KUALA LUMPUR: UOB Kay Hian Malaysia Research has cuts is FBM KLCI earnings forecast by 3.4% due to the poor 2Q20 results season but raised its 2021 forecast by 5.5% to largely account for further upgrades of glove makers.
The research house said on Wednesday revised up its end-20 target to 1,600 to be more aligned to the bottom up target of 1,675 but it was mindful of an impending market consolidation.
“Strategy: Focus on selected export- or -external oriented plays, high yielders, economic reopening plays (on vaccine discovery), ” it said.
UOB Kay Hian said the 2Q results were still disappointing, with banks holdings back interim dividends.
It pointed out 34% of the companies under UOBKH’s universe of stocks disappointed in the 2Q20 results season, while 11% surpassed expectations, compared with 36% and 10% in the 1Q20 reporting season.
Earnings disappointments were mostly linked to consumer, property, REITs, plantation, telco, utilities, most of the oil and gas segments and banks (Public Bank and Maybank).
Banks held back on their interim dividend payments, an unprecedented event. Bucking the trend, the glove manufacturing sector experienced phenomenal earnings forecast upgrades.
“Overall, we cut our 2020 net profit forecast for the FBMKLCI by 3.4%, and for our coverage universe by 7.1% but increase our 2021 forecast by 5.5% to mainly reflect upgrades in the gloves manufacturing sector.
“The forecast cuts were broad based as 11 of the 27 sectors/sub-sectors under our coverage endured 2020 earnings downgrades, while only glove manufacturers, the exchange (Bursa), plantation, port, technology and O&G (asset owner subsector) saw earnings upgrades, ” it said.
UOB Kay Hian said its strategy factored in expiry of loan repayment moratorium and “virus containment” mode.
The former factor suggests market consolidation amid a likely reversal of months’ of retail investment inflows.
As for the latter factor, which is tied to wide expectations for imminent positive developments towards the Covid-19 vaccine or/and cure discoveries, favours selective economic reopening plays (eg gaming, airport).
“Thematic opportunities in selected export or external-oriented catalysts, e-government and dividend compression investments.
“Nevertheless, we continue to expect positive momentum for selected external-oriented (eg electrical and electronics (E&E) sector and medical related exporters, Yinson), e-government, and the dividend yield compression plays.
“End-20 FBMKLCI target revised to 1,600, valuing the market at 21.5 times 2020F PE (+4SD) and 16.4 times 2021F PE (mean).
“This is conservatively lower than the latest bottom-up target of 1,674 following upgrades in glove manufacturing players’ target prices.
“Our top picks are Genting Malaysia, PPB Group, Pentamaster, Top Glove and Yinson, as well as mid-caps Astro, BAT, Globetronics, MRCB-Quill Reit, and Scientex. We added laggards Pentamaster (within the E&E sector) and Astro, and dropped Tenaga (lacking catalyst) and Duopharma (spectacular share price performance), ” it said.
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