FBM KLCI downgraded after muted 1Q

FBM KLCI currently trades at a price-to-earnings ratio of 21 times on a trailing basis


Equity analysts have slashed their end-2019 forecast for the FTSE Bursa Malaysia KLCI (FBM KLCI), following the subdued first-quarter (1Q) corporate earnings numbers released at the end of last month amid the escalation in the US-China trade tensions.

According to eight local research arms, the market benchmark, on average, is expected to end the year at 1,700 points, with the most bearish estimate from CIMB Investment Bank Bhd at 1,596 points and the most bullish from AmInvestment Bank Bhd at 1,820 points.

The FBM KLCI currently trades at a price-to-earnings ratio of 21 times on a trailing basis and 16.8 times estimated earnings of its members for the coming year.

The index’s dividend yield is 3.38% on a trailing 12-month basis.

The bearish stance from market analysts came despite the market rising over the past two trading weeks to end up six points higher at 1,655 points at yesterday’s close.

Maybank Kim Eng analyst Wong Chew Hann is concerned that trade tension poses downside risks to Malaysia’s macro and corporate earnings growth.

“Based on our revised market earnings estimates, the FBM KLCI’s valuations are now at 16.1 times 12-month forward price earnings (PE) ratio,
above its long-term mean (since 2001) of 15.8 times.

“We lower our end-2019 FBM KLCI target to 1,680 (from 1,760), pegging it to 15.8 times one-year forward PE (16.3 times previously) at its long-term
mean, also the low end of its trading range since early 2013,” she stated in a research note.

The 1Q numbers remained subdued as core net profit of its research universe (109 stocks) fell 10% year-on-year (YoY) after core earnings fell 15% YoY
in the fourth quarter of 2018 (4Q18).

“The ratio of stocks with core earnings that missed our forecasts relative to that, which was positively surprising, spiked to 2.7 times (4Q18: 1.3 times), while just 39% (4Q18: 47%) were in line,” Wong (pic) said.

The investment bank added that earnings risk remains on the downside with plantation company earnings most at risk if crude palm oil (CPO) prices fail to recover quickly.

“We reiterate our defensive strategy for equities. Technology is no longer an ‘Overweight’ after we downgrade our call on two stocks this results season,” it noted.

Hong Leong Investment Bank Bhd (HLIB) said 40% of 1Q results came in below expectations, 44% in line and only 16% above.

“We now project flat FBM KLCI earnings growth for 2019 at 0.8% and 4.6% for 2020 while the FBM KLCI target is cut slightly to 1,700 (from 1,710),”
its head of research Jeremy Goh said.

MIDF Amanah Investment Bank Bhd stated 10% of stocks under its coverage reported higher than expected earnings, while 32% posted earnings that were lower than expected versus 58% which came within expectations in the 1Q.

“The aggregate reported earnings of FBM KLCI 30 constituents totalled RM14.55 billion in 1Q, remarkably positive sequentially, but deeply
negative on-year at +25.7% quarteron- quarter (QoQ) and -13.1% YoY respectively.

“On adjusted basis, the aggregate normalised growth was much less remarkable sequentially at -4.4% QoQ, while the on-year figure was in shallower water at -5.7% YoY,” it said in a research report last week.

The poor 1Q earnings were mainly from the plantation (low CPO and palm kernel price), construction (post the 14th General Election impact), oil and gas (lower margin on newer projects) and tech sectors (global inventory adjustment and weaker smartphone sales).

The aggregate financial year 2019 earnings estimate of the FBM KLCI constituents under MIDF’s coverage were cut by 2.8% to RM53.4 billion.

Accordingly, the research arm lowered its 2019 FBM KLCI baseline target from 1,800 points to 1,720 points, while acknowledging valuation
expansion is a bona fide risk to the baseline outlook.

CIMB Equities Research said of the 131 companies under its coverage, only 12% reported results that were above expectations in the 1Q, while 38% missed expectations.

“The high ratio of earnings disappointment suggests Malaysian corporations are facing a more challenging operating environment due to local and external (US-China trade war and slower global growth) factors,” CIMB said.

The research arm expects a full year decline in earnings of 3% for 2019 as compared to its previous expectations for FBM KLCI earnings
to grow 5% this year.

CIMB cut its end-2019 FBM KLCI target to 1,596 based on 15.5 times PE from its previous target of 1,638 based on 15.1 times PE.

Sharing the same sentiment, Affin Hwang Capital Research trimmed its FBM KLCI target to 1,679 from 1,810 based on an unchanged 18 times estimated 2019 earnings.

The research arm noted 39.5% companies under its coverage disappointed in terms of earnings delivery in 1Q, while 47.6% were in line with
expectations, and only 12.9% surpassed expectations.

Affin regarded the earnings disappointments were largely in the plantation, oil and gas, transportation and utilities.

“While foreign outflows might recede over the near term, there was still no significant catalyst for the local equity market, especially given
the poor corporate earnings delivery in the 1Q.

“Moreover valuations for the FBM KLCI remained at a premium over its peers,” Affin said in a research note.

AmInvestment argued near-term supports/catalysts for the market could come from relatively low valuations from a historical standpoint, market-friendly policies from the government and possible easing in US-China trade tensions amid a potential rate cut by the US Federal Reserve.

It maintained its end-2019 FBM KLCI target at 1,820 based on about 19 times estimated 2019 earnings and 18 times estimated 2020 earnings.