Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 21 Jan 2022, 10:31 AM


3QCY21 Results Review - Fat Tails

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It was a “mixed” conclusion to the 3QCY21 reporting season that ended yesterday. Of the 132 stocks covered, earnings of 35 (27%) were above, 48 (36%) were within and 49 (37%) were below, our expectations. 37% disappointed versus just 28% the previous quarter. But, those that exceeded expectation was also greater. At 27% beats versus 23% previously, it managed to do so only because the plantation sector turned in an overwhelming number of beats. 10 out of the 11 planters that reported better results than our and the street’s expectations accounted for nearly a third of all outperformers. The strong earnings upgrades in the planters as well as CIMB and RHBBANK were the main reasons compelling us to raise our FY21E FBMKLCI EPS estimates by 2% to 108.6 sen. And, following clearer guidance on the Prosperity Tax, a less aggressive than previously assumed application led to FY22E EPS being cut by just 5% (versus 9%) to 102.2 sen. As a result of EPS adjustments, EPS growth for FY21 is 44% and for FY22, -6%. Post the EPS adjustments, we reduce our year-end FBMKLCI target from 1,601 to 1,533 based on a forward FY22 PER of 15x which represents 0.5 SD below the 10-year mean of 15.5x. Our Top Picks are: DIALOG (OP; TP: RM3.50), F&N (OP; TP: RM32.45), GENTING (OP; TP: RM6.38), GHLSYS (OP; TP: RM2.30), KGB (OP; TP: RM2.50), MAYBANK (OP; TP: RM10.55), RHBBANK (OP; TP: RM6.50), TM (OP; TP: RM7.00), UZMA (OP; TP: RM0.67), and YINSON (OP; TP: RM7.35).

The tone of 3QCY21 results season is mixed to negative: Compared to 2QCY21, the latest quarter saw higher percentage of those reporting results below our expectations but also of those that came in above. The same trend is also seen when compared against consensus estimates (see appendix 1). We note that the positive surprises and upgrades were heavily skewed by overwhelming beats in the Plantation sector which contributed nearly a third of the total of outperformers – disproportionately high considering that planters make up just 8% of total number of stocks under coverage. Against this, there were three large cap sectors that disappointed, being O&G, Gaming and Consumer sectors.

FY22E EPS growth disrupted by Prosperity Tax: In our latest 4QCY21 quarterly Investment Strategy report dated 30th September – “Shifting Grounds” – we projected FY21/FY22 EPS for the FBMKLCI at 106.1/108.1 sen. Post results and numerous managements’ guidance, we revise these to 108.6/102.2 sen (vs. current estimated consensus EPS of 105.7/105.8 sen). FY21E EPS was raised 2% mainly on account of overwhelming earnings surprises by the planters and EPS upgrades of 17% each in CIMB and RHBBANK that managed to offset less combined cuts in GENM, GENTING and PETDAG. For FY22, EPS was cut 5% mainly on account of one-off Prosperity Tax which for most, will impact next year save for TM which has guided that it is pre-emptively setting aside provisions in 4QFY21. As a result of these adjustments, EPS growth for FY21/FY22 are expected to come in at 44%/-6%.

End 2021/2022 FBMKLCI targets are set at 1,533/1,680: Among the 28 of the 30 FBMKLCI components that we cover, 13 came within, 8 above, and 7 below, expectations. On our current year-end target of 1,533 points, the implied one-year forward PE on the just adjusted FY22E EPS is 15x which is close to 0.5SD below the 10-year mean of 15.5x which we believe is fair to apply for a fragile early-stage recovery. In deriving our end-2022 target, we apply the same forward PER on FY23E EPS of 112.0 sen, giving a target of 1,680.

Banks - results were mixed, NEUTRAL: This sector came in mixed where 5 reported results within, 4 came above (CIMB, RHBBANK, AFFIN and ABMB), and only one disappointed (MBSB), expectations. In the 3QCY21, credit costs have generally trended down sequentially and YoY. The 4QCY21 should at least see credit cost continuing to fall YoY if not also sequentially, given elevated pre-emptive provisionings in the 2H of last year. As expected, modification loss impacting 3QCY21 have been modest (as reflected in limited squeeze in NIMs) given that they are offered on opt-in terms unlike last year’s blanket basis. The general guidance appears to be for NIMs to stay flat while the current year’s pedestrian loans growth of 3-4% may only pick up more strongly in 2H 2022. For the four banks that announced better-than-expected results namely, AFFIN, RHB Bank and CIMB, the GGM-derived PBV target prices were raised on higher RoE assumptions and for ABMB, on higher dividend payout. FY21E earnings were raised for them to capture better YTD performances (strong NOIIs, impressive cost containment as reflected in lower CIR) and in certain cases trimmed forward impairment assumptions.

