1H2012 Report Card - At An Inflection Point

The just-concluded June reporting quarter again saw more earnings disappointments although these came mainly from the small cap fraternity. The earnings of the big caps improved, although we suspect this was due to the low base in 1Q2012. As earnings estimates had been sufficiently lowered over the past two quarters, we see the UDR improving in 2H2012. Fresh talk of the general election likely to be held in November, a friendly pro-election Budget and interesting IPOs over the next two months should prop up the FBM KLCI. Investors may focus more aggressively on the construction, oil & gas and banking sectors to capitalise on sector-related news flow. As yield plays remain crucial to ward off external risks, we continue to find comfort in consumer and telco names. 

Big caps make a comeback. Of the 114 companies under our coverage that reported their results in the recently-concluded reporting season, 47% posted numbers that were in line while 38% disappointed. This compares with 55% and 31% in 1Q12 respectively. Although there were still a great number of earnings misses among the bigger caps (see Fig. 3), with the proportion rising to 34% from 27% in 1Q2012, there were also more winners this time round, thanks to earnings surprises from Maybank, Sime Darby, Gamuda, Digi, Carlsberg and NCB. Among the small caps, there were a higher number of disappointments - at 44% vs 36% in 1Q12 - largely fuelled by weak earnings from tech companies.

Bummers in technology, steel and plantations. Not surprisingly, the steel and plantation sectors continued to dominate the line-up of under-achievers, with the highest number of earnings misses, notwithstanding the earlier downgrades. It would appear that more time is needed to iron out the structural issues plaguing the steel sector although we see some improvements in the pricing and cost dynamics. The planters bore the brunt of weak production growth and flat CPO prices, which hurt earnings, but we expect production to quickly normalise in the September quarter and going into 2013. Similarly, there are early signs of a ramp-up in activity in the oil & gas sector, which should reverse their unexciting performance thus far in 1H2012. The semiconductor sector, meanwhile, received a blow from falling average selling prices (ASPs), triggering a fresh round of earnings downgrades. 

Consumer, telco sectors still a good place to hide. While retailers fared well in a typically soft quarter, it was the breweries that exhibited exemplary performance, bolstered by good volume sales and a change in product mix. Several of our top picks in the small cap segment - Johore Tin, Oldtown and Syarikat Takaful Malaysia - turned in respectable numbers which necessitated selective upgrades during the quarter. 

UDR at an inflection point. The upgrade to downgrade ratio (UDR) slipped to a low of 0.25x in 2Q2012 from 0.5x in the quarter ended March, implying four downgrades for every upgrade. This reflects the uncertain global economic environment, which continued to cloud earnings visibility, prompting analysts to further tone down their expectations. As earnings forecasts have been sufficiently lowered over the past few quarters, we think the UDR is set to improve in 2H2012.

Of upgrades/downgrades and discontinuing coverage. The more significant upgrades during the just-ended results season were for MAS and NCB (both upgraded to BUY) while the notable downgrades in recommendation were for Padini, Malaysia Smelting Corp (MSC), MPI and Unisem (all to NEUTRAL). We discontinued coverage on Masterskill after the group racked up the third consecutive quarterly losses.

(Please see our sector-by-sector earnings round-up in the following pages)

A disappointing quarter. The 2Q earnings of the companies within our auto coverage either met expectations or were disappointing. While both Perodua and Toyota vehicle sales numbers were commendable, respectively boosting MBM’s and UMW’s revenues, the companies’ other divisions put a dent on our earnings expectations. In the case of MBM, and for most of the other autoparts makers, the profit drag was largely attributed to lower production of auto parts and components for Proton, as the national automaker saw production numbers plunging due to waning demand. As for UMW, its oil and gas earnings were hit by forex losses from India coupled with lower contribution from the Naga 1 drilling rig that was dry-docked. Although the 2H outlook will be challenging, we expect automakers and assemblers with new models or facelifts in the pipeline – such as UMW, MBM and Tan Chong – to see better numbers ahead. We maintain our NEUTRAL call on the auto sector. We upgraded Tan Chong as we see the counter as a laggard play in anticipation of encouraging demand for its upcoming Nissan Almera, its first B segment line-up.

