PETALING JAYA: Kenanga Research said while the third-quarter reporting season showed some signs of improvement, it is insufficient to excite the market in anticipation of negative earnings revisions despite earnings downgrades since the last two quarters.
The research house has further cut FBM KLCI FY18/FY19 earnings growth estimates to -0.2%/3.5% from 4.2%/1.4%.
“As such, our end-2019 index target is lowered to 1,805 from 1,870 previously, representing FY18/FY19 PER (price-to-earnings ratio) of 15.7 times/14.7 times.”
Kenanga Research highlighted that apart from lower earnings, substantial cuts in some key index constituents’ target prices such as Genting Malaysia, Genting, IHH Healthcare, Telekom and Tenaga have also attributed to the downgrade in index target.
For the third quarter, building materials, media and utilities sectors were the major culprits while construction, consumer and plantation sectors displayed some signs of weakness as well.
PublicInvest Research said positive surprises were seen in the oil and gas sector, driven by stronger revenue recognition, though this was largely anticipated given the stability of crude oil prices at US$60/bbl which would encourage resumption in activity.
It noted that sluggish conditions in the property space are starting to weigh on the sector, as are decidedly weak commodities prices on the plantation sector.
With the telecommunications and gaming sector continuing to come under regulatory pressure, the research house said earnings outlook may also remain challenged amid clouded sentiment.
However, it said a mitigating factor could still be the banking sector, which by all accounts, has exhibited the most stable earnings amongst the key sectors of the economy.
PublicInvest’s earnings growth assumptions for 2018, 2019 and 2020 are 0.4% 1.5% and 6.4%, respectively.
“On this note, we think the optimistic levels the FBM KLCI could trade toward in 2019 range between 1,750 and 1,800 points.”
Overall, the research house still sees trading opportunities in the market with an “overweight” stance on the oil and gas and manufacturing sectors despite weakness seen in earning It also suggests selective exposure in the banking sector.
It also sees value in the small and mid-cap space despite the pronounced weakness seen this year, and think some of these stocks are poised for rebounds underpinned by their unchanged fundamentals.
Commenting on the short-term market outlook, Kenanga said despite recent corrections, the KLCI is still trading at a premium against its regional peers.
The research house noted that as the forward PER valuation premium of KLCI over selected regional peers was recorded at 19.8%, which is at the higher end of its historical range, it could limit potential foreign equity inflow.
“In fact, as of end-Nov 2018, we saw total net foreign equity outflows of RM2.1 billion and RM10.7 billion, respectively, since end-Sep 2018 and end-Dec 2017.”
The KLCI closed 4.73 points or 0.28% lower at 1,694.99 points today.
Source: The Sun Daily