While the second quarter (2Q) reporting season remains largely uninspiring, converging improvements in top-down macro and bottom-up earnings drivers may signal a long-anticipated inflection point. MQ Research wrote a report yesterday, providing further analysis and their top stock picks, with favoured sectors being banks, construction and logistics, with Government-Linked Companies (GLC) Reform remaining an over-arching market theme.

Conclusion

• Whilst a broadly uninspiring 2Q reporting season underscored the continued frustrating disconnect between strong 1H GDP growth (+5.7%) and lacklustre corporate earnings, converging improvements in top-down macro and bottom-up earnings drivers may signal a long-anticipated inflection point. Reinforcing this turn would be accelerated infrastructure project awards and reflationary policies ahead of the next general elections (GE14), which have to be held by Aug 2018. Per modest bottom-up 1,822 KLCI target (+5% total shareholder return (TSR)), stock-picking remains key. MQ Research’s favoured sectors are banks, construction and logistics, with GLC Reform remaining a structural, over-arching market theme: big-cap picks are Tenaga, Sime, CIMB, Telekom, Gamuda, RHB, AirAsia and POS(M).

Impact

• 2Q17 macro stats impress: Malaysia’s 2Q gross domestic product (GDP) growth of 5.8% (consensus expectation: 5.4%) was the fastest pace since 1Q15, underpinned by strength in private consumption and net exports. The fiscal balance improved quarter-on-quarter (q-q), with recovery in foreign buying interest re Ringgit assets supportive of Malaysian government securities (MGS) yield downtrend and broader liquidity conditions. The current account surplus expanded to 3.0% of gross national income (GNI), rebounding from 1Q’s 1.7% low.
• Bottom-up drivers improving: while 2Q guidance ex-financials, construction and tech/exporters remains conservative, KLCI consensus EPS growth forecast has nonetheless ticked higher, reflecting macro momentum and improved earnings drivers re oil price (well-above budgeted USD45/bbl), Ringgit (strengthening), loans approvals (+10% year to date (YTD), double the pace of loan growth) and interest rates (stable-to-lower on improved liquidity conditions).
• Households in better shape: as supported by improved 2Q labour market indicators – unemployment rate moderated to 3.4% (1Q: 3.5%) whilst private sector wage growth surged to 7.1% (1Q: 4.5%) – household debt/GDP ratio sustained its downtrend, to 85.6%, a five-year low. Advanced balance sheet repair, coupled with faster growth of household financial assets and improving real wage growth, should buttress consumption going forward.
• Ringgit revival: whilst recent Ringgit strength vs the USD appears largely due to the latter’s weakness, the aforementioned dynamics i.e. recovered oil price, fiscal restraint, current account surplus, stabilising capital flows suggest the Ringgit could continue to strengthen independently. USD exporters have enjoyed a prolonged period of earnings-boosting Ringgit weakness; reversal will now favour USD importers such as Tenaga, AirAsia and Astro.

Action and Recommendation

• Actionable ideas are focused on:
  1. banks, for broadly improved earnings drivers, with rising oil price to cap oil & gas-led non-performing loans (NPL) concerns; MQ Research likes CIMB, RHB;
  2. construction, where Gamuda is the big-cap exposure but mid-caps like Econpile are most EPS-sensitive to order book wins; and
  3. GLC Reform, where Sime Darby’s new management line-up is set to execute on the conglomerates break-up; MQ Research also likes Tenaga (dividend upside) and POS (M) (e-commerce execution).
• Other picks include Telekom, AirAsia, Time dotcom, Bumi Armada, SunCon and AQRS. Switch out of DiGi, PetDag, PGas, PChem and MAHB.

Source: Macquarie Research - 19 Sept 2017