Investment Highlights

We downgrade our end-2021 FBM KLCI target to 1,695 pts

• We downgrade our end-2021 FBM KLCI target to 1,695 pts based on 16x our 2021F earnings projection (+27.1%), which is at a discount to its 5-year historical average of 18x (vs. 1,770 pts based on 17.5x our 2021F earnings projection previously).

• The discount is to: (1) mitigate the distortion arising from earnings spikes from glove makers, i.e. Top Glove, Hartalega and Supermax in 2021F due to the abnormally high glove selling prices that are not recurring; and (2) reflect the rapid rise in bond yields globally, led by US Treasuries in recent weeks (while it is debatable if it is a tell-tale sign of economic reflation or runaway inflation, or both). Bond yields typically have an inverse correlation with equity valuations.

• We continue to believe that the recovery-focused investment theme from end-2020 will extend well into 2021F. Investors will continue to accumulate recovery plays, i.e. fundamentally strong names in the banking, power, oil & gas, consumer, REIT and transport sectors, while lightening their positions in pandemic plays, i.e. glove makers and selected excessively priced technology names.

• The fundamentals of banking stocks should improve in line with the economic recovery. While clarity is still lacking with regards to the extent of the irreversible damage the pandemic has inflicted on businesses, and hence asset quality of banks, we take comfort that banks have started to make pre-emptive provisions in the form of management overlays, in addition to provisions based on changes to macroeconomic factors.

• Other key sectors that are poised to benefit from the recovery are power (increased demand for electricity, particularly, from the commercial and industrial segments), oil & gas (higher crude oil prices), seaport (higher throughput on the recovery in global trade), airport (the eventual reopening of borders), consumer (cash handouts and recovery in the job market to sustain consumption) and REIT (reduced rental rebates, recovery in footfall and occupancy). Meanwhile, while the availability of effective vaccines has greatly brightened the recovery prospects of the air travel sector, we remain mindful of the need for airlines to recapitalise its balance sheet after months of massive losses during the pandemic.

• We acknowledge that our market has been flying under the radar of foreign investors due to Malaysia’s insignificant and shrinking weighting in MSCI Emerging Markets Index, the market’s inherently high valuations, coupled with the lack of tech start-up listing. We expect domestic liquidity (from both institutional and retail investors) to remain robust in 2021F and shall continue to neutralise foreign selling if any, as it did in 2020.

Corporate Malaysia delivered in 4Q2020, as per the previous quarter

• FBM KLCI component stocks delivered a set of 4Q2020 results that was fairly consistent with the previous quarter, as the market seemed to have come to grips with the impact of the pandemic on corporate earnings. The 4Q2020 results were generally resilient with 33%, 58% and 8% beating, meeting and missing our projections respectively. This was comparable with 33%, 54% and 13% for "above", "within" and "below" respectively in 3Q2020 (Exhibit 2).

• As against the market consensus, the numbers came in more in line (less surprises to the upside) as compared with the previous quarter with "above", "within" and "below" at 34%, 38% and 28% respectively, vs. 45%, 31% and 24% in 3Q2020 (Exhibit 2).

• Eight FBM KLCI component stocks under our coverage beat our projections, namely, Public Bank (higher net interest income and non-interest income), IHH Healthcare (recovery across geographical segments), Axiata Group (lower operating expenditure), Sime Darby Plantation (stronger downstream profits), KL Kepong and IOI Corp (higher CPO selling prices realised), and Top Glove and Hartalega (higher glove selling prices).

• On the other hand, two FBM KLCI component stocks under our coverage missed our projections, namely, CIMB Group (higher provisions) and Nestle (Malaysia) (lower out-of-home sales, higher Covid-19 SOP-related costs).

Source: AmInvest Research - 1 Mar 2021