AmInvest Research Reports

Strategy - Mixed Results, Mild Adjustment to Index Growth Outlook

AmInvest
Publish date: Mon, 04 Mar 2024, 11:11 AM
AmInvest
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Investment Highlights  

  • Mixed corporate results in 4Q2023. Corporate results were mixed in 4Q2023 with 31 underperformers accounting for 32% of the stocks under our coverage, almost the same proportion as in 3Q2023. These stemmed from consumer, construction, glove and plantation companies while the financial sector was mostly in line. However, outperformers improved to 26% of our stock universe vs. 20% in 3Q2023 while the share of companies delivering results within expectations slid to 42% from 48% in 3Q2023 (Exhibit 6).

    We downgraded our rating on 2 REITS to HOLD – YTL Hospitality as the stock reached near our FV and Hektar due to negative mall rental reversions. A bright spot was MISC, which we upgraded to BUY due to stronger-than-expected growth from the petroleum and gas subsegments.
  • Sequential earnings declined for gloves, construction, power, healthcare, manufacturing and automobile sectors. Comparing 4Q2023 core earnings against 3Q2023, the worst performer was the glove sector which reversed to losses due to Red Sea-impacted shipment delays, followed by construction (-68%) from cost overruns on thin-margined legacy projects, power (-34%), healthcare (-27%), manufacturing (-22%) and automobile (-21%) (Exhibits 7-8). The best performer in this quarter was the property sector with a doubling in quarterly earnings due to higher land sales and improved progress billings. The technology segment was a distant second, with a sequential 4Q2024 core earnings growth of 15%, supported by new smartphone launches and the medical segment (Exhibit 9).
  • FBMKLCI core earnings growth - lower for 2024F but higher in 2025F. Our FBMKLCI earnings projections have been marginally tweaked by 1%-2% for 2024F-2025F from slight adjustments to banking earnings, partly offset by Tenaga Nasional’s higher operational costs and Petronas Chemicals’ lower product prices. Hence, FBMKLCI’s 2024F core net profit growth slid to +13.4% from +14.7% last month from a slight uptick of +1% in 2023 earnings base (Exhibit 19).

    For comparison, Bloomberg consensus’ 2024F FBMKLCI earnings growth is only 3.7% currently. We caution that Bloomberg’s estimates may not yet have fully accounted for all analysts’ earnings revisions. Even so, based on our more sanguine 2024F corporate earnings growth for FBMKLCI, Malaysia is dwarfed by Bloomberg’s estimate of +33% for Indonesia, +43% for Vietnam, +18% for Philippines and +14% for Thailand (Exhibit 23). For 2025F, we are now projecting FBMKLCI’s earnings growth at +8.6%, up from +7.2% last month, while Bloomberg’s slid to +5% from +6%.
  • Foreign buying gained momentum. As the ringgit depreciated 2.7% YTD2024, the FBMKLCI rose 1.7% MoM to 1,538 as foreign buying gained momentum, rising 91% MoM to RM1.3bil, half into utilities and the rest into finance (23%), telco (15%), transport (11%) and technology (10.5%). This was slightly offset by foreigners selling out of the industrial products/services, plantation and construction sectors (Exhibits 12-14).

    In February, foreigners bought into Sime Darby, Maybank, YTL Power, IHH Healthcare, Tenaga YTL Corp, IJM Corp, TM and MISC, while selling Gamuda, Press Metal, KL Kepong, QL Resources, Ekovest, CIMB and Inari Amertron (Exhibit 4). The overall foreign buying activities were largely offset by local institutional net sales of RM964mil.
  • Reversal of foreign inflows into ASEAN region. YTD2024, ASEAN region experienced a net foreign equity inflow of RM4.6bil with an inflow of RM4.9bil in Feb vs. a slight outflow of RM307mil in Jan. The Southeast Asian countries that drew in YTD2024 net foreign equity were Indonesia (RM5.6bil), Malaysia (RM2bil) and Philippines (RM1bil) while Thailand experienced an outflow of RM3.7bil. YTD2024, foreigners were net buyers of RM40bil South Korean equities while Taiwan attracted RM23bil foreign equity inflow, which underpinned the TWSE index rise of 5.8%. However, India, which enjoyed 2023 foreign equity inflows of RM125bil, experienced net sales of RM15bil that translated to a flattish 1.2% rise in Nifty index in YTD2024 (Exhibit 16).
     
  • Mild Malaysian equity valuations against the region. With support from foreign institutional buying activities, the FBMKLCI’s YTD rise of 6.7% outpaced Taiwan’s +5.8%, China’s +1.4%, India’s +1.2%, Indonesia’s +0.6%, Korea’s -0.5% and Singapore’s -3% (Exhibit 10).

