OSK 3rd Quarter Earning 09


Meeting Estimates
3Q09’s corporate earnings generally met expectations as the second half of the results reporting season saw poorer earnings that moderated the strong set of banking numbers released earlier in the month. While the Banking and Gaming sectors outperformed, O&G, Plantations, Steel and Consumer stocks were the underperformers. With the Upgrade to Downgrade ratio retreating to a reasonable 1.35x, we saw the KLCI’s rally sputter in the latter part of November. Still, the earnings are good enough for us to upgrade our 2010 KLCI corporate earnings growth to 16.3% from 15% previously. Our 2010 KLCI fair value is based on 16.5x 2010 EPS.

Reality catches up with expectations. While the banks met our expectations for a strong set of results, we were initially surprised at the strength of the 3Q results reporting season as the Upgrade to Downgrade ratio soared to above 3x in the earlier half of the reporting period (see 19 Nov report). However, just as we had warned that the latter half of the reporting period is likely to see more muted results, a string of underperformers among the consumer and plantation stocks brought the final tally of outperformers to a more reasonable 31% exceeding consensus and 32% exceeding our forecasts.

Big caps easier to predict. Our forecasts were more accurate for the Big caps, with 46% coming in within expectation versus only 42% for Small caps. Nonetheless, the small caps continued to outperform, with 35% of the companies exceeding forecasts. On a sectoral basis, Banking and Gaming outperformed while O&G, Plantations, Steel and Consumer stocks underperformed. The performance of the O&G sector was marred by the high profile letdown from KNM and Petra Perdana while Consumer stocks were hit by a later Budget announcement date.

Recovery seen in Steel, Transport, Conglo and Media earnings for 2010. While the Upgrade to Downgrade ratio fell from 1.62x to 1.35x in 3Q, we still see a rebound in 2010 earnings for sectors such as Steel and Transport, which were hit by losses in 2009. For 4Q, we expect Banks to continue posting a good set of results as Non-interest Income soar. Consumer stocks too should benefit from stocking activities as well as year-end sales.

Reiterating our headline numbers. We reiterate the changes to our headline numbers below, including the upgrade to our GDP growth forecast as well as KLCI fair value. Post the 3Q results season, we upgrade our 2009 earnings forecast from a 4% to a 3% contraction and from a 15% growth to 16.3% growth for 2010. Our 2010 KLCI fair value is 1345 pts, based on a 16.5x 2010 PER while an appropriate year-end target for the KLCI is 1308 pts, as we highlighted in our December outlook report.