Investment Highlights

• Sector and stock selection will be key to relative outperformance given rising risks of a US-led global recession for 1H2024, partly cushioned by reinvigorated project rollouts from a firm government mandate. We are OVERWEIGHT on oil & gas, construction, technology, manufacturing, ports, power, property, REIT and transportation sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Gamuda, Dialog Group, Gamuda, Sunway, Yinson, Pavilion REIT and Mah Sing (Exhibit 20). 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 21). 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 19).

• Positive catalysts from delivery of Madani economic initiatives under a steady Federal government, which just implemented a minor cabinet reshuffle of ministerial roles to emphasise on performance, competence and dynamism as the country aims to accelerate foreign direct investment inflows. With the government already announcing the National Energy Transition Roadmap and New Industrial Master Plan 2030, we expect a more focus-driven rollout of long-delayed infrastructural projects in 2024. Prime Minister Datuk Seri Anwar Ibrahim recently said that there should be no more excuses for delays in the development of projects for Sabah, especially pertaining to water and electricity supplies, as well as the Pan Borneo Highway.

• Soft US landing scenario with 2024F year-end MYR target of 4.50. Our in-house economist reiterates a baseline “softlanding” economic scenario in the 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. Nevertheless, we expect the lag effects from past tightening measures to continue surfacing over the coming months, catalysing recessionary fears amid US Federal Reserve’s “higher-for-longer” interest rate regime.
  Recall that the Fed has pushed the Fed Funds Rate (FFR) to 5.25% - 5.50%, reflecting 525 bps hikes since the monetary policy tightening campaign was initiated early last year. Our economist thinks that the ringgit is undervalued currently and has reinforced our 2024F year-end target of 4.50 (Exhibit 1) as USD weakness is expected to emerge once US economic indicators soften further, paving the way for a back-loaded rate cut which could stabilise equity prices.

• Mixed Malaysian equity valuations against the region. Against the backdrop of the US Federal Reserves’ higher-for-longer interest rate narrative, the FBMKLCI’s YTD decline of -2.6% appears defensive compared to Thailand’s -17%, Hong Kong’s - 15% and Philippines/Singapore’s -5% (Exhibit 2). The rolling forward of FBMKLCI’s 5-year median forward P/E has fallen from 15.0x last month to 14.9x (vs. pre-pandemic 2017-2019 median of 17x) due to persistently low post-Covid19 valuations of below 14x. The FBMKLCI’s 2023F PE of 14.5x, which translates to -0.1 standard deviation below its 5-year median (SDB5YM), appears pedestrian compared to the region’s below-median valuations such as Hong Kong’s -1.6, Vietnam’s -1.4, Philippines/Singapore’s -1.2 and Indonesia’s -0.4. (Exhibit 15).
  In terms of 2024F corporate earnings growth, Malaysia’s 13% is comparable to Indonesia’s 12% and Philippines’ 10% while Thailand could rebound at a faster 16% following a contraction of 11% in 2023. Malaysia’s 2024F GDP growth of 4.5% outpaces the world’s 2.6% and US’ anaemic 1.2%, which could easily be cut as consumption is impacted by elevated interest rates, the highest since June 2006. While better than Thailand’s 2024F GDP growth of 3.5%, Malaysia lags behind Philippines’ 5.7% and Indonesia’s 5.0%.

• Base-case end-2024 FBM KLCI target at 1,545, pegged to an unchanged 2024F P/E of 14.9x – at parity to its 5-year median albeit at 3 standard deviations below prepandemic 2017-2019 median of 17x. Notwithstanding below-median 2024F P/E valuation of 14x, 2024F corporate earnings growth of 13%, highly compelling dividend yields and, low foreign shareholding low of 19.6% currently and prospects of a stronger ringgit next year, we are now cautious on rising probability of a global recession from the aftermath of an extended 500bps US interest rate hike cycle, which will drive volatility across all markets.
  The worst-case scenario from a global recession, new pandemic-driven lockdowns, more US rate hike surprises, bank failures and worsening geopolitical conflicts translates to an end-2023 FBMKLCI target of 1,315, pegged to 2024F P/E of 12.7x at -1 SDB5YM.
  The 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 1,655, pegged to 2024F P/E of 16x at 0.5 standard deviation (SD) above its 5-year median.

• Neutral on the banking sector, which accounts for the largest 35% weighting on the FBMKLCI index, premised on macro headwinds, ongoing geopolitical tensions, pressure on funding cost and challenges on treasury income from uncertainties in yield curve. Net interest income growth will be underpinned by a modest growth in loan volume and lower NIM compression of 2bps in 2024F compared to 14bps in 2023, tempered by persistent deposit competition. Non-interest income could be lower on the back of a decline in investment and treasury income against the backdrop of a flattish OPR with limited room for further decline in banks’ net credit cost given that the macroeconomic uncertainties continue to guide banks to remain prudent on provisions. Even so, we like CIMB Group, Hong Leong Bank and RHB Bank on compelling P/BV valuations.

