Feb 13, 2017

FBM KLCI - Breaking The Trading Band

On expectation of further earnings recovery. 2017 Year-end Target: 1,830 points

Price consolidated within a trading band during past 1.5 years… The FBM KLCI has been stuck in a price consolidation from the second half of 2015 until today. During the past 1.5 years, prices were trading largely within a band of between 1,600 and 1,720 points.

…despite plunging earnings and the ensuing resumption of upcycle… However, it is notable that the FBM KLCI price consolidation was against the backdrop of deteriorating earnings which dropped from 98 points in July 2015 to 89 points in June 2016. Thereafter, the earnings upcycle resumed until it reached nearly 100 points in December 2016.

FBM KLCI: Price versus 12-Month Trailing Earningsfbm klci price vs earning

…as the initial plunge was arguably seen as transient. The FBM KLCI price consolidation during the period of earnings slump and throughout the ensuing resumption of earnings upcycle indicates that the market may have viewed the initial slump as transient hence disregarded the fluctuations in earnings. On this score, recall our 2016 outlook report dated 10 December 2015 titled “Resumption of Earnings Upcycle”.

As earnings caught up with price and given expectation of further earnings recovery,… The valuation gap is narrowing drastically pursuant to FBM KLCI earnings recovery since middle of last year. Moreover, given the expectation of further recovery this year whereby earnings (Bloomberg consensus) are estimated to reach a level of circa 106 points, the FBM KLCI is likely to regain its upward price momentum moving forward.

…the FBM KLCI would plausibly be breaking above the trading band moving forward. Thus, we expect the FBM KLCI to break above the trading band towards a target range between 1,730 and 1,860 points by the end of

KLCI historical and forward consensus earnings fbm klci historical earning

FBM KLCI year-end baseline target. We reiterate our FBM KLCI 2017 year-end baseline target at 1,830 points which equates to PER17 of 17.1x

source: MIDF Research – 8/2/2017