KUALA LUMPUR: Maybank Investment Bank (IB) Research has cut its end-2015 KLCI target to 1,610 and targets KLCI to hit 1,750 in end-2016.
“Our earlier end-2015 KLCI target of 1,830 is no longer realistic. With downside risk still to public listed companies’ earnings, albeit lower after our recent earnings cuts, a fair value for the KLCI should be below its mean valuations. We cut our end-2015 KLCI target to 1,610, based on -0.5SD of mean.
“Into 2016, our tentative target for the year end is 1,750. A more defined target for end-2016 would depend on several factors which are still volatile at this juncture. Our base case assumes that political noises will quiet down by this year end,” the investment bank said in its latest strategy report.
Maybank IB said it continued to advocate a defensive strategy for the near term, and advise investors to buy at lower levels. It said the prevailing weakness could prompt the KLCI back down to -1SD of mean which would be at 1,500 points. Conversely, it said a reversion to mean would imply the KLCI at the 1,720 level, but this would require commodity prices to stage a sustained rebound.
The research house said the second half to date had seen higher bouts of volatility driven by China’s devaluation of the Yuan and crude oil price instability. Meanwhile, the prospect of a US rate hike later this month remains.
“At the domestic front, confidence is weaker due to the falling ringgit and unsettling political noises/governance issues. We think that the issues leading to the current weak sentiment are unlikely to be resolved soon. This means volatilities will stay elevated,” Maybank IB said.
Commenting on the recent quarterly results, Maybank IB said the second quarter results reporting season had been the “most disappointing”, with 41% of its universe reporting earnings that fell short of its forecast.
“Big caps that prominently missed were Malaysia Airports Holdings
, UMW Holdings, Genting Plantations Bhd, Bumi Armada, FGV, AirAsia, Genting, Malakoff, Genting Malaysia, YTL Power. That said, we have more upgrades in stock calls as valuations have fallen,” it added.
It said that in the earnings reported by the larger sectors – financial, plantation, telco - were uninspiring; they were down either year-on-year or quarter-on-quarter. There were more sectors that disappointed –auto, building material, construction, gaming, oil and gas and plantation.
Maybank said banks’ second quarter results was a mixed bag, with Alliance Financial Group and RHB reporting poorer than expected results, while HL Bank surprised on the upside, due mainly to a lower-than-expected tax rate. Operationally, the banks fared fairly decently with second quarter operating profit up 7% YoY. However, with impairment allowances surging two-fold, led by Maybank and CIMB, second quarter net profit rose just 2% YoY and was down 2% QoQ. First half net profit net profit was relatively flat.
Power earnings were mixed. It said Tenaga Nasional Bhd (TNB) beat expectations while YTL Power was below, with the variance coming mainly from taxes. TNB reversed out its cumulative cost over-recoveries (amounting to RM1.8bil) in the quarter. YTL Power meanwhile surprised on dividends, by announcing a 10sen dividend per share for FY15 in the absence of M&A. Separately, results of both gas utilities (Petronas Gas and Gas Malaysia) were in line.
Meanwhile, results of the wireless telcos were below expectations, mainly due to prepaid revenue softness arising from GST implementation problems. Axiata’s results were further dragged down by higher-than-expected depreciation at XL and Robi. Fixed line telcos were generally in line, with TM enduring some seasonal weakness.
Maybank said plantation sector’s second quarter results was largely disappointed.
“Out of the 10 stocks under our coverage, 60% was below expectations, 20% above expectations (Sime Darby and Ta Ann [but largely due to strong timber earnings]) and 20% within expectation(IOI Corp and KL Kepong),” it added.
Looking forward, Maybank said low crude palm oil average selling price and weaker ringgit and rupiah against US dollar have persisted into third quarter. The only positive in second half 2015 is the seasonal peak crop cycle for plantation companies which, in turn, will help to mitigate the weak CPO average selling price.
“Recalibrating for earnings revisions made during the second quarter results reporting season, we now estimate a slower 1.9% core earnings growth for the KLCI in the current year (against +5.2% previously) and 8.1% in 2016 (versus 9.7% previously). Incorporated in our revised earnings forecasts is a lower CPO average selling price of RM2,100 per tonne for the plantation sector for 2015 (RM2,400 per tonne previously) and RM2,300 per tonne for 2016,” it said.
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