Investment Highlights

• We raise the base-case end-2023 FBMKLCI target at 1,570 (from 1,500 previously) pegged to a higher 2024F P/E of 15x – at a slight discount to its 5-year median of 15.2x albeit at 3 standard deviation below pre-pandemic 2017-2019 median of 17x. Notwithstanding the vagaries of foreign equity flows, we expect domestic institutions to largely continue a buying position towards the end of the year on ample local liquidity, below-median valuations, highly compelling dividend yields, window dressing activities against the backdrop of improving corporate earnings growth for next year, moderating political noises, 16- year foreign shareholding low of 19.9% currently and prospects of a normalising ringgit. 
  A 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 1,645, pegged to 2024F P/E of 15.7x at a 25% premium to its 5-year median.
  The worst-case scenario from a global recession, new pandemics and worsening geopolitical conflicts translates to an end- 2023 FBMKLCI target of 1,222, pegged to 2024F P/E of 11.7x at 1.5 standard deviation below its 5-year median (SDB5YM). We do not discount global equity volatility from more US rate hike surprises, bank failures and fresh geopolitical/trade tensions.
• Corporate results disappointed again in 2Q2023. Corporate results disappointed yet again in 2Q2023 with 37 underperformers accounting for 38.5% of the stocks under our coverage vs. 36% in 1Q2023 and 23.5% in 4Q2022. These stemmed from plantation, construction, oil & gas, power, glove, media, and technology sectors. Outperformers accounted for only 8.3% of our stock universe vs.10.5% in 1Q2023 and 26.5% in 4Q2022. The share of companies delivering results within expectations slid slightly to 53% from 54% in 1Q2023 and 50% in 4Q2022 (Exhibit 2).
• Sequential earnings declined for transport, media, oil & gas, automobile, construction, REITS and healthcare sectors. QoQ, the worst performer was the transport sector which registered a 78% QoQ drop in earnings due to airline losses, followed by media (-58%), oil & gas (-33%), manufacturing (-32%), autos (-20%), construction (-19%), REIT (-11%), healthcare (-7%) and insurance (-5%) (Exhibit 4-5). There were only 8 outperformers which included Genting Plantations, YTL Power International, YTL Hospitality REIT and Paramount Corporation.

• 2023F FBMKLCI core earnings reversed to a contraction. Our FBMKLCI earnings projections have been reduced by 11% for 2023F and 6% for 2024F. This stemmed from Petronas Chemicals, which accounted for 64% of the 2023F earnings revision due to lower product prices and operating losses for its JV Pengerang start-up; coupled to a less extent, Tenaga (7%), IHH Healthcare (5%) and plantation companies (14%). This reversed our 2023F FBMKLCI core net profit to a decline of 6.6% from an earlier growth of 4.2%. The lower 2023F earnings base effect translates to a stronger 2024F earnings growth of 12.9% from only 7.3% previously. For 2H2023, we expect the downward earnings revision cycle to have bottomed out with inflation moderating to 2% in July (from a peak of 4.7% in Aug 2022), plateauing energy costs and improving migrant work force while the US economy now appears headed for a soft landing as opposed to earlier recessionary prospects in the beginning of the year.
  For comparison, Bloomberg consensus’ 2023F FBMKLCI earnings growth (which includes 2022 prosperity tax impact) has been reduced MoM to a growth of 5.6% from 10.3% earlier. We caution that Bloomberg’s estimates may not yet have fully accounted for all analysts’ earnings cuts. For 2024F, Bloomberg’s FBMKLCI earnings growth rose from 7.8% previously to 10.8%, albeit lower than our revised projection of 12.9%.
  At this stage, Malaysia is now comparable to Bloomberg’s 2024F index earnings growth of 10% for both Indonesia, Philippines and Thailand as well as Singapore’s paltry 2% The only ASEAN country that is projected to show stronger index earnings growth than Malaysia will be Vietnam (+30%) (Exhibit 19).