Earnings propped up by lower provisions. The banks under our coverage continued to report sturdy 2Q12 aggregate y-o-y earnings growth of 11.1%, but at a slight moderation from 1Q12’s aggregate y-o-y growth of 13.9%. However, 2Q12 pre-provision operating profit grew at a slower pace at 5.9% y-o-y vs 1Q12’s 11.0% aggregate sector growth. This was largely expected given 1Q12’s lumpy and unsustainable trading gains, which expanded 33.8% y-o-y vs 2Q12’s more sustainable 5.3% growth. On a quarterly basis, the high base of 1Q12’s lumpy trading gains resulted in a 0.9% decline in aggregate sector pre-provision operating profit. However, given an improvement in asset quality and hence provisions (-25.9% q-o-q), net profit rose 5.9% q-o-q.

Maybank beats expectations. Among the banks under our coverage, only Maybank exceeded expectations, with its annualised 1HFY12 earnings trumping consensus and our full-year forecasts by 13% and 9% respectively. Its 1HFY12 earnings expanded 21.3% y-o-y while that in 2QFY12 went up 6.7% q-o-q. The group’s pre-provision operating profits were equally impressive, growing by 7.2% q-o-q and 22.9% y-o-y. The stronger-than-expected results were largely driven by: i) a 5.6% q-o-q surge in loans growth with an accompanying 4bps uptick in sequential NIMs, ii) a 67% growth in transaction service charges and fee income, and iii) improved operating efficiencies, which helped to bring down the cost to income ratio to 47.3% from 49.2% in 1Q12. On a y-o-y comparison, net profit and pre-provision operating profit jumped 21.2% and 22.9% respectively despite a 229% y-o-y surge in provision charge.

CIMB reaps robust investment banking income. As expected, CIMB reported a significant pick-up in investment banking fee income, which expanded 838% q-o-q as the group earned huge equity investment banking income from large IPOs such as Felda. Given a slew of upcoming large IPOs slated for 2HFY12 (ie: IHH, IGB REIT and Astro), we expect significant sequential growth in investment banking income in the ensuing quarters. However, lower fixed income trading gains (-23% q-o-q) and forex income (- 94% q-o-q) dampened the pick-up in investment banking income, resulting in a 11.9% q-o-q decline in overall non-interest income.

 

In the breweries sector, both GAB’s and Carlsberg’s earnings came in within estimates, posting commendable y-o-y growth on the back of healthy volume growth in the malt liquor market (MLM) and an improved product mix. 2Q is a seasonally weaker quarter due to the lack of major festivities to boost demand. On a half-yearly basis, GAB continued to see strong performance for its Guinness and Heineken brands while Carlsberg made further inroads with its Asahi and Kronenbourg products.

Meanwhile, the 7.7% y-o-y industry volume growth that the legal cigarette market enjoyed in 1Q2012 has tapered down to a tame 0.4% growth in 2Q2012. BAT’s 1H profits beat estimates due to cost efficiencies arising from a change in its distribution model and lower staff bonus provisions. Meanwhile, JT International’s earnings were within forecasts on better performance for Mild Seven but weaker demand for Winston.

We maintain an OVERWEIGHT rating on breweries on expectations of continued healthy volume growth and a more favourable product mix (consumers drinking premium beers, increasing profits per litre of beer sold). On the other hand, the tobacco industry will likely enjoy another year of excise duty hike reprieve in 2013, although a resumption in duty hike post-general election will likely cause tobacco volumes to start contracting again. Maintain NEUTRAL on Tobacco.

 

Numbers lag expectations. Of the nine construction counters in our coverage, four reported results came within expectations while the rest posted numbers that lagged our estimates. Gamuda (BUY, FV: RM4.46) was an exception as it outperformed our expectations due to the recognition of accelerated margins in its construction and property division. The underperformers were mainly affected by company-specific micro factors, such as the subpar plantation showing for both IJM (TRADING BUY, FV: RM6.32) and AZRB (TRADING BUY, FV: RM0.90), the slower-than-expected LRT extension project progress for TRC (TRADING BUY, FV: RM0.83) and weaker-than-expected construction margins recognised for WCT (BUY, FV: RM3.36). Going forward, we expect the earnings momentum for the entire sector to pick up in 2HCY12, as major projects move up the construction S-curve with a recognition of higher margins being likely.  

