This article first appeared in Capital, The Edge Malaysia Weekly on June 5, 2017 - June 11, 2017

WITH the conclusion of earnings season, investors are adjusting their portfolios, looking at companies that beat, met or missed expectations.

Inter-Pacific Securities Sdn Bhd research head Pong Teng Siew tells The Edge that investors “have to be more careful and selective about stocks to invest in”. “Investors need to realise that story telling [time] is over. Now, companies need to show that they can deliver. Now is the time to show me the money,” he explains.

Pong points to some of the profit-taking activity that took place last month — after the announcement of quarterly results — leading to the first monthly decline this year.

He adds that while share prices almost doubled or tripled from the bottom, earnings recovery was not as strong, giving investors a rude awakening.

According to Pong, the FBM KLCI is trading at forward price-earnings ratio (PER) of about 15.9 times, which is near the benchmark’s peak valuation.

“The current valuation is near the highest level seen in 2007. In 2007, the index traded as high as 16.1 times PER,” he shares.

What are some of the stocks trading at lofty valuations?

Axiata Group Bhd

While telecommunication companies might not be the preferred bets this year, Axiata continues to trade at an expensive valuation with a 12-month trailing PER of 117.6 times (its five-year average is 29.7 times). DiGi.Com Bhd and Maxis Bhd were trading at a trailing PER of 24 and 23 times respectively.

A fund manager shares with The Edge that Axiata’s high trailing PER was due to the weak results last year. “FY2016 (financial year ended Dec 31, 2016) wasn’t exactly a good year for Axiata and the big loss of RM309.5 million in the fourth quarter led to a smaller earnings base, which explains the high PER. Nonetheless, if the group is able to maintain and continue that positive trajectory in earnings from the first quarter, it would appear to be trading at a rather reasonable level,” he says.

According to Bloomberg data, out of 29 analysts who track the stock, six have a “buy” call, 20 have “hold” and the remaining three, “sell”. The consensus 12-month target price is RM4.89, which is slightly lower than its current price of RM4.94.

PublicInvest Research analyst Eltricia Foong has a neutral view of the company. In her report dated May 26, she says, “Despite the earnings headwinds, we believe its share price would be supported at current levels given market’s anticipation of corporate news flow pertaining to the potential sale of its overseas units such as M1 in Singapore and Ideas in India.”

JF Apex Securities Research analyst Lee Cherng Wee has revised the target price to RM4.58 from RM4.75 following Axiata’s first-quarter results, which missed estimates.

JHM Consolidation Bhd

The best-performing counter for companies with a market cap of at least RM500 million on Bursa Malaysia, JHM’s share price has surged 460% in the last year.

The group, which manufactures micro-electronics and LED components, is currently trading at a trailing PER of 23.3 times. In the last five years, its trailing PER averaged at about 16 times.

An analyst says while JHM’s earnings continue to point towards an upward trend, the magnitude of growth does not match the growth seen in its share price.

Semiconductor players

Semiconductor players continue to be the darling of investors, so much so that almost half of those that are linked to Apple Inc’s iPhone have a higher valuation than Apple Inc itself.

On average, some of the semiconductor players have an average trailing PER of 23 times while Apple Inc has a trailing PER of 17.9 times.

Alliance-DBS Research Sdn Bhd analyst Toh Woo Kim says the upward momentum seen in Globetronics Technology Bhd’s share price remains strong, with expectations of better results until 2018, driven by the strong interest in 3D sensor suppliers.

“Globetronic’s valuation traded up to 17 to 18 times PER (forward) in 2015 and early 2016 when its 3D imaging sensor was widely expected to be adopted. In the current situation, the adoption of light and gesture sensors is more certain, with potential upside from other sensor products as well,” Toh says.

He adds that other players such as Inari Amertron Bhd have enjoyed multiyear re-ratings due to the adoption of LTE in smartphones and strong relationship with Broadcom. “A similar trend is expected for Globetronics owing to rising sensor usage in smartphones and the company’s strong relationship with the Swiss-listed customer.”

Another analyst says the multiyear re-rating for semiconductor players is expected as the Internet of Things era begins. “If you believe in the story for IoT, where droids and smarthomes will be part of our everyday lives, the growth potential for the semiconductor players is huge,” he says.

AirAsia X Bhd

Although the group’s share price dropped about 24.5% in the couple of days after it reported that its net profit plummeted by more than 90% year on year, AirAsia X Bhd still trades at a trailing PER of 29.3 times. In comparison, AirAsia Bhd is trading at a trailing PER of five times.

In other words, expectations for AirAsia X to perform is six times higher than that for AirAsia.

A fund manager with a local house shares that the high expectation is due to its return to profitability since the last quarter of 2015. “After AirAsia X returned to the black in the last quarter of financial year 2015, the group has shown some steady growth, which has created a hype that it will continue. But with the latest results, this should bring the airline back to reality,” he says.

AirAsia X’s share price has gained 18.1% year to date to 42 sen at last Friday’s close, while AirAsia’s has jumped 40.2% to RM3.21.

Affin Hwang Investment Bank analyst Aaron Kee has downgraded AirAsia X to a “hold” after the disappointing results, pointing to higher fuel and staff costs as the main drag on the group’s bottom line.

In his report dated May 23, 2017, Kee says AirAsia X remains a solid turnaround story, but earnings volatility may dampen sentiment in the near term.

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