In our last Strategy Report “A Rocky Road to Recovery” for the 4Q20, we stated that “a virtuous circle of confidence can develop very quickly on positive news of vaccine development, potentially sparking a risk-on mode in 2021”. That scenario is playing out and vaccines are already changing the market narrative that is likely to lead to a rotation trade from bonds to equities. And within the equity class, from growth to value with a focus on 2020’s laggard sectors that were worst impacted by Covid19. We expect liquidity to remain ample despite concerns over a higher budget deficit in 2021 and questions over cashflow impacts on pension funds due to expanded withdrawal facility – all the more the reason why BNM will keep financial conditions loose for an extended period. Interest rates are not about to rise globally, but even after allowing for a 20 bps rise in the domestic risk-free rate, an expected decline in equity risk premium towards mean from elevated levels will likely support the market. As the rubber gloves sector mean reverts, we revise theFBMKLCI’s target PE multiple to15.7x from 16.8x since our last report a quarter ago. On ourjust introduced FY22 EPS of 109 sen, we see our market potentially reaching a target of 1711 by the end of 2021. We have OVERWEIGHT calls on: Automotive, Construction, Gaming, Rubber Gloves, Technology, Tobacco & Brewery and Utilities. UNDERWEIGHT Healthcare and Media. Top picks for 1Q21 are: AIRPORT (OP, TP: RM6.86), AXIATA (OP, TP: RM4.30), CARLSBG (OP, TP: RM26.50), GENTING (OP, TP: RM5.70), HARTA (OP, TP: RM21.00), INARI (OP, TP: RM3.14); MPI (OP, TP: RM29.00), RHBBANK (OP; TP: RM6.30), SUNCON (OP; TP: RM2.45), TENAGA (OP, TP: RM12.40) and ULICORP (OP; TP: RM1.45)

FBMKLCI’s FY21 EPS raised post 3QCY20 results earnings season, earnings turnaround in sight in 2021: A review of 3QCY20 results and corporate guidance led us to raise FBMKLCI’s 2021’s EPS expectation by 7.6% to 102.8sen. This marked our first upgrade after three straight quarters of disappointments. And, post TOPGLOV’s bumper results on 9 December, we further raised it by 3.4% to 106.3sen. While tweaking FY20 EPS to 74.1 sen (from 73.1), the big upgrade to FY21E EPS (from 95.5 sen to 106.3) were due to upgrades in the banks, telcos, rubber gloves and positive impact on earnings from FBMKLCI rebalancing. Post these adjustments, the core EPS for FY20 represents -22% annual contraction and a rebound of 43% in FY21, from a low base (chart 1). In hindsight, it is fairly safe to say that earnings have indeed bottomed in the 2Q20, due to the worst impact of the MCO taking hold during this period. On our estimates, the FBMKLCI EPS bottomed in 2QCY20 at 13.1sen and 4QCY20 should see 22.2sen (chart 2). We expect a sequential growth of 30% in the 2H20 over 1H20 to bring the full year 2020 EPS to 74.1 sen. We see strong sequential growth in the banks just on the absence of large modification losses that dragged 1H20 and loans to pick up despite increased estimates in credit costs in the final 4QCY20 due to front loaded pre-emptive provisioning. This would pave the way for a more resilient rebound in 2021 as OPR cuts reach a tail end and provisioning levels more adequately provided for. The gloves sector will continue to drive the KLCI’s EPS growth on the back of continued upsurge in ASP while sharp turnarounds in GENTING and loss maker GENM further contribute to this upside.

Source: Kenanga Research - 4 Jan 2021