Analysts lower FBM KLCI year-end target

MIDF Research has cut its FBM KLCI outlook to 1,400 due to the recent quarterly earnings season where financial results were below market expectations.

PETALING JAYA: Brokers have cut their year-end FBM KLCI target to reflect the weak corporate earnings from April to June, despite their belief that earnings would be stronger in the second half of the year, with the government’s stimulus measures and a recovery in demand.

MIDF Research has cut its FBM KLCI outlook to 1,400 due to the recent quarterly earnings season where financial results were below market expectations.

The research house said the price-earnings ratio (PE) valuation of the index for 2020 has expanded to 21.2 times, which is well above the 10-year (2010-2019) historical average of 16.2 times.

MIDF said companies’ earnings under its coverage had plunged 42% in the second quarter of this year except for the healthcare, technology and plantation sectors.

“Almost all other sectors (except transport and logistics) showed both negative sequential and on-year earnings (as reported) growth percentages inthe second quarter, ” it said.

Meanwhile, CGS-CIMB Equities Research expects earnings to be stronger in the third quarter, with recovery from the Covid-19 lockdown due to pent-up demand, rebuilding of inventory and stimulus measures.

It lowered its year-end FBM KLCI target to 1,520 to reflect its earnings downgrade.

For its top three picks, it has replaced Top Glove Corp Bhd with Public Bank Bhd and Yinson Holdings Bhd with MPI, while retaining Tenaga Nasional Bhd (TNB), as investors are likely to rotate in the later part of the year to cyclical sectors, which will benefit from the recovering economy.

“Quarterly market earnings for stocks under our coverage fell year-on-year for an eighth consecutive quarter (-56% y-o-y in 2Q20), due mainly to lower earnings from the automotive, bank, chemicals, consumer, insurance, property, shipping, electronics manufacturing services, utility, travel and leisure, and travel infrastructure sectors.

“We also noted that most of the companies that were loss-making were in the airlines, auto, construction, property, media and gaming sectors.

“Following our latest earnings revisions, we expect the FBM KLCI’s 2020 core net profit to decline by 16% from 11% previously, as we adjust for earnings downgrades in the Genting group, TNB, MISC Bhd and IHH Healthcare Bhd, ” CGS-CIMB said in a report yesterday.

UOB Kay Hian, on the other hand, upped its end-2020 FBM KLCI target to 1,600.

However, it warned that there would be an impending consolidation in the market due to the expiry of the loan repayment moratorium this month.

The research house advised investors to focus on selected export or external-oriented plays such as electrical and electronic and medical-related exporters, e-government, and the dividend yield compression plays.

It also suggested that investors look at plays involving the economy reopening and vaccine discovery.

Its top picks include Genting Malaysia, PPB Group Bhd, Pentamaster Corp Bhd, Top Glove and Yinson, as well as mid-caps Astro Malaysia Holdings Bhd, British American Tobacco (M) Bhd, Globetronics Technology Bhd, MRCB-Quill Reit, and Scientex Bhd.

“We added laggards Pentamaster within the E&E sector and Astro, and dropped TNB due to lacking catalyst and Duopharma Biotech Bhd (spectacular share price performance), ” it said in a report.

Yesterday, the 30-company index closed 16.11 points higher at 1,537.54 as investors bet on economic recovery beyond 2020.

Top gainers include Malaysian Pacific Industries Bhd, Nestle (M) Bhd, Fraser & Neave Holdings Bhd and PPB Group.

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