• Foreign buying softened in Aug. As the ringgit depreciated by 1.8% MoM against the dollar, foreign buying activities softened, dropping to only RM141mil from RM1.4bil in July (Exhibit 6-8). Foreigners were buying property (41%), plantation (26%), technology (17%), construction (8%) and banks (7%) which included MayBank, YTL Power, S P Setia, KL Kepong, IOI Corp, UEM Sunrise, Boustead Plantation, Inari Amertron and Malaysia Airports. However, foreigners were net sellers of industrial products/services (32%), consumer products (31.9%), healthcare (28%) and telcos (8%) involving Petronas Chemicals, CIMB, Top Glove, Press Metal, IHH Healthcare, Hong Leong Bank, Sunway and Dialog Group (Exhibit 27). 
  In a rare conjoint exercise with foreign counterparts, local institutions reverted to a net buying position, purchasing RM393mil of domestic equities in August. Nevertheless, the low volume from both domestic and foreign buying activities failed to lift sentiments significantly, translating to a flattish MoM FBMKLCI.

• YTD foreign outflows from ASEAN region. YTD, net foreign selling in Malaysia declined to RM2.6bil (from RM2.8bil in July), vs. RM2.8bil purchased by local institutions. For comparison, foreign net selling was more intense for Thailand at RM17.7bil while the Philippines was RM1.2bil. China received 66% of net foreign inflows, reaching RM200bil compared with India’s RM78bil, South Korea’s RM34bil and Taiwan’s RM14bil. In Southeast Asia, Indonesia reverted to net foreign selling, with a massive RM6.1bil of outflows in August which more than offset the cumulative inflows to date. ASEAN registered YTD2003 net foreign equity outflows of RM23bil (vs. RM48bil inflows in 2022) with Malaysia accounting for 12% of YTD ASEAN net foreign equity sales (Exhibit 12).

• Malaysian equity valuation gap narrowed, still a bargain. The rolling forward of FBMKLCI’s 5-year median forward P/E has fallen from 15.4x last month to 15.2x (vs. pre-pandemic 2017-2019 median of 17x) due to persistently low post-Covid19 valuations. Coupled with index earnings revisions and equity markets in Thailand and Philippines faring worse than Malaysia since the beginning of the year, the FBMKLCI’s valuation gap against regional markets has narrowed from -0.6 SDB5YM last month. Currently, the FBMKLCI’s 1-year forward PE of 14.5x translates to still-a-bargain -0.3 SDB5YM, vs. Philippines’ -1.4, Vietnam’s -1.1 and Indonesia’s -0.7 (Exhibit 18).

• Expect net foreign equity inflows to continue. We acknowledge that the US Fed rate hike cycle with stronger-thanexpected 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 foreign equity buyers to continue since July this year amid Malaysia’s stillbelow median equity valuations, ringgit normalisation and our inhouse 2023F GDP growth of a relatively robust domestic consumption-driven 4% vs US’ 2% (from 0.6% last month). With a soft landing expected for the US economy next year, we continue advocating investors to accumulate on weakness in anticipation of a stronger domestic stock performance towards the end of the year.

• OVERWEIGHT on banks, oil & gas, autos, consumer, power, property, REIT and healthcare sectors with top picks being CIMB, RHB Bank, Alliance Bank, Tenaga Nasional, 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, Sunway REIT and Gamuda (Exhibit 21).

• Technical analysis: Ever since the FBM KLCI broke above its 5-month downtrend line derived from the Jan highs, the index has rebounded higher and oscillated around its 20-day exponential moving average (EMA) for the past 1 month. We think that this sideways movement is a base-building period for the index. Longer term, we expect KLCI to trend higher next. The 20-day and 50-day EMAs confirmed a bullish crossover in late July, indicating that bullish momentum is picking up. Support level is seen at 1,440 and 1,400. On the upside, the resistance level is set at 1,465, followed by the 1,500 psychological mark (Exhibit 1).

Source: AmInvest Research - 4 Sept 2023