CEO Morning Brief

Transition to Endemicity, Election Play to Buoy KLCI in 2022 — Analysts

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Publish date: Wed, 06 Apr 2022, 12:00 AM
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TheEdge CEO Morning Brief

KUALA LUMPUR (April 6): Bursa Malaysia is projected to end the year at between 1,622 and 1,745 points, supported by ample liquidity, the reopening of international borders as well as the possibility of a general election, according to analysts.

Hong Leong Investment Bank (HLIB) Research raised its FBM KLCI target to 1,680 points from 1,600, valuing the bellwether index at 16.2 times price-earnings ratio (PER) based on 2022 earnings per share (EPS).

“We forecast KLCI earnings growth of -0.6%/+7.3% for calendar year 2022 (CY22)/23. With [border] reopening and [the country heading for] endemicity, Malaysia’s relative appeal amid the geopolitical conflict and a possible 'election rally' on the horizon, we turn more upbeat on the market,” said HLIB analysts Jeremy Goh and Felicia Ling in an economics and strategy note dated March 30.

Although cost inflation pressures are a key risk, they believe the government will try to contain these pressures in light of the upcoming national election, which must be held by July 2023 if not earlier. The analyst said that the KLCI's performance in the past three election years of 2008, 2013 and 2018 indicated an upward trend five to six months before the election.

“While we expect the market to continue trading in choppy fashion, we reckon the Ukraine-Russia conflict has given Malaysia relative appeal in the eyes of foreign investors — a neutral geopolitical stand, a relatively insulated economy compared to the West and exposure to commodity plays. A case in point: net foreign inflows to the local bourse have totalled RM4.23 billion since the conflict began in late February, more than offsetting last year’s entire RM2.99 billion net outflow,” the analysts said.

Another research house that also raised its year-end KLCI target was AmInvestment Bank Research, which forecast a higher KLCI target of 1,745 from 1,651 previously.

In an April 4 note, its analyst Alex Goh said the stock market is likely to stay within the 1,500-1,600 threshold in the near term given commodity price volatility, supply chain disruption and geopolitical shocks.

“Towards the end of the year, we expect the market to reach an inflection point as local institutional funds switch to long positions on probable window-dressing activities amid clearer visibility of our [estimated] KLCI 2023 EPS growth recovery of 14.9%, which will be the fastest expansion since 2012, excluding the 2021 sharp rebound of 31% year-on-year from Covid-19 lockdowns,” Goh explained.

In contrast, both CGS-CIMB Research and Kenanga Research maintained their year-end KLCI forecasts at 1,622 and 1,670 respectively.

CGS-CIMB said the market would continue to weigh the positive impact of high commodity prices, higher tourist numbers due to the reopening of borders, and the possible return of foreign labour, which will ease the current shortage, against possible pressure on corporate profit margins due to rising costs of electricity, fuel, raw materials and labour, as well as interest rate hikes.

“The KLCI is currently trading at 15.4 times 2022 PER, with [estimated] dividend yields of 3.6%. We reiterate our year-end 2022 KLCI target of 1,622 points,” said the research firm in a note dated April 4.

Kenanga, on the other hand, left its year-end target for the KLCI at 1,670, implying a PER of 15 times for 2022.

“We are now maintaining our KLCI earnings growth forecasts of -0.3% for CY22 (negative despite a recovery due to 'Cukai Makmur' [the prosperity tax] versus -8.1% in the first quarter [1QCY22]) and 12.2% for CY23 (versus 11.2% in 1QCY22),” said Kenanga.

At 5pm on Tuesday (April 5), the KLCI closed 0.13% or 2.13 points lower at 1,596.79.

Top stock picks in 2022

HLIB has "buy" calls for all of its stock picks which centre on reopening beneficiaries, commodity exposure, laggards and apolitical election plays.

These include Tenaga Nasional Bhd (TNB) with a target price (TP) of RM13.60, Press Metal Aluminium Holdings Bhd (RM7.71), RHB Bank Bhd (RM7) and Sunway Bhd (RM2.58).

Meanwhile, AmInvestment's top buy recommendations include Malayan Banking Bhd (Maybank) with a fair value of RM10, TNB (RM12), CIMB Group Holdings Bhd (RM6.50), RHB (RM7.10), MR DIY Group (M) Bhd (RM4.45) and Telekom Malaysia Bhd (RM7.08).

As for CGS-CIMB, its top picks with an "add" call are Hong Leong Bank Bhd (TP: RM21.80), Malaysia Airports Holdings Bhd (RM7.05) and Petronas Chemicals Group Bhd (RM10.76).

Kenanga, on the other hand, has "outperform" calls on its top picks including AEON Co (M) Bhd (TP: RM1.70), Dayang Enterprise Holdings Bhd (RM1), D&O Green Technologies Bhd (RM5.60) and Kelington Group Bhd (RM1.90).

Source: TheEdge - 6 Apr 2022

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