PETALING JAYA: Analysts have cut the FBM KLCI and corporate earnings forecasts on the back of disappointing second-quarter (Q2) results.
MIDF Research said the latest corporate earnings again failed to excite hence the diminution in its aggregate forward earnings estimates for both FY2019 and FY2020.
“However, we take cognisant that equity price is a function both underlying value and valuation. Granted, the performance of corporate earnings may have been less than buoyant lately hence the decision to cut our FBM KLCI 2019 baseline target. Nevertheless, valuation expansion is a bona fide risk to our baseline outlook on the local benchmark.”
MIDF’s 2019 baseline target for the KLCI benchmark has been revised downward to 1,680 points from 1,720, mainly due to earnings and target price revision, particularly for banks, gloves and industrials.
The aggregate reported earnings of FBM KLCI 30 constituents totalled RM13.77 billion in Q2, remarkably positive yearly but negative sequentially at +18.6% year-on-year (yoy) and -5.4% quarter-on-quarter (qoq) respectively.
Within MIDF Research universe, 4% of stocks under its coverage reported higher than expected earnings. Of the rest, 28% posted earnings that were lower than expected versus 68% which came within expectations.
Its target price changes involved 17 upward against 42 downward adjustments. It made 23 changes to its stock recommendations with seven upgrades and 16 downgrades.
“The aggregate FY2019 earnings estimate of the FBM KLCI constituents under our coverage was cut by 1.3% to RM52.7 billion. Likewise, the FY2020 figure was shaved by 0.5% to RM55.8 billion.“
Meanwhile, RHB Research trimmed its end-2019 FBM KLCI target to 1,620 points from 1,640 points after applying a liquidity driven target price-to-earnings ratio of 17.5 times from 17 times to forward earnings.
Describing Q2 as another “meh” quarter, RHB said four sectors, namely plantations, rubber products, property and basic materials posted earnings that were below expectations.
“RHB universe estimates for 2019 and 2020 were cut by 2.5% and 3.7%, with the benchmark FBM KLCI earnings growth at -6.3% and +4.6%. The market still trades at a lofty 17.5 times forward earnings and such stretched valuations should limit the fundamental upside.”
The research house said while cost savings initiatives were apparent, it saw the biggest absolute earnings revisions from plantations and banks, with the former now having disappointed for the sixth quarter in succession.
Affin Hwang Capital pointed out that large-cap stocks continued to fare better than the smaller-cap stocks as there were more large-cap companies that positively surprised (28.6% in Q2 vs 14.3% in Q1).
Its overweight calls remain for the construction, REIT, healthcare and insurance sectors.
RHB Research has reiterated its core strategy to identify and accumulate quality laggards with a bottom-up approach to stock selection.
“The market’s (volatile) trading patterns have reaffirmed our buy on weakness strategy, although remaining liquid and nimble will be important.”
