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.”
PETALING JAYA: Despite negative developments in the banking sector and a modest growth outlook for banks, investors can draw comfort from the sector’s inexpensive valuations.
HLIB Research said the sector is trading at -1.5 standard deviation (SD) to its five-year mean price-to-book (P/B), retaining its neutral call and advocating selective stock picking rather than blanket exposure to the sector.
“Those that favour exposure to this sector have to be selective. We like banks that give above average dividend yields, still eking out healthy growth, and valuations got bashed down to -2SD and trough P/B valuations.”
Its preferred pick is Malayan Banking Bhd (Maybank). Other buys are RHB Bank Bhd, Alliance Bank Malaysia Bhd and BIMB Holdings Bhd.
MIDF Research opined that banking stocks in general are currently undervalued given its fundamentals remains intact. Hence, it is maintaining the positive stance on the banking sector at this junction.
The banking system saw a lower loan growth of 3.9% year-on-year (yoy) in July 2019 compared with the 4.2% in June.
Despite the weak business sentiment, Affin Hwang Capital noted that the loan disbursement of RM102.4 billion in July 2019 remained higher than the average monthly disbursement from 2014-18 of RM93 billion.
Business loans grew at a more subdued pace of 2.5% yoy in July (from 3.4% in June 2019), partially affected by loan repayment activity in the finance/insurance sector, wholesale/retail trade and manufacturing sectors.
Household loan growth was up 4.7% yoy in June (June: 4.9% yoy) driven by residential mortgages and personal financing.
“We are currently reviewing our 2019 loan growth target of 5%, amidst cautious business and consumer outlook in 2019. On the other hand, downside risks are largely cushioned by the broad-based economy while over the longer term, we expect consumer sentiment to gradually improve and drive consumption spending,“ said Affin Hwang.
It said the banking system liquidity remains healthy and ample, and expects banks’ funding costs to ease over the next six months following the Overnight Policy Rate cut, as most banks have an average fixed deposits’ maturity of between six to nine months.
“We expect the overall banking system NIM to edge down by 6bps in 2019 to 2.22%, stemming from weak asset yields and overall higher funding cost.”
Affin Hwang Capital maintained its neutral sector stance, with RHB and Aeon Credit Service (M) Bhd as its top picks.
“We maintain our neutral sector view as we foresee a sector core earnings growth of 1.0% yoy in 2019, followed by 4.3% yoy in 2020.”
HLIB said with limited positive catalysts to spur stronger borrowing demand, it has toned down 2019 loans growth estimate to 4-4.5% from 4.5-5%.
The research house believes sustaining net interest margins (NIM) would remain as an uphill challenge, given that the slower loans growth environment should encourage banks to engage in price-based competition to chip share away from one another.
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KUALA LUMPUR: Despite the ongoing US-China trade war, Bank Negara Malaysia (BNM) does not see a global recession in the cards, but merely a modest economic growth.
BNM Economics Department director Fraziali Ismail (pix) said the recession fear is overplayed globally.
“We’re not seeing a recession risk, be it globally or domestically. What we’re seeing is lower growth compared to our long term average,“ he told a media engagement session here this morning.
Yesterday, Affin Hwang Capital cautioned that the escalating US-China trade tensions may possibly lead to a global recession in 2020, posing downside risks to Malaysia.
KUALA LUMPUR: Bank Negara Malaysia (BNM) does not see a global recession on the cards due to the ongoing US-China trade war, but merely modest economic growth as trade tensions persist.
BNM Economics Department director Fraziali Ismail said the recession fears are overplayed at this juncture.
“We’re not seeing a recession risk, be it globally or domestically. What we’re seeing is lower growth compared to our long-term average,“ he told a media engagement session here today.
On Tuesday, Affin Hwang Capital cautioned that the escalating US-China trade tensions may possibly lead to a global recession in 2020, posing downside risks to Malaysia.
Protracted trade tensions have weighed on growth prospects and amplified financial market volatility. For Malaysia, flaring trade tensions pose significant downside risks to growth, as developments in the external sector could have substantial spillovers to the domestic economy.
Assuming all trades are tariffed, Fraziali said, global growth could be shaved 150 basis points but its shock would not be as big as the global financial crisis.
“It’s a huge shock but it won’t by its own plunge the global economy into a deep recession.”
While dismissing a global recession, the central bank noted that this may be potentially the lowest global growth and trade in 20 years if trade tensions escalate further, and the downside risks to global growth and trade are severe.
Fraziali said Malaysia’s growth will face external headwinds but the country’s inherent strengths will help it weather these challenges. Malaysia must stand ready and remain vigilant of risks and nimble policymaking is crucial in pursuing any opportunities that arise.
“Prepare for rainy days,” he said.
Malaysia’s export growth is directly affected given the significant exposure to the US and China. China (13.9%) and the US (9.1%) account for 23% of Malaysia’s exports and trade tensions have contributed to slower Malaysian export growth to both countries.
The moderation in exports is further amplified by Malaysia’s deep integration in the global value chain, being the second most integrated economy in the region with 55.6% of total exports in the global value chain.
However, Fraziali said Malaysia’s diversified exports help mitigate adverse impact of trade tensions, as seen in the resilience in Malaysia’s export performance by products and markets.
Electrical & electronics (E&E), crude petroleum, liquefied natural gas and petroleum products have been the key contributors to export growth at various periods of trade tensions.
“To the extent that there are shocks to a component, there are others that are still holding the fort. We’re rich in our diversity in terms of the structure of the economy, major trade partners and products that we produce,” said Fraziali.
The ringgit’s depreciation also provided some support to export growth in local currency terms.
There are already signs of trade diversion with Malaysia gaining 4.2% and 4.6% market share in the US and China for selected products between July 2018 and April 2019.
In the US market, Malaysia gained 4.2% market share, mostly in tariffed E&E products, as China saw a loss of 6.2%. In the China market, Malaysia gained 4.6%, mostly in tariffed commodities and petrochemical products, and the US lost 2.5%.