KUALA LUMPUR (Dec 4): The aggregate reported earnings of the FBM KLCI's 30 constituents came in at RM16.5 billion for the third quarter of calendar year 2023 (3QCY2023), and increased sequentially at 16.6% quarter-on-quarter (q-o-q) and 0.7% year-on-year (y-o-y), said MIDF Research.

In its earnings wrap for 3QCY2023, MIDF said that on an adjusted basis, the aggregate 3QCY2023 normalised earnings of the 30 constituents rose sequentially at 4.1% q-o-q, but declined by 7.7% y-o-y to RM16.3 billion.

“Within MIDF's universe, 24% of stocks under coverage reported higher-than-expected earnings.

“Moreover, 38% posted earnings that were lower than expected, versus 37% which came within expectations.

“Target price changes involved 27 upward adjustments and 29 downward adjustments. Furthermore, we made 14 changes to our stock recommendations with eight upgrades and six downgrades,” it said.

MIDF said aggregate earnings estimates for the KLCI constituents under its coverage were cut by 3.3% to RM58.3 billion for financial year 2023 (FY2023), and by 2.0% to RM64.0 billion for FY2024.

“Meanwhile, aggregate earnings [forecasts] for stocks under MIDF’s universe were cut by 2.7% to RM74.9 billion for FY2023, and raised by 1.8% to RM86.0 billion for FY2024.

“Nonetheless, we maintain our end-2023 KLCI target at 1,540 points, and for FBM70 at 14,500 points, due to: i) increasingly positive market sentiment engendered by the cessation of US Federal Reserve (Fed) rate hikes, and ii) an attractive KLCI and still undemanding FBM70 valuations,” it said.

MIDF said the positive q-o-q normalised growth performance in 3QCY2023 was mainly contributed by earnings improvement among the financial services (Hong Leong Bank Bhd, AMMB Holdings Bhd, and Hong Leong Financial Group Bhd), consumer (Genting Malaysia Bhd and Genting Bhd), and telecommunications and media (Axiata Group Bhd and CelcomDigi Bhd) constituents.

On the other hand, the research house said the negative y-o-y normalised growth performance in 3QCY2023 was mainly contributed by earnings diminution among the industrial (Petronas Chemicals Group Bhd), utilities (Tenaga Nasional Bhd or TNB), plantation (Kuala Lumpur Kepong Bhd and Sime Darby Plantation Bhd), and transport and logistics (MISC Bhd) constituents.

“Nonetheless, the decline was moderated by the y-o-y improvement, particularly among financial services (CIMB Group Holdings Bhd, Malayan Banking Bhd or Maybank, and Public Bank Bhd) as well as telecommunications and media (CelcomDigi, and Telekom Malaysia Bhd or TM) constituents,” it said.

MIDF said the percentage of companies that registered earnings above its expectations improved to 24% in 3QCY2023, compared with 13% in the prior quarter.

Similarly, it said the percentage of negative surprises also rose to 38% from 36% in 2QCY2023.

Accordingly, MIDF said the percentage of companies with results that met expectations declined to 37% in 3QCY2023, from 51% in the prior quarter.

Moreover, the industrial sector recorded the highest percentage of positive surprises at 60% of stocks under its coverage.

“Meanwhile, the transportation and logistics sector registered the biggest percentage of underperformers at 71% of companies under our coverage,” it said.

MIDF said that in comparison to the preceding quarter, there was an increase in the number of outperformers among the KLCI constituents under its coverage in 3QCY2023 from three to four.

Nonetheless, it said the number of underperformers likewise increased from six to eight.

“In 3QCY2023, the outperformers among the KLCI constituents under our coverage consisted of two telcos, namely CelcomDigi and TM, as well as CIMB, and Westports Holdings Bhd.

“Meanwhile, the underperformers consisted of three oil and gas-related companies, namely MISC, Petronas Chemicals, and Petronas Gas Bhd, as well as Axiata Group Bhd, IHH Healthcare Bhd, PPB Group Bhd, Public Bank Bhd, and TNB,” it said.

Going forward, MIDF expects the KLCI to tread higher despite the earnings cut: due to i) increasingly positive market sentiment engendered by the cessation of Fed rate hikes; and ii) relatively attractive valuations buttressed by Malaysia’s general macro growth.

“Hence, we maintain our end-2023 KLCI target at 1,540 points, or a price-earnings ratio of 15.6 times.

“On the other hand, the consensus earnings per share estimate for FBM70, which now stands at 761.1 points, was slightly up from the post-2QCY2023 estimate of 756.6 points. The current valuation of FBM70 (which represents mid-cap stocks) at 18.5 times is nearing the upper end of its 15 times to 19 times historical range,” it said.