Investment Highlights

• Net foreign buying accelerated in August. As the ringgit appreciated by 6.2% in last month, the FBMKLCI rose in tandem by 3.3% as net foreign equity purchases soared by 92% MoM to RM2.5bil in August from RM1.3bil in July while local institutions were net sellers at RM874mil. The majority of August foreign purchases were in banks (82%), followed by utilities (7%) and telcos (5%) with the remaining in construction, plantation and healthcare.
  
  In August, foreigners bought into Public Bank, DIMB, Maybank, Hong Leong Bank, RHB Bank, AmBank, Alliance Bank, Tenaga, TM, Celcom Digi, Maxis, IHH Healthcare and Sime Darby Guthrie. However, they were net sellers of YTL Power International, YTL Corp, MISC, Sime Darby, MyEg, Sime Darby Property and S P Setia.

• Malaysia was the second highest net foreign inflow beneficiary in ASEAN region. Malaysia’s YTD net foreign inflow of RM3.1bil was the second highest in the ASEAN region, roughly half of Indonesia’s RM7.1bil. The rest of South East Asia experienced net outflows which includes Thailand (-RM16bil), Vietnam (-RM10bil) and Philippines (RM1.6bil). In August 2024, Indonesia outpaced the region with a net foreign inflow of RM8.1bil, followed by India (RM5bil) and Malaysia (RM2.5bil).

• YTD index outperformance against ASEAN. YTD, with support from RM3.1bil foreign institutional buying activities which was boosted by local institutional purchases of RM2.8bil, FBMKLCI posted a rise of +15%, rivalling Japan’s equity market performance. This exceeded Philippines’ +7%, Indonesia’s +6% and Thailand’s -4%. The only ASEAN country that almost matched Malaysia’s YTD index gain was Vietnam (+13.6%) (Exhibit 10).
  
  With total net local institutional and foreign buying of RM5.9bil YTD, FBMKLCI’s 2024F P/E of 18x (based on Bloomberg’s estimates) has run up to 1 standard deviation above pre-pandemic 2017-2019 median of 17x, with the monthly rolling forward of FBMKLCI’s 5-year median forward P/E unchanged at 14.6x. This also means that the FBMKLCI’s 2024F P/E has now raced to an excessive 1.5x standard deviation (SD) above its latest 5-year median, the highest in the region, even overshadowing US’ +0.8, India’s +0.6 and Taiwan’s +0.3 as well as China/Indonesia/Vietnam’s -0.4, Thailand’s -0.6, Philippines’ -0.9 and Hong Kong’s -1.2 (Exhibit 21).

• 2024F year-end USDMYR target revised to 4.40 from 4.63. As US rate cut probabilities starting from this month have become more certain following clear signals from Jerome Powell during the Jackson Hole symposium, our economist has revised our end-4Q2024 USDMYR target from 4.63 to 4.40 while acknowledging potential short-term corrections in the US election run up culminating in a Trump victory. By the end of 2025, our economist is looking at USDMYR to improve further to 4.20 with the narrowing of interest rate differentials.

• Raised base-case end-2024 FBM KLCI target from 1,635 to 1,660, pegged to a higher 2024F P/E of 15.7x (from 15.2 earlier) – 0.5 standard deviation above the 5-year median of 14.6x, supported by robust foreign equity flows and stronger MYR prospects. Nevertheless, we caution investors on potential short-term corrections due to:
  
  i) Slower-than-expected rollout of domestic infrastructural projects against the backdrop of the government’s prerogatives on fiscal prudence with a lower 2024F budget deficit target of 4.3% from 5% in 2023 while the finalisation of the JohorSingapore Special Economic Zone could be deferred to next year,
  
  ii) Moderating domestic consumption amid rising domestic inflation from targeted subsidy rationalisation and/or government’s additional revenue-generating plans in the upcoming Budget 2025 announcement on 18 October, and
  
  iii) Likely derating of the oil & gas sector, which accounts for a substantive 12% of the FBMKLCI weightage, given Petronas’s potential capex cuts of up to 30% against the backdrop of Petroleum Sarawak (Petros) taking over as the sole gas aggregator in the state.
  
