Top Story : Earnings Review - Market volatility amidst gradual normalisation of policies
Strategy Update
- The earnings reporting season that just ended showed the bulk of corporate results that we covered
84.5%) came in within or above our expectations. The recovery in earnings that started from 2Q 2009 was sustained into the 4Q, with earnings upgrades continuing to exceed downgrades.
- Sequentially, net EPS for FBM stocks under our coverage eased to +4.2% qoq in 4Q, after having surged to +39.1% in 3Q. However, yoy, net EPS for FBM KLCI stocks under coverage continued to trend up and registered double-digit growth of 11.7% in 4Q, from +4.0 in previous quarter. This suggests the recovery in corporate earnings is still gaining momentum, which is consistent with the improvement in the economy. - Banking earnings continued to exceed expectations on account of higher fee-based income, stronger loan growth and improved asset quality. Apart from banks, the manufacturing, insurance and transportation sectors also continued to report earnings that were generally above our forecasts. Only the steel products sub-sector reported disappointing results.
- Reflecting largely the better-than-expected banking earnings, net EPS for the FBM KLCI benchmark has been revised up slightly to -14.2% and +15.7% for 2009 and 2010, respectively, from the corresponding rates of -15.7% and +15.0% two months ago.
- Our end-2010’s FBM KLCI target remains unchanged at 1,400 (15x 2011 earnings) despite expectations of greater market volatility.
- In our view, the current correction/market volatility is an opportunity to ccumulate quality stocks for longerterm performance. However, investors would have to factor in the anticipated global policy changes in the months ahead. The challenge is to look for stocks that could generate capital upside from earnings growth as well as have attractive dividend yield to outperform the market. The focus would include recovery leaders and quality cyclicals for an early reflation trade.
- Overall, we continue to be positive on the banks as an economic recovery play. The semiconductor industry would also be interesting given the strong pent-up demand with new applications, and hence strong earnings recovery. In addition, we also like the commodity/asset reflation theme and believe the telecoms sector could surprise on the upside given the strong earnings growth emerging from data servicesand the sector has strong cash flows to underpin attractive dividend payments.
RHB Equity 360°- 02/03/2010
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