AmInvest Research Reports

Strategy - KLCI target impacted by 1Q2023 under-delivery

Publish date: Fri, 02 Jun 2023, 09:54 AM
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Investment Highlights

  • 1Q2023 results under-delivered. The 1Q2023 results came in largely below expectations with underperformers accounting for 36% of the stocks under our coverage vs. 23.5% in 4Q2022 and 19% in 3Q2022. Outperformers accounted for only 10.5% of our stock universe vs 26.5% in 4Q2022. However, the share of companies delivering results within expectations rose slightly to 54% from 50% in 4Q2022 (Exhibit 2-4).
  • Plantation, technology, and property registered sequential earnings decline. QoQ, the worst performing sector was plantation, which registered an average 75% QoQ drop in earnings due to the plunge in crude palm oil prices and increased production costs. This was followed by the technology sector’s core net profit, which fell 55% QoQ from weak end-consumer demand and property (-31%) due to lower 1Q sales (Exhibit 5).
    The best performing sector was REITs, which scored an impressive 48% sequential earnings rebound from favourable rental reversion coupled with improving occupancy rates. The transportation sector also fared better with a 19% QoQ core earnings growth driven by Malaysia Airport’s rising passenger traffic and narrowed losses by Pos Malaysia.
  • Softer 2023F EPS growth at 4.2%. Excluding the 2022 prosperity tax impact, our 2023F FBMKLCI earnings have been reduced by 2.7% to translate to a softer growth of 4.2% from 7.2% previously. For 2024F, the FBMKLCI earnings were tweaked lower by 0.9%, which led to a higher stronger growth of 7.8% from 5.1% due to a lower base in the previous year.
    For comparison, Bloomberg consensus’ 2023F FBMKLCI earnings (which includes prosperity tax) has been reduced MoM by a wider 3.9% to a growth of 10.3% from 14.8%. For 2024F, Bloomberg’s FBMKLCI earnings were lowered by 2.2% to a growth of 7.8%, slightly higher than our revised projection. Thailand’s corporate earnings fared worse, being cut over the past month by 6.4% for 2023F while Indonesia slid 2.6% and Vietnam 1%. So far, the consensus changes to index earnings for Philippines and Singapore were relatively flat MoM.
    For index earnings growth this year, Malaysia’s growth of 10% far outstrips Indonesia’s paltry 2.6% and Thailand’s 0.1%. The other ASEAN countries which are projected to show stronger index earnings growth than Malaysia are Singapore (+22%), Vietnam (+14.7%) and Philippines (+14.1%).
  • May foreign selling have rebounded on US debt ceiling concerns. Amid concerns of the raising of US debt ceiling, net foreign outflows surged 2.9x MoM from RM251mil in April to RM728mil in May, which was partly offset by local institutions’ net buying of RM709mil (Exhibit 7-8). 58% of the May foreign net selling pressure was in banks with the rest in consumer and industrial products/services, involving CIMB Bank, Public Bank, RHB Bank, Tenaga, Hartalega, Genting and Hong Leong Bank. However, foreigners were net buyers in Maybank, CelcomDigi, Malaysia Airports, MyEG, YTL Corp, IHH, and Telekom Malaysia (Exhibit 27).
  • YTD foreign outflows from ASEAN region. In Jan-May this year, Malaysia experienced mild foreign selling of RM2.8bil vs Thailand’s RM12.7bil and Philippines’ RM2.5bil. China received 64% of the region’s net foreign inflows, reaching RM200bil compared with Taiwan’s RM46bil and South Korea’s RM40bil. In Southeast Asia, only Indonesia registered significant net foreign inflows of RM6.1bil. ASEAN registered YTD2003 net foreign equity outflows of RM12bil vs RM48bil inflows in 2022. Excluding Indonesia and Vietnam, Malaysia accounted for 15% of YTD ASEAN net foreign equity sales (Exhibits 12-13).
