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2Q21 results not as bad as feared

■ 2Q21 earnings revision ratio fell to 0.53x due to MCO. However, corporate earnings grew 5% qoq due to higher CPO and petrochemical prices.
■ Earnings could weaken sequentially, and we predict more results disappointments in 3Q21F due to EMCO in Klang Valley and ongoing MCO.
■ We raise our 2021F year-end KLCI target to 1,629 pts (from 1,604 pts). Our revised top three picks are now more skewed towards recovery plays.

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Key takeaways from the 2Q21 results season

The ratio of companies that posted results above our expectations fell to 20% in the 2Q21 results season (1Q21: 28%), while the ratio of underperformers rose to 37% (1Q21: 24%). Key takeaways from the results season are (1) the nationwide full movement control order (FMCO) in Jun dented corporate earnings; (2) the strong 148% yoy rise in
corporate earnings in 2Q21 for companies under our coverage was due to higher palm oil and petrochemical prices and low earnings base in 2Q20 on the back of stricter lockdowns under MCO 1.0; and (3) on a qoq basis, core net profit grew 5%, driven by the agribusiness, petrochemical, shipping and technology players.

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Raising KLCI earnings and lifting our KLCI target to 1,629 points

We tweak our KLCI core net profit forecasts for CY21F/22F by +3.3%/+2% and now expect growth of 41%/0.9%. The earnings upgrade came mainly from Petronas Chemical, IHH Healthcare and KL Kepong. Excluding bank constituents in the KLCI, we project KLCI CY21F/22F EPS growth to be +49.8%/-4.9%. We raise our end-2021F KLCI target to 1,629 pts, based on 12M forward P/E of 14.5x (which is 1.5 s.d. below its historical three-year moving average mean P/E of 16.2x), from 1,604 pts previously, mainly to reflect earnings revision post the 2Q21 results season.

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Gamuda and Inari added to our top three picks

We add Gamuda and Inari (replacing Telekom Malaysia and Unisem) and keep Public Bank as our top three picks. We added Gamuda to our top picks list as the stock could benefit from positive newsflows from the tabling of the 12th Malaysia Plan (12MP) and Budget 2022. We see potential re-rating catalysts for Inari from potential M&A, stronger than- expected radio frequency (RF) chip demand and new customer wins. Our top picks list now includes AMMB Holdings, DKSH, EITA, HSS Engineers, Hap Seng Plant, MRDIY, MSM, Genting Plantations, Petronas Chemicals and Lotte Chemicals. We remove Petronas Gas, MISC, CCK, Kossan Rubber and ATA IMS. Our top picks now skew towards stocks that we believe will see stronger earnings in the coming quarters due to relaxation of movement controls and high commodity prices.