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4Q24 Outlook & Strategy - Budget 2025 and Ringgit Trend Will be Focused

MalaccaSecurities
Publish date: Fri, 04 Oct 2024, 09:07 AM
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Summary

  • Wall Street may see positive momentum driven by the booming AI sector and the Fed’s dovish stance, with a rate cut cycle likely in the near term. On the other hand, the Bursa exchange will depend on the movement of the ringgit to determine its future trend.
  • We believe strong FDIs, positive foreign inflows into the equity market, rising data center developments, and the ongoing NETR and NIMP blueprints will support Malaysia’s economic growth. As a result, we favour stocks in the Construction, Building Materials, Property, Utilities, Technology, and Oil & Gas sectors.
  • Besides, we like Consumer and Industrial Products sectors, especially in a strong ringgit environment. For defensive sector, we like Healthcare.

Seasonality Analysis

  • Strong July season… As anticipated in our seasonality analysis, local exchange rallied in July, supported by foreign brokers upgrading Malaysia and strong foreign inflow. Based on the table, the FBM KLCI is likely to remain positive for 4Q.
  • …but was spooked by the yen carry trade (YCT) incident. However, the trend did not sustain into August as the strengthening yen led to the unwinding of the carry trade, causing the market to retrace. Bargain-hunting was noticed mostly in larger market cap companies, and sustained foreign inflow supported the firm ringgit.
  • Small caps were pressured. Following the YCT incident, investors were pushed away from small caps, contributing to their underperformance of small cap index throughout Aug-Sep. However, the rebound may return in 4Q for small caps.

US Economic Review and Outlook

  • The Fed turned dovish. Pressured by the markets, the Fed to cut rates by 50 bps cuts, deviating from the initial expectation of 25 bps, as inflationary pressure declined. This move contributed to positive market sentiment, pushing US equities higher. Going forward, the Fed is expected to stay dovish for the rest of 2024.
  • Weaker but stable dollar environment. With the Fed’s dovish tone, we believe the USD to remain weaker compared to previous quarters. However, as global central banks also shift to dovish policies, the DXY is likely to stabilise around 100-102.
  • Inflation stabilising. Key inflation indicators such as CPI, PPI, and PCE have been moving toward the Fed's target of 2%, which will significantly influence future monetary policy decisions.
  • US GDP suggests expansionary mode. Real GDP grew by 3.0% YoY in 2Q24, an upward revision from the initial estimate of 2.8%. This was driven by increased private inventory investment, federal spending, and imports, though consumer spending fell short of expectations.
  • US job market and unemployment. In August, non-farm payroll has increased by 142k, while the unemployment rate stood at 4.2%. Mainly, the job addition was noticed within the construction and healthcare sectors. Although the job employment was below expectation the unemployment rate is still healthy for now.
  • Disinversion of yield curve. Following two years of an inverted yield curve, the recent dovish Fed actions have led to a disinversion. However, markets remain cautious, with a 30% consensus estimate of a potential US recession.

US Outlook

  • Strong US economic activity with potential rate cuts in 2024. As inflationary pressures stabilise due to the Fed's aggressive tightening, the possibility of a more accommodative stance is growing. With a recent 50 bps rate cut by the FOMC, lower borrowing costs could boost economic activity and support corporate earnings growth moving forward.
  • Growth in AI-related sectors. As the top companies in the US have spent near USD150bn in 2024, and are expected to spend another USD1trillion in the AI capex, according to Goldman Sachs. This includes data centers, cloud services that may unlock significant efficiency and productivity for businesses, we believe it may fuel long term growth in economic activities, translate to corporate earnings growth in the coming years.

