained.

Source: Kenanga Research - 2 Dec 2020