EYEING THE SCREEN: An investor monitors stock market prices in Kuala Lumpur. The year’s just-concluded second quarter season – traditionally the weakest financial-reporting quarter – has presented no major upside surprises, according to observations made by head researchers. — Reuters photo
KUCHING: The year’s just-concluded second quarter season – traditionally the weakest financial-reporting quarter – has presented no major upside surprises, according to observations made by head researchers.
Research houses on Friday had pared down respective targets for the nation’s benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) to an average level hovering around 1,400 to slightly above 1,500 points.
“The second quarter’s earnings season was the second in succession that we deem to be disappointing, as negative earnings surprises exceeded positive earnings surprises,” noted Bernard Ching, head of research at ECM Libra Capital Sdn Bhd (ECM Libra).
“Earning growth momentum is also waning as we cut 2011 and 2012 aggregate earnings of stocks within coverage by 2.3 per cent and 2.1 per cent, respectively,” he added. As such, ECM Libra had also downgraded its year-end FBM KLCI target from 1,650 to 1,450 by pegging a lower 13-times price/earnings ratio to reflect higher risk aversion as well as risk of further earnings downgrades.
According to a Reuters report, global investors seemed to be slashing their holdings of equities to below 50 per cent in August, making it probably the worst month for stocks in years.
“Corporate Malaysia earnings growth momentum story is showing some cracks following two consecutive quarters of disappointing earnings. Since December, earnings growth of the FBM KLCI for 2011 has been cut from 13.1 per cent to 10.5 per cent now,” observed Ching.
“The earnings cut was even more drastic within ECM universe of coverage, which resulted in the contraction of 2011 earnings growth projection from 14.8 per cent in December to 8.8 per cent now.
“Although 2012 earnings growth of FBM KLCI has expanded over the same period from 8.9 per cent in December to 12 per cent now, we believe that the risk of underperformance is greater now. The banking and power sectors are expected to contribute 42 per cent and 25 per cent, respectively, of the earnings growth in 2012,” he added.
Concurring to such an outlook, TA Securities Holdings Bhd’s (TA Securities) head of research Kaladher Govindan said going forward, there would be further downside risk of earnings forecasts should the economic momentum fail to pick up.
“Moreover, external shocks, whether in the form of double dip recession in US, worsening European banking crisis or a slowing China economy, could further dampen corporate earnings going forward.
“As we have highlighted in our Malaysian Strategy report dated August 29, earnings forecasts were downgraded post-second quarter reporting season – the first after five consecutive of upgrades.
“Cumulatively, we have downgraded earnings of companies under our coverage by 4.7 per cent and 4.5 per cent for 2011 and 2012, respectively. Additionally, we maintain a ‘neutral’ view on Malaysian equity with a year-end target of 1,490.”
Within a similarly cautious sentiment, Ching said although fundamentals of the nation’s equities should remain intact amid uncertainties on the external front, earnings growth momentum story would obviously be coming to an end.
“Risk of further disappointing earnings seasons cannot be ruled out as estimates for 2012 and beyond have largely been kept intact so far. Nonetheless, we favour defensive high-yield stocks such as Axis Real Estate Investment Trust (REIT), Berjaya Sports Toto Bhd and CapitaMalls Malaysia Trust.”
“We are selective on growth stocks, preferring those that depend on domestic or regional demand, which is more resilient against export to advanced economies. Our picks are Axiata Bhd, AirAsia Bhd (AirAsia), Parkson Holdings Bhd and QL Resources Bhd.
While still believing in the oil and gas upcycle theme, Ching stressed that stock selection would still be important as many stocks had run ahead of fundamentals.
“On this, we prefer laggards such as Alam Maritim Resources Bhd and Wah Seong Bhd.”
TA Securities, meanwhile, reiterated its strategy of accumulating attractive dividend yielding stocks with some of its stock picks in this perspective included Carlsberg, Lingkaran Trans Kota Sdn Bhd, Berjaya Sports Toto Bhd, Boustead Bhd and YTL Power International Bhd.
“Avoid stocks with high level of foreign shareholding, which appears increasingly susceptible to a sell down in the event global equity market outlook turns bearish,” said Govindan, adding that the top five stocks with high level of non-strategic foreign shareholding would include AirAsia, Genting Bhd, IJM Corp Bhd, CIMB Group Bhd and Uchi Technology Bhd | 