Malaysia Economic Review and Outlook

  • 2Q24 Malaysia GDP gained 5.9% YoY supported by (i) stronger household spending, (ii) improved exports, and (iii) rising investment activities. Despite disruptions in O&G production, the economy remains on track for a 4-5% growth in 2024, according to BNM and MOF.
  • Rising tourist arrivals… Tourist arrivals surged to 2.3 million in June 2024, surpassing pre-pandemic levels. This growth was supported by visa-free travel policies for China and India.
  • …and Tourism Malaysia promotes Visit Malaysia Year 2026 (VMY26). In the recent Tourism Expo Japan, Tourism Malaysia took part in promoting VMY26, introduces two new niche packaged: (i) Edu+ (Edutourism) and (ii) Unimaginable Golf Packages, offering travellers experiential learnings, cultural exchange and world- class golfing experiences. The VMY26 has set to draw 35.6m international tourists, and potentially generating estimated RM147.1bn (US$31bn) for tourism revenue.
  • Brent oil price fallen below USD80. Despite earlier production cuts by OPEC+, weaker demand from China and other global markets has kept oil prices under pressure. Saudi Arabia's recent policy shift toward increasing production may further soften Brent crude prices.

Market performances and review

  • MSCI World and S&P500 are trading at premium, trading at the P/E of 23.1x and 26.3x vs. 10Y average P/E of 19.6x and 21.3x, respectively; supported by the AI boom.
  • The FBM KLCI is still at a discount of 15.3x P/E vs. the 10Y average P/E of 17.2x, despite the rally from 1,450 range since early 2024. We believe the overall situation is turning better on the local front with the foreign inflows in equities, stronger ringgit environment, coupled with more foreign investments into data centers.
  • Foreign fund inflows. As of end-Sep 2024, the foreign participation inflow has risen to RM3.98bn as compared to net outflow as at end-Jun 2024 of –RM0.7bn, signalling stronger momentum heading into 4Q24.
  • Mixed trading and more downside risk. In 3Q24, the FBM KLCI gained 3.7%, while both the FBM Small Cap and FBM ACE fell by over 10%. Sectoral wise, Financial Services, Construction (+18.2%), and REITs (+3.6%) led gains, while Technology (- 23.0%), Energy (-11.4%) and Industrial Products (-9.6%) underperformed.

4Q24 Strategy

  • Ringgit strength matters. The strengthening ringgit from RM4.70-4.80/USD early this year to around RM4.20/USD at this current juncture has shifted investor focus towards domestic sectors like Consumer and Manufacturing, which benefit from lower raw material costs; we expect stronger earnings growth in next quarter.
  • Global MNCs investing big… With a stable political environment, strategic geographical locations and business-friendly policies, Malaysia should continue to attract foreign direct investment (FDI) from multinational corporations (MNCs). Since Nov-2023, companies like Google, Nvidia, and Microsoft have invested in Malaysia, reflecting rising confidence in Malaysia's economic potential. Also, the KL20 summit and National Semiconductor Strategy position Malaysia as an emerging player in the global semiconductor industry, which may benefit the Technology sector, including EMS players, albeit a near-term stronger ringgit.
  • …covering AI, Data Center, and Cloud Services. Malaysia's strategic location in the SEA region, along with ample landbanks and lower construction costs will be the main attraction for MNCs. Oracle recently has committed around USD6.5bn to AI and cloud computing in Malaysia. These investments are likely to benefit the Construction, Building Material, and Property sectors. Also, the rising demand for electricity and water will provide a boost to the Utilities sector (power, water, solar).
  • Ongoing execution within NETR and NIMP blueprints. The government aims to increase the renewable energy (RE) generation from 40% to 70% by 2050; requiring over RM600bn in investments for the power sector. Besides, with the mushrooming of data center requiring clean energy, the demand for RE is expected to rise. Economy minister Mohd Rafizi Ramli, pointed out that natural gas will comprise 56% of the energy mix by 2050, playing a key role in the country’s NETR. Meanwhile, the NIMP 2030 is expected to create opportunities in the smart and semiconductor factories, electric vehicles (EVs), and chemical industries, benefiting the Natural Gas, Renewable Energy, Water, and Technology sectors.
  • Tourism and Medical Tourism. With the increasing tourist arrivals, we expect growth in the medical tourism sector as well. Malaysia remains a preferred destination due to its highly skilled doctors, decent hospital facilities, and attractive tourist spots. We remain optimistic on the Healthcare segment.
  • Net cash companies with stable dividend yields. We reckon investors to focus on companies with solid balance sheet and high dividend yields track records. In this regard, the Consumer and Shipping sectors appear defensive and attractive.

