Surging infections since late May has delayed the anticipated recovery in the domestic economy. But June’s renewed lockdown and acceleration in vaccinations should likely lead to reductions in infections, paving the way for a volatile and somewhat hesitant rise in equities in the 2HCY21 amidst an investment landscape spooked by fears of an uneven recovery. The risk-free rate is vulnerable to an increase not only on fears of further pension funds’ asset liquidation or US inflation, but also because of an increasingly stretched Federal Government’s balance sheet. Despite these headwinds, our picks based on beneficiaries of economic reopening – selected tourism-related and consumer plays – remain among our top picks along with the Tech sector. Target prices for REITs however, are reduced on technical grounds due to a higher discount rate. We introduce e-payment service providers riding on the exponential growth in the widespread use of digital transactions as a new investment theme that investors should not miss. As for the FBMKLCI, we lower our applied PE multiple from 15.3x to 14.3x to account for a higher risk-free rate and market risk premium. With corporate earnings expected to rebound 43%/2% in FY21E/FY22E, we value the FBMKLCI on 14.3x FY22E EPS of 110.0 sen giving a year-end target of 1,575. While upside to FBMKLCI may be limited, market pullbacks are selective buying opportunities. We have OVERWEIGHT calls on: Building Materials, Construction, MREITs, Gaming, Rubber Gloves, Technology/Semiconductor and Utilities. Top picks for 3Q21 are: D&O (OP, TP: RM5.50), GAMUDA (OP, TP: RM3.75), GENTING (OP, TP: RM6.05), GHLSYS (OP, TP: RM2.30), INARI (OP, TP: RM4.00), MAYBANK (OP, TP: RM10.65), PADINI (OP, TP: RM3.60), SCGM (OP, TP: RM3.02), TGUAN (OP, TP: RM3.38) and TM (OP, TP: RM7.00).

The 1QCY21 results season concluded at the end of May in fairly good shape: On the basis that over half of our stock universe met expectations, and among the bell-weather FBMKLCI components, over half also met expectations with outperformers outnumbering misses by 2 to 1, it has not been a bad conclusion to a challenging quarter. The sectors that disappointed most were construction, media and gaming while building materials outperformed expectations.

Reading between the lines and from guidance provided by management where available, we raised the FBMKLCI’s FY21E/FY22E EPS by 2%/2% to 114.9/113.6 sen. But with MR DIY replacing SUPERMX in the June FBMKLCI semi-annual review confirmed, we cut EPS by 4%/2% to 110.2/111.5 sen (and again this week post announcement of the extended FMCO and PEMULIH aid package to 108.1/110.0 sen). Amongst sectors in the broad market, building materials outperformed expectations the most. Those that disappointed were construction, gaming and media sectors.

Source: Kenanga Research - 30 Jun 2021