Investment Highlights

• 2024F year-end MYR target remain at 4.63. Although the MYR has strengthened by 3.2% MoM and 4.7% since 23 April this year to MYR4.56=US$ currently, our economist still views that our end-4Q2024 target of MYR4.63=US$ is still appropriate given current geopolitical uncertainties and upcoming US presidential elections. Our economist notes that the current momentum could see the ringgit appreciating past the MYR4.50=US$ level with the view that the US Federal Reserve could take only one rate cut for the rest of 2024, either in September or November to avoid the risks of the US economy suddenly shifting towards a ‘hard-landing’ scenario, coupled with preventing inflation to rebound quickly.
  
  Variations to our economist’s forecast depends on US Fed policy with an upside to 4.50 and the downside at 4.80. We note that a less bullish MYR outlook towards the end of the year could moderate the direction of foreign equity inflows into the Malaysian market. However, a stronger MYR will have a mixed impact on corporate earnings, largely benefiting importers while adversely affecting exports with trade comprising 132% of Malaysia’s 2023 GDP.

• Negative MYR impact for exporters. Within our universe of stocks, a stronger ringgit is naturally negative for exporters such as technology, oil & gas and selected manufacturing companies . For technology companies such as Inari Amertron, Pentamaster, Vitrox, MPI and Globetronics, USD-denominated sales exposure, partly mitigated by locally- sourced input costs that could have an estimated 5%-10% downside to earnings.
  
  For oil & gas players such as Yinson, Hibiscus Petroleum and Bumi Armada, MYR appreciation is expected to be negative for oil and gas companies with exposure towards upstream operations as sales of Brent crude oil and/or natural gas are in US$. Similarly, services such as lease of FPSO assets or marine vessel services are also expected to see a negative impact as spot and term charter rates are also in US$. However, the impact may be partly negated through natural hedging with cost structures that are predominantly within the same currency or futures contract which are used for hedging purposes.
  
  The appreciating ringgit is also generally earnings-negative to export-focused manufacturing companies given that most of the revenues are denominated in US$ as compared to their cost structure. However, the negative impact on core earnings varies due to share of exports to revenue, e.g., Ancom Nylex -9-11%, VS Industry -15-20% and Cape EMS -20-25%. For Lee Swee Kiat, the impact on core profitability is negligible at -1% mainly due to relatively lower export share in total revenue.
  
  A stronger ringgit will also be detrimental to export-oriented glove makers as over 90% of their revenue is denominated in US dollars. However, the impact on glove makers varies according to the magnitude of hedging arrangements. Based on our estimates, for every 10% strengthening of the MYR against the US dollar, the impact on core earnings will be a decrease of 0.5-1.0% for Hartalega, 1.3-1.5% for Kossan, and 11-13% for Top Glove, which does not have much forward foreign currency contracts but rely on natural hedge.

• MYR positive for importers such as automobile, transportation, consumer, media and healthcare segments. A stronger ringgit generally benefits the automobile sector as it lowers the cost of imported content. A stronger MYR against USD is positive for Sime Darby and Tan Chong Motors as some of their components are priced in USD. However, these are not priced on the spot market rates, being dated 3-6 months, and therefore the strong ringgit needs to prevail at these rates for longer for the benefits to be apparent going forward.
  
  For air carriers in transportation, tourist arrivals may be benefit as higher fuel costs are passed through to passengers. For the consumer segment, a weaker USD will be positive for most of staple players as raw material are mostly sourced overseas and USD-denominated, which we believe will be earnings-positive for companies such as Berjaya Food, Spritzer, Power Root, Nestle and Guan Chong. For healthcare players, the impact of a stronger ringgit on Apex Healthcare and IHH Healthcare's core earnings is mildly positive at <2%.

