On a winning streak

1Q21 core profit at a record; +61% YoY, +30% QoQ
Notwithstanding sluggish 1Q21 GDP (-0.5% YoY; 4Q20: -3.4% YoY) due to MCO 2.0 (13 Jan – 4 Mar), core net profit of our research universe (quarters ending Feb/March) summed to a quarterly record (Fig 6), underpinned by a third consecutive quarter of QoQ earnings expansion, at +30% QoQ (4Q: +13%) (Fig 1). Further, 1Q21 ratio of beats-to-misses was a high 2.2x (4Q: 1.3x), only the third time beats surpassed misses since 1Q10 (Fig 2). Four sectors reported earnings outperformance – banks, construction, petrochemicals and plantations – while, yet again, there were no sectors that broadly missed expectations. Notwithstanding this positive bias, 1Q’s earnings upgrade-to-downgrade ratio of 1.7x was significantly lower the aforementioned beats-to-misses ratio, reflecting analyst cautiousness due to the resurgent pandemic and renewed national lockdown. In a related vein, we upgraded ratings for 5 stocks (4Q20: 12), and downgraded 4 (3). Per Fig 13, Bumi Armada was raised to BUY; ViTrox, Lotte Chemical, UEM Sunrise and Tan Chong were raised to HOLD; Sunway REIT and THP were cut to SELL; HLFG and PChem were reduced to HOLD.

20201 earnings rebound subject to lockdown risk
Reimposition of a nationwide lockdown from June 1 (Fig 20), for an initial period of 2 weeks, poses potentially significant growth headwinds, depending on duration – however, sectors most at risk such as consumer, REITs, tourism and aviation have low earnings and KLCI representation. Per Fig 13, for 2021E, we now estimate our research universe’s core earnings to grow by +43.1% YoY (vs. +44.3% per our estimates post-4Q20 reporting), and for the KLCI, by +49% (vs. 50.1% previously). Per Fig 15, much of this high growth estimate is contributed by the Gloves sector, where we expect their 2021E core earnings to be 2.2x that of 2020; and Banks, where we expect core earnings to rebound +21% YoY after falling -19% YoY in 2020. Petrochemical is another key contributor to our research universe’s core earnings growth in 2021E; we expect core profits to double YoY.

KLCI target and sector positioning unchanged
With recovery deferred rather than derailed by the latest spike in Covid cases, and vaccinations set to ramp up dramatically in the coming weeks, we maintain our end-2021 KLCI target at 1,830 (16x forward PER, per historical mean and reflective of an equities-supportive environment of building (albeit potentially delayed) earnings recovery, ample market liquidity and relative attraction vs. fixed income per wide earnings yield gap vs. MGS (Fig 19). We make no sectoral weighting changes (Fig 28) though flag positive updates for the banks and plantation sectors (pg.18).

Stock constituent changes to portfolios
To our balanced general portfolio recommendation i.e. a mix of value and growth picks, with yield focus, as detailed over pgs.19-20, we remove 3 stocks (PChem, Top Glove, Sunway) and add 3 stocks (SP Setia, MFCB, GENM) per top picks list (Fig 29); re ESG Portfolio picks, we remove Sunway REIT and add ViTrox (Fig 30); SELL-rated stock list (Fig 31) has shortened further post-aforementioned ratings upgrades; finally, we remove Sunway REIT and add MBM Resources to our conviction yield basket (Fig 33).