OVERWEIGHT. The1H12 jobs secured by public-listed contractors amounted to RM18.1bn, trumping the total of RM4.8bn registered in 1H11, as contracts from the MRT SBK line continued to be dished out. Moving into 2H12, while we expect the positive momentum to slow given that 40 out of a total of 85 contract packages worth RM16bn for the SBK line have been awarded, we remain bullish on the sector as a whole as we expect more mega-billion projects such as the RM7bn West Coast Expressway, the RM2bn-RM3bn Kuala Lumpur Outer Ring Road, the RM26bn Tun Razak Exchange, the proposed Prai power plant extension as well as the development of the RM2.3bn RRI land in Sg Buloh likely to hog the limelight after national election, which is now rumoured may be held as early as November. Hence, we maintain our OVERWEIGHT call. 

A fair season. The retail companies did fairly well despite the quarter being a traditionally weaker season.  Revenue growth was decent across the industry, ranging from high single- to double-digit y-o-y. Department store operators Parkson and AEON performed fairly well by charting healthy revenue and earnings but EBIT margins were lower due to higher operating costs. All of the retailers’ results were within our expectations except Bonia and Multi Sports, which finished below estimates. Bonia’s net profit fell short of our numbers owing to higher general and administration costs from start-up expenses in Indonesia and Vietnam while Multi Sports’ earnings drop was mainly due to lower orders arising from more rigorous client screening to prevent bad debts. We reaffirmed our view that 2H12’s outlook for the retail industry remains upbeat as consumer spending is expected to pick up due to the upcoming festive season and mega sales campaigns. We like Amway (FV RM11.45) in the retail space, given its stable performance and decent dividend yield.

Mixed results. Our top pick – QL Resources (FV RM4.05) posted decent numbers, mainly driven by better showing from integrated livestock farming and marine product manufacturing, which offset the weaker contribution from palm oil activities. Nestle’s numbers were in line, largely attributed by stronger domestic consumption, better exports and efficient cost control. Nonetheless, KFC continues to deliver disappointing earnings due to losses in integrated poultry, education, ancillary and KFC India operations. Johore Tin’s results came in above our expectations due to stronger orders from its dairy product manufacturing business. We expect the company’s earnings momentum to be sustainable in the next quarter as the orderbook for its main product, sweetened condensed milk, remains strong. On the other hand, Oldtown’s results were within consensus and our expectations. Despite our positive view on the stock, we believe that its 3QFY12 results may be muted (flat y-o-y, lower q-o-q) as it is seasonally the weakest quarter for the company, coinciding with the fasting month of Ramadan.

Decent quarter. The education counters under our coverage reported fairly decent 2QFY12 results, with Masterskill (NR) being the only exception as it dived deeper into the red on continued losses in its enrolment base. After three consecutive quarters of disappointing earnings, we ceased covering the counter during the quarter as it was lacking any re-rating catalysts in the near term. On the other hand, the 2QFY12 earnings of Prestariang (BUY, FV: RM2.15), HELP (NEUTRAL, FV: RM1.93) and SEGi (BUY, FV: RM2.52) were withinexpectations. Overall, we maintain our market capitalisation-weighted OVERWEIGHT rating on the sector, which has promise of sound long-term potential. We reiterate our believe that bigger players like SEGi stand to benefit the most from the Government’s relentless push to make Malaysia a high-income nation, with the education sector identified as a key driver of the domestic economy. We also see potential in new and upcoming education peers like Prestariang, given its alluring valuation and untapped growth potential.

Financials. MBSB’s 1HFY12 earnings of RM 173.1m were up 18.1% y-on-y, as 2QFY12 net profit grew 19.7% y-o-y and 17.9% q-o-q to RM93.7m. Its earnings growth was largely contributed by improved net interest income (+18.5% y-o-y) as well as stronger Islamic banking income (+78.0% y-o-y), which surged 34.9% q-o-q to RM174.9m, while gross loans climbed 47.0% y-o-y. Meanwhile, asset quality was intact as gross non-performing loans (NPL) ratio improved to 12.4% while net NPL ratio shrank by more than half to 5.6% in the current quarter.

Insurance. Premium growths in the insurance sector were largely robust. Syarikat Takaful's results beat our expectations on the back of favourable response to its Bankatakaful tie-ups with Malaysia Building Society (MBSB) and Bank Islam. Allianz's results exceeded our estimates due to improved combined ratio and investment performance. Moreover, we were comfortable with managements' focus to allocate a higher amount of expenses to boost its agency force, service delivery and underwriting qualities in view of the detariffication, which is expected to take place in 2016. Looking at similar instances worldwide, detariffication may lead to a substantial reduction in industry premium margins while putting pressure on insurance players that lack prudent underwriting policies and pricing power. We have upgraded our earnings forecasts for Syarikat Takaful and rolled over Allianz's earnings forecast to FY13. Our top picks are Allianz and Syarikat Takaful.

