During the 4Q21 results season, 46%/35% were within HLIB/consensus expectations, 34%/36% above and 20%/29% below. Compared to the preceding quarter, disappointments fell while positive surprises rose. Aggregate core earnings for our coverage universe is estimated to have rebounded +49% YoY in 2021 given less restrictive lockdowns vs 2020, alongside earnings boost from gloves, plantation and PChem. We project -0.4%/+6.1% KLCI earnings growth for CY22/23. Maintain KLCI target at 1,600 (15.5x PE on CY22 EPS).

4Q21 results wrap up. During the recently concluded 4Q21 results season, of the 114 stocks within our coverage, 52 (46%) came in within expectations, 39 (34%) above and 23 (20%) below. When stacked against consensus estimates, 35% were inline, 36% above and 29% below.

Better showing continues. Compared to the preceding quarter (i.e. 3Q21), (i) disappointments reduced from 30% to 20% while (ii) positive results surprises increased from 26% to 34%. Consequently from a ratio perspective (% of results above/ below), this more than doubled from 0.88x to 1.70x. Note that this is the third consecutive quarter of sequential improvement in the said ratio.

Key surpasses and misses. Notable positive results surprises largely stemmed from Consumer (following a full quarter impact from reopening in 4Q), Gaming (mainly domestic centric ones – GenM and BToto – again, from the reopening), Healthcare (mixed reasons) and Plantations (average CPO price was +16.6% higher QoQ in 4Q21). The only notable sector miss was O&G, which broadly came from the lagged effect of lower Petronas capex in 2020-2021 from lower oil price then – some companies cited lack of jobs in hand to breakeven.

Earnings recovery. We estimate that aggregate core earnings for our coverage universe improved +14.1% QoQ as (i) 4Q marked a full quarter where most lockdown restrictions were lifted; vs half of 3Q was in full lockdown mode, (ii) higher CPO price as explained above, but was partially offset by (iii) weaker glove results from ASP decline. On a YoY basis, aggregate 4Q21 core earnings were up +6.6%. For the full year 2021, aggregate core earnings surged +48.8% YoY, as lockdown measures were less restrictive in 2021 vs 2020 (mainly MCO1.0), coupled with higher earnings from the glove makers, plantation and PChem (all on higher selling prices).

Outlook. Despite Covid-19 case resurgence from Omicron recently chalking a new daily high (>30k), we note that severity indicators (symptomatic cases, ICU and mortality) are a far cry from what was seen during last year’s deadly “Delta wave”. With this, we reckon another lockdown can be averted, paving way to transition to an endemic stage. The government continues to push ahead with its reopening – easing quarantine guidelines and opening its boarders soon – which should make 2022 a relatively more reopened year, aiding earnings recovery. We are cognizant on risks stemming from supply chain disruptions and resulting cost push inflation. Nonetheless, the recent Ukraine-Russia conflict may see central banks slowing down on their rate hike path.

Forecast. We project CY22/23 KLCI earnings growth of -0.4%/+6.1%. The flattish earnings growth for CY22 stems from broad based earnings recovery across most index constituents being offset by decline in gloves and PChem.

KLCI target at 1,600. Maintain KLCI target at 1,600 based on 15.5x PE (-1SD to 5Y mean) tagged to CY22 EPS. Our top picks are largely unchanged – Tenaga, SDPlant, RHB, TM, Sunway, Astro, DNeX, Takaful, Armada, Kobay and FocusP – but we replace UWC with Frontken.

Source: Hong Leong Investment Bank Research - 3 Mar 2022