Oct 23, 2013

Little change on earnings front…all eyes on Budget 2014


•  Slight  dip  in  FBM  KLCI  consensus  earnings.  During  the  week  ended  20  October  2013,  current  year  FBM  KLCI consensus EPS saw a minor week-on-week drop of -0.03 to 106.75. The weekly decline in current year EPS figure is  attributable  to  slight  downward  adjustments  in  earnings  of  Banking  and  Plantation  sectors  (refer  to  Sectorial review below). Nonetheless, the FBM KLCI gained 13.84 points, a 0.78% rise, during the week to close at 1,799.59 and its current year PER ended higher at 16.86x.

klse index


banking sector •  Banking.  For  the  week  under  review,  current  year  FBM  KLCI–Banking  consensus  EPS  saw  a  small  week-on-week drop of  -0.02 to 42.80. Nonetheless the FBM KLCI–Banking gained 3.98 points,  or 0.69%, to close at 578.11. The benchmark Banking current year PER consequently rose to 13.51x. The FBM KLCI-Banking currently commands the lowest  valuation,  apart  from  the  Utility  sector,  among  the  benchmark  sectorial  components.  The  low  valuation corresponds to our own expectation of only a slight  pickup in the banking sector loan momentum going forward due to (i) still weak external macroeconomic conditions, and (ii) expectation of a slower roll out of ETP projects as  government  takes  measures  to  reduce  fiscal  deficits.  Furthermore,  net  interest  margins  (NIMs)  of  banks  are expected to continue to be impacted by competitive pressures on lending and deposit rates.

plantation •  Plantation. The current year FBM KLCI–Plantation consensus EPS also saw a slight week-on-week decline of -0.01 to 14.73 during the review week. However, FBM KLCI–Plantation gained 1.89 points, or 0.68%, to close at 279.84 hence  its  current  year  PER  increased  further  to  a  current  year  high  of  19.00x.  The  PER  multiple  of  Plantation constituents which is at a premium to the overall FBM KLCI implies market optimism toward the prospects of CPO prices and, by extension, potential earnings recovery of plantation stocks in the coming year. As we mentioned in previous week, this view is supported by recent spate of mergers and acquisitions by plantation companies (i.e. FGV-Pontian  and  IOI-Unico)  which  were  transacted  at  valuations  not  reflective  of  the  prevailing  depressed  CPO prices. 


•  Telecommunication.  The  current  year  FBM  KLCI–Telecommunication  consensus  EPS  was  unchanged  week-onweek  at  13.37.  However,  FBM  KLCI–Telecommunication  was  up  1.08  point,  0.36%,  to  close  at  301.23  during  the week  under  review.  The  benchmark  Telecommunication  retains  the  highest  valuation  among  the  benchmark sectorial components as it ended the week with a current year PER of 22.54x.

oil and gas •  Oil & gas.  The current year FBM KLCI–O&G consensus EPS was unchanged week-on-week at 10.72. For the week under  review, FBM KLCI–O&G added 3.97 points, or  1.83%, to close at 221.13. Its current year PER  climbed to a new  current  year  high  of  20.62x.  The  FBM  KLCI-O&G  trades  at  a  premium  to  the  broad  market  valuation.  The
ever  higher  valuation  multiple  is  reflective  of  investors’  sanguinity  with  regard  to  its  above  average  growth prospects which are driven by the positive outlook in the oil and gas sector.


•  Utility. For the week under review, the current year FBM KLCI–Utility consensus EPS was also unchanged at 10.69. The  FBM  KLCI–Utility  nevertheless  ended  the  week  higher  by  1.88  points,  or  1.45%,  to  close  at  131.95  and  with current year PER of 12.35x. The FBM KLCI-Utility trades at a discount to the broad market valuation and has the lowest  multiple  among  the  benchmark  sectorial  components.  It  corresponds  to  the  Utility  stocks  generally  staid growth prospects but they are nonetheless good dividend payers.

others •  Others. Similarly, the current year FBM KLCI–Others consensus EPS was unchanged at 14.44. However, FBM KLCIOthers  gained  1.03  point,  or  0.36%,  to  close  at  287.34  during  the  review  week.  Its  current  year  PER  ended marginally higher at 19.90x.



•  Earnings, dividend, taxes and the equity market. The trajectory of equity market is principally hinged upon the expected performance of its corporate earnings. Furthermore, the valuation of equity price also bears a positive correlation to its net dividend payout. Hence reduction in either or both corporate and dividend tax rates should, ceteris  paribus,  provide  a  good  fillip  to  the  local  equity  market.  On  the  government’s  end,  the  initial  income shortfall may later on be well compensated by higher corporate investments and thus bigger taxable earnings and dividends.
•  Commitment  to  PFR  may  arguably  be  the  key  to  preserve  investors’  confidence. But  however,  the  present fiscal reality affords the government little latitude to forgo present income for future higher revenue, the basic construct  of  our  wish  list  in  above.  Not  now,  as  the  government  is  running  on  the  deficit  and  its  debt  level  is already  on  the  brink  of  the  55%  self-imposed  ceiling.  And  more  importantly,  the  international  rating  agency  is breathing down its neck, so to speak. Therefore the urgency, present and now, is to retain Malaysia’s sovereign rating  and  preserve  global  investor  confidence  on  the  country  with  judicious  implementation  of  the  public finance  reform  (PFR)  initiatives.  Thus  we  reckon,  under  current  scenario,  an  unflinching  commitment  (with affirmed timelines) by the government to fiscal consolidation, as per the PFR initiatives, may turn out to be the
key to continue winning investors’ heart.

•  Reiterate our 2013 and 2014 year-end targets.Hence we expect slower domestic demand growth for next year but compensated by improvement in external performance. We reiterate our FBM KLCI year-end targets for 2013 and 2014 at 1,800 and 1,900 points respectively.