• MYR neutral for financial services, construction, plantation, power, property, ports and REITs. For financial institutions, the impact will be minimal in view that assets of local banks are largely in MYR with Malaysian operations contributing to a large portion of group’s earnings. For overseas operations of the larger capitalised banks, assets of these foreign entities are well hedged against liabilities, thus mitigating the impact of fluctuations in currencies. For insurance stocks, we also expect negligible impact as all policies underwritten by companies under our coverage are in MYR.
  
  For the power sector, Tenaga Nasional’s incentive-based regulatory framework’s cost pass-through mechanism negates the impact of lower fuel costs while most earnings and borrowings are in MYR. YTL Power’s overseas earnings have a natural hedge against their borrowings in foreign currencies. For plantation companies, a strong MYR narrows the CPO price discount with soybean oil and softens palm oil sales, which could be offset by lower USD-denominated fertiliser costs.
  
  For telecommunications companies, their revenue is primarily domestic-based except for Axiata. A stronger ringgit reduces the cost of importing 5G equipment and technology, which are often priced in US dollars or other foreign currencies. This lower import costs lead to lower capital expenditure for telcos to upgrade 5G networks. We think Telekom Malaysia (TM) and Axiata could experience a slight positive effect due to their USD-denominated borrowings, as a stronger ringgit makes debt servicing cheaper. However, this benefit may be partially offset by cross-currency swaps, which could moderate the overall impact.
  
  Meanwhile, the revenue of property and REIT companies are mainly derived from Malaysia while most of their assets and borrowings are not USD-denominated. For construction, we view limited impact of the stronger MYR as most costs are local. The market has been flooded with cheap steel imports from China, and a stronger currentcy might make the imports even cheaper now.
  
  For ports, a stronger ringgit makes Malaysian exports less price-competitive, potentially leading to a decrease in export volumes. Conversely, ports may experience higher import volumes due to lower prices of imported goods. Ports benefit from lower operating costs due to lower unhedged fuel costs and capital expenditures. We expect no significant immediate impact on vessel movements, as these are more correlated with global economic growth and trade flows rather than currency fluctuations.

• Support from July foreign buying. As the ringgit appreciated last month, the FBMKLCI rose 2.2% MoM as foreigners were net buyers of RM1.3bil vs. local institutional selling at RM688mil. For foreigners, this was a reversal from a slight net selling position of RM61mil in June. 57% of net foreign purchases were in the financial sector, 18% in property, 15% in construction and 10% in industrial products/services .
  
  In July, foreigners bought into Tenaga, CIMB, Maybank, Sunway, Gamuda, AmBank, Bursa Malaysia, VS Industry and Mah Sing Group . However, they were net sellers of RHB Bank, Public Bank, YTL Power, YTL Corp, Holg Leong Bank, Inari Amertron, Nestle, Time DotCom and KL Kepong . Foreign shareholding level in Malaysian equities slid slightly to 19.5% in June from 19.6% in May.

• ASEAN region drew in foreign equity funds. In July, foreign equity funds switched to net buying mode in which Indonesia accounted for 54% of the RM3.5bil net purchases, Malaysia 38% and Philippines 8%. However, Vietnam experienced foreign outflows of RM1.5bil and Thailand RM224mil. India continued to benefit from foreign inflows of RM17bil as wells as South Korea (RM6bil) . With the July net inflow, ASEAN’s YTD2024 net foreign outflow slid by 6% to RM27.6bil from last month vs. RM37bil in 2023.

• FBMKLCI earnings growth prospects dwarfed by regional peers. Our 2024F FBMKLCI earnings growth is largely maintained at 15.4% , still ahead of Bloomberg’s +6.7%, which has fallen from +7.5% in the previous month. For 2025F, this is expected to decelerate to +9.8% vs. Bloomberg’s +8.7%. Even based on our more sanguine 2024F corporate earnings growth for FBMKLCI, Malaysia is dwarfed by Bloomberg’s estimate of +70% for Korea, +37% for Indonesia, +38% for Japan/Taiwan, +32% for Vietnam and +18% for Philippines .