  • Malaysian equity valuation gap remains wide. The net foreign selling pressure drove down Malaysia’s stock index from 1,500 on 20 Jan to the YTD trough of 1,383 currently. YTD, the FBMKLCI drop of 7% was worse than Indonesia’s -3.2%, Singapore’s -2.8% and Philippines’ -1.4%. Within the region, countries which fared worse were Thailand (-8.1%) and Hong Kong (-7.8%) and Hong Kong (7.8%) (Exhibit 4). Hence, FBMKLCI’s valuation gap remains wide, trading at 1-year forward PE of 13.2x currently – which translates to 1.3 standard deviation below its 5-year median (SDB5YM) of 16.1x, vs. Philippines’ -1.4, Indonesia’s -0.8, and Thailand’s -0.2 (Exhibit 15).
  • Expect US debt ceiling resolution in base-base scenario. In our base-case scenario, we expect the US government to eventually resolve the raising of its debt ceiling to avert a global financial collapse against the backdrop of the upcoming Presidential elections next year. If this is not resolved, we do not discount a similar scenario to the Global Financial Crisis which caused the FBMKLCI to plunge below 900 by the end of 2008.
  • Expect net foreign equity outflows to reverse in 2H2023. We acknowledge that the US Fed rate hike cycle with strongerthan-expected economic news flow could continue to spur volatility in global markets over the near-term. However, underpinned by Malaysia’s firmer currency outlook, we expect a return of foreign equity buyers towards the end of the year amid attractive Malaysian equity valuations and our inhouse 2023F GDP growth of a relatively robust domestic consumptiondriven 4.5% vs consensus’ 2.6% for global average and 1.1% for US. Hence, we continue advocating investors to accumulate weakness amid near-term volatility in anticipation of a stronger stock performance towards the end of the year.
  • We lower our base-case end-2023 FBMKLCI target of 1,570 (from 1,630 earlier), pegged to 2024 P/E of 13.9x- 1 SDB5YM of 16.1x, which is supported by Malaysia’s relatively stronger economic outlook, our economist’s MYR expectation of a stronger RM4.20-RM4.30 by December this year and government’s request for EPF to raise the proportion of its domestic investment portfolio to 70% from 64% in 2022. Although Malaysia’s 2023 GDP growth is expected to taper to 4.5% (vs. consensus: 4.0%) from 8.7% in 2022, this remains better than recessionary prospects in Europe amid expectations for a reset in US interest rate hike trajectory by end-2023 or early 2024. 
    Best-case scenario from an abrupt US Federal Reserve policy reversal and better-than-expected global economic growth would underpin an end-2023 FBMKLCI target of 1,700, at 2024 PE of 15x at 0.5 SDB5YM.
    worst-case scenario from a global recession, new pandemics and worsening geopolitical conflicts translates to an end- 2023 FBMKLCI target of 1,310, pegged at 2024 PE of 11.6x - 2 SDB5YM PE. We do not discount global equity volatility from more US rate hike surprises, bank failures, trade tensions and additional global sanctions on Russia.
  • OVERWEIGHT on banks, oil & gas, autos, consumer, power, property, REIT, and healthcare sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Dialog Group, Inari Amertron, Sunway REIT, and DuoPharma BioTech (Exhibit 22). 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 23). Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Westports Holdings, Inari Amertron, Sunway Holdings, Sunway REIT and Gamuda (Exhibit 21).
  • Technical analysis: Ever since the FBM KLCI failed to recover above its 50-day exponential moving average (EMA) in early May, the index has been gradually declining to indicate the return of bearish bias. Coupled with the bearish cross of its 20-day EMA below the 50-day EMA seen in late Feb as well as the bearish shooting star pattern formed on 8 May, this has enhanced the view of a bearish short to medium term outlook. The resistance level is anticipated at 1,440, followed by 1,460. Towards the downside, we are eyeing the key support at 1,372, which is the lowest point in 2022. If the key support is taken out, we expect a deeper pullback towards the next support at the 1,300 psychological mark for the KLCI (Exhibit 1).

Source: AmInvest Research - 2 Jun 2023

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