PETALING JAYA: Malaysian corporate earnings forecast for this year has been cut on the back of lower second-quarter earnings and to reflect the current global economic uncertainties.
Analyst have reduced their earnings expectation for stocks under their coverage with some cutting the FTSE Bursa Malaysia KLCI (FBM KLCI) year-end target by up to 14%.
OSK Research cautioned investors against an aggressive bottom fishing strategy for now as there could be better opportunities later.
“Instead, in view of the strong possibility of an early general election by year-end, the re-election of the current Barisan Nasional government may spur a modest rally in the market post-elections. As such, a better time to bottom fish may be when profit taking accelerates ahead of the election date,” OSK head of research Chris Eng said in his September outlook report.
He added that some trading positions may be taken in mid-cap stocks.
“While we continue to advocate a generally defensive strategy, investors with higher risk appetite may wish to trade in selected mid-caps that have been sold down of late and might appear attractive. In such a case, we would advocate those that have longer term recession resilient business models such as KPJ Healthcare Bhd and Supermax Corp Bhd, as bashed down mid-caps tend to outperform when a recovery sets in,” he said.
OSK Research's FBM KLCI range is a maximum of 1,557 points and minimum of 1,378 points for this year. It's 2012 FBM KLCI fair value is 1,466 points.
The research house said that preliminary indications showed that the second quarter results season came in below expectations and would likely result in a one to two percentage points cut in OSK Research's 17.1% earnings growth forecast for this year and 12.8% estimate for next year.
This will also lead to a 1% to 2% cut in its year-end 1,557 KLCI target.
ECM Libra Investment Research head Bernard Ching said while the fundamentals of Malaysian equities remained intact amid external uncertainties, the earnings growth momentum story has come to an end.
“We are downgrading our end-2011 FBM KLCI target to 1,450 from 1,650 by pegging a lower 13 times price to earnings to reflect higher risk aversion and risk of further earnings downgrade,” Ching said in his second quarter 2011 results round-up report. The report added that corporate Malaysia's earnings growth momentum story was showing cracks following two consecutive quarters of disappointing earnings.
The earnings cut within ECM's universe of coverage resulted in the reduction of calendar year 2011 (CY11) earnings growth projection to 8.8% now from 14.8% made in December 2010. Despite CY12 earnings growth of FBM KLCI expanding from 8.4% to 14.6% for stocks under ECM's coverage, Ching said the risk of under-performance was greater now, as growth in the banking and power sectors was fraught with uncertainty.
“The high loan growth seen in the banking sector over the past two years is showing signs of tapering off amid recent rounds of overnight policy rate hikes and lending restrictions such as loan-to-value ratio cap and statutory reserve requirement hikes. As for the expected earnings growth in the power sector, it is almost entirely made up of expectation of earnings recovery by Tenaga Nasional Bhd when gas supply normalises. Should these two sectors fail to deliver, CY11 earnings growth could potentially be cut by more than half,” he added.
While the index dropped 6.5% in August, OSK Research pointed out to the lingering uncertainties on the global economic outlook and advised investors to continue focussing on defensive stocks while nibbling at some rebound plays this month. OSK's top buys include Axiata Group Bhd, PETRONAS GAS BHD, TELEKOM MALAYSIA BHD, AirAsia Bhd and KPJ Healthcare.
Meanwhile, HwangDBS Vickers Research head Wong Ming Tek said the percentage of companies that reported disappointing earnings in the second quarter of 2011 was similar to that of first quarter of 2011. However, notable disappointments stemmed largely from stock specific issues such as sizeable losses for TNB and Malaysia Airlines (MAS).
“For the quarter, net profit for our stock universe was lower by 3%, quarter-on-quarter, largely due to shock losses at TNB and MAS and lower profits from Genting group which experienced reduced contributions from the Singapore and British operations.
However, this was partly mitigated by strong bank profits under investment gains,” said Wong.
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