• Above-median Malaysian equity valuations vs. under-valued region. Since the beginning of the year, FBMKLCI’s YTD gain of 12% was the best performer in ASEAN, ahead of Vietnam’s 11%, Singapore’s 7%, Phillippines’ +3%, Indonesia - 0.2% and Thailand’s -7%. This outpaced China’s -1.2%, Hong Kong’s +2% and Korea’s +4% .
  
  The monthly rolling forward of FBMKLCI’s 5-year median forward P/E remained at 14.6x vs. pre-pandemic 2017-2019 median of 17x amid persistently low post-Covid19 valuations. Our FBMKLCI’s 2024F PE of 14.9x (Bloomberg’s valuation) currently trades above the latest 5-year median, yet valued significantly higher in contrast to Hong Kong’ -1.3 standard deviation below its 5-year median, Philippines’ 1.1, Thailand’s -0.8, Korea/Indonesia/Singapore’s -0.7, Vietnam’s -0.5 and China’s -0.3 .
   
• Maintain base-case end-2024 FBM KLCI target at 1,635, pegged to a 2024F P/E of 15.3x – 0.25 standard deviation above the 5-year median of 14.6x, supported by robust domestic liquidity. We remain cautious of:
  
  i) slowing global economic growth prospects,
  
  ii) less-optimistic expectations of the timing of US Federal Reserve cuts, which will drive volatility across all markets, and
  
  iii) moderating domestic consumption amid rising domestic inflation from targeted subsidy rationalisation later in the year.
  
  In our view, these downside risks could be partly mitigated by resilient local institutional liquidity as Malaysian equities offer decent corporate earnings prospects, compelling dividend yields of 4% and low foreign shareholding of 19.5% amid reinvigorated expectations of infrastructural rollouts on 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 1,815, pegged to 2024F P/E of 16.9x at 1 SD above the 5-year median.
   
• Sector and stock selection will be key to relative outperformance amid uncertain macro-driven headwinds in 1H2024, as softening global economic growth prospects and continuing subsidy rationalisation policies moderate positive equity sentiments currently being sustained by robust domestic liquidity.

  We downgraded Tenaga Nasional last week as the share price has risen to near our fair value, which means that the power sector has been derated to Neutral from Overweight. Hence, the sectors with OVERWEIGHT ratings are technology, oil & gas, manufacturing, ports, property, healthcare, REIT and transportation sectors. Our neutral rating on banking, plantation, telecommunications, automobiles and consumer sectors now account for 67% (from 62% last month) of the FBMKLCI index weightage.

  We have replaced Tenaga with YTL Power International as amongst our Top BUYs, which also include Public Bank, IHH Healthcare, Hong Leong Bank, IOI Properties, Telekom Malaysia, Inari Amertron, Dialog Group, IOI Properties and Yinson (Exhibit 24).

  For small cap ideas, we like fertility specialist Alpha IVF (BUY, FV: RM0.42/share) which continues to deliver remarkably high pregnancy success rates, superior margins and savvy focus on target markets amid rising affluence and low IVF penetration rates in the region position ahead of peers. We also like stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer (BUY, FV: RM3.19/share) and niche agrichemical producer Ancom Nylex (BUY, FV: RM1.28/share), as well as grossly undervalued companies such as Deleum (BUY, FV: RM1.70/share) (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: The trend of the FBM KLCI appears to be turning positive again after it surged to a new 52-week high on 19 Jul 24. To recap, since the KLCI recovered above the key 1,500 psychological mark in late-Jan 24, the index has been trending higher, following a pattern of higher highs and higher lows. Coupled with the breakout from its 7-week bullish flag pattern a few weeks ago and the rise in its 20-day and 50-day exponential moving averages, the bullish momentum may persist in the longer run. Therefore, we expect the KLCI to trend higher in the coming months. Resistance is set at 1,640, followed by the 1,700 round figure. Key support sits at 1,580, with the next support level at 1,530 if a decisive breakdown occurs (Exhibit 1).

Source: AmInvest Research - 2 Aug 2024