There is a strong correlation between corporate earnings and the stock market performance.
On aggregate, the top 30 companies listed on Bursa Malaysia reported total earnings of RM15.9 billion for the first-quarter (1Q) of 2017, up 18.6% year-on-year (YoY).
According to Bloomberg data, more than 50% of the Kuala Lumpur Composite Index (KLCI) constituents outperformed forecast results.
This marks the third consecutive quarter the FTSE Bursa Malaysia (FBM) KLCI constituents have outperformed the consensus estimates in terms of earnings results.
On top of that, 18 out of the 29 companies reported positive earnings growth in comparison to the corresponding quarter in 2016.
Sector wise, the financial and consumer discretionary led other sectors on earnings growth in 1Q.
The financial sectors posted an impressive performance with majority of the industry players delivered positive YoY earnings growth underpinned by positive loan growth.
With the expectation of a stronger economy, the sector, being pro-cyclical, is likely to see better prospects.
Genting Malaysia Bhd from the consumer discretionary sector delivered quarterly earnings growth of about 97% on a YoY basis.
The Genting Integrated Tourism Plan (GITP) launched two years ago is starting to bear fruit.
Although the GITP development works are ongoing, the resort was visited by 4.9 million visitors in the 1Q and recorded a higher hotel occupancy rate of 90%. Moving forward, the group is likely to benefit from the higher tourist arrivals to Malaysia, targeted to reach 32 million in 2017 due to key catalysts such as the Kuala Lumpur 2017 SEA Games, Visit [email protected] campaign and the extension of visa exemption for Chinese tourists.
The telecommunication recorded the worst quarterly earnings among the sectors, with all four constituents pos- ting negative earnings growth for the 1Q.
We believe the sector will continue to face the issue of margin compression due to intense competition.
Despite the ameliorating earnings growth, we noticed there was a pullback in the local equity market especially in the small-cap segment, as represented by the FBM Small Cap (SC) Index.
The FBM SC Index expe-rienced a decline of 4.3% during the last two weeks in May. We believe the recent pullback would probably be a short-term blip owing to apparent profit-taking activity.
Bursa is likely to trend higher underpinned by a bundle of decent macro-economic data — strong gross domestic product growth, ameliorating business condition index and double-digit growth in exports.
The robust foreign buying, which accumulated a year-to-date net purchase of RM10.39 billion as of June 9, 2017, will remain supportive to our local stock market.
All in all, 1Q earnings was on firm ground with improving earnings growth and positive earnings surprise.
Moving forward, although we would likely see a moderation in total earnings growth on a YoY basis due to the end of low-base effect, we believe the momentum is likely to prolong into the second-half of the year supported by improving fundamental of the economy.
Therefore, the current fair valuation of 16.8 times estimated price-earnings (PE) multiple of June 15, is slightly higher than our fair PE of 16 times.
The local equity market is expected to deliver a rather reasonable return for investment horizon over the next three years.