Investment Highlights

• Mixed 3Q2022 report card. The results of the 3Q2022 season were mixed as underperformers accounted for 19% of the stocks under our coverage vs 27% outperformers with 55% in line. In comparison, 2Q2022 underperformers constituted 29%, outperformers 26% and in line 44% (Exhibit 1). The oil & gas, consumer and REIT sectors outperformed with each industry registering at least 4 companies with above-expected results while the plantation, construction and property sector disappointed with at least 3 underperformers in each segment.

• Stronger QoQ core earnings from REIT, power, banks, insurance, construction and property sectors. QoQ, the best performing sector was REIT (+44%) given the post-pandemic retail mall recovery with a rebound in footfalls and tenant sales (Exhibit 2). This was followed by power (+42% QoQ) as Malakoff secured higher capacity payments while YTL Power benefited from higher electricity prices. Insurance rose 29% QoQ with higher net earned premiums and lower fair value losses from interest rate movements. The earnings of banks, which account for the largest FBMKLCI weightage at 34%, rose 10% QoQ on higher net interest income from loan expansion and margins driven by OPR hikes with modest loan impairment allowances.

• The worst QoQ sector earnings drop was glove (-81%) with declining average selling prices, followed by plantation (-41%), which was depressed by lower crude palm oil prices and increased production costs. Manufacturing earnings fell 32% QoQ as lower commodity prices impacted Ancom Nylex’s industrial chemical division.

• Slightly lower 2023F FBMKLCI EPS growth to 5.2% from 5.6% earlier. While 2022F FBMKLCI EPS was largely unchanged with a marginal growth of 0.4%, our corporate forecast revisions have slightly reduced 2023F core earnings growth to 5.2% from 5.6% previously. This mainly stemmed from lower CY23F earnings for Telekom Malaysia (-10%) and Petronas Chemicals Group (-2%) together with mild revisions to banks. Note that our 2023 forecasts are more conservative than Bloomberg consensus’ 11.8%.

• Easing net foreign equity selling pressure. Foreign selling pressure eased off in November with net sales of RM282mil, halving from RM594mil in October (Exhibit 7). Together with local institutional buying of RM153mil, this partly supported a mild 9% rebound to 1,491 from a 2-year low of 1,373 on 13 October 2022, a level not seen since May 2020 during the initial outbreak of the Covid-19 pandemic. The November selling activities mostly focused on industrial products & services (66%) followed by financial services (17%) and plantation (15%). This decreased foreign equity shareholdings in October to 20.5% from 20.6% in September, which remains substantively below the 22.4% in January 2020 before the Covid 19 global outbreak (Exhibit 10).

• Partially cushioned by local buying. The weakness on Malaysian equities was partly cushioned by local buying support which reached RM2.2bil in September-November vs net foreign sales of RM2.5bil. While the local institutional net buying activities were a mild relief amid counter-cyclical transactions with foreign investors, local institutions were still YTD net sellers of RM8.2bil (Exhibit 7-9). This was 44% more than cumulative foreign net purchases of RM65.7il in 2022 so far, against the backdrop of an aggressive US Federal Reserve stance and Malaysia’s GE15 election.

• Still among only 3 ASEAN countries with YTD net foreign inflows. The net selling over the past 3 months reduced YTD 2022 foreign net buying position by 27% from RM8.2bil as at 31 August 2022 to RM5.7bil (Exhibit 5), of which 75% was into the financial sector with the balance mostly into plantation and industrial products/services. Within the region, only Indonesia, Thailand and Malaysia enjoyed YTD net foreign equity inflows with Malaysia accounting for a lower share of 11% of ASEAN’s net purchases from 16% in August this year (Exhibits 11-12).

• Malaysian equities at bargain Southeast Asian valuations. India, Indonesia and now Singapore has bucked the regional YTD downtrend with the Nifty Fifty delivering index gains of 8%, Indonesia 7% and Singapore 5%. The worst performers were the Far East markets - Hong Kong (-2%), Taiwan (-18%), Korea (-17%) and China (-13%) (Exhibit 3) vs Malaysia’s -5%. Hence, the FBMKLCI still trades at a Southeast Asian bargain at 0.9 standard deviation below its 5-year median (SDB5YM) of 16.2x, vs 0.3 SDB5YM for Thailand and 0.7 SDB5YM for Singapore. Indonesia’s 2023 consensus earnings for Indonesia has been revised upwards to 17% from flat just a month ago, due to persistently high commodity prices. Hence, Indonesia now trades at 1.3 SDB5YM from 0.8 SDB5YM in the beginning of November (Exhibit 16).

• Tapering interest rate hike expectations next year. Our economist expects Bank Negara to raise the overnight policy rate (OPR) by 25 basis points (bps) in January 2023 that will bring the OPR to 3.00% for the whole of next year. Given the aggressive stance of the US Federal Reserve, consensus’ expectations of additional rate hikes this year could elevate the Federal funds rate from 3.75%-4.00% currently to 4.50% by the end of this month and 4.65% next year.

• Expect net foreign equity outflow to reverse. Given the tapering selling trajectory last month, we expect a return of foreign equity buyers in the near-term from the September-November foreign equity outflows amid attractive Malaysian equity valuations and our inhouse 2023 GDP growth projection of 4.5% vs the global rate of 2.1% and US’ 0.4%. This will be underpinned by expectations of a strengthening ringgit, which already rallied from RM4.75/US$ on 4 November to RM4.40/US$ currently, with our economist projecting at RM4.15-RM4.20/US$ (vs. consensus: RM4.40/US$) by end-2023.

• Maintain our base-case end-Dec 2022 FBMKLCI target at 1,540 premised on 0.5 SDB5YM, underpinned by a post-Covid domestic consumption-driven economy amid an improving political landscape.
  For 2023, we are looking at a base-case end-2023 FBMKLCI target of 1,630, pegged to 0.5 SDB5YM as Malaysia’s tapering GDP growth of 4.5% next year remain better than recessionary prospects in US and Europe with expectations for a reset in US interest rate hike trajectory in 2H2023.
  Best-case scenario would be a 2023 FBMKLCI target of 1,740 at parity to its 5-year median PE of 16.2x while worst-case scenario from a full-blown global recession, new pandemics and geopolitical conflicts translates to 1,380, pegged at 2 SDB5YM. We do not discount equity volatility from more US rate hike surprises with lingering supply chain disruptions from China’s ongoing Covid lockdowns, US-China trade tensions and Russia being shunned by the global economy.

• OVERWEIGHT on banks, oil & gas, autos, ports, property, REIT and media with top picks being Maybank, RHB Bank, CIMB, Yinson, Dialog Group, Bermaz Auto, Inari Amertron, Sunway REIT and Astro (Exhibit 23). We also like small cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer and niche agrichemical producer Ancom Nylex, as well as grossly undervalued companies such as Deleum (Exhibit 24). 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 - 2 Dec 2022