Malaysia’s 3Q14 results
In view of the earnings cuts, our end-2015 KLCI target has been lowered from 2,050 points to 1,970 points, based on an unchanged 10% premium over the three-year moving average price earnings ratio (PER) or a PER target of 16.5 times. We still prefer the Economic Transformation Programme (ETP) sector winners i.e. oil and gas, construction and property. We also continue to like smaller-cap stocks.

The November results season was a disappointment as the percentage of stocks in our universe that missed expectations increased from August’s 30% to 36%.  The percentage of companies that beat expectations, however, increased from 11% to 13%.

As a result, the revision ratio stayed at its lowest point since the second quarter of 2011 (2Q11), at 0.36 times. In terms of companies that met expectations, the proportion declined from 59% to 51%. All in, 15 sectors disappointed, two more than the previous results season, while only two (three previously) beat expectations. Only the construction and transport sectors did better than expected while the rest either missed forecasts or at best were in line.

Our biggest fear has materialised as 2014 core net earnings per share (EPS) growth has been continuously cut from double digits earlier in the year to only 0.7%. This represents the third year of close to zero earnings growth. Banks, plantation companies and telcos are the key culprits dragging down earnings. 2015 growth should improve to 8.1% due to the low base but there are downside risks due to low commodity prices and the impact from the implementation of the goods and services tax (GST) starting from April 1.

Of the 117 companies that we track, 36% missed expectations during the recently-concluded reporting season, a deterioration from the 30% that missed during the August results season.

Our revision ratio (number of forecasts upgraded vs number of forecasts downgraded) stayed at 0.36 times as the percent increase in number of companies that beat expectations and disappointed was the same 20%. This ratio is closing in with the lows of 0.32 times in second quarter financial year ending 2008 (2QFY08) and 0.31 times in 2QFY11.

3QFY14 EPS changes dipped deeper into negative territory on both a quarter-on-quarter and year-on-year basis. This second straight quarter of contraction is worrying.

In the last three months, we cut calender year ending 2014 (CY14) EPS by 5.2% and CY15 EPS by a steeper 7.9%. The number of companies with their earnings upgraded increased from 11 to 12, while the number of companies with their earnings downgraded increased from 24 to 37. — CIMB Research, Dec 2

This article first appeared in The Edge Financial Daily, on December 3, 2014.