Plantations – well above expectations, NEUTRAL: Plantations stood out as all 11 stocks outperformed our and street’s expectations except for PPB that came within. While we had expected the planters to report strong September quarterly earnings, the extent to which they exceeded expectations was surprising. We were mostly right on FFB output levels but missed on surprisingly high realized ASPs. Hence, CPO ASP was raised 11% from RM3,700 to RM4,100 for CY21, resulting in the sector’s earnings being raised by 8%. For CY22, we maintain ASP at RM3,200 per tonne but trimmed earnings just slightly by 1% on account of higher fertiliser and labour cost. The sector call remains NEUTRAL as we see limited upside to CPO price from current levels. Our top pick within the sector is integrated planter KLK (OP; TP: RM23.60) which is currently attractively priced at 2SD below 5-year mean PER. For trading-oriented investors, the preferred pick to capture the existing upside to high CPO price would be pure upstream Malaysian-based planter HSPLANT (OP; TP: RM2.30) with minimal forward hedging. The adjustments to target prices have been mixed; with a few downgrades as we roll over valuation base to FY22E earnings for which lower earnings are expected. Target prices were trimmed for PPB and SIMEPLT while raised for KLK, FGV, TAANN and UMCCA on higher than previously assumed realized ASP.

Gaming – disappointed for the second straight quarter, stay OVERWEIGHT: In the gaming space, all four counters turned in losses that were worse-than-expected in the 3QCY21. For the second straight quarter, this sector suffered the deepest cuts in estimates as GENM’s estimated FY21 core net loss was widened by 11% to RM1.15b while GENTING’s FY21 net profit of RM351m is now projected to end in a loss of RM23m and for FY22, EPS was cut by 22%. However, the OP calls on GENM and GENTING were maintained out of conviction that their FY22E earnings will recover sharply, and at current prices, both are trading at steep discounts of 12% and 23% to their respective SoPs. GENTING disappointed on sluggish and uneven earnings recovery at GENS and worse-than-expected losses at subsidiary GENM’s Resorts World Genting, being a victim of prolonged lockdown and ban on interstate travel in the 3Q. Better performances at the UK and North America (with lower losses at Empire Resorts) units provided little relief. As for NFOs, the disappointment for both BJTOTO and MAGNUM stemmed from slower than expected recovery in ticket sales after reopening. That said, a full recovery towards pre-pandemic level is now expected in 2HFY22. At current levels, the sector offers deep value recovery plays in GENTING, GENM and BJTOTO offering dividend yields of between 3% to 6%.

Oil & Gas – another disappointment, OVERWEIGHT: Overall results were below expectations with 2 above and 9 below among a total of 12 covered O&G stocks. PChem was the only large cap that exceeded our expectations, the other was small-cap ARMADA. PCHEM surprised on stronger-than-expected margin spreads due to higher average product prices, its FY21E and FY22E EPS were raised 11% and 2%, respectively. The large cap disappointments were MISC and PETDAG for which FY21E EPS was cut 10% but FY22’s maintained. For PETDAG, worse-than-expected impact from the national lockdown on sales volume was largely to blame. Positively though, margin spread improved on normalization of oil prices. For the second straight quarter weak spot rates for petroleum shipping weighed on MISC’s 3QFY21 but offset to a certain extent by better LNG shipping amidst higher earnings days from new deliveries and construction gains from Mero-3 FPSO. Overall, the sector is still trading at a deep discount, with the KLENG index still trading at 2SD below its mean valuations on 2022E. 2022 should likely be a year of a sector-wide recovery, on the back of activity levels resumption amidst the reopening of borders. We are also not overly worried of the recent weakness in oil prices, as we believe that current levels should be more than healthy enough to drive a recovery in activity levels, with our average Brent crude oil assumption of USD65/barrel in 2022 maintained. Top picks include DIALOG (OP, TP: RM 3.50) and YINSON (OP, TP: RM7.35).

Consumer – a victim of curtailed demand and high input costs crimping margins, NEUTRAL: This sector had a poor earnings season where not only did 6 of 11 stocks underperformed our expectations, they underperformed consensus’ as well. Generally, largely to blame was the under-estimation of the scale of input costs hikes (raw material, cost of goods, freight charges and forex rates among others) and in some cases, the severity of the impact the lockdowns had on demand. Other consumer-related sectors namely Brewery (where both HEIM and CARLSBG came below) and Media advertising (3 of 4 names were below) also disappointed. Our sector top pick F&N came in within expectation while the other OP call DLADY managed to exceed expectation. DLADY’s operations were only minimally disrupted despite lockdowns given it is an ‘essential goods producer’, while it was able to grow sales and margins by leveraging on its brand and rising penetration of milk consumption.

Technology – Within expectation: robust momentum to maintain beyond 2021, OVERWEIGHT: This sector delivered earnings that were generally within expectations with 6 of 10 reported results coming in within estimates and 4 below. Of note is that the two largest cap OP calls – INARI and MPI – met high expectations with earnings on track to achieve record breaking quarters. For INARI, it rode on strong demand for high margin 5G RF components on early ramp-up of the 2021 US smartphone program slated for an early launch and for MPI, its 4QFY21 and 1QFY22 were record back-to-back quarters thanks to robust demand for chips from data centres and the automotive industries. For both, operating margins were not only stronger YoY but QoQ as well. Remarkable was that despite the MCO 3.0-mandated labour constraints of 60%, almost all of the tech manufacturers demonstrated good workforce deployment as they reported higher sequential revenue and profits. With domestic lockdowns easing and demand for semiconductor chips and OSAT services remaining robust, the tech sector’s strong earnings momentum is expected to continue well into 2022.

Source: Kenanga Research - 2 Dec 2021

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