In a nutshell, our market view remains pretty much unchanged. The domestic economic growth is expected to be decent at 4.7% in 2019 while big caps’ FY18E/FY19E earnings growth rates are estimated at 0.7%/6.9%. Nonetheless, we believe the local market may still remain stuck in a range-bound mode until significant rerating catalysts are seen. While the downside could be cushioned, upside is uninspiring with our end-2019 Index Target pegged at 1,775, implying FY18E/FY19E PERs of 16.9x/15.8x. Nonetheless, with >50% of listed stocks on Bursa Securities declining >20% in 2018, we believe values have emerged. Therefore, in this quarter we focus on stocks that were sold down heavily. We have selected (i) AEON (OP, TP: RM2.00), (ii) BIMB (OP, TP: RM5.05), (iii) MBSB (OP, TP: RM1.25), (iv) OCK (OP, TP: RM0.570), (v) PADINI (OP, TP: RM4.05), (vi) PESTECH (OP, TP: RM1.45), (vii) PWROOT (OP, TP: RM1.65), (viii) SKPRES (OP, TP: RM1.25), (ix) UEMS (OP, TP: RM0.850) and (x) WCT (OP, TP: RM0.850) as our 1Q19 Top Picks. Timing-wise, the ideal Buy on Weakness (B.O.W.) zone is between 1,670 and 1,620.

Short-term pain, long-term gain. We have little to say about the market turmoil in recent months. As far as we are concerned, the domestic economic growth is still decent and implementation of a few new measures by the new government should bode well for the long-term structural outlook of Malaysia. Nonetheless, with the sticky fiscal deficits, this weaker fiscal position makes Malaysia vulnerable to external hostile uncertainties, hence the short-term cyclical outlook remain challenging.

Market Outlook. For the local equity market, we believe 1Q19 should do well as 4Q and 1Q are normally the stronger quarters in terms of stock market performance. Coupled with the strong sell-downs of late, we reckon that weak-hands could have left the market and therefore, the market could turn more supportive going forth. In fact, market could also have bottomed at ~1,626.93 following the sell-down after the recent uninspiring corporate results season along with some substantial rating and earnings downgrades. Besides, with more than half of the entire Bursa Securities listed stocks declining >20% in 2018, we believe values have emerged. This can be seen from the historically low Forward PERs of FBM70 and FBMSC Indices. We still see reasonably good probability for FBMKLCI swinging higher, say touching 1,800, as per our Simulation Study. Technically speaking, the FBMKLCI is still supported above its long-term uptrend line (since end-1998). And, it is believed that the FBMKLCI could still swing above the 1,800-psychological resistance should the uptrend support line (1,630 and rising) and the crucial 1,600-psychological support remain intact.

Latest Numbers. We have remodelled our earnings universe. As such, readers should be aware that the previous earnings growth estimates are not comparable with the new numbers. Our FY18E/FY19E earnings growth rates for FBMKLCI are now estimated at 0.7%/6.9%. The strong growth number for FY19 is due mainly to some number distortions caused by a few stocks, i.e. AIRPORT, AXIATA, IHH, PMETAL and TOPGLOV. Based on consensus numbers, the market is expecting FY18E/FY19E earnings growth estimates of 5.5%/3.0%.

Index Target. In line with the declining consensus target (from 1,895 as of end-Sep 18 to ~1,800 in end-Dec 18), we have also revised down our end-2019 index target to 1,775 (from 1,805), representing FY18E/FY19E PERs of 16.9x/15.8x.

1Q19 Sector Outlook. Apart from upgrading Aviation to OVERWEIGHT but downgrading Building Materials to UNDERWEIGHT, our various sector ratings remain fairly stable as compared with the previous quarter.

Risks to our view include: (i) relatively high valuation premium over its regional peers, (ii) weaker crude oil and crude palm oil prices, and (iii) weaker market sentiment as per our Price-Volume Study.

Source: Kenanga Research - 2 Jan 2019