Genting Bhd

Genting Bhd’s annualized 1HFY12 core earnings made up 38.8% and 41.1% of consensus and our full-year forecasts respectively. 1HFY12 core EBITDA and earnings declined 14% and 29% y-o-y respectively, which was largely expected since Genting Singapore recently reported 1HFY12 earnings that were 19% below expectations. Given Genting Singapore’s substantial 40% earnings contribution to group earnings, its underperformance was the key drag on Genting group earnings. Following our recent downwards earnings revision for Genting Singapore, we have correspondingly nudged down our earnings estimates for Genting Bhd by 13.7% and 17.3% respectively for FY12 and FY13. The group’s lower-than-expected core earnings essentially reflect: (i) Genting Singapore’s 28.6% decline in 1H12 core earnings as a result of a 14% drop in VIP volume and a lower VIP hold percentage, and (ii) a 42% slide in plantation earnings via Genting Plantation, which was impacted by a 13.2% drop  in FFB production as well as weaker CPO prices.

Genting Malaysia

Genting Malaysia’s annualised 1HFY12 net profit was in line with our full-year forecast, representing 51.2% of our full year estimates and 50.8% of consensus, after adjusting for exceptional items which included pre-operating expenses of RM17.7m and RM48.2 in construction cost overruns from Resorts World at New York. The group reported a sterling 90% q-o-q recovery in 2Q12 earnings despite slower q-o-q domestic VIP volumes as it benefited from stronger win rates from both its Malaysian and UK gaming operations, offsetting 1Q12’s performance which was impacted by lower domestic gaming win percentages. Its UK gaming operation was a strong performer, registering a 278% q-o-q growth and 141% growth y-o-y in EBITDA. Casino attendance grew by 6% and, coupled with strong win rates, helped underpin the impressive growth. Its US casinos reported a 22.4% q-o-q growth in operating earnings on the back of a 5% improvement in average win/machine/day to USD375. Given the relatively impressive earnings delivery from its foreign gaming operations in the two countries, the company’s domestic gaming profit contribution was diluted to 75% in 2Q12 and 82% in 1HFY12 vs the 90% level in 1Q12.

Berjaya Sports Toto

BToto’s annualized FY12 earnings were largely in line with our and consensus’ full-year estimates, making up 98% of our full-year forecast and 102% of consensus’ full-year forecast. Its key subsidiary, Sports Toto Malaysia, registered a revenue and pre-tax profit growth of 5.1% and 13.4% respectively. Revenue growth was driven primarily by stronger Jackpot sales while the growth in pre-tax profit relative to revenue got a boost from a lower prize payout ratio. On a sequential comparison, revenue and pre-tax profit declined 7.2% and 32.3% q-o-q. The lower revenue was attributed to the high base effect of 3Q12 due to the CNY festive season, while the plunge in pre-tax profit was attributed to a higher prize payout ratio in 4Q12. The group declared a fourth interim dividend per share of 5 sen (vs 4Q11: 3 sen), bringing its full-year DPS for FY12 to 27.0 sen single tier tax exempt (vs FY11’s 21.0 sen), representing a payout ratio of 89.5%.

Mixed results. Faber's results were in line with expectations attributed to heightening activities in relation to its HSS concession and higher progress billings from its property division. Despite the uncertainty surrounding the concession, we are confident that Faber will eventually renew the concession and maintained our forecast premised on the assumption that the concession will be renewed based on existing terms. KPJ on the other hand reported 2Q earnings below ours' and consensus' estimates attributed to a two-week closure of the operating theatres in some of its flagship hospitals. We have revised down our forecast earnings and rollover our EPS forecasts, but have upgraded our call in view of the sector PE rerating post-IHH.

Largely in line. Except forCentury Logistics, whose earnings continued to be undermined by its O&G logistics segment, other logistics companies in our coverage universe performed well during the quarter under review. The smaller cap Freight Management and our top sector buy, TASCO, posted healthy profits, thanks to the strong expansion in its third party logistics business with MNCs involving the provision of comprehensive solutions which encompass warehousing, and air, sea and land freight services. We expect the volume handled by the logistics companies to register decent growth amid weak economic sentiment, fortified by contracts secured with MNCs to ship mainly consumer products that have fairly inelastic demand such as food and beverage items, tobacco, home appliances and clothing. Among the bigger cap companies, Pos Malaysia registered decent results, mainly boosted by its courier business which benefited from the higher parcel deliveries handled during the quarter against a backdrop of resilient consumer spending. We continue to like the postal group’s potential strategic synergy with DRB-HICOM.

