September  quarter  earnings  failed  to  spark  after  only  52.1%  of  the stocks  under  our  coverage  reported  earnings  that  were  in  line  while 37.0% disappointed. We upgraded the tech sector to OVERWEIGHT. We trimmed  our  2014  and  2015  earnings  forecasts  by  4.5%  and  2.4% respectively.  With  earnings  growth  poised  to  recover,  we  are  positive on equities and remain buyers of growth stocks on weakness.

Another  forgettable  quarter.  Earnings  for  corporate  Malaysia  for  the September quarter were slightly worse than the preceding quarter after 37% of the quarter’s results disappointed while only 52.1% reported earnings in line with expectations. The ratio of disappointing earnings is the  highest  seen  in  the  past  16  quarters.  73  stocks  saw  earnings downgrades while only 23 received upgrades and, accordingly, our 2014 and  2015  earnings  forecasts  are  lowered  by  4.5%  and  2.4% respectively.  Of  the  24  FBM  KLCI  component  stocks  we  have  explicit coverage  on,  only  45.8%  were  in  line  and  37.5%  below.  Forecasts  for the component stocks were lowered by 4.4% and 1.7% respectively with the  biggest  estimate  reductions  coming  from  the  plantations,  oil  &  gas (O&G),  and  banks  sector  while  media,  consumer  and  shipping  saw earnings  upgrades  Our  2015-2016  earnings  growth  forecasts  for  the RHB  universe  is  8.4%  and  9.5%  (7.0%  and  7.8%  for  FBM  KLCI component stocks) respectively. The  earnings downgrades and modest earnings  growth  means  the  benchmark  index  already  trades  at  16.5x and 15.3x 2015 and 2016 respectively that will continue to cap the near term upside for the market.

Tech  sector  upgraded  to  OVERWEIGHT.  15  out  of  22  sectors contained  earnings  that  were  in  line  while  seven  (auto,  plantations, banks, timber, construction, gaming and basic materials) disappointed, a similar  ratio  to  the  preceding  June  quarter.  No  sectors  exceeded expectations. The tech sector was upgraded to OVERWEIGHT as recent recommendation  revisions  means  that  we  have  five  BUYs  and  three NEUTRALS.  The  sector  is  generally  expected  to  benefit  from  the expected  recovery  in  exports  and  is  a  net  beneficiary  of  the  stronger USD. Notably, the aviation sector’s results were in line, breaking a cycle of three preceding weak consecutive quarters. The auto sector has the longest (seven quarters) streak of earnings below expectations.

Buy on weakness.  While developed economies continue to struggle to transition  into  a  self-sustaining  growth  stage  from recovery,  we  believe the  sharply  lower  crude  oil  prices  will  help  to  increase  the  disposable incomes  of  consumers  thereby  helping  to  hasten  the  global  economic recovery  and  boost  demand  for  exports.  The  risk  of  significant  policy tightening in developed economies that could derail the recovery is also low, in our opinion. Lower oil prices will put pressure on revenues but is unlikely to derail Malaysia’s fiscal deficit target of 3% of GDP in 2015. However,  investments  into  the  O&G  sector  will  slow  as  will  earnings growth  for  O&G  companies.  With  the  pickup  in  corporate  earnings heading  into  2015  and  2016,  we  continue  to  be  optimistic  on  domestic equities, given the lack of appeal of other asset classes. We continue to advocate  a  buy  on  weakness  strategy,  focusing  on  selective  growth stocks  that  can  create  shareholder  value,  over  and  above  defensives and  yield  stocks.  We  revise  our  end-2014  and  end-2015  FBM  KLCI target to 1,850 pts (from 1,940 pts) and 1,950 pts (from 2,100 pts) based on 16.8x and 16.5x one-year forward respectively.

Reference Exhibits

Source: RHB