Malaysia Strategy:3Q16results wrap,still no inflection

Of the 52 companies under coverage reporting over the 3Q16 reportingseason, almost 50% missed expectations whilst just over 20% came in above(Fig 1). Among beats, banks surprised positively as loan loss provisioningcontinued to undershoot, notwithstanding challenging macro environmentwhilst our telco / utilities picks (Tenaga, Telekom, Gas(M)) delivered robustcore profit growth. Plantations and construction had mixed delivery whilstconsumer / gloves, oil & gas, property and healthcare disappointed. Witheconomic indicators either sluggish or weakening, and management guidanceuniformly cautious, it is no surprise the KLCI consensus EPS growth trendcontinues to be lowered.

Revision trend remains negative: With the Brexit vote in June adding topessimism relating to the still-decelerating domestic economy and politicalturbulence, expectations were low the 3Q reporting would indicate a bottom renegative revision trend. Consensus continues to adjust EPS growth forecastslower ie now -0.5% and 7% for 2016 and 2017, respectively. For MQcoverage, results season adjustments reduce our 2016 EPS growth estimateto -0.4% (from 3.3% post-2Q reporting) but we see an uptick in 2017 growthto 10.8% (from 7.0%). Besides a low base effect, we had raised earnings forplantations in Oct on higher CPO price assumptions (ASEAN Plantations –Tighter 2017 makes us more positive). We also note corporates have anincentive to suppress 2016 earnings to take advantage of profit growth-linkedcorporate tax reductions for 2017 and 2018, as articulated in Budget 2017.

Utilities, MyEG were convincing beats: Tenaga’s core profit came in 11%ahead of expectation whilst Gas(M)’s FY16 earnings forecast was raised 6%following higher than expected gas distribution margin. In the wake of 42%YoY earnings growth, MyEG’s FY17-19E EPS was raised 2-5%, imputingupside from the hostel business and foreign worker rehiring programme.

Genting(M) 3QYTD earnings were 83% of consensus but largely due to taxwrite-backs.

Disappointments in property, oil &gas: negative newsflow among propertystocks included Mah Sing cutting its sales targets whilst sector heavyweightSP Setia’s 9MFY16 earnings were only 56% of our FY16 forecast. Earnings atBumi Armada and UMW Oil & Gas missed by a large margin, contrasting withan in-line SAKP on better-than-expected cost savings and margin resilience.

KLCI upside anchored by big-cap picks: Sizeable TP upsides for big-capsTenaga, Sime Darby, Telekom, Axiata and IHH underpin MQ’s macro risksadjustingbottom-up 12mth KLCI target of 1,770, or a +7.6% upside.