99SMART – The “MILO” In The Mini-Market Segment

  • 99SMART, a mini-market and groceries retailer, amplifying the “Near n’ Save” concept and was recently listed on Bursa exchange.
  • Potential KLCI inclusion should be the next key catalyst as it is currently ranked 27th. Should it surpass 25th by the cut-off time in Nov, it will be included to the FBM KLCI and may attract more foreign funds into the stocks.
  • Strong expansion plan. With a target of reaching 3,000 stores by 2025, we anticpate double digit earnings growth, leading to more than RM500m net income by 2025.

FFB – Strong Growth With The Ice Cream Segments

  • FFB specialises in dairy farming, producing and marketing cow’s milk and plant- based products. Recently, they added ice cream to their portfolio.
  • Turned around after stable raw material cost and stronger demand. We believe FFB has moved out from the margin squeeze situation during 2023 and has turned around successfully with higher demand coming from the HORECA segments.
  • Capacity expansion for ice cream division. By the second half of 2025, FFB's Enstek facility will produce approximately 700,000 pieces of ice cream per day.

LHI – Aiming For Record Earnings

  • LHI is one of the leading fully integrated poultry operators in the SEA region.
  • Stable and lower feed costs due to strong ringgit. Based on the current ringgit trend, we expect LHI to benefit with lower feed costs and should translate to higher earnings potential.
  • Demand have picked up. In 2Q25, earnings surged over 40%, driven by higher prices and sales volume in Indonesia and Philippines, as well as improved feedmill margins. This growth trend is likely to continue, aided by lower inflation, reduced interest rates and a strong economic environment in the near term.

TEOSENG – Anticipating Floating Egg Price Mechanism

  • TEOSENG is involved in poultry farming, egg production, animal feed and egg tray manufacturing, organic fertilizer production, and pet food & medicine distribution.
  • FY23 earnings surged sharply. With higher demand, stabilised feed costs, and subsidies from government, TEOSENG’s registered stellar earnings of RM155.8m in FY23 (vs. RM21.6m in FY22).
  • Anticipating a new egg price mechanism. Since they have increased the ceiling price for chicken, we believe a new mechanism for egg ceiling price may be introduced in the near term. Although it might not be a popular measure, it certainly will help the egg producers in a long run.

QL – Marine and Livestock Segments To Benefit From Strong Ringgit

  • QL is an integrated agro-based business producing food from livestock, seafood, and palm oil, while its convenience store, FamilyMart, complements its existing value chain. Additionally, it has a green-energy venture through BMGREEN.
  • A stronger ringgit should reduce costs in QL’s Marine product manufacturing and integrated livestock farming contributes more than 70% of QL’s revenue.
  • Convenience store, palm oil and clean energy. Increased demand from FamilyMart should be expected with the opening of new stores, while the palm oil division is likely to generate higher earnings due to stable crude palm oil price. Meanwhile, the NETR may boost the demand for green energy installation, translating to stronger earnings from the clean-energy segment. Fig #17 QL – Gradual Uptrend Move After Sideways Breakout

ITMAX – Highly Scalable Smart Cities Solutions Provider

  • ITMAX provides cutting-edge technology solutions that promote smart and efficient solutions for cities, townships, and enterprises.
  • Johor is the next growth area, with ITMAX securing contracts from Johor state, Segamat Municipal Council over the next 15 years. As Johor focuses on smart city and AI initiatives, further growth will be anticipated.
  • Highly scalable and replicable. ITMAX’s solutions can be replicated in other states, providing strong earnings catalyst. Fig #18 ITMAX – Flag formation breakout

SSB8 – Awaiting flag formation rebound

  • SSB8 engaged in the provision of construction services including project initiation, planning and design, construction project management and many others.
  • SJEE acquisition. SSB8 acquired a strategic 51% stake in SJEE Engineering for RM23.0m (profit guarantee of RM15.0m over 3 years). SJEE currently has near to RM100m in orderbook, specialises in M&E works for data center.
  • Decent margins, net cash with dividends. With an 18% net profit margin and a net cash position of RM53.4 million, SSB8 stands out from its peers in the construction sector. The company's dividend yield is 1.8%.

