3QCY2012 Results Review - Sign of Weakness Emerging?

We saw a much weaker‐than‐expected set of 3QCY12 results. In line with the downward revisions in most of the earnings estimates and target prices, we have revised down our 12‐month index target to 1,705 (implying 18.1x & 16.1x FY12 & FY13 earnings estimates respectively) from 1,750 previously based on both the Top‐Down and Bottom‐Up approach. Our FY12 and FY13 net earnings growth rates have also been fine‐tuned slightly from 5.8% and 11.1% to 5.6% and 10.8% respectively. The downside revision is not a surprise to us. Recall that we had mentioned in our 4Q12 Investment Strategy Report that the downside risk exists. Apart from the weaker sector outlook, as per our shorter list of OVERWEIGHT calls then, we had also highlighted at that time that our index target was heavily reliant on the (i) Gaming, (ii) Oil & Gas and (iii) Banking stocks. As such, the recent cut in the earnings estimates of companies especially for the Gaming and Oil & Gas stocks inevitably impacted our Index Target. While we have lowered our Index Target, we still believe that a “Buy‐on‐Weakness” strategy is still the right strategy as the index had corrected recently.  Furthermore, this is because we still believe that the local market should be supported by the seasonality factor as per our Seasonal Study, provided that the General Election (“GE”) should not take place before March 2013.

Largely below expectations. The recent reported results were largely below market expectations. Based on the FBMKLCI constituents, we saw the highest downgrades in the consensus EPS in the past 1 year after the recent reporting month. The consensus’ estimated Current Year EPS and Next Year EPS saw downgrades of 1.9% and 1.4% respectively. The major disappointments came from the Plantation and Oil & Gas sectors while the Auto and Consumer (or F&B sub‐segment to be exact) sectors delivered slightly better than expected results.

Plantation sector – The major culprit. Recall that the plantation stocks results were below expectation with 56% of the nine planters under our coverage reporting earnings which were below the consensus estimate.    This was caused by the lower than expected CPO prices and a slower FFB yield recovery from the tree stress effect. Post‐3QCY12 result, we have assumed a lower CY13 average CPO price of RM2,850 (from RM3,000 previously), leading to our UNDERWEIGHT call on the sector.

While the consensus did downgrade its EPS estimate for the Oil & Gas sector as well, note that our own downgrade for the sector was milder since our earnings forecasts were less aggressive in the first place. However, we did cut MHB (UP; TP: RM4.02) and WASEONG’s (MP; TP: RM1.78) significantly. MHB's earnings were severely impacted by provisions on a project it was working on while WASEONG was impacted by significantly low‐margin contracts as its headline awards like the North Malay Basin project and Turkmenistan project had been pushed to 2013. That said, we are still maintaining our OVERWEIGHT rating on the sector given that many rumoured projects have yet to be awarded.

Source: Kenanga