Investment Highlights

• Maintain base-case end-2024 FBM KLCI target at 1,550 for now, pegged to a 2024F P/E of 14.5x – slightly below its 5- year median of 14.7x, which is likely to decline over the next quarter given persistently low post-pandemic valuations. Our conservative base-case target stems from: i) an appreciating MYR towards the end of the year that could unravel earlier foreign equity inflows attracted by the weak currency, ii) slowing global economic growth prospects, iii) less-optimistic 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 later in the year.
  
  While the index has already surpassed our base-case target, we are wary of potential profit-taking activities and continued rotational plays with the introduction of EPF Account 3 which could lead to withdrawals of RM20bil-RM30bil vs. YTD local institutional equity purchases of RM5.1bil while foreigners sold RM2.2bil. While this could be partially mitigated by the repatriation of foreign investments by local institutions, we adopt a cautious stance over the next 2 months pending further clarity on global macro headwinds.
  
  Even so, downside risks are mitigated by Malaysian equities offering improving corporate earnings prospects, compelling dividend yields of 4% and low foreign shareholding low of 19.6% (Exhibit 15) amid reinvigorated expectations of infrastructural rollouts with a firm government mandate.
  
  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-2024 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 a faster pace of US Federal Reserve rate cut, stronger domestic government rollout of infrastructural projects and better-than-expected global economic growth would underpin an end-2024 FBMKLCI target of 1,700, pegged to 2024F P/E of 15.9x at 0.5 SD above the 5-year median.
   
• FBMKLCI earnings growth prospects dwarfed by regional peers. Our 2024F FBMKLCI earnings growth has been revised to +15.3% (Exhibit 15) from +13.3% previously due to consensus adjustments to Press Metal’s (UNRATED) estimates. This is ahead of Bloomberg’s +11.3%. For FY2025F, this is expected to decelerate to +8.7% vs. Bloomberg’s +5.3%.
  
  Even based on our more sanguine 2024F corporate earnings growth for FBMKLCI, Malaysia is dwarfed by Bloomberg’s estimate of +63% for Korea, +43% for Indonesia, +35% for Vietnam, +34% for Japan, +30% for Taiwan and +18% for Philippines (Exhibit 19).
   
• Foreigners continued selling at a lower pace. As the ringgit was slid slightly by 1% in April, the FBMKLCI rose 1% MoM on local institutional purchases of RM2.4bil while foreigners continued to be net sellers albeit at a lower RM1.4bil from RM2.9bil in March. 38% of the April net foreign sales were in the financial sector, followed by consumer products/services (26.4%), REITs (13.6%) and industrial products/services (9.5%) (Exhibits 8-10).
  
  In April, foreigners sold out of Public Bank, CIMB, RHB Bank, Sime Darby, PPB Group, Press Metal, Maybank, QL Resources, Petronas Chemicals and KL Kepong . However, they were net buyers of Axiata, YTL Power, IHH Healthcare, Tenaga, TM, Mah Sing, YTL Corp, MyEG and Eco World Development. Both local institutions and foreigners were net buyers of YTL Corp (Exhibit 5).
  
  All in, this caused the foreign shareholding level in Malaysian equities to drop to 19.6% in March from 19.9% in Feb.

• Foreign outflows from ASEAN region. Foreign equity funds continued to gravitate towards Korea (RM8.5bil) in April while the ASEAN region experienced a net foreign equity outflow of RM8.2bil compared to an inflow of RM6.2bil in March 2024, leading to a YTD outflow of RM9.5bil.
  
  Although Indonesia enjoyed RM10.2bil of net foreign inflows in the 4-month period in Dec 2023-March 2024, this reversed to net selling of RM5.3bil last month. Meanwhile, Malaysia’s YTD net foreign equity sales of RM2.2bil was dwarfed by China’s RM15.4bil and Thailand’s RM8.6bil.
   
