CEO Morning Brief

Banks, Planters and Telcos KLCI Outperformers in 1Q, MIDF Says

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Publish date: Fri, 03 Jun 2022, 09:49 AM
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TheEdge CEO Morning Brief
Banks, planters and telcos KLCI outperformers in 1Q, MIDF says

KUALA LUMPUR (June 2): Banks, plantation companies and telecommunications companies (telcos) were the outperformers among the FBM KLCI component stocks in terms of earnings performance for the quarter ended March 31, 2022 (1Q22) based on MIDF Amanah Investment Bank Bhd's estimates.

In an earnings review, MIDF Research said three financial services groups, namely CIMB Group Holdings Bhd, Hong Leong Bank Bhd and Hong Leong Financial Group Bhd, two plantation companies, namely Sime Darby Plantation Bhd and IOI Corporation Bhd, and two telcos, namely Axiata Group Bhd and Telekom Malaysia Bhd (TM), were among the outperformers.

In addition, IHH Healthcare Bhd, Nestlé (Malaysia) Bhd and Petronas Chemicals Group Bhd also outperformed in the quarter under review, the research firm said in an earnings wrap review of corporate earnings for 1Q22 released on Thursday (June 2).

Meanwhile, MIDF stated in the report that the underperformers comprised of two glove companies, namely Top Glove Corporation Bhd and Hartalega Holdings Bhd, two utilities companies, namely Petronas Gas Bhd and Tenaga Nasional Bhd, as well as Dialog Group Bhd, Digi.Com Bhd, MISC Bhd, Petronas Dagangan Bhd, PPB Group Bhd and RHB Bank Bhd.

The research house revised downwards its aggregate earnings forecast for the KLCI constituents for 2022 marginally by 0.3% or RM187 million to RM64.5 billion.

"The lower aggregate forecast for 2022 was mainly contributed by downward earnings revisions for Top Glove and Hartalega, MISC, Petronas Dagangan, Petronas Gas, Digi and RHB Bank but moderated by upward revisions for Petronas Chemicals, Kuala Lumpur Kepong Bhd (KLK), Hong Leong Bank and Hong Leong Financial Group," said the research outfit.

MIDF noted that the earnings performances of the glove companies under its coverage were all below expectations. Top Glove, Hartalega, Supermax Corporation Bhd and Kossan Rubber Industries Bhd are part of MIDF’s coverage.

"The lacklustre performance was due to the industry coming off a period of exponential growth on the back of the Covid-19 pandemic," said MIDF. The research firm also pointed out that the average selling price (ASP) and demand for rubber gloves are declining as the world is now entering the endemic phase of Covid-19.

"The influx of new players results in higher supply, thus creating more downward pressure on the ASP. Buying activities have moderated in tandem with a reduction in consumption levels as large buyers, such as governments and large hospital chains, are full or near full in terms of personal protective equipment supplies,” MIDF added.

Over at the banking sector, MIDF observed a trend of poorer investment and core net fee gains dragging non-interest income, credit costs coming within or better than management guidance, and higher lending yields but stationary cost of funds benefiting net interest margins.

It also observed a trend of good-to-great loan growth, less chunky provisions coming from oil and gas provisions, and macroeconomic overlays to be maintained until 2023.

“We expect credit costs to be skewed towards the second half of 2022, when the effects of rescheduling and restructuring loan run-off on asset quality become clearer. Ultimately, we remain positive on the sector, with a ‘buy’ call on nine out of 10 of the stocks under our coverage.

“We can look to the overnight policy rate hike's positive effects on loan books, major provision write-backs in 2023, less chunky overlays and the economy's return to normalcy as core drivers of the sector's growth,” MIDF said.

It added that banks such as Affin Bank Bhd, Alliance Bank Malaysia Bhd and CIMB had undertaken strategic improvements such as portfolio derisking and restructuring and kitchen-sinking exercises, making them more attractive stock candidates now than pre-pandemic.

For the plantation sector, MIDF said that while companies like Sime Darby Plantation, KLK and IOI Corp recorded a stellar performance driven by higher margins owing to a higher average crude palm oil price, the majority of planters were having lower fresh fruit bunch production due to unusual heavy rainfall during January to early February, compounded by a harvester shortage.

“Going forward, we expect production levels to slightly improve following seasonal high [production] months, better weather conditions as well as the return of 32,000 foreign workers in June,” the research firm said.

MIDF believes crude palm oil prices would remain high, driven by a better demand outlook on the back of better economic activities locally and globally, a subdued production outlook for soybeans on the back of drought in South America, and supply tightness for sunflower oil on the back of the Russia–Ukraine crisis.

“All factors considered, we maintain our 'positive' stance on the plantation sector,” MIDF said.

As for the telco sector, MIDF explained that the performances of TM and Axiata in 1Q22 were much on the positive side as the former, being the nation’s main fixed line player, had many business opportunities under the MyDIGITAL initiatives, while the latter had regional exposure to emerging countries with a lot of growth potential.

Moving forward, MIDF opined that the introduction of a single wholesale network model will add more pressure for telcos to adapt to the changing dynamics of the competitive industry.

“The companies may be required to pay upfront wholesale fees to Digital Nasional Bhd. In terms of the 5G adoption rate, we think it will likely be slow as a complete ecosystem is still in its infancy stage.

“All in all, we are 'neutral' on this sector due to potential delays in Malaysia’s 5G roll-out plan as well as unexciting mobile service revenue growth,” MIDF said.

Source: TheEdge - 3 Jun 2022

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