The just concluded 2QCY21 results season saw a mixed performance overall that led to slight earnings upgrades. Of the 133 stocks in our research universe, 123 have reported results, with 59 (48%) coming in “within”, 31 (25%) “above” and 33 (27%) “below”, our expectations. Of the 28 FBMKLCI components that we cover, 17 (61%) were within, 7 (25%) above, and 4 (14%) were below, expectations. Against our estimates, the Plantations sector had an overwhelming 73% of stocks surpassing expectation. The other two sectors that surprised positively were Utilities and Healthcare while sectors leading the misses were Construction, Gaming (both for the second straight quarter), Sin and Consumer. An earnings review led us to raise the FBMKLCI’s FY21E/FY22E EPS from 108/110 sen to 110/113 sen. The big upgrades in earnings of KLK, SIMEPLT IHH, CIMB and PCHEM more than offset earnings cuts in GENTING and GENM. Earnings were raised for the plantation sector on higher realized ASPs, PCHEM for higher product margin spread and IHH for improved contributions of its Turkish and Indian hospital chains while GENM and GENTING’s FY21E earnings were cut after imputing more severe lockdown impact on patronage. Compared to 1QCY21, the 2QCY21 fared better in that the percentage of outperformers against our in-house estimates is higher at 25% versus 17%, while the misses were less at 27% versus 30% previously. As a result of raising FY22E EPS from 110 to 113 sen, the year-end FBMKLCI target is raised from 1,639 to 1,683 on an unchanged forward PE multiple of 14.9x. Our Top Picks are: F&N (OP; TP: RM33.15), GENTING (OP; TP: RM6.05), GHLSYS (OP; TP: RM2.30), INARI (OP; TP: RM4.80), MAYBANK (OP; TP: RM10.65), PMETAL (OP; TP: RM6.50), RHBBANK (OP; TP: RM6.15), TENAGA (OP; TP: RM11.76), TGUAN (OP; TP: RM3.70), TM (OP; TP: RM7.00).

Year-end FBMKLCI target raised by 3% to 1,683: Post results, we adjust FY21E/FY22E EPS to 109.6/113.3 sen from 108.1/110.0 sen (vs estimated consensus EPS at 111.74/109.7 sen). On our year-end target of 1,683 points, the implied forward PE multiple on our FY22 EPS estimate is 14.9x (0.5SD below 10- year mean).

Underlying earnings trend of KLCI components are generally positive: Of the 28 out of the existing 30 FBMKLCI components that we cover, 17 came within, 7 above and only 4 (GENTING, GENM, PETDAG, TOPGLOV) were below, expectations. FY21E/FY22E EPS have been raised due mainly to material earnings upgrades in SIMEPLT (+31%/+0%), KLK (+19%/+5%), PCHEM (+57%/+26%), IHH (+30%/+21%) and CIMB (+21%/+16%), overwhelming downgrades in GENTING (-31%/+8%) and GENM (-91%/-0.1%).

Banks - results were within expectations, NEUTRAL: This sector came in within expectations where 7 reported results within, 3 came above, and none disappointed, expectations. Banks’ guidance are however generally cautious and a few, such as Public Bank, RHB Bank, CIMB and Affin are guiding for provisions to remain elevated in 2HCY21. However, mod loss impacting 3QCY21 will be modest given that they are offered on opt-in terms unlike last year’s blanket basis. Taken together, the general guidance seems to be as such: expect 2HCY21 to come in flat to mildly negative on elevated credit cost (despite pre-emptive overlays provided in 4QCY20) and flat NIMs, while loans may only pick up more strongly in 2022. It looks that at this point of the cycle, most if not all banks have fully repriced their products. Due to the PEMULIH scheme, the proportion of loans targeted for assistance have risen for most banks. Our current full-year FY21 projections imply weaker earnings 2HFY21, HoH. Some banks announced better-than-expected dividends namely, HLBANK, RHBBANK and CIMB. GGM-derived PBV target prices were raised for AMBANK, CIMB from raised ROE assumptions and for HLBANK on higher dividend payout and lower beta.

Plantations – well above expectations, NEUTRAL: Plantations stood out as all 11 stocks outperformed our expectations except for IOICORP and PPB that came within and UMCCA, below. And most also exceeded market’s expectations. We were mostly right on FFB output levels but missed on surprisingly high realized ASPs. FY21E and FY22E earnings for the sector were raised on higher CPO price per tonne forecast of RM3,700 for CY21 and RM3,200 for CY22 from RM3,000 for both years. However, the applied target PERs were lowered on generally higher ESG discounts. Hence, the adjustments to target prices have been mixed; when rolling valuation base to FY22E earnings for certain planters, target prices were trimmed for KLK and SIMEPLT while estimates were raised for GENP and HSPLANT on higher than previously assumed realized ASP. The call for the sector remains NEUTRAL.