• We have downgraded the automotive sector from OVERWEIGHT to NEUTRAL on a more conservative outlook on sales prospects. Coming off a high base this year, we foresee a softening in the automotive sales 1H2024 as vehicle sales are expected to normalise after the expiry of SST exemption as well as potential upside to inflation from the extension of subsidy rationalisation to RON95 in 2H2024, impacting consumers’ real disposable income. Consequently, the anticipated rollout of a targeted subsidy mechanism will likely ensue a rise in inflation, constraining both consumption and growth. Hence, we have downgraded MBM Resources to HOLD while retaining BUY on Bermaz Auto.

• We are sanguine on the construction sector with a re-energised recovery of job flows in 1H2024 underpinned by a stable government and improving operating margins from moderating costs and adequate workforce, further catalysed by prolific overseas jobs. The long-awaited Mass Rapid Transit Phase 3, costing RM45bil, should kick off by 1Q2024. Besides the Penang LRT and Sabah-Sarawak highway packages, multiple projects in Australia, Taiwan and Vietnam are on the table.
  Our top construction pick is Gamuda given its proven ability to successfully penetrate new overseas markets to secure open tenders in Australia, Taiwan and Singapore. To date, Gamuda is the only Malaysian contractor to secure major tenders in Australia and Taiwan. Amongst the 6 construction stocks in our coverage, Gamuda has by far the largest order book of RM26bil – 67% of a combined RM41bil, 4.9x Sunway Construction’s RM5.3bil and 5.8x IJM Corp’s RM4.5bil. We still like Sunway Construction with potential job wins from the finalisation of a huge RM10bil Vietnam coal-fired power plant, construction of warehouses/data centres and internal building jobs from companies within Sunway group, especially medical centres.

• Prospects for oil & gas sector remains bright as Petronas is currently targeting to scale up domestic capex in 2023-2027 to a total RM113bil (+12% vs. 2018-2022), which translates to RM23bil annually to the local oil and gas ecosystem. With limited competition amongst global floating production, storage and offloading (FPSO) players, Yinson Holdings is wellpositioned to be selective in choosing projects worth over US$1bil which offer the best returns. We favour Dialog Group, supported by resilient non-cyclical tank terminal and maintenance-based operations.
  Manufacturing sector is OVERWEIGHT due to our selective picks that have competitive advantages in niche segments such as Ancom Nylex, the largest herbicidal ingredient producer in Southeast Asia and Lee Swee Kiat Group, Malaysia’s largest mattress manufacturer. Cape EMS is expected to ride on adoption of 5G, evolution of digital payment eco-systems, Internet of Things, EVs, and shift towards e-cigarettes from conventional alternatives.

• Upgraded technology sector to OVERWEIGHT on more positive revenue recovery prospects for semiconductor players in 2024 given bottoming out from the technology downcycle with a gradual pace of demand recovery, ongoing technology advancement for new products from automotive and consumer electronics segments with leading-edge chips and new features as well as equipment tools, and trade diversion with the “China plus one” strategy to leverage on the strength/production of multiple hubs and more cost-effective supply chains as MNCs divert their production hub to Southeast Asia. Top picks are Inari Amertron, given that increasing content requirements for radio frequency filters for next generation mobile connectivity will underpin its earnings growth and margin resiliency, and Vitrox for a well-diversified revenue base and its vision inspection machines for automotive and telecommunication segments.

• Ports are expected to re-rate on potential tariff hikes while ASEAN countries benefit from the diversification of supply chains by multinationals from China. In 3Q2023, Malaysia attracted FDIs totalling RM914.5bil with the manufacturing sector emerging as the second-largest contributor at RM389.1bil, representing 43% of the total. The setting up of plants and distribution hubs by fast-growing sectors, such as communication equipment, semiconductors, textile and apparel are expected to boost container throughput in the region. Hence, we like Suria Capital, Bintulu Port and Westports.

• Affordable housing demand will drive the earnings growth of property stocks, hence, we like Sunway given the strong brand recognition established by its highly successful landmark developments and expanding healthcare business. IOI Properties is poised to secure substantial contributions from IOI Central Boulevard’s recurring income upon its completion in FY24F, along with launches of major projects in Singapore. For mid cap property stocks, we like Mah Sing for its strength in affordable housing developments at strategic locations as well as savvy execution and quick-turnaround business model.

• We favour Pavilion REIT, YTL REIT and IGB REIT due to widening yield spread against 10-year MGS yield amid the tail end of monetary policy tightening and potential 2H24 interest rate cuts in developed economies. Retail REITs will continue experiencing healthy growth in 2024F, driven by stable occupancy rates and positive rental reversions, underpinned by a stable labour market and modest inflation rate of 2.5%-3.5% coupled with a continued gradual recovery in tourist arrivals.

Source: AmInvest Research - 14 Dec 2023