Investment Highlights

• Maintain our base-case end-2023 FBM KLCI target at 1,515, as slightly lower index earnings were offset by a moderated 2024F P/E of 14.6x – near its rolled-forward 5-year median of 14.9x (from 15.0x last month), albeit at 3.5 standard deviations below pre-pandemic 2017-2019 median of 17x. We still expect some upward traction towards the end of the year on ample local liquidity, below-median 2024F P/E valuation of 14x, highly compelling dividend yields and year-end window dressing activities against the backdrop of improving corporate earnings growth for next year, moderating political noises, 16-year foreign shareholding low of 19.5% currently and prospects of a stronger ringgit next year.
  The worst-case scenario from a global recession, new pandemic-driven lockdowns and worsening geopolitical conflicts translates to an end-2023 FBMKLCI target of 1,294, pegged to 2024F P/E of 12.5x at 1 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.
  Best-case scenario from an abrupt US Federal Reserve policy reversal and better-than-expected global economic growth would have underpinned an end-2023 FBMKLCI target of 1,635, pegged to 2024F P/E of 16.2x at 0.5 standard deviation (SD) above its 5-year median. With only a month remaining in the year, the probability of such a scenario is remote.

• Another weak corporate results in 3Q2023. Corporate results disappointed again in 3Q2023 with 30 underperformers accounting for 32% of the stocks under our coverage vs. 38.5% in 2Q2023, 36% in 1Q2023 and 23.5% in 4Q2022. These stemmed from consumer, property, construction and transport sectors. Outperformers improved, rising to 19% of our stock universe vs. only 8.3% in 2Q2023,10.5% in 1Q2023 and 26.5% in 4Q2022. The share of companies delivering results within expectations slid slightly to 48% from 53% in 2Q2023, 54% in 1Q2023 and 50% in 4Q2022 (Exhibit 4).
  There were 18 outperformers (vs. only 8 in 2Q2023) which included Allianz Malaysia, Bermaz Auto, CelcomDigi, Genting Plantations, Hap Seng Plantations, Hartalega, Hibiscus Petroleum, IHH, Kossan Rubber Industries, Bintulu Port, Telekom Malaysia, Westport Holdings and YTL Power International.

• Sequential earnings declined for media, automobile and property sectors. QoQ, the worst sectoral earnings performer was media, which dropped by 45% due to lower advertising revenue and home shopping losses while weaker sales and margin erosion impacted automobile (-15%) and property (-7%) (Exhibit 5-7).

• 2023F FBMKLCI core earnings lowered slightly. Our FBMKLCI earnings projections have been lowered by 1% for 2023F and 0.6% for 2024F. For 2023F, this stemmed from Petronas Chemicals, which accounted for 32% of total earnings cuts due to softer product prices and lower plant utilisation rates, Tenaga’s (29%) under-recovery of fuel costs and Axiata’s (24%) overseas losses.
  This caused 2023F FBMKLCI core net profit to decline by a slightly faster pace to -7.8% from -6.6% last month. As 2024F earnings were moderated by a lower degree, the lower 2023F earnings base effect translates to a mildly stronger 2024F earnings growth of 13% from 12.5% previously. For 4Q2023, we expect the downward earnings revision cycle to taper off with inflation moderating to 1.8% in October (from a peak of 4.7% in Aug 2022), plateauing energy costs and improving migrant work force while our economist expects the US economy to head 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 4.5% from 5.7% earlier. We highlight that Bloomberg’s estimates may not yet have fully accounted for all analysts’ earnings cuts. For 2024F, Bloomberg’s FBMKLCI earnings growth rose to 11.7% from 10.7% last month, albeit lower than our revised projection for now.

• Possibility of earnings revisions next year. At this stage, Malaysia’s corporate earnings growth is now comparable to Bloomberg’s 2024F index earnings growth of 13% for Indonesia, Philippines (+10%) and Thailand (+16%), outpacing Singapore’s paltry 3%. Vietnam (+24%) is the only ASEAN country projected to show significantly higher index earnings growth than Malaysia’s (Exhibit 19). Nonetheless, we caution that these corporate growth estimates may be revised if a US-triggered global recession becomes more likely next year.
  For example, FBMKLCI started in January 2023 with a 2023F earnings growth of 5.0%, which was progressively reversed to the current -7.8% due to slower-than-expected global economic recovery rates, especially in China and slowing consumer sentiments.

