3Q23 Earnings Broadly Inline

As expected, corporate earnings season for 3Q 2023 indicate a slowing rate of downgrade. Earnings performance is largely in-line with Malaysia's expanding economy, which grew by 3.3% YoY in 3Q23 (2Q23: 2.9%), as resilient domestic demand, offsetting continued export weakness. We are cautiously optimistic on the market and retain our 2024 FBMKLCI target of 1,720-points. Of the 72 companies under our coverage that released financial results, 44% were in line, 26% were stronger-than-expected while the remaining 30% reported lower-thanexpected results. The positive surprise came mainly from consumer F&B segment (better sales and margins) and plantations (higher QoQ productions, sales volume and lower production costs); while the negative mostly came from retail (higher operating costs i.e., input costs, A&P and labour) and oil & gas (soft petrochemical demand and cost overruns for EPCC player) companies. For comparison, approximately 57% of FBMKLCI components reported earnings that were in line with consensus expectations, with the remainder split between “above and below expectations” categories. Our BIMB Securities stock universe, on the other hand, performed similar to FBMKLCI, with a total of 44% reporting earnings within our estimates.

Outlook is Expected to Remains Intact

We anticipate a meaningful recovery in cumulative KLCI earnings next year. The key driver behind the improved earnings outlook for Bursa Malaysia in 2024 is a marked turnaround expected in construction, consumer, property, travel, leisure, and hospitality sectors. Nearly all the sectors under our coverage are expected to show positive growth projections for the upcoming year, except for Plantation (-14% YoY) and Auto (-3% YoY) sectors.

Domestic demand is expected to remain resilient, supported by improved employment, a revival in tourism activities, and continued incentives for the B40 group. Despite this, the implementation of subsidies rationalization in 2024 poses a risk of inflationary pressures, which could lead to slower consumption spending on big-ticket items for both the affected T20 and a part of the M40 group. Nevertheless, we remain cautious on cost pressures stemming from higher operating costs (i.e., A&P and labour), an unfavourable USD/MYR exchange rate and the expected elevated prices in some commodities (such as cocoa, sugar and wheat), which could potentially compress margin.

The anticipated influx of tourists, especially from China, is poised to contribute to higher footfall in malls and stores, benefiting the retail and F&B segments, as well as the travel, leisure, and hospitality sector. Consequently, Bursa Malaysia is expected to remain on the radar of foreign investors well into 2024, thanks to our solid growth prospects (GDP 2024F: 5.0%; 2023E: 3.7%), undervalued Ringgit, low political risk, and positive news flow amid PMX reform efforts that could gain in traction in 2024.

The Rubber Gloves sector is expected to experience a significant surge in aggregate net profit, projecting to grow over 100% in 2024. This marks a notable deviation from the anticipated contraction of >100% in 2023, following the -94% recorded in 2022. This forecast is particularly promising as most glove manufacturers have shown improvement in their operating margins, benefiting from lower input costs following the normalization of supplies after decommissioning a production facility. Additionally, the expected stabilization of Average Selling Prices (ASPs) suggests that the sector has likely reached its bottom, adding an appeal to its outlook.

Next to rubber gloves, the construction industry is poised for a +27% growth in earnings. This growth is attributed to the anticipation of pump-priming measures, including projects such as MRT3, Penang and Johor LRT, HSR, and highway expansions. Furthermore, growth opportunities in the industrial property market and the renewable energy sector are gaining traction, contributing to the positive outlook for the construction sector. Continuing the positive trend, the oil & gas sector remains a favourite, given its potential to benefit from higher capital expenditure (capex) spending by O&G companies amid elevated oil prices. The higher utilization rate is expected to lead to increased day-rates and earnings. Despite a recent 8% YoY decline in the sector's aggregate net profit, a more optimistic outlook foresees a +16% growth for the full year 2023.

Key Risk to Earnings

A significant risk to earnings this year lies in the market potentially underestimating the impact of rising costs, which has adversely affected several sectors in recent quarters. The escalation of input costs, coupled with an increase in overhead cost, has exerted margin pressure on various sectors, particularly affecting consumers (such as Nestle and Dutch Lady) and the plantation sector. Additionally, the lagging impact of the Ringgit's weakness against the USD may come into play this year. However, our economists project the Ringgit to end the year at RM4.55 per Dollar, indicating a more favourable exchange rate outlook. This attractive level of the Ringgit is expected to act as a pulling factor for foreign investors who have historically been hesitant about Bursa Malaysia. Consequently, we maintain our FBMKLCI 2023 year-end target of 1,550-points. This optimistic outlook serves as a mitigating factor against the risk of cost increases, offering a more balanced perspective for the market.

Source: BIMB Securities Research - 4 Dec 2023