Earnings prospects intact
Stephanie Jacob 
Market volatility will be a feature of the market in the near term, says Ching

THERE was a mixed bag of corporate results for the fourth quarter of last year (Q4FY17) which overall pointed to a continuing recovery on the local bourse.

Although the numbers posted lacked positive surprises, they nonetheless indicate that the earnings recession for Malaysian equities has ended, according to AllianceDBS Research’s Bernard Ching.

The Q4 corporate earnings within the research house’s coverage grew 2.6% year-on-year despite more misses. Full-year growth for the FBM KLCI last year came in at 6.8%, compared to the earlier estimate of 5.2%.

“This signifies the end of the earnings recession for Malaysian corporates,” Ching pointed out in a recent outlook report.


Improved note

Hong Leong Investment Bank analyst Jeremy Goh’s report card on the Q4 results noted that the year ended on an improved note for listed corporates.

There were fewer earnings disappointments from the stocks under the research house’s coverage as more met or exceeded their expectations, he added.

Taking a holistic view of the bourse, Goh estimates that the benchmark KLCI registered overall earnings growth of 10%. He opined that this was mainly driven by the banks, gaming and plantation sectors.

“The proportion of results within expectations at 58% was the highest in four years, while those that disappointed were at its lowest [25%],” Goh’s report stated.

AllianceDBS’ Ching credits the banking and automotive sectors for contributing to the better earnings. The banking sector was boosted by lower provisions and stronger bottom lines while the latter benefited from stronger sales volume and a more favourable foreign exchange climate.

Generally, blue chips in the AllianceDBS’ investment universe met expectations in Q4. Maybank Bhd, Hong Leong Financial Group Bhd, Hong Leong Bank Bhd, Genting Bhd and Genting Malaysia Bhd all delivered better-than-expected results.

Among stocks that disappointed with negative earnings surprises were Astro Malaysia Holdings Bhd and telco Axiata Group Bhd.

Those which did not meet forecasts were generally hampered by cost factors, says HLIB’s Goh. “Of the 27 companies [out of those followed by HLIB] which reported result disappointments, 15 [55%] were due to cost factors such as for raw materials, interest and tax.”


Defensive KLCI

More recently, last month was a bumpy month on the local bourse as it saw a market correction and a net outflow of close to RM1.12 bil by foreign investors – the first monthly outflow since November last year. However, on a year-to-date basis, Malaysia has attracted RM2.21 bil worth of foreign funds compared to RM1.57 bil recorded in the same period last year.

Moving forward, market volatility will be a feature of the market in the near term, argued Ching. “[This is] on concerns of faster than anticipated inflation and monetary tightening in the US,” he noted, pointing to concerns that the imposition of an anti-dumping tariff by the US could stoke retaliatory measures from other significant economies.

Closer to home the lack of positive surprises in Q4 earnings and general election anticipation has caused increasing risk aversion to small and mid-cap stocks.

However, despite these early headwinds the KLCI managed to recover most of its monthly losses. As of end-February, the benchmark index closed down by just 0.7% against the 1.5% lost by the MSCI South East Asia (SEA) Index.

In fact, Malaysian equities have outperformed their regional peers except neighbour Indonesia by posting year-to-date gains of 4.1%.

On the very least, despite the unexciting earnings results, Ching still believes that earnings recovery remains on track. On such basis, AllianceDBS has raised its forecast for the KLCI earnings for both CY18 and CY19 by about 1%.

The research house sees this growth being underpinned by a continued recovery in the banking sector (which contributes 56% of KLCI earnings growth) on lower provisions and improved earnings traction. Gaming and healthcare are also expected to play their part in driving results.

“Note that earnings growth for 2018 will largely be driven by expected margin recovery as revenue growth is estimated at 4.8% versus earnings growth of 10.7%,” Ching added. Therefore should revenue grow faster than the expected pace, there could be a further upside surprise to earnings growth.


Opportunity to accumulate

The market correction early last month might have come sooner than expected but the expectation is that the market can still be sustained by both local and global market conditions.

While market sentiment has turned cautious earlier than expected, UOB Kay Hian Research foresees selective small to mid-cap stocks to outperform the market. “The recent market pullback provides good opportunities to accumulate,” suggests its research head Vincent Khoo.

The recent market pullback provides good opportunities to accumulate, says Khoo

Khoo advises investors to look at opportunities arising from several key events such as the upcoming dissolution of Parliament ahead of the general elections and the awarding of contracts for mega projects.

The research house’s top picks for this month are Ann Joo Reesources Bhd, Bumi Armada Bhd, Gabungan AQRS Bhd, Serba Dinamik Holdings Bhd, VS Industry Bhd and Yong Tai Bhd.

HLIB Research’s Goh also is optimistic over the direction of Malaysian equities. This view is driven by catalysts such as the stronger ringgit, a revival in domestic consumption and expected foreign inflows following the upcoming general election, he said.


Valuations undemanding

In the view of AllianceDBS’ Ching, the KLCI’s overall valuations are undemanding as it is currently trading at CY18 price-earnings of 16.4 times which is near its historical mean.

“Furthermore, it is appealing versus its regional peers as well,” he pointed out. “Relative valuation against regional markets is also not demanding following its laggard performance in 2017.”

The MSCI Malaysia price-earnings premium over MSCI SEA is currently at one times which is slightly below the historical mean of 1.2 times.

Ching reiterated that the research house’s key investment themes remain unchanged, going forward. “[They are a] cyclical recovery in loan growth and interest-rate hikes, a cyclical global oil & gas capital expenditure recovery, sustained electrical and electronics exports, and tourism [sector] benefiting from discretionary spending recovery and an influx of Chinese tourists.”

On a sectorial basis, AllianceDBS has an overweight call on banking, healthcare, electrical manufacturing services and oil and gas. However, it is underweight in terms of the building materials and glove sectors.

This article first appeared in Focus Malaysia Issue 275.