Investment Highlights

• 4Q2022 results under-delivered. The 4Q2022 results performance was worse than the previous quarter with underperformers accounting for 23.5% of the stocks under our coverage vs. 19% in 3Q2022. Outperformers accounted for 26.5% of our stock universe, slightly below 27% in the previous quarter. However, the share of companies delivering results within expectations declined to 50% from 55% in 3Q2022 (Exhibit 2-4).

• Gloves, power, EMS, tech and O&G registered sequential earnings decline. QoQ, the worst performers were the glove companies with the sector reversing to 4Q loss due to overcapacity amid intense pricing competition, followed by the power sector (-38%) with Tenaga’s lumpy year-end operating costs. The electronic manufacturing services (EMS) and technology sectors also suffered earnings declines due to sluggish demand for consumer electronic products while the oil & gas sector was dragged by lower product prices for Petronas Chemicals and Petronas Gas’ higher internal gas consumption. Property was the best sector performer due to higher sales and completion of units, followed by plantation, buoyed by higher CPO production while consumer benefited from improved spending activities (Exhibit 5).

• 2023F EPS growth at 8.9%. Excluding the prosperity tax impact, our FBMKLCI EPS growth slid by 4%-point to 14.9% for 2022 given the earnings under-delivery. However, the index’s 2023F EPS growth rose to 8.9% from 5.8% previously due to our reinitiation of Axiata and Digi following the completion of Digi’s acquisition of Celcom. This was also helped by higher earnings forecasts for Maybank and Hong Leong Bank, partly offset by reductions for Public Bank. Including the prosperity tax impact, our 2023F EPS growth would be near Bloomberg consensus’ 18.9%. For 2024F, our relatively unchanged EPS growth of 5.4% is likewise similar to consensus’ 5.5% (Exhibits 15 & 19).

• Foreign selling slowed down. Net foreign outflows halved MoM to RM168mil in February while local institutionals reversed to net sales of RM260mil from net purchases of RM754mil in January (Exhibit 7-8). Local institutionals were selling banks – MayBank, Public Bank and RHB Bank and CIMB, as well as MyEG, Press Metal and Digi. For foreigners, MyEG was the top sell, followed by Petronas Chemicals and Public Bank (Exhibits 26-27).

• YTD foreign outflows from ASEAN region. In Jan-Feb this year, Malaysia experienced mild foreign selling of RM516mil as well as Philippines at RM106mil while Thailand experienced higher sales of RM3.2bil. However, Indonesia enjoyed a reversal with foreigners buying RM1.6bil in Feb vs net sales of RM911mil in Jan. In ASEAN, Malaysia accounted for 19% of YTD foreign net sales (Exhibits 12-13).

• Malaysian equity valuation gap remains wide. The foreign selling contributed to Malaysia’s stock index sliding 3% YTD vs. India’s 3.6% and Thailand’s 2.9% (Exhibit 6). Hence, the FBMKLCI decline has led to a widening valuation gap, trading at 1- year forward PE of 12.9x currently. This translates to 1.7 standard deviation below its 5-year median (SDB5YM) of 16.5x, vs. Indonesia’s 0.8 and Philippines’ 1.0 and Thailand’s 0.4 (Exhibit 18).

• Reopening of China’s economy. China’s relaxation of Covid 19 movement restrictions engender improving prospects for regional economic growth against the backdrop of pent-up consumer spending in a country with high savings rates. This will relieve supply chain disruptions that have disrupted global trade over the past year, potentially mitigating recessionary prospects in gas-constrained Europe. All in, we expect this to positively impact most sectors involved in technology, EMS, transportation, plantation, oil & gas, construction, ports, REITS, consumer, local pharmaceuticals and selected property companies with China exposure.

• Expect net foreign equity outflow to reverse in 2H2023. We acknowledge the US Fed rate hike cycle with stronger-thanexpected economic news flow will continue to spur volatility in the global markets over the next few months. However, underpinned by Malaysia’s firmer currency outlook, we expect a return of foreign equity buyers in 2H2023 amid attractive Malaysian equity valuations and our inhouse 2023F GDP growth projection of a relatively robust domestic consumption-driven 4.5% vs consensus’ 2.4% for global average and meager 0.7% for US. Hence, we advocate accumulating on weakness amid 1H2023 volatility in anticipation of a stronger stock performance towards the end of the year.

• We maintain base-case end-2023 FBMKLCI target of 1,630, pegged to 0.5 standard deviation below its 5-year median of 16.5x, which is supported by Malaysia’s relatively stronger economic outlook and our economist’s improving MYR expectation to RM4.20-RM4.30 by December this year. Although Malaysia’s 2023 GDP growth is expected to taper to 4.5% (vs. consensus: 4.0%) from 8.5%-9.00% in 2022, this remains better than recessionary prospects in US and Europe with expectations for a reset in US interest rate hike trajectory in 2H2023.
  
  Best-case scenario from an abrupt US Federal Reserve policy reversal and better-than-expected global economic growth would underpin a 2023F FBMKLCI target of 1,740 at parity to its 5-year median PE of 16.5x.
  
  The worst-case scenario from a full-blown global recession, new pandemics and worsening geopolitical conflicts translates to a 2023F FBMKLCI target of 1,380, pegged at 2 SDB5YM. We do not discount global equity volatility from more US rate hike surprises, US-China trade tensions and additional global sanctions on Russia.

• OVERWEIGHT on banks, oil & gas, autos, ports, property, REIT, healthcare and media with top picks being RHB Bank, CIMB, Bank Islam, Tenaga Nasional, Yinson, Telekom Malaysia, Dialog Group, Inari Amertron, Sunway REIT and DuoPharma BioTech (Exhibit 24). 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 25). 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 23).
   
• Technical analysis: FBMKLCI is still in consolidation mode with a slight negative bias. The KLCI’s sideways trend remains unchanged as the index has continued to oscillate in between the 1,440 and 1,500 range. A breakout on either side would give us a clue about the near-term direction. However, the index failed to push higher to re-test the 1,500 psychological mark, coupled with the bearish crossover seen in its 20-day and 50-day EMAs a week ago, indicating that short-term weakness remains intact. The immediate support levels are seen at 1,440 and 1,420. If a decisive breakdown occurs, the next crucial support is anticipated at 1,372, which was the lowest point in 2022. On the upside, the immediate resistance is set at the 1,500 threshold, followed by 1,530 at the previous high of 17 Aug 2022 (Exhibit 1).

Source: AmInvest Research - 2 Mar 2023