We suspect 2Q18 is likely to be a weaker yet volatile quarter. To navigate the quarter, we prefer bigger cap stocks over mid-and-small-cap stocks. Timing wise, the ideal “Buying On Weakness” (B.O.W.) Zone is <1,830. Nonetheless, for stocks that have been bashing down heavily, buying opportunities could have emerged as valuations for these stocks have reached or fast-approaching their respective trough valuations. We also prefer consumer-related sectors due to their earnings visibility. Based on these investment strategies, we pick TENAGA (OP, TP: RM17.17) and TM (OP, TP: RM6.85) for exposure in big cap space. We choose BIMB (OP, TP: RM5.20) as a proxy to the banking sector. We have also hand-picked HAIO (OP, TP: RM6.00), HEIM (OP, TP: RM23.30) and SEM (OP, TP: RM1.70) from the consumer space. We also select PBB (OP, TP: RM22.60) as one of our Top Picks as we believe PPB presents a good value proposition for its strong Consumer sector exposure. CMMT (OP, TP: RM1.30), MQREIT (OP, TP: RM1.15) and WCT (OP, TP: RM1.90) are chosen as we believe these stocks offer good value after the recent sell-downs. AIRASIA (OP; TP: RM5.30) is picked for its potential special dividend after unlocking some of their non-core assets. With or without an M&A angle, we also like MBMR (OP, TP: RM2.85) for its strong turnaround in business and undemanding valuations.

What to expect in 2Q18? With the 14th General Election (GE14) fast approaching coupled with the Muslim fasting month falling in mid-May 2018, we believe trading volume or market interest could be lacklustre; thus 2Q18 is likely to be a weaker yet volatile quarter for the year. Besides, as mid-and-small-cap stocks have shown signs of cooling off as per our Valuation Gaps (between FBMKLCI vs. FBM70 & FBMSC) study and the fact that their Forward PERs have yet to correct back to the lower end of their historical ranges, especially so for the FBM70 Index, we believe the underlying de-rating process is likely to continue in coming months, with big cap stocks outperforming the smaller ones. We also notice that the Accumulated Volume-Price Indicators for FBM70 and FBMSC have dropped below their respective 30-day SMA, suggesting a reversal in Buying Momentum. However, the Buying Momentum of FBMKLCI seems sustainable as per our Accumulated Volume-Price Study. The Accumulated VolumePrice Indicator for FBMKLCI is well supported above its 30-day SMA. These observations have reinforced our expectations of weaker small-and-mid-cap stocks while the bigger cap stocks could be relatively stronger.

Latest Numbers and Index Target. Coupled with the few newly announced results, we have fine-tuned our FY18E/FY19E earnings growth estimates for FBMKLCI to +6.1%/+6.0% (from -0.2%/+3.4% in the previous quarter or +7.4%/+6.0% post results reporting season). Recall that the higher earnings estimates vis-à-vis the previous quarter is due mainly to earnings upgrades in the banking sector and some minor adjustments in Gaming and Consumer sectors. Post revisions, our estimates are now getting closer to the consensus estimates of 5.7%/7.3%. Post results season, due to our earnings upgrade for FBMKLCI constituents and higher target prices assigned, we have also pegged our end-2018 index target at 1,950 (from 1,860 in the previous quarter but unchanged at 1,950 since results reporting season), representing FY18E/FY19E PER of 16.2x/15.7x. Note that despite a somewhat disappointing results reporting season, we notice that most of the weaker results were shown mainly among the non-FBMKLCI constituents. FBMKLCI component stocks, on the other hand, have generally reported fairly decent results. Hence, our index target upgrade. Worth noting that our index target upgrade is also inline with the recent upgrade in consensus index target. Note that consensus has recently raised its index target to ~1,960 as of endMar18 from <1,850 as of end-Dec17.

The caveat, however, is that the potential inflow of foreign capital could be capped due to valuations of FBMKLCI. Forward PER of FBMKLCI is still traded at a relatively higher level vis-à-vis regional peers post recent corrections in global and regional markets. Forward PER valuation of FBMKLCI is back to ~15% premium against regional peers, which may not be as attractive by historical standard.

2Q18 Sector Outlook. Generally speaking, our various sector ratings remain pretty much unchanged except for our upgrade in Construction sector and downgrade in Gloves and Plastics Packaging sectors.

• Overweight: Aviation, Construction↑, Gaming, MREITs and Power Utility.

• Neutral: Automotive, Banks & Non-Bank Financials, Building Materials, Consumer, Media, Oil & Gas, Plantation, Property, Technology/Semiconductor, Transportations & Logistics and Telco.

• Underweight: Gloves↓, Healthcare, Plastics Packaging ↓.

2Q18 Investment Strategy. Considering the aforementioned view, we believe the market could be stuck in a range-bound mode for the next few months. For us, the ideal “Buying On Weakness” (B.O.W.) Zone is below -1SD-level, hence <1,830. Stock selection wise, we also believe that bigger cap stocks will be more resilient than small-and-mid-cap stocks. However, as some of the small-and-mid-cap stocks have been heavily sold down, especially the smaller cap stocks, we sense buying opportunities emerging should valuations for these stocks have reached or fast-approaching their respective trough valuations, say close to or below -2SD.

Source: Kenanga Research - 3 Apr 2018