In a research report released yesterday (4 Mar), Macquarie Equities Research (MQ Research) summarized the results for various sectors in Malaysia. Corporate banks, telcos, healthcare and Petronas Chemicals took the lead, while consumer was the biggest miss. MQ Research also highlighted that the FY19/20 estimated market earnings growth (excluding plantation) appears in line with consensus; base case 12-month KLCI target is 1,791 or 17x 2019 PE.

Event

• While 4Q18 GDP data painted a broadly resilient picture re macro and Ringgit bond market is calm, equities remain pressured by a combination of external growth risk (i.e. trade war escalation), and weak sentiment re domestic policy and regulatory uncertainties. Nonetheless, with FY19/20E earnings growth averaging c.10% and balance sheets broadly robust, 4Q18 reporting validates MQ Research’s view beta is oversold while defensives like retail banks, gloves are fully valued; besides thematic GLCs (GLC Reform) and Petronas subsidiaries (Monetisation), MQ Research favours corporate banks and selected mid-caps i.e. Time dot com, Vitrox, construction.

Impact

• 4Q18 – stabilisation: compared to post-3Q18 KLCI 2019 EPS forecast of 4.9%, current 2019 and 2020 forecasts are a more robust 14.6% and 6.3%, respectively, helped by 2018’s low base effect (note large impairments re telcos) and strengthened commodity price outlook, particularly re plantations. Per MQ Research’s recommended sector positioning, the corporate banks outperformed their retail counterparts on both growth (Maybank) and yield (RHB), while underlying operational strength for other heavyweights i.e. telcos (Axiata, TM), healthcare (IHH) and Petronas picks PChem and MISC, more than mitigated for sluggish smaller sectors i.e. construction, property, consumer.

• Coverage updates: since 3Q reporting, MQ Research has upgraded AMMB to Outperform and IHH to Neutral– on the flipside, MQ Research cuts Padini to Neutral, Inari to Underperform, and Bursa (M) to Neutral, as weak market volumes persist.

• KLCI target – base vs. bull: revised MQ forecast 2019/20 earnings growth of 10% and 7.3% (MQ19 post-3Q18 reporting: 7.5%) takes base case 12mth KLCI target to 1,791 (+5.3% or 17x 2019 Price-to-Earning (PE); previously 1,775). Strong delivery on market thematics would put bull case bottom-up 12mth KLCI target of 1,864 (+10% or 18x 2019 PE) within reach.

Outlook

• Overarching equity market themes for 2019 are GLC reform and Petronas monetisation, with regulatory clarity and infrastructure stimulus reboot being supporting catalysts. MQ Research’s favoured Khazanah-GLCs are Tenaga, Telekom, Axiata and CIMB; for Petronas subsidiaries, MQ Research likes PChem and MISC. Re sectors, they favour banks (corporate banks Maybank, RHB, AMMB preferred over retail-centric Public, HLBK), exporters (semicons like Vitrox preferred over gloves) and mid-cap construction (AQRS, Econpile, HSS).

Source: Macquarie Research - 5 Mar 2019