Construction – disappointed for second straight quarter, even our below street forecasts, OVERWEIGHT: The underperformance has generally been due to weaker-than expected construction margins and in certain cases, precast margins, caused by higher raw material costs especially steel. Additionally, the lockdown has lasted and taken longer than expected to ease affecting construction and property progress billings as well as toll receipts. We anticipate 3QCY21 to remain weak due to low productivity throughout Jul to mid-Aug. While construction sites have been allowed to re-open starting from 16th August 2021, productivity momentum will only pick up gradually as site operating capacity is capped by workers’ vaccinations levels. We expect 4QFY21 to see stronger productivity upon full vaccination of workers, which would allow 100% operating capacity at sites (based on latest guidelines). Four contractors have delayed their results release: HSL, KIMLUN, MITRA and MUHIBAH.

Gaming – double down due to misses, OVERWEIGHT: Overwhelmingly disappointing again, 3 (GENM, GENTING and MAGNUM) out of the 4 covered stocks missed expectations. This sector suffered the deepest cuts in estimates as GENM’s estimated FY21 core net loss was doubled from RM546m to RM1.04b while GENTING’s FY21E EPS was cut by 31% as the impact of extended lockdowns especially at Resorts World Genting was more severe than expected, while the recovery at GENS remained uneven. However, the OP calls on GENM and GENTING were maintained out of conviction that their FY22E earnings will recover sharply, and at current prices, both are trading at steep discount of 15% and 22% to their respective SoPs.

Consumer – a victim of curtailed demand and high input costs crimping margins, NEUTRAL: This sector suffered a bad earnings season where not only did 6 of 11 stocks underperformed our expectations, they underperformed consensus’ as well. Generally, we believe that largely to blame was the underestimation of the scale of input costs hikes (raw material, cost of goods, freight charges and forex rates among others) and in some cases, the severity of the impact the lockdowns had on demand. Other consumer related sectors namely brewery, gaming and media advertising also disappointed. The only stock that stood out was F&N, beating expectations on better export sales, supported by an expanded portfolio of successful halal-based food products.

Technology – robust momentum to maintain in 2HCY21, OVERWEIGHT: While this sector delivered earnings that were generally within expectations (6 of 8 reported results coming in within estimates), the two largest cap names – INARI and MPI – surprised positively. For INARI, it rode on strong demand for high margin 5G RF components on early ramp-up of the 2021 US smartphone program slated for a September launch and for MPI, its 4QFY21 was a record quarter thanks to robust demand for chips from data centres and the automotive industries. Operating margins were not only stronger YoY but QoQ as well. Remarkable was that despite the MCO 3.0-mandated labour constraints of 60%, almost all of the tech manufacturers demonstrated good workforce deployment as they reported higher sequential revenue and profits. Besides MPI and INARI, these included the likes of SKPRES, UNISEM, KGB and D&O. With expectations of domestic lockdowns easing as 4QCY21 approaches and demand for semiconductor chips and OSAT services remaining robust into CY22, the tech sector is expected to sail smoothly through 2HCY21.

Oil & Gas - came in mixed, NEUTRAL: Results were mixed with 3 above and 4 below among a total of 12 covered O&G stocks. PCHEM was the only large cap that exceeded our expectations, the others were ARMADA and SAPNRG. While PCHEM surprised on stronger-than-expected margin spreads due to higher average product prices, the sustainability of such high prices is questionable as supply normalizes with easing disruption of supply chain and new capacity additions coming into the market. That said, FY21E and FY22E EPS were raised 57% and 26%, respectively. The large cap disappointment was from PETDAG which FY21E and FY22E EPS were cut 11% and 5%, respectively. Margin spread narrowed on normalization of oil prices and slowing sales as lockdowns in June and reduced travel activity. Weak spot rates for petroleum shipping weighed on MISC’s 2QFY21 but offset to a certain extent by gains from contract negotiations while for DIALOG, it finished its FY06/21 within expectations despite a slowdown in downstream services. With its defensive terminal business largely intact, improving prospects for Pengerang phase 3 as RAPID commences and trading at near trough valuation, the call on DIALOG remains an OP.

Telecommunications – well within range, NEUTRAL: The sector came in within expectations amidst an increasingly competitive cellular segment. AXIATA’s subsidiary Celcom seems to have found its footing in the prepaid market, as it posted its 5th consecutive quarter of prepaid subs growth, likely at the expense of DIGI, which posted its 4th consecutive quarter of prepaid subs decline. However, it may not mean much for DIGI as the Celcom-Digi merger process is progressing well and looks likely to materialise. MAXIS on the other hand, is gaining postpaid subscribers but this is ARPU dilutive as a sizeable incremental addition are on entry level plans. There is little doubt from the current state of play that the cellular market has matured and is highly competitive, raising the urgency for service providers to at least maintain market share by maintaining service quality and coverage as they face the next stage of providing 5G-enabled services.

Source: Kenanga Research - 2 Sept 2021