Adex picks up. As expected, advertising expenditure (adex) picked up in 2QCY12, thanks to the Euro 2012. Still, earnings of the three bigger cap media companies under our coverage were slightly affected by the sluggish 1QCY12 numbers. We expect the media sector to continue to do well in 2HCY12, especially in 3QCY12, on the back of some adex-friendly events, such as the recently ended 2012 Olympic Games, the Hari Raya festive season and the highly anticipated General Election. As for the internet media segment, Catcha’s numbers were affected by its high operating cost from an earlier investment. Nonetheless, we believe internet media will be a key growth area going forward, judging from the steady growth in the country’s internet penetration rate and improving broadband speed provided by the telcos. We maintain our Overweight call for the sector.

On track to recover. Better outlook for 2H2012. We reckon that the 2QCY12 results of most O&G companies showed some signs of recovery. On the domestic front, the outlook for 2H2012 brightens in anticipation of more capex spending from Petronas. Nevertheless, we have revised our FY12 earnings assumptions for a few of the O&G companies under our coverage due to a gestation period, before the impact of the new contracts kicks in. Maintain Overweight on the O&G sector and our top picks are SapuraKencana Petroleum (BUY, FV: RM2.88) and Dialog (Buy, FV: RM3.16).

Generally weaker. Plantation companies generally reported a weak set of 2Q12 results due to the softer-than-expected seasonal uptick in production and the flattish realised CPO price. Sabah’s production was the most disappointing, showing an abnormal sequential decline. This was due to the effects of drought from two years ago as well as weather swings, which affected production of fully mature trees, which make up a major part of the state’s plantations. Pure Sabah plays were badly affected; IJM Plant was the worst hit, with production falling by 34.5% q-o-q instead of rising as per usual trend. Genting Plant and IOI Corp, with two-thirds of both their production coming from Sabah, saw their numbers sinking 24.9% and 27.9% respectively. Meanwhile, Kulim’s earnings were hit by unusually heavy rainfall at its Papua New Guinea operation as well as weak Johor production. The downstream players also continued to be negatively affected by Indonesia’s export duty structure, which made the country’s refined products more competitively priced. While earnings were disappointing in 2Q, we expect 3Q to be significantly better as production normalises. We are maintaining our Overweight call on the sector on expectation of a much stronger 2013 in terms of palm oil price as the disruptive weather phenomenon El Nino looms.

Within forecasts. SP Setia's earnings were largely within expectations, attributed to higher progress billings from on-going projects. We expect the group's sales performance to strengthen in view of the strong take-up from Aeropod in Sabah. Glomac's results were within forecasts as well, driven by strong response from its township projects on the back of a strong pipeline of strategic projects moving forward. Our forecasts and calls for SP Setia and Glomac are unchanged. For REITs, Sunway REIT recorded resilient earnings but was slightly hampered by finance expenses relating to the acquisition of Sunway Putra Place, despite the lower cost of debt achieved via its proactive Capital Management Programme. We maintain our forecast but arrive at a higher FY13 target yield.

Sector resilient amid global economic crisis. Except for Adventa and Kossan, the results of the bigger rubber glove companies all came in within consensus and our expectations. Nonetheless, we downgraded our earnings forecast, and the call on Hartalega due to the limited upside on its share price towards our FV. We also believe the company will experience a margin compression due to the price war in the nitrile gloves segment going forward. Profit margins will be in the range of 20%-22%, rather than the 25%-26% achieved in the past years.   All in, we are maintaining our Overweight call on the sector as it is buoyed by the resilient demand on gloves from the US and Europe, low latex prices, favourable forex rates and the capacity expansions among all the glove manufacturers in order to meet the strong.

 

A short-lived revival. As anticipated, most steel mills in Malaysia posted a sequential improvement in the current reporting period as steel prices improved q-o-q and cheaper materials progressively arrived in 2QCY12. Nonetheless, the quantum of improvement were disappointing as annualised numbers generally fell short of our and street’s full year estimates, despite a few exceptions.

