What happened: What the market had thought to be a temporary stalling in the 4QCY22 earnings momentum has been exacerbated further in an overwhelmingly disappointing (on a relative basis) 1QCY23, with the number ofearnings misses far exceeding the surprises. The macro-trend has tilted noticeably to the downside, with the current quarter confirming the “surrender” already seen in the immediate preceding one (4QCY22), from nascent recoveries seen in the two before (3QCY22 and 2QCY22).

Negative surprises were aplenty, most noticeably in plantations (5 misses from 8 under coverage), gaming (2 misses from 3 under coverage), media (2 misses from 2 under coverage), manufacturing (EMS) (2 misses from 3 under coverage), and even gloves (2 misses from 3 under coverage). Weakness was partly the result of higher-than-expected costs, though predominantly (and worryingly) the result of notably lower business volumes. Oil and gas was a mixed bag with equal numbers surprising, meeting and disappointing despite a return of contract flows with crude oil prices remaining at around the USD80 per barrel level. Consensus appeared to have been more optimistic, thereby seeing greater levels of disappointment vis-à-vis ours.

Effects of the above-mentioned disappointments are reflected in the earnings cuts (37) and downward revisions in target prices (31) this time round, and which are expected to have sufficiently factored in noticeably bearish assumptions.

What we see: Whereas the larger-capitalized index-component stocks were left relatively unscathed in the previous reporting cycle, the current one failed to escape the “carnage” of downward revisions with cuts in the plantations, telecommunications and gaming names. As a result, growth in the 2023 and 2024 earnings baskets are now lowered to +3.1% and +8.3% respectively (@4QCY22: +9.6% and +5.8%). Our year-end FBM KLCI target is thereby lowered to 1,530 points (1,650 previously) on a ~15x multiple to CY23 earnings.

A month or so ago, market direction was dictated by concerns over banking defaults in the US, and its potential contagion on the global financial system. A week ago, market direction was dictated by pronounced concerns over a potential sovereign debt default in the US as lawmakers continued to argue over the nation’s debt limit (but which has since been resolved, necessary approvals granted notwithstanding). New day, new issue, same outcome – market uncertainty and lethargy. Major global economies are on edge and are at significant risk of sliding into recessions.

1H 2023 has indeed proven to be uncertain (unstable, even) as global economies worked through the full effects of aggressive rate hikes over the last 12 months. Sentiment is weak, understandably, though the market remains relatively undervalued even with the earnings picture having deteriorated in recent times. While the market remains a very trading-oriented one in the face of increasingly uncertain macro conditions, we would also suggest greater accumulation in the market on ongoing weakness to ride on the recovery going into 2024.

Multi-year (longer-term) growth stories and earnings stability have given way to short-term worries over the current state of affairs. While performance of our suggested picks have not set markets alight as yet, they have outperformed on the downside (ie. benchmark indices slumping more YTD). We continue to believe in the prospects of Able Global, D&O Green Technologies, Inari Amertron, and SKP Resources as the smaller-capitalized picks for 2023. Gamuda and Maybank are picks amongst the larger-capitalized stocks.  CCK Consolidated’s defensive business nature, in addition to seeing robust demand from its Indonesian operations is still an attractive proposition. Genting will now see its business operations improving more noticeably in 2024. IJM Corporation remains a potential beneficiary of expected increase in targeted domestic infrastructure spending.

Source: PublicInvest Research - 2 Jun 2023