KUALA LUMPUR (June 6): Analysts said the first quarterly results came broadly below expectations, with significant corrections in the plantations, petrochemicals and gloves sectors.

CGS CIMB said the quarter under review saw more downgrades than upgrades, and cumulatively, the normalised profit under its coverage universe made up 23% of its revised full year forecast.

“...The earnings trend reversed in 2022, as the government imposed a windfall tax, and selling prices for petrochemical, plantations and gloves companies started to correct,” said the research house, noting that revenues grew by 16% in 2022, while normalised net profit declined by about 11%.

The research house estimated that revenues grew by 9.2% year-on-year (y-o-y) in 1Q2023 and normalised net profit eked out a slight 0.8% y-o-y increase (from its earlier estimate of an 11% y-o-y decline in the preceding quarter).

“The results were distorted by significant declines in profits for petrochemical and plantations, while the gloves companies reported losses (with the exception of Hartalega Holdings Bhd).

“If we were to exclude these distortions, the overall performance does not seem too bad, with revenues up 15% y-o-y in 1Q2023 and normalised net profit expanding by 29%,” it added.

CGS CIMB estimated that normalised net profit margin for its coverage universe came in at 9.3% in 1Q2023, compared to 9.2% in the previous quarter and 10.1% in 1Q2022, and a high of 15.1% in 1Q2021.

Excluding the distortions, however, it said net margin for 1Q2023 was up from 9.4% in 1Q2022 and 10.1% in 4Q2022 to 10.5%.

CGS CIMB noted that sectors that generated good growth in 1Q2023 were the automotive, banks, both consumer staples and consumer discretionary, real estate, transport and utilities sectors.

On the other hand, technology, industrial goods (mainly gloves), agri business, media, healthcare, and energy and materials (mainly due to petrochemicals) saw significant profit declines. Telecom trendlines were decent, except for charges below the Ebitda line for Axiata Bhd.

“We estimate that 12 of the 17 sectors under our coverage achieved more than 22% of their full-year earnings targets, but consumer discretionary, industrial goods, Media, agri business, and technology were lagging,” it said, adding that its top sector picks are domestic-focused banks, construction and materials, real estate, and REITs, while conglomerates are also attractive.

It also sees good stock ideas within the healthcare, auto, telecoms, consumer discretionary and utilities sectors.

Meanwhile Maybank Investment Bank Research (Maybank IB) said 1Q2023 results were broadly disappointing, with key drags being plantations (-59% quarter-on-quarter (q-o-q), -67% y-o-y) and petrochemicals (-34% q-o-q, -82% y-o-y), and technology (-25% q-o-q).

During the quarter under review, the research house said its universe’s core earnings declined 0.8% y-o-y (excluding glove stocks) and down 4.5% q-o-q (excluding glove stocks).

It said during the quarter, six stocks were upgraded (4Q2022: 2), five of which to “buy” — Carlsberg Malaysia Bhd, MyEG Bhd, RCE Capital Bhd, S P Setia Bhd and YTL Power Bhd; and eight were downgraded (4Q2022: 18), of which three are now “sells” — Berjaya Food Bhd, Leong Hup Industries Bhd, and Bumi Armada Bhd.

Maybank IB said following sizeable earnings cuts for telcos, petrochemical, banks, gloves and plantations sectors, it is now forecasting a sharply reduced +6.5% core profit expansion for its universe and +6.2% for the KLCI (vs +13.6% and +12.1% estimates previously) for 2023.

It also expects 2H2023 to see better market traction despite earnings risks, given a combination of weakening demand (decelerating GDP), pressured average selling prices (notably across he plantations, petrochemical and materials sectors) and extended margin pressures due to higher labour and materials input costs affecting consumer and banks (via NIMs per deposit competition/declining Casa).

“Still, we anticipate improved market performance in 2H2023 on easing inflation/rate concerns, more tangible macro/corporate earnings uplift from China’s reopening, and more settled domestic politics post-state elections in July; valuation backdrop is also attractive, with the KLCI now on just 12 times forward PER, historically a short-lived market level/bottom,” it added.