    The improved stock valuations largely maintained FBMKLCI’s 5-year median forward P/E at 14.8x over the past month vs. pre-pandemic 2017-2019 median of 17x due to persistently low post-Covid19 valuations. The FBMKLCI’s 2024F PE of 13.6x (Bloomberg’s valuation) translates to a mild -0.6 standard deviation (SD) below the latest 5-year median, yet overshadowed by the region’s below-median valuations such as Hong Kong’s -1.9, China/Philippines/Vietnam’s -1.2, Singapore’s -1.1, Thailand’s -0.7 and Indonesia’s -0.6 (Exhibit 19).
     
  • Soft US landing scenario with 2024F year-end MYR target of 4.50. Our in-house economist maintains a baseline “softlanding” economic scenario for the US with Fed rate cuts of 75-100 basis points in 2H2024. However, US Federal Funds futures contracts are currently priced on the expectation of 5 US Federal Rate cuts this year vs. earlier anticipation of 7 reductions in the beginning of January. This still appears optimistic given the current consensus expectation of US inflation rate of 2.7% is well above the Federal Reserve’s target of 2%.

    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 2022. Where the USD/MYR is currently trading at, our economist 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 (Exhibit 3).

    We acknowledge that foreign equity flows are poorly correlated to the USDMYR exchange rate on a 1-year to 10-year time scale. Yet the FBMKLCI has a strong negative correlation coefficient to the USDMYR at -0.74 over the past 10 years and - 0.67 for the latest 3 years (Exhibit 2). This could mean that a stronger ringgit towards the end of the year could mean a reversal in foreign equity inflows that has helped propel the FBMKLCI over the past 2 months.
     
  • Slightly higher base-case end-2024 FBM KLCI target at 1,550 (from 1,545 previously), pegged to a 2024F P/E of 14.5x – slightly below its 5-year median of 14.8x, which is likely to decline over the next quarter given persistently low postpandemic valuations. Malaysian equities offer potential ringgit appreciation, below-median 2024F P/E valuation of 13.6x (Bloomberg’s consensus valuation), improving corporate earnings prospects, compelling dividend yields of 4%, low foreign shareholding low of 19.6% (Exhibit 15) amid reinvigorated expectations of infrastructural rollouts with a firm government mandate.

    However, following current bullish equity trends since the beginning of the year, our base-case target stems from rising downside risks as follows: i) an appreciating MYR towards the end of the year could unravel foreign equity inflows attracted by the weak currency, ii) slowing global economic growth prospects, iii) shifting expectations of the timing of US Federal Reserve cuts, which will drive volatility across all markets, and iv) moderating domestic consumption amid rising domestic inflation from targeted subsidy rationalisation, 2%-hike in service tax rate to 8% in March and introduction of high value good tax at 5%-10% on 1 May. 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 1,340, pegged to 2024F P/E of 12.5x at -1 SD below the 5-year median.

    The best-case scenario from an abrupt US Federal Reserve policy reversal, stronger domestic government rollout of infrastructural projects and better-than-expected global economic growth would underpin an end-2023 FBMKLCI target of 1,700, pegged to 2024F P/E of 15.9x at 0.5 SD above the 5-year median.
     
  • Sector and stock selection will be key to relative outperformance given limited re-rating catalysts as our neutral sectors account for 65% of the FBMKLCI weighting. We remain OVERWEIGHT on oil & gas, construction, technology, manufacturing, ports, power, property, REIT, glove and transportation sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Gamuda, Dialog Group, Sunway, Yinson, Pavilion REIT and Mah Sing (Exhibit 28).

    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 28). For dividend plays, we like REITS such as UOA REIT, Pavilion REIT, Hektar REIT, Sunway REIT and IGB REIT as well as MayBank, MBM Resources, RHB Bank and CIMB Bank (Exhibit 65).

    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 29).
     
  • Technical analysis: The recent push to a new 52-week high indicates that FBM KLCI’s bullish trend is likely to persist in the near term. KLCI may potentially push higher from here, following a successful breakout above the 2-week bullish flag pattern a month ago. Coupled with the golden cross of its 20-day exponential moving averages (EMA) above the 50-day EMA a few months back, further support a positive sentiment for the index. Resistance is seen at 1,570, followed by the 1,600 psychological mark. On the downside, the immediate support level is anticipated at the 1,500 threshold. If the said support is taken out, we expect a deeper pullback towards the next support at 1,465. (Exhibit 1).

Source: AmInvest Research - 4 Mar 2024

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