What happened Earnings momentum has held steady, an encouraging development in itself considering the relatively strong showing in the immediate preceding quarter, with hits (above and/or in-line) and misses at an equally-high 80%:20% (1QCY24 – 81%:19%). This undoubtedly lends further weight to fundamental strength in the market. Earnings adjustments continue to mirror the current’s quarter positive momentum (i.e. more upward than downward), with contributing factors mostly business-driven. Downward revisions were broaderbased, though not huge in quantum as better quarters are expected ahead.

Earnings surprises this current quarter continue to be broad-based, with almost all sectors under coverage having one name or another. Improved operating conditions (i.e. stronger demand) aided in the performance of the oil and gas (8 hits/0 misses) while sustained improvements in consumption spending continued to be reflected in the relatively encouraging showing from the property (9 hits/0 misses) and healthcare (5 hits/0 misses) sectors. Gloves was the surprise package this current quarter with incumbents disclosing improvements in average selling prices and unit demand, though media continued to be a letdown as it struggles to maintain relevance amid a shift in industry dynamics. Performance of structurally-critical index heavyweights like banking, plantations and telecommunications remained steady meanwhile.

What we see. Earnings adjustments to stocks under our coverage were broadbased this time round. Upward revisions to index heavyweights picked up pace (i.e. CIMB Group, Genting, Axiata Group, IHH Healthcare) meanwhile. Downward tweaks by consensus to the earnings of YTL Corporation, YTL Power International and Petronas Chemical (not under PIVB coverage) negated the positive effects of the above however. On the balance, the 2024 earnings basket is now expected to expand by +12.7% (@ 1QCY24: +11.6%) while 2025 earnings will grow by +8.8% (@ 1QFY24: +8.2%).

Strengthening of the Ringgit was/is seen as a key driver (for 2024, at least) in the performance of the local bourse, and is a reflection of growing confidence in the country’s fundamentals. With the undervaluation gap having narrowed significantly in recent weeks, this particular tailwind appears to have run its course. That said, the US Federal Reserve has yet to guide on the degree on its monetary loosening which may (or may not) result in a more significant weakening in the US Dollar. This may induce even greater repatriation of funds back into Malaysia, thereby giving the Ringgit another upward lift.

The just-concluded 2Q CY24 earnings reporting continues to reaffirm the momentum built from the two preceding quarters nonetheless, with a similarlystrong showing of hit/misses and upward/downward earnings revisions skewed to the positive. The revision ratio cycle suggested then (in December 2023, March 2024 and June 2024) that the short-term movement of the market would have been upward, which it did fulfil. This current quarter should be no different, more so with the revision ratio currently skewed heavily to the positive.

All pieces remain in play, though the market continues to be a trading-oriented one amid external-driven uncertainties. We still suggest buying on weakness, in anticipation of near- to medium-term strength on account of steadier economic prospects and value proposition of the local bourse.

The index-heavy banking sector which anchors near-term prospects of the earnings basket with its ~50% composition has performed reasonably well earnings-wise, thereby reflected in the positive momentum on the local bourse. With forward valuations remaining relatively inexpensive even with the recent appreciation in respective share prices, there are still some upsides left in the market. On this note, our year-end FBM KLCI target is raised to 1,750 points as we expect a gradual reversion to the long-term mean of ~16x multiple to CY24 earnings.

Source: PublicInvest Research - 3 Sept 2024