For the 4Q22 results season, 42%/44% of stocks under our coverage came in within HLIB/consensus expectations, 31%/29% below and 27%/28% above. Sequentially, the ratio of % results above/below fell from 1.14x to 0.89x (consensus: 1.43x to 0.97x). Result misses came from Building Materials, Gloves, Media, Healthcare and REITs (office), while positive surprises were from Construction and to a lesser extent, Banks. Aggregate core earnings for our coverage universe in CY22 was flattish (+2.5% YoY; +23.1% ex Gloves). We project CY23/24 KLCI earnings growth at 7.4%/5.5%. Lower KLCI target from 1,580 to 1,560 based on an unchanged 15.1x PE (-1SD) tagged to CY23 EPS.

4Q22 results wrap up. For the recently concluded 4Q22 results season, out of the 118 stocks under coverage, 42% came in within expectations, 31% below and 27% above. When stacked against consensus, 44% were inline, 29% below and 28% above.

Disappointments pick up. In comparison to the preceding quarter (i.e. 3Q22), there was an increase in disappointments (25% to 31%), while results that exceeded expectations saw a slight decline (28% to 27%). Consequently, from a ratio perspective (% of results above/below), this decreased QoQ from 1.14x to 0.89x. A similar trend was also witnessed for consensus, with the ratio declining from 1.43x to 0.97x.

Exceeds and misses. Notable results misses came from Building Materials (company specific reasons), Gloves (all in the red due to weak ASP and volume), Media (softer adex and higher newsprint cost), Healthcare (non-hospital ones – Pharmaniaga and UMediC) and REITs (office based ones). On the other hand, positive results surprises stemmed from Construction (our prior earnings cut may have been overdone, while 4Q22 saw pick-up in progress billings) and to a lesser extent, Banks (Public and AMMB).

Flattish earnings. We estimate that aggregate core earnings for our coverage universe slipped -4.6% QoQ (largely dragged by PChem and Tenaga) but rose +7.9% YoY (SPLY still had lingering effects from Phase 1 lockdown). Full year CY22 aggregate core earnings is estimated to have inched up +2.5% – while most companies saw earnings recovery, this was more than offset by the cliff dive in Glove earnings (CY22 ex Gloves: +23.1% YoY) and PChem.

Outlook. While the Fed has dialled back on its rate hike quantum, there is now increasing probability that (i) this may pick-up again (possibly +50bps) during the Mar FOMC and/or (ii) a higher terminal rate. Such a scenario spells further widening in the FFR-OPR spread, which the KLCI is inversely correlated to at -57%. We expect the market to remain choppy until mid-year which is when the US rate upcycle would probably peak. In addition, US recession probability readings continue to remain elevated but its contagion effect could be cushioned by China’s timely reopening. Domestically, the re-tabled Budget 2023 was a relatively muted one – this isn’t necessarily a bad thing as risk of “market unfriendly measures” being thrown in have now subsided.

Forecast. We project CY23/24 KLCI earnings growth of 7.4%/5.5%.

KLCI target at 1,560. Following the earnings adjustments post 4Q22 results, we lower our KLCI target from 1,580 to 1,560 based on an unchanged 15.1x PE (-1SD 5Y) tagged to CY23 EPS. Our KLCI EPS forecast is -8.4% below consensus, in part reflecting the lack of earnings clarity from an uncertain macro backdrop. Nevertheless, we note that KLCI’s P/B (arguably a firmer parameter) looks attractive at -1.7SD below 5Y mean, offering some solace for nibbling. Our top picks are unchanged (refer to left table).

Source: Hong Leong Investment Bank Research - 3 Mar 2023