UOB Kay Hian(UOB KH) has reduced its 2021 earnings forecast for the FTSE Bursa Malaysia KLCI (FBMKLCI) after “disappointing results” in 1Q2021.

“Q-o-q, a higher percentage (30%) of the companies under our coverage reported disappointing 1Q2021 results, while only 21% surpassed expectations,” say analyst Vincent Khoo and UOB KH’s Malaysia research team in a June 2 research note.

The UOB KH team note that sector disappointments were mostly related to airport, construction, consumer, gaming, oil & gas and REITs, while positive earnings surprises were mostly linked to banks (CIMB Group, Maybank, Public Bank), plantations (IJM Plantations, Sime Darby Plantation) and property (Mah Sing).

To that end, the team has cut their 2021 earnings forecasts for the FBMKLCI and coverage universe by 2.4% and 3.6% respectively. Consequently, UOB KH’s end-2021 FBMKLCI target has been reduced to 1,665, representing 43% growth from 2020’s low base.

The UOB KH team point out that May was a particularly tough month that was “punishing for Malaysia’s equities” due to a number of events, including China’s intention to curb runaway commodity prices, allegations of forced labour malpractices at glove manufacturers, a Securities Commission investigation into engineering firm Serba Dinamik, and the Movement Control Order (MCO).

While the FBMKLCI outlook looks bleak in the near team, the UOB KH team expects things to pick up by end-3Q2021 as Malaysia reaches a good vaccination threshold. To that end, they expect reopening plays, including aviation, gaming (Genting Malaysia, Magnum) and metal-based companies (Press Metal) to regain momentum.

UOB KH’s lowered FBMKLCI target of 1,665 values the market at 14.7 times  2021 P/E, compared to a mean P/E of 16.2 times. “Our top-down target is well below our bottom-up target,” the team notes.

UOB KH’s top large-cap picks include  Astro, CIMB, IGB REIT, Inari Amertron, MrDIY, MYEG, Sunway Berhad, and Yinson. It also includes mid-cap Pentamaster among its picks.

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