KPJ – Leading Healthcare Services Provider

  • KPJ is a top private healthcare provider with over 28 hospitals nationwide and they have international presence in Indonesia, Thailand, and Bangladesh.
  • Medical tourism to benefit KPJ. We believe the overall demand for medical tourism will be on the rise after the reopening of borders after Covid, with Malaysia’s strategic location enhancing its appeal.
  • New CEO took KPJ to greater heights. Under the leadership of new CEO, Mr Chin Keat Chyuan, KPJ’s revenue and earnings are on track to hit record highs.

SENFONG – Riding The Automotive Growth In China And India

  • SENFONG processes cup lump rubber into block rubber, producing SMR and Premium Grade varieties and is sold to tyre manufacturers and rubber traders.
  • Significant China and India automotive markets. SENFONG’s sales were contributed more than 80% from China and India region, we believe SENFONG will be able to capture the robust automotive segment as total automotive sales has been growing in China (+11.9% YoY, 30.0m in FY23) and India (+9.4% YoY, 3.8m in FY23).
  • Shorter replacement cycle for EV tires. The growing demand for EV tires, which have shorter replacement cycles, presents additional opportunities for SENFONG.

GASMSIA – Playing A Key Role In NETR

  • GASMSIA is a natural gas distribution company in Malaysia. GASMSIA operates and maintains 2,600km of Natural Gas Distribution System network across Peninsular Malaysia, with a customer base of more than 36k.
  • Key role in NETR. As part of Malaysia's NETR, natural gas is set to play a critical role in replacing coal-fired power and supporting renewable energy, positioning it as a key energy source. By 2050, natural gas is expected to supply 56% of Malaysia's total energy and account for 29% of its electricity generation capacity.
  • Net cash with strong dividend yield. GASMSIA net cash of RM358.7m and a dividend yield of near to 6.6% underscore its strong financial position.

DELEUM – Strong Orderbook With Solid Balance Sheet

  • DELEUM, an integrated solutions provider in O&G upstream, operates in (i) Power & Machinery and (ii) Oilfield Integrated Services.
  • Orderbook and tenderbook. Healthy orderbook of RM570.5m which may last them another 12-18 months, while tenderbook stood at RM1.4bn.
  • Healthy balance sheet and dividend payout. With a solid net cash position of RM220 million and a payout ratio exceeding 50% of net income, the company offers a dividend yield of approximately 5%.

AGX – Growing The Aerospace Logistics Segment

  • AGX is a global logistics company providing third-party logistics services, including freight forwarding by air, sea, or land, warehousing in operational regions, aerospace logistics for MRO support, and road transportation.
  • Aerospace logistics (30% of FY23 revenue) is the second largest segment, is set to grow with the ongoing expansion of the aviation sector in the SEA region. Also, AGX could expand their clients based with its 19-year track record in this segment.
  • Net cash position of RM6.8m. With a net cash position of RM6.8m post-IPO, we expect AGX to reward shareholders through dividends.

ECOWLD – QUANTUM To Drive Growth In The Future

  • ECOWLD is a Malaysian property developer with nearly 9,000 acres of landbank across key regions and a total gross development value exceeding RM80bn.
  • The newly launched industrial revenue pillar, QUANTUM, caters to data centers, digital ventures, and high-tech industries, aiming to attract global players in the technology and digital sectors.
  • Unlocking value in landbank. With Microsoft purchasing land from ECOWLD, the company is poised to unlock value from its remaining industrial landbank of 1068 acres in Iskandar Malaysia, driven by the data center boom.

KSL – Beneficiary Of JB-SG RTS And JSSEZ

  • KSL is a leading property developer, has a presence in Johor and the Klang Valley.
  • JSSEZ and SFZ to attract global investors. PMX has announced several initiatives under the Forest City’s Special Financial Zone, which aligns strategically with the JB- SG Special Economic Zone and this synergy is expected to attract global investors, positioning Johor as a key player in SEA’s economic landscape. In return, KSL which has huge landbank in Johor may benefit from the property boom.
  • JB-SG RTS link. As of Jul-2024, construction of the JB-SG RTS Link has reached 83% completion and expected to be operational by Jan-2027. Johor is finalising local transport network to support RTS integration and it will boost the attractiveness of Johor properties, which may benefit KSL in the long term.

Source: Mplus Research - 4 Oct 2024

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