Corporate earnings in Q2 'show some semblance of improvement'

PETALING JAYA: PublicInvest Research said the second-quarter's earnings report card showed some semblance of improvement following the previous quarter's letdown, but the uptick may not be structural in nature.
Positive surprises were evident in the auto and healthcare sectors, while the bleeding in the oil and gas sector seems to have abated. Manufacturing, however, remains a disappointment and airlines also surprised on the downside.
"Of some encouragement is the fact that none of the market-moving economic-defining sectors showed any significant worse for wear," it said in a research note today.
For PublicInvest Research, the current quarter's earnings hits (above and/or in line) are at 68:32%, versus 60:40% in the first quarter.
With most of the current misses still cost-related, the research house has lowered its expectations again.
"The one encouragement, if any, is that sales trends for most still remain intact albeit muted, while upward revisions are rising slightly."
As the market is fairly valued currently, PublicInvest Research is maintaining the 2018 year-end target for the FBM KLCI at 1,790 points.
On whether there is a further upside to the market, the research house said the earnings growth assumptions for 2018, 2019 and 2020 are 3.2%, 5.9% and 6.5%, respectively.
"On this score, we are suggesting a preliminary year-end 2019 FBM KLCI target of 1,900 points, though many odds could be stacked against its favour.”
PublicInvest Research is maintaining an “overweight” stance on the oil and gas and manufacturing sectors despite weakness seen in earnings. It also suggests selective exposure in the banking sector.
The research house continues to see value in the small- and mid-cap space, and retain most of its suggested picks despite year-to-date underperformances of some companies as it believes the current share price weaknesses are overdone.
“AMMB Holdings, Hibiscus Petroleum, Mega First, N2N Connect, Perak Transit continue to make up the core holdings in our suggested picks, in addition to CIMB Group and Tenaga Nasional. Ta Ann Holdings is newly included.”
MIDF Research noted that the aggregate reported earnings of FBM KLCI 30 constituents totalled RM11.42 billion in Q2, down 31.2% quarter on quarter and 27.4% year on year.
However, more pertinently, the aggregate normalised sequential growth was positive at +2.7% quarter on quarter while the normalised on-year number posted a much smaller negative at -3.2% year on year.
Within MIDF Research’s universe, merely 3% of stocks under coverage reported higher than expected earnings. Of the rest, 39% posted earnings that were lower than expected versus 58% which came within expectations.
It has trimmed the aggregate FY18 earnings estimate and FY2019 earnings forecast of the FBM KLCI constituents under its coverage by -0.2% to RM55 billion and 0.8% to RM57.2 billion, respectively.
MIDF Research is maintaining its end-2018 FBM KLCI target at 1,800 points.