During the 2Q22 results season, 52%/49% came in within HLIB/consensus expectations, 26%/21% below and 22%/30% above. Sequentially the ratio of % results above/ below was unchanged at 0.87x. Positive results surprises came from those related to discretionary spending – Auto, Brewers and Consumer discretionary – while disappointments stemmed from Construction, Transport and to a lesser extent, Gloves, Property and REITs (office). Aggregate core earnings for our coverage universe declined -11% YoY – while most reported earnings recovery, this was more than offset by the cliff dive in glove earnings and Sapura. We now project CY22/23 KLCI core earnings growth of -7.5%/+7.7%. KLCI target is revised down from 1,610 to 1,560.

2Q22 results wrap up. For the recently concluded 2Q22 results season, of the 117 stocks within our coverage, 52% came in within expectations, 26% below and 22% above. When stacked against consensus estimates, 49% were inline, 21% below and 30% above.

Pretty similar sequentially. Compared to the preceding quarter (i.e. 1Q22), there was a reduction in both disappointments (27% to 26%) and positive surprises (23% to 22%), while the proportion of those coming inline rose from 50% to 52%. Consequently, from a ratio perspective (% of results above/ below), this remained unchanged sequentially at 0.87x.

Surpasses and misses. Notable positive results surprises mainly came from sectors related to discretionary spending – Auto (ramp up in deliveries on easing supply chain woes, alongside buyers taking advantage of the final quarter of SST exemptions), Brewers and Consumer discretionary (both on higher consumption following the transition to endemicity, alongside the Omicron wave subsiding). On the flipside, disappointments largely stemmed from Construction (elevated material cost, labour shortage and weak job flows), Transport (mainly aviation on weaker -than-expected recovery despite global reopening momentum), and to a lesser extent, Gloves (ASP decline), Property (labour shortage hampering progress) and REIT (office based ones).

Earnings slip. We estimate that aggregate core earnings for our coverage universe rose +14.7% QoQ (merits from the transition to endemicity, alongside marginally higher CPO price by +4.4%) but slipped -4.6% YoY (while most companies saw earnings recovery, this was more than offset by the plunge in glove earnings). Cumulative 1H22 aggregate earnings declined by -10.9% YoY – while 70.4% of companies under our coverage reported earnings improvement, this was more than offset by the cliff dive in glove earnings as well as Sapura.

Outlook. In recent months, market swings have been largely influenced by the Fed’s tone regarding its monetary tightening stance. Following US entering a technical recession and signs that its inflation may have peaked (Jul: 8.5% vs Jun: 9.1%), investors began to speculate that the Fed may soften its tightening stance and eventually pivot next year. However, recently at Jackson Hole, Fed Chair Powell dispelled this, making it clear that fighting inflation is the Fed’s top priority and that even if some pain is required, it would continue raising rates and shrinking its balance sheet for some time. Until a shift in the Fed’s tone happens, coupled with domestic election fluidity, we expect continued market choppiness. That said, we take solace in the low foreign shareholding levels – Jul at 20.2%, inches away from its all-time low of 20.1% – which we believe has scrapped the bottom of the barrel. In fact, after an outflow in Jun (-RM1.3bn), foreigners resumed their net buying in Jul (+174m) and Aug (+RM2.1bn), bringing the 8M21 sum to (+RM8.3bn).

Forecast. Post 2Q22 results, we now project CY22/23 KLCI core earnings growth at -7.5%/+7.7% (from -4.0%/+6.6).

KLCI target at 1,560. With the earnings adjustments, our KLCI target is revised down to 1,560 (from 1,610) based on an unchanged 15.6x PE (-1SD to 5Y mean) tagged to mid-CY23 EPS. We maintain most of our top picks – Tenaga, KLK, RHB, Sunway, DNeX, Armada, Kobay, Evergreen and FocusP. However, we drop PMetal, Dialog (both experienced results shortfall) and Affin (share price +12.9% since we included in our top picks in Jul). These are replaced with MAHB, BIMB and Dayang.

Source: Hong Leong Investment Bank Research - 5 Sept 2022