While the Sep quarter earnings contained some positives, consensus estimates for high single-digit earnings growth in 2016 contain downside risks given the subdued consumer sentiment and lacklustre global macroeconomic environment. While risk premiums have eased slightly, unattractive valuations would cap the upside. Trading opportunities in the market may require a bottom-up approach to stock-picking.

More upside surprises this quarter. The September quarter’s earnings fared reasonably well against RHB estimates. While there were still more misses than beats, the ratio of 1.6x is the lowest seen in seven quarters and well below the average of 2.2x observed in the past four years. 19.6% of stocks reported better-than-expected results, while 32.2% disappointed (48.3% in line). Against consensus, the beats ratio was similar (18.9%) although fewer stocks (41.3%) met expectations. Across the RHB coverage universe, the conclusion of the reporting season saw overall earnings estimates being lifted by 0.9% and 0.7% for FY15 and FY16 respectively, with the upgrades coming from MISC, O&G and utilities offset by the plantations, gaming and telecom sectors. For the 25 FBM KLCI component stocks covered, 16% beat our expectations with 56% in line. Notable beats include Petronas Chemicals, SapuraKencana, MISC and Tenaga. The misses were from the plantations, banks, gaming and telecommunication sectors. Overall, FBM KLCI component stocks received earnings upgrades of 1.5% and 1.2% for FY15 and FY16 respectively. Our forecasts now show a 0.9% contraction in normalised EPS for 2015 and 8.6% growth in 2016 (from -2.6% and +9.3% respectively) in our 4Q15 strategy report Malaysia Strategy 4Q15: Crisis of Confidence Presaging Darker Clouds On The Horizon?

Improved sectoral performance. The September quarter earnings improved from a sectoral perspective compared to that of the preceding quarter, after three sectors (timber, utilities and rubber products) beat expectations and six fell short (Jun 2015 quarter: one sector above expectations, six below). The logistics sector was downgraded to NEUTRAL (from Overweight).

Stock-picking is key. The market remains in consolidation mode as expectations grow for the US Fed to start normalising interest rates in December. We expect a December rate lift-off to be followed by a cumulative 75-100bps increase through 2016. This could be a mild short-term negative for the market and already somewhat priced in. Malaysia’s dependence on commodities means that a protracted slowdown in China’s economy and the outlook for oil prices are the two major risks for the market. At this juncture, we see limited downside for the market in the near term, given the planned MYR20bn equity injection into ValueCap, foreign institutions already maintaining an underweight stance, high liquidity levels and continued active participation of government-linked company (GLC) funds. Investor sentiment has improved somewhat recently on the sale of Edra Global’s energy assets to China General Nuclear (CGN), which also helped to lift the MYR. While risk premiums have eased a little, the bearish outlook for oil prices, fiscal challenges, soft domestic consumer sentiment and downside risks to corporate earnings would cap the upside for the market. We still see the domestic market offering trading opportunities that require a bottom-up approach to stock selection.

Source: RHB Research - 2 Dec 2015