CY2Q17 Report Card

• After two straight quarters of improvement, CY2Q17 reporting season reverted to a disappointing one. While majority of HLIB universe (47%) still came in within expectations (CY1Q17: 58%), a higher percentage of companies reported lower than expected results (43%; CY1Q17: 30%). Almost the same percentage surprised on the upside (10%; CY1Q17: 12%).

• Against consensus, it was almost similar trend where 47% (CY1Q17: 31%) came in below; a lower percentage within (47%; CY1Q17: 63%), while a same percentage of companies above (6%; CY1Q17: 6%) (Figure 4).

• Post earnings revisions, 2017 EPS growth was revised lower to +3.1% (vs. +7.5%). 2018 EPS growth was, however, revised higher to 7.8% (vs. 4.5%) mainly due to base effect (Figure 7). The downward revision in 2017 mainly reflected cut in earnings projection for Astro, Digi, GenM, IHH, IJM and IOI.

• Sectors that disappoint include construction, consumer, healthcare, media, O&G, plantation and rubber products.

• Number of earnings downgrades rose to 44 (CY1Q17: 28) while earnings upgrades declined to 16 (CY1Q17: 18). Thus, the revision ratio (i.e. number of downgrades for every earnings upgrade) deteriorated further to 2.7x (CY1Q17: 1.6x; CY4Q16: 1.0x).

• In terms of stock ratings, there were 11 downgrades (CY1Q17: 4) and 5 upgrades (CY1Q17: 8) (Figure 5).

Comments

• CY2Q17 results again do not mirror the further improvement in GDP growth (+5.8%; 1Q17: +5.6%), which was driven mainly by strong exports, restocking activity and rising household consumption.

• We reiterate our view that most positives (i.e. macro improvements & infra projects) have been priced in by the market. In line with our expectations for GDP growth to moderate in 2H17, we believe upside is limited and expect the market to remain in sideways mode towards year-end.

• On external front, rising geopolitical tensions and imminent Fed balance sheet dial-back will give rise to higher market volatility and profit taking activity.

• On domestic front, lackluster corporate earnings amid lack of forceful theme will cap market’s upside move. That said, downside is protected by ample domestic liquidity with lesser risk of abrupt foreign selling.

FBM KLCI Target

• We maintain our end-2017 FBM KLCI target at 1,760 based on 16x (historical mean) one-year forward earnings.

Strategy

• Stock picking becomes more important as we continue to expect broad rally to wither. We like stocks with earnings certainty and growth catalysts.

• Our Top Picks: Big Caps (unchanged): Airport, Gamuda, Genting Bhd, Sunway Bhd & Tenaga; Small/Mid-Caps: George Kent, Heveaboard, Pecca, Rohas Tecnic and United Malacca.

Source: Hong Leong Investment Bank Research - 6 Sept 2017