Macquarie Equities Research (MQ Research) released a report (3 Sep) stating that 59% of its coverage reported results that either met or beat its reduced expectations. MQ Research continues to have a constructive view on the market post 2Q20 results and maintains its 1,648 year-end target for the FBM KLCI.

Event

• 59% of MQ Research’s coverage reported results which were in line or better than expectations in 2Q20 following a reduction in MQ Research’s estimates post the 1Q20 results season. In terms of misses, property, construction and utilities presented the highest percentage of misses, with telcos, gloves and banks delivering the most beats. Of note were the number of corporates (banks in particular) which missed on dividend expectations. There was evidence of some companies kitchen sinking during the quarter, setting themselves up for a better performance in 2H20. And most encouragingly, telcos and utilities pointed to better than expected collections despite fears of rising unemployment.
• While corporates were generally cautious about the outlook, MQ Research notes that commentary was generally for an improvement in coming quarters as economic activity picks up as movement restrictions were eased. Bank credit costs are likely to be the most watched data point into 4Q20.

Impact

• KLCI target maintained for now. MQ Research is holding its end-20E KLCI target at 1648 (17.5x 21E price-earnings ratio (PER)), pending updates to key estimates post these results. MQ Research is currently estimating KLCI earnings per share (EPS) to decline 17% (-10% post 1Q20 results) in 20E before rebounding 35%, helped especially by rebounds in earnings for banks, gaming and the telco sectors. Higher than expected average selling prices (ASP) at glove producers could further boost earnings growth in 21E, while bank credit costs could be the key risk for 21E growth.
• What next? At this point, MQ Research believes a further widescale restriction of movements is unlikely. Unemployment will remain elevated and income levels curtailed, but empirical data and anecdotal evidence suggest the economic recovery is underway. The ending of loan moratoriums at the end of September should see a rise in credit costs for the banks, but commentary from banks on the provisions taken and future credit costs has been mixed. Nonetheless, MQ Research believes investor sentiment (and bank valuations) have been sufficiently suppressed to warrant selective exposure.

Outlook

• MQ Research maintains its constructive view on the market post 2Q20 results. MQ Research believes the uptick in economic activity will support earnings and valuations for the broader market, which will allow for the redistribution of funds to a broader segment of the market after having been concentrated in the glove names, which have contributed +162pts of the KLCI’s -73pt (-4.6%) year-to-date (YTD) move. MQ Research’s top picks continue to favor exporter/global thematics (TOPG, PCHEM, SDPL), recovery plays (MAHB, GENM), digitalisation of economy (T), selective banks (RHBBANK, CIMB) and higher dividends/defensive (TNB, RANH). MQ Research has dropped AQRS following its recent downgrade.

Source: Macquarie Research - 4 Sept 2020