Malaysia Strategy-1Q17results wrap:hesitant start

Conclusion

Contrary to earlier expectations that 4Q16 kitchen-sinking and commodity pricerecovery would see market earnings recovery gain traction, 1Q17 reportingproved disappointing. While the number of companies meeting expectationsrose to 27 (4Q: 21), the number that missed inched higher to 16 (4Q: 15), andonly 5 beat. Guidance outside of banks, tech/exporters and constructionremained uninspiring, with expectations of market earnings acceleration intactas underscored by unchanged 2017 KLCI consensus EPS growth forecast.

Impact

Consensus unfazed: also reflecting to some extent the general reluctance toadjust earnings early in the year notwithstanding the weak start, consensushas not materially adjusted 2017 KLCI EPS growth expectations, i.e., still atthe post-4Q 6%, with 2018 forecast at a faster 12.7%. For Macquariecoverage, earnings upgrades post-4Q results, especially for banks and oil &gas, and our above-consensus earnings estimates for heavyweights likeTenaga, Sime Darby and IHH (as well as new coverage POS(M) and HLBank) have our 2017/2018 one-offs-adjusted earnings growth at 8.5%/8.8%.

Banks the biggest beat…: per improving operating trends in 4Q, particularlyin support of net interest margin (NIM) recovery, the bigger banks delivered aconvincing earnings recovery, underpinned by positive jaws (i.e. higher NIM,contained operating expenses) and lower credit costs. These drivers appearsustainable against a backdrop of accelerating GDP growth, with restructuringactivity (CIMB’s broking arm sale, AMMB-RHB merger talks) also picking up.

…with plantations, telcos in-line: in line with a much higher 1Q CPO price(+29% YoY), plantation companies delivered on expectations of sharp recovery(only IOI missed due to lower CPO production). Telcos also met expectations,with Maxis performing best among the pressured mobile operators (DiGi theworst) while preferred fixed-line players Telekom and Time were resilient.

Transport/logistics, consumer, GENM disappoint: the mixed bag that istransport/logistics missed for a variety of reasons, from kitchen-sinking (POS)to higher taxes (MAHB), to negative yield-cost dynamics (AAX, downgradedto Neutral). Karex and BAT were big misses re consumer, underscoring ournegative view on both, while GENM’s sluggish core Malaysian visitorship andearnings have us reiterating the share price has run ahead of fundamentals.

KLCI upside anchored by big-cap picks: TP upsides for big-caps – Tenaga,Telekom, Sime Darby and IHH (vs. downsides for PetGas, PetDag and Digi) –underpin MQ bottom-up 12mth KLCI target of 1,836, or +2.7% upside.

Outlook

GLC Reform is our key market theme for 2017, top picks being Tenaga, SimeDarby and POS(M). With scope for debt-funded fiscal stimulus and tradeexpansion constrained, necessity of internally-generated, debt-neutral growthmeans rising pressure for domestic reforms, particularly re GLCs where weare already seeing momentum re management changes, rising GLIC activism.

Other big cap picks (Fig 2) include Telekom, IHH, Gamuda, CIMB, SP Setiaand AirAsia. Mid-caps with resilient yield and core franchises are Bursa(M),Gas(M) and TimedotCom; we also like HLBK, Bumi Armada and Econpile.