Malaysia KLCI target raised, profit estimates increased despite earnings disappointment: Affin Hwang

Malaysia ringgit notesMalaysia ringgit notes

Affin Hwang has raised its forecasts for Malaysia’s market despite fourth-quarter earnings disappointing.

While the fourth-quarter earnings season was disappointing, the KLCI constituents posted 2017 earnings per share (EPS) growth of 5 percent, Affin Hwang, which has a tie-up with Daiwa, noted in a note on Friday. That was ahead of its forecast for 4.6 percent and a “marked improvement” after three straight years of EPS declines, it said.

The KLCI constituents earnings quality was also better, with more positive surprises and fewer negative ones, which should support further capital inflows, Affin Hwang said.

Positive expectations for the ringgit

Affin Hwang said foreign interest was returning to Malaysian shares, largely driven by positive expectations for the ringgit.

Affin Hwang raised its 2018 year-end ringgit forecast, tipping the dollar/ringgit at 3.80, driven by a weak U.S. dollar amid a rising U.S. fiscal deficit and improving domestic macro fundamentals.

That pushed up Affin Hwang’s KLCI target to 1923 at year-end, based on 18.6 times 2018 KLCI EPS, up from the previous forecast of 1854, based on 17 times EPS. The index closed Monday down 0.72 percent at 1842.62.

Affin Hwang is assuming KLCI EPS growth of 7 percent this year, up from the previous forecast of 4.8 percent, after taking into account the fourth-quarter earnings season.

”While only 3.3 percent upside may seem meagre, we think that there is room for P/E multiples to overshoot in the near term, should there be a sudden surge in inflows, and trading opportunities could arise,” Affin Hwang said.

Alpha picks

It stuck with its sector allocations, staying Overweight on rubber products, oil and gas, banking and financial services, construction and infrastructure, insurance, gaming, utilities and small-to-mid caps. But it said it raised its large-cap weighting, removing some smaller caps.

Its top three alpha picks, defined as “bombed out” shares with the potential for sharp share price re-ratings amid improving earnings, are Aeon, Scicom and UWM OG.