• Mild Malaysian equity valuations against the region. With support from local institutional buying activities which exceeded net foreign selling, FBMKLCI posted a YTD rise of 8.6% vs. Singapore’s -0.2%, Indonesia’s -0.9% and Thailand’s -2.6%, Philippines’ +8.2% and Vietnam’s +13%. This outpaced +3% for China, India and Korea (Exhibit 6).
  
  The monthly rolling forward of FBMKLCI’s 5-year median forward P/E remained at 14.7x vs. pre-pandemic 2017-2019 median of 17x amid persistently low post-Covid19 valuations. The FBMKLCI’s 2024F PE of 13.8x (Bloomberg’s valuation) translates to a mild -0.4 standard deviation (SD) below the latest 5-year median, yet overshadowed regionally by Hong Kong/Philippines’ -1.2, Vietnam’s 1.0, Singapore’s 0.9, Indonesia/Korea’s 0.8 and Thailand’s 0.7 (Exhibit 17).
   
• Soft US landing scenario with 2024F year-end MYR target of 4.50. Our in-house economist maintains a baseline “soft- landing” economic scenario for the US with Fed rate cuts of 75-100 basis points in 2H2024. As we have highlighted earlier in our reports, US Federal Funds futures contracts are no longer projecting any US Federal Rate cut this year with a strong bias vs. earlier anticipation of 7 reductions in the beginning of January. This is not a surprise as US inflation rate of 2.9% for 2024 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 maintains our 2024F year-end target of 4.50 at this juncture (Exhibit 3).
  
  We note that the FBMKLCI has a strong negative correlation coefficient to USDMYR of -0.63 to -0.73 for the past 5-12 years . This could mean that However, we acknowledge that a slower-than-expected US rate cut could lead to persistent MYR weakness and conseqa stronger ringgit towards the end of the year could mean a reversal in foreign equity flows. Where the USD/MYR is currently trading at, our economist maintains our 2024F year-end target of 4.50 at this juncture (Exhibit 3).

• Sector and stock selection will be key to relative outperformance given limited re-rating catalysts as our neutral sectors (banks, plantation, telcos, consumer, retail and healthcare) account for 65% of the FBMKLCI weighting. We remain OVERWEIGHT on oil & gas, construction, technology, manufacturing, ports, power, property, REIT and transportation sectors.
  
  Our top picks are Hong Leong Bank, IOI Properties, Greatech Technology, RHB Bank, Tenaga Nasional, Telekom Malaysia, Gamuda, Dialog Group, IOI Properties, Yinson and Pavilion REIT (Exhibit 24).
  
  For small cap ideas, we introduce Alpha IVF as a replacement for Kimlun Corporation, which recently surpassed our fair value. We like Alpha IVF’s strong medium-to-long term growth prospects as well as its reputation as the top fertility centre in the region with best-in-class clinical pregnancy rates and superior net profit margins.
  
  We also like other 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).
  
  For dividend plays, we like REITS such as YTL Hospitality, Pavilion, UOA, Sunway and IGB as well as RHB Bank, Maybank, Paramount Corp, MBM Resources and CIMB Bank (Exhibit 22).
  
  Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Inari Amertron, Sunway Holdings, Gamuda, Sunway REIT, Westports Holdings and Yinson Holdings (Exhibit 23).

• Technical analysis: After consolidating for more than 2 months, FBMKLCI finally broke above the sideways trend (the rectangle pattern) in late April, indicating the resumption of its previous uptrend. As the KLCI continued to hold above the resistance-turned-support at the 1,560 level, coupled with rising 20-day exponential moving average (EMA) and 50-day EMA, the bullish momentum is likely picking up. The immediate support level is seen at 1,560, followed by 1,540, with the 50-day EMA acting as support. Key support is maintained at the 1,500 psychological mark. Towards the upside, we are eyeing the resistance at the 1,600 round figure, followed by 1,620 threshold. (Exhibit 1)

Source: AmInvest Research - 3 May 2024