Meanwhile, the initial start-up of some Economic Transformation Programme (ETP) projects may sufficiently keep local prices relatively more stable than in international steel market but any substantial pickup in steel demand is only expected at least until the General Election is held. Furthermore, international steel prices are once again falling, which may give rise to a destructive time lag of lower Average Selling Prices (ASP) against a backdrop of still-expensive raw material costs. Thus, we remain cautious on the steel industry’s medium term outlook and maintain NEUTRAL on the sector.

A gloomy 3Q seen. We were disappointed with the overall performance of the tech companies under our coverage - only one of the five reported results that were in line, whereas the other four reported numbers that were below expectations. The subpar performance among the HDD component companies could be attributed to: (i) the modest quantity of global HDD shipments (+7% q-o-q, -5.5% y-o-y), and (ii) the 4%-5% decline in ASP during the quarter. To make matters worse, Western Digital and Seagate guided for flat HDD shipments while PC shipments are also expected to grow marginally in 2H. We think that both the operations of JCY (NEUTRAL, FV: RM1.44) and Notion (NEUTRAL, FV: RM1.30) will be adversely affected by these upstream headwinds. Nonetheless, the former should still register significantly better numbers in FY13 versus the pre-Thai floods level. As for the latter, we think its camera business segment should help mitigate the impact of lower HDD sales. In the semiconductor assembly and test services sector, we see challenging days ahead for MPI (NEUTRAL, FV: RM2.72) and Unisem (NEUTRAL, FV: RM1.21). Worldwide semiconductor sales in 1H2012 were still 5.4% below that in the comparable period in 2011 while the book-to-bill ratio shrank further to 0.87x from 0.93x in July. Nevertheless, both companies are capable of springing surprises in the upcoming quarter given that the former should start to see contribution from phase 2 of its Carsem Suzhou plants while Unisem successfully keeps a lid on rising fixed costs to lift profit margins. Lastly, Century Software (SELL, FV: RM0.29) – the only software and services provider under our coverage – performed below expectations. Moving forward, we think its profit margins should still be crimped by higher fixed costs, as was the case in the past two quarters.

A decent quarter. The telcos reported mixed results, with TM and Timedotcom being the bright spots, reporting above average consensus earnings for 1H2012. The quarter was characterized by stiff mobile competition, which exerted pressure on voice revenue across the board, with the benefit of continuing robust data growth as the offsetting factor. Handset sales leveled off q-o-q as the Samsung Galaxy SIII was only unveiled towards the latter part of the quarter. Also, during the June quarter, Maxis undercut TM’s fiber-to-the-home (FTTH) packages to promote awareness of its new product, although it only managed to capture 4.2k new subscribers versus TM’s 68k additions. The telcos continued to dish out generous dividends, with TM paying out 30 sen/share as part of its capital distribution exercise announced earlier, in addition to the 9.8 sen/share it declared for the quarter. There were also goodies from Axiata, which proposed a higher-than-expected interim DPS of 8 sen/share, double the quantum paid in the previous corresponding quarter, while Digi and Maxis continued with their regular quarterly payouts of 5.9sen/share and 8sen/share respectively. 

TM still our top pick. Reflecting the sector’s safe haven characteristic, telco stocks continued to outperform the market, with all the telcos notching up new highs. Admittedly, their PER valuations could no longer be a meaningful gauge of the relative attractiveness of individual stocks and the sector. We continue to advocate a strategy of selective stock-picking, focusing on management execution and potential for earnings and dividends surprising on the upside. Our top pick is still TM (BUY, FV: RM6.50), followed by TIMECOM (BUY, FV4.52). We maintain our NEUTRALrecommendations on MAXIS (FV: RM6.50), AXIATA (FV: RM6.04), and DIGI (FV: RM4.07). As two out of five stocks under our coverage have our Buy recommendation, we maintain our NEUTRAL weight on the sector.

 

A weak quarter; Turnaround gains traction. 2Q was a weak quarter for most of the transportation counters under our coverage, with oil and other major operational costs being the culprits for the earnings disappointments. The sole outperformer in the sector was NCB Holdings, which saw its earnings maintaining momentum as it turns around. Meanwhile, the solid companies under our coverage - AirAsia and Malaysia Airports – are starting to see deteriorating margins as higher costs bite. Meanwhile, companies that had been attempting to turn around over the past few years, such as MAS and MISC, are starting to see encouraging improvements in their operational numbers after aggressive cost-cutting measures. Going into 2H, we expect better earnings, which explain the high weighting of BUY calls in our Transport coverage. Nonetheless, with the landscape expected to remain rather challenging, we  maintain our NEUTRAL call on the sector.

Source: OSK