Malaysia’s corporate earnings for the first quarter of the year (1Q19) were broadly lackluster, with top-line headwinds resulting in misses dominating the scorecard, as summarized in Macquarie Equities Research’s (MQ Research) report (12 Jun).

Read on for an excerpt of the report and to find out MQ Research’s top Malaysian stock picks, which include Telekom, Tenaga and Top Glove, among others.

Event

• As foreshadowed by broad year to date (YTD) economic deceleration detailed in 1Q19 GDP data, and extended macro uncertainties re trade war escalation and domestic policy / regulatory uncertainties, 1Q reporting/guidance were broadly lacklustre – balance sheet stresses appear contained but revenue traction is sluggish, while cost base adjustments are lagging i.e. margin squeeze. However, as underscored by strong post-results share price rebounds for sharply de-rated Tenaga and Telekom, bearish expectations appear priced-in.
• Coupled with rebooting fiscal stimulus, above-target oil price and ample liquidity, risk-reward favours beta over defensives; as articulated in strategy update The road to “KLCI 1,850” is paved with good policies, internal growth drivers-supportive policy-centric newsflow alone could allow the KLCI to recover to its 12-month highs.

Impact

• 1Q19 – treading water: post-1Q19 MQ19E/20E KLCI earnings per share (EPS) forecasts are a moderated 8.1% (from 10%) and 7.7% (7.3%), respectively, vs. consensus 2019/20 forecasts of 31% (2018 low base) and 7.2%, respectively. Favoured big-caps were lacklustre e.g. for banks, weak operating income to be further pressured by May’s net interest margin (NIM)-reducing overnight policy rate (OPR) rate cut, while PChem (lower product prices) and Axiata (weak revenues) also underwhelmed. On the flip side, long-pressured benchmark government linked companies (GLC) Tenaga (write backs) and Telekom (costs cuts) surprised positively, while mid-cap bank pick RHB also came in ahead.
• Coverage updates: post-4Q18 reporting, MQ Research has downgraded Public Bank and Hartalega to Underperform, while raising Inari to Neutral, and revising higher RHB and Telekom.
• KLCI target – base vs. bull: base case 12mth KLCI target is 1,774 (+7.5% or 17.5x 2019 price to earnings (PE), per trading band average; previously 1,791). Strong execution on market thematics (GLC Reform, Petronas Monetisation) would enable bull case bottom-up KLCI target of 1,850 (+12% or 18x 2019 PE).

Outlook

• Per the table below, deep-value non-bank GLC picks are Tenaga, Telekom, Axiata and MAHB, while for Petronas subsidiaries, MQ Research likes PChem and MISC. For banks, MQ Research prefers discounted, higher growth/yield corporate banks (Maybank, CIMB, AMMB, RHB) over fully-valued retail peers.
• For rebooting construction sector stimulus, MQ Research prefers smaller niche players AQRS, Econpile, MRCB and consultant HSS. Weaker ringgit bias will continue to benefit exporters such as Vitrox and TopGlove. PGas (switch into Tenaga), Public (switch into Maybank), BAT and Gent(M) are non-consensus Underperform ratings.

Source: Macquarie Research - 13 Jun 2019