• Foreigners reverted to net buying position in November. As the ringgit recovered slightly by 2.3% MoM to MYR4.66=US$1 and US 10-year treasury yields moderated slightly to 4.34% 58bps to 4.92%, foreigners reverted to buying RM1.6bil equities in November from RM2.2bil net sales in October (Exhibit 6-8). They were net buyers of healthcare (21%), financial services (16%), plantation (10%) and telcos (8%) involving Public Bank, Maybank, YTL Corp, YTL Power, Genting, TM, MISC, Gamuda, IHH, Top Glove, PPB Group and Sime Properties (Exhibit 2) in November. However, foreigners were selling Nestle, Hong Leong Financial Group, CIMB, RHB Bank, Sunway, Capital A and Bermaz Auto.
  Conversely, local institutions reversed to a net selling position, disposing RM1.4bil of domestic equities last month. Overall, these higher domestic sales mostly cushioned foreign buying activities, leading to a slight 11-point MoM FBMKLCI gain in November.

• YTD foreign outflows from ASEAN region. YTD, net foreign selling in Malaysia declined to RM2.6bil (from RM4.2bil on 30 Oct) vs. RM5bil purchased by local institutions. For comparison, foreign net selling was more intense for Thailand at RM25bil while the Philippines and Indonesia were slightly higher at RM4.1bil-RM4.2bil. China has experienced net equity outflows from February 2023 to June 2023, leading to a YTD net foreign sale of RM147bil, which accounts for 71% of regional outflow of RM208bil since the beginning of the year. As a comparison, India enjoyed YTD foreign equity inflows of RM56bil while South Korea RM14bil. ASEAN registered YTD2003 net foreign equity outflows of RM38bil (vs. RM48bil inflows in 2022) with Malaysia accounting for 7% of YTD ASEAN net foreign equity sales (Exhibit 14).

• Mixed Malaysian equity valuations against the region. Support from domestic institutions partly cushioned the FBMKLCI from the US Federal Reserves’ higher-for-longer interest rate sentiments, as the FBMKLCI’s YTD decline of -2.9% appears defensive compared to Thailand’s -17%, Hong Kong’s -14%, Singapore’s -5.5% and Philippines -5% (Exhibit 8). The rolling forward of FBMKLCI’s 5-year median forward P/E has fallen to 14.9x from 15.0x last month (vs. pre-pandemic 2017-2019 median of 17x) due to persistently low post-Covid19 valuations.
  The FBMKLCI’s 2023F PE of 14.5x, which translates to -0.1 SDB5YM, appears pedestrian compared to the region’s belowmedian valuations such as Hong Kong’s -1.6, Vietnam’s -1.4, Philippines/Singapore’s -1.2 and Indonesia’s -0.4 (Exhibit 19).

• Soft US landing scenario with 2024F year-end MYR target of 4.50. Our in-house economist still holds to an initial baseline “soft-landing” economic scenario in US, albeit the downside risk is relatively higher now compared to earlier as a rate cut is unlikely to take place any time before mid-2024. At the very most, we view another 25 bps hike can still be absorbed while anything beyond that could invite greater downside economic risks. Moreover, the lag effects from past tightening measures should continue to surface over the coming months. Hence, we opine that policy tightening thus far is adequate and the Fed should avoid over tightening to engineer a soft-landing scenario for the world’s largest economy.
  Recall that the Fed has pushed the Fed funds rate to 5.25% - 5.50%, reflecting 525 bps hikes since the monetary policy tightening campaign was initiated early 2022. Our economist views the ringgit as undervalued currently and has reinforced our 2024F year-end target of 4.50 as USD weakness is expected to re-surface once US economic indicators soften further, paving the way for a back-loaded rate cut.

• OVERWEIGHT on oil & gas, autos, power, property and REIT sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Dialog Group, Gamuda, Yinson and Pavilion REIT (Exhibit 26). We may downgrade consumer sector to Neutral from Overweight currently due to softening global economic growth prospects and weakening consumption trends.
  We 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 27).
  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 25).

• Technical analysis: FBM KLCI’s sideway trend remains unchanged as the index has continued to oscillate between 1,412 and 1,465. A breakout on either side would give us a clue on the near-term direction. However, as the index has managed to hold above its rising 20-day exponential moving average (EMA) and 50-day EMA lately, the odds of an upside move is getting higher. Hence, we believe that the KLCI is still in consolidation mode with a slight positive bias. The support level is seen at 1,412, followed by 1,370, which is the lowest point in 2023. Towards the upside, we are eyeing the immediate resistance level at 1,465, followed by the 1,500 psychological mark (Exhibit 1).

Source: AmInvest Research - 4 Dec 2023