Tuesday, 5 March 2013

4QCY12ResultsReview - MorePrice Catalysts Are Needed

In a nutshell, the recent reported results were slightly below market expectations. Based on 109 stocks under our coverage, we still saw as high as 37 stocks, or 34%, delivering belowthanexpected results. This was quite a surprise as we had already seen major downgrades earlier post the 3Q12 results season. While the results did not cause any major selldowns to the market, we believe more price catalysts are needed in order to push up the consensus target level in order to lead to a higher potential upside. As for now, we believe the market is at best NEUTRAL due to the anticipated slower earnings growth in 2013. Apart from the conclusion of the General Election, we believe a rerating opportunity will only emerge in 2H13 when the investment community rolls over their valuation base year to 2014. That said, we continue to advocate a BuyonWeakness(B.O.W.)strategy, preferably when the index approaches 1,610 and below. As for stock picks, in view of the General Election concern and uncertainty, we believe that the mainstream investment choices will still be the names with highdividend yields and those that have consistently delivered positive total returns. Stocks that fit into this criteria are those that are (i) paying dividends in March to May 2013, (ii) regarded as consistent performers, and (iii) rated as OUTPERFORM by us i.e. STAR (TP:RM2.94), MAYBANK (TP: RM10.90), TM (TP: RM6.68), NESTLE (TP: RM73.30), PPB (TP:RM15.00) and RHBCAP (TP: RM8.30).

Below expectations. Steel players under our coverage came in below ours and the consensus estimates given a softer average selling price and higher operating costs attributable to the sluggish international market coupled with the continued overcapacity issue on the global steel market, especially in China in 2012. As for retail companies’ 4Q12 results, they came in broadly in line with the street and our expectations except for PARKSON and PADINI, which missed ours and the consensus numbers. We believe that this could be due to the global economic uncertainty and the slowdown in consumer spending. In addition to that, fierce competition, pricing competitiveness and higher marketing cost also had a further negative impact on the overall retail companies’ earnings. The education sector, on the other hand, generally posted disappointing FY12 results as well due largely to higher costs. As expected, the plantation sector's results were also generally below the consensus estimates due to the low average CPO price of RM2189/mt recorded in 4Q12. Among the big caps, earnings disappointments were also seen in SIME, IOICORP and KLK due to the lower earnings from their plantation divisions. Technology companies also reported subdued 4QCY12 results with four out of the six stocks under our coverage coming in below our expectations. The disappointment was on the back of flattish revenue growth amid the global economic uncertainties as well as thinner margins as a result of higher operating costs. Major downgrades by us here were on MPI,UNISEM,NOTIONand JCY, which reported net losses in 4QCY12.

Above expectations. Developers’ results meanwhile were c.60% above estimates due to higher billings and lumpy land sales recognitions. It appeared that developers that exceeded sales were the ones with overseas earnings,strong Johor project drivers and/or en bloc sales offerings.

Weaker earnings going forward? Our FBMKLCI’s FY12A, FY13E and FY14F core net profit growth rates are now estimated at 12.0%, 3.2% and 9.4% respectively in contrast to the consensus FBMKLCI’s historical, current and next year growth rates of 14.4%, 0.2% and 8.9% respectively. While the numbers seem to vary, the trend in the earnings estimates is clearcut, which is on a lower path in 2013.

Lower index target? We are maintaining our yearend FBMKLCI Target Index at 1,700 pending our final review. However, there is a risk of a mild downward revision, say to 1,690, in our target above in our forthcoming Quarterly Investment Strategy.

Source: Kenanga

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