  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 low of 19.6% (Exhibit 15).
   
• 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.

• Slightly better 2Q2024 report card. Corporate results were more in line with expectations in 2Q2024 with 21 underperformers accounting for 23% of the stocks under our coverage vs. 25% in 1Q2024. However, outperformers rose slightly to 14% of our stock universe vs. 13% in 1Q2024 while the share of companies delivering results within expectations climbed to 63% from 62% in 4Q2023, of which the financial sector was mostly in line.
  
  We upgraded Axiata Group (FV: RM3.50/share) to BUY after exceeding expectations with higher revenue across key market segments. Likewise, Apex Healthcare (FV: RM2.95/share) was re-rated on higher-than-expected manufacturing margins.

• Sequential earnings declined for insurance, gloves and telco sectors. Comparing 2Q2024 core earnings against 1Q2024, the worst performer was the insurance sector, which slid 14% due to declines in insurance service results and investment income while gloves (-12%) was impacted by global shipment constraints. The telco sector encountered margin declines due to cheaper entry-level packages amid stiff competition.
  
  The best QoQ core net profit performers were the manufacturing sector (+83%), mainly due to increased orders from V.S. Industry’s key customers, oil & gas segment (+70%) from seasonally stronger vessel utilisation rates coupled with recognition of services contracts, and healthcare (+45%) from robust growth in revenue per patient for IHH Healthcare’s key market segments (Exhibit 9).

• Lowered FBMKLCI core earnings growth for 2024F but largely unchanged for 2025F. Our FBMKLCI earnings projections have been lowered by 0.8%-point to 4.6% for 2024F mainly due to cuts to PPB Group, Petronas Chemicals Group, Sime Darby and CelcomDigi. The cuts stemmed largely from lower-than-expected sales revenue which lowered margins (Exhibit 19).
  
  For comparison, Bloomberg consensus’ 2024F FBMKLCI earnings growth has been lowered more to 7.8% from 9.6% last month. Even based on our more optimistic 2024F corporate earnings growth for FBMKLCI, Malaysia is dwarfed by Bloomberg’s estimate of +72% for Korea, +43% for Taiwan, +36% for Indonesia/Vietnam, +17% for Philippines and 16% for China (Exhibit 23). For 2025F, we now project FBMKLCI’s earnings growth at 9.9%, up slightly from +9.3% last month, while Bloomberg’s estimate remained at 7.1%.

• Sector and stock selection will be key to relative outperformance as softening global economic growth prospects and continuing subsidy rationalisation policies moderate positive equity sentiments currently being sustained by robust foreign equity inflows, and previously by domestic institutions up to April this year.
  
  Our neutral rating on banking, plantation, telecommunications, power, automobiles and consumer sectors now account for 67% (from 62% last month) of the FBMKLCI index weightage. This could rise to 79% if the oil & gas sector is derated due to Petronas’ potential capex cuts. The sectors currently with OVERWEIGHT rating are technology, oil & gas, manufacturing, ports, property, REIT and transportation sectors with our Top BUYs being encompass Public Bank, IHH Healthcare, Hong Leong Bank, IOI Properties, Telekom Malaysia, Inari Amertron and Dialog Group.
  
  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 canny 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).
  
  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.
  
  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.

• Technical analysis: The recent surge above the key resistance of 1,640, reaching a new multi-year high, suggests that the FBM KLCI's bullish trend remains intact. Coupled with the positive slopes of its 20-day and 50-day exponential moving averages (EMA), the upward momentum is likely to persist in the longer run. We now anticipate the key support zone at 1,580-1,600. Failure to hold this support zone could lead the KLCI to a further correction towards its recent trough of 1,530. On the upside, the immediate resistance level is at the 1,700 psychological mark. A breakout above 1,700 would be positive for the index and likely lead to a test of the next resistance at the 1,730 threshold.

Source: AmInvest Research - 5 Sep 2024