Investment Highlights

• Mixed 2Q2022 report card. The results of the 2Q2022 season were mixed as underperformers accounted for 29% of the stocks under our coverage vs. 26% outperformers with 44% in line. In comparison, 1Q2022 underperformers constituted 27%, outperformers 25% and in line 48% (Exhibit 1). The REIT, consumer and plantation sectors outperformed with each segment registering 4 stocks with above-expected results. Meanwhile, the construction sector led the underperformers with 4 out of 5 stocks under our coverage followed by 3 oil and gas stocks.

• Stronger QoQ core earnings from the power, automobile, plantation and consumer sectors. QoQ, the best performing sector was power (+83%) in the absence of forced outages at Malakoff’s Tanjung Bin plant and YTL Power’s lower asset impairments (Exhibit 2). This was followed by automobile (+59% QoQ) which enjoyed higher sales volumes amid the sales and service tax exemption which expired in June this year. Plantation earnings rose 15% QoQ on higher crude palm oil prices and downstream contributions while the consumer sector also climbed by a similar quantum sequentially due to buoyant post-Covid consumption recovery.

• The worst QoQ sector earnings decline was glove (-56%) from declining selling prices, followed by electronic manufacturing services (-37%) due to high labour and raw material costs. Healthcare slid 19% QoQ, construction 17% and REITS 16%.

• Slightly lower 2023F FBMKLCI EPS growth to 7.4%. While 2022F FBMKLCI EPS largely remained flattish, our corporate forecast revisions have slightly reduced the index’s 2023F core earnings growth to 7.4% from 8% previously. This is mainly due to lowered CY23F earnings for Petronas Chemicals Group (-9%), Hartalega (-46%), MISC (-5%) and Press Metal Aluminium Holdings (-10% based on consensus). We note that our 2023 EPS growth is more conservative than Bloomberg consensus’ 11.5%.
• Rebound in August net foreign equity buying. Foreign investors rebounded to net equity buying position of RM2bil in August after a tepid RM175mil in July, and a substantive reversal from net selling of RM1.3bil in June (Exhibit 7). This supported a 7% FBMKLCI rebound to 1,512 currently from a 2-year low of 1,411 on 13 July 2022, which was a level not seen since May 2020 during the initial outbreak of the Covid-19 pandemic. This is likely to increase foreign equity shareholdings in August after falling to 20.2% in July 2022 from 20.6% in February this year. However, this remains substantively below the 22.4% in January 2020 before the Covid-19 global outbreak (Exhibit 10).
• Only 1 of 3 net foreign buys in the region. YTD 2022 foreign net buying position surged to RM8.2bil in August, surpassing the previous peak of RM7.4bil in May 2022, which subsequently slid to RM6.2bil on 31 July 2022. Since the beginning of the year, 57% of net foreign purchases was in the financial sector, plantation 24% and industrial products/services 20%, partially offset by net sale of technology stocks. Within the region, only Indonesia, Thailand and Malaysia enjoyed YTD net foreign equity inflows with Malaysia accounting for 16% of ASEAN’s net purchases (Exhibits 11–12).

• Mostly offset by local institutional sales. The mild recovery on Malaysian equities was stifled by net equity sales by local institutions in August reaching RM2.4bil, offsetting foreign investors’ net purchases and partly suppressing the FBMKLCI uplift. Amid counter-cyclical transactions with foreign investors, local institutions were YTD net sellers of RM10.2bil (Exhibits 5–6). This was 24% more than cumulative foreign net purchases in 2022 so far, which continues to dampen investor sentiments amid rising concerns of overly aggressive US interest rate hikes and looming recessionary headwinds.

• Malaysian equities still at bargain valuations. Regionally, most stock exchanges declined YTD except the Jakarta Composite Index, which rose 9%, Singapore 3% and India 2%. Taiwan and Korea fell the most YTD by 17%, Hong Kong 15%, China 12% and Philippines 8%. Comparatively, Malaysia weathered the recent sell-down well with a decline of only 3.5%.
  Even so, the FBMKLCI still trades at a bargain 1.0 standard deviation (SD) below to its 5-year median of 16.3x, comparable to Hong Kong’s. Only Taiwan still trades at a much lower 2 SD below its 5-year median (SD5YM). We highlight that the only other 2 Southeast Asian countries, Thailand and Indonesia, which enjoyed strong foreign equity inflows, currently trades at SD5YM of 0.4 (Exhibit 16). While an improvement from the FBMKLCI’s YTD low of -1.7 SD when the index was at 1,411 on 13 July this year, we believe current levels offer good opportunities to accumulate given that the index did not seriously breach 2 SD threshold below the 5-year median even during the 2020–2021 unprecedented Covid-19 pandemic watershed (Exhibit 6) that caused a 2020 GDP recession of 5.5% in Malaysia.

• Expect the return of foreign equity buyers to persist in 2H2022 from the August rebound in foreign equity inflows amid compelling valuations and prospects of our recently-raised inhouse 2022 GDP growth projection of 6.4% vs. the global rate of 2.7%. This will be further underpinned by expectations of a stronger 2H2022 ringgit with our economist projecting the USD/MYR to strengthen from RM4.49 currently to RM4.40 (consensus: RM4.42) by 4Q2022, subsequently improving further to RM4.20 (consensus: RM4.30) by the end of 2023.

• Maintain base-case end-2022 FBMKLCI target of 1,630 as our 2022F aggregated EPS was mostly unchanged. This target is pegged to 15.7x, 0.5 SD below to its 5-year median at 16.3x as both foreign and local investors are likely to switch back into buying positions towards the end of the year amid clearer visibility to 2023F EPS growth expectations of 7.4%.
  Near term, the fund flow volatility could continue to drive the index within a range-band of 1,400 to 1,600 as the recent reopening of international borders and stronger economy may be curtailed by overly-aggressive US rate hikes, stagflationary worries, earnings volatility amid commodity price swings, further supply chain shocks from Russia being shunned by the global economy, GST reintroduction and political noises running up to the 15th general election (GE15).

• Our worst-case 2022 year-end outlook remains on an FBMKLCI drop to 1,415, pegged to 2022 PE of 14.8x, 2 SD below its 5-year median, driven by substantive earnings disappointments, intensified global recessionary momentum, fresh outbreaks of new Covid-19 variants, further geopolitical shocks and a reversal of foreign net flows.

• Reiterate OVERWEIGHT on the automobile, banking, media, oil & gas, ports, power and technology sectors with top BUYs being Maybank, Tenaga Nasional, CIMB Group, RHB Bank, Berjaya Food, Telekom Malaysia, Inari Amertron, Malaysian Pacific Industries, Bermaz Auto and Dialog Group (Exhibits 19 & 23). For dividend stocks, our top 5 picks with yields of over 6% are Malakoff, Astro, Globetronics, Maybank and YTL REIT (Exhibit 21).
  Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Westports Holdings, Inari Amertron, Sunway Holdings, Yinson Holdings, Sunway REIT and Astro (Exhibit 22).

Source: AmInvest Research - 1 Sept 2022