HLBank Research Highlights

Strategy - Getting Better

Publish date: Tue, 05 Dec 2023, 10:27 AM
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This blog publishes research reports from Hong Leong Investment Bank

For the 3Q23 results season, 48%/44% of stocks under our coverage came in within HLIB/consensus expectations, 27%/34% below and 25%/22% above. Sequentially, the ratio of % results above/below rose from 0.38x to 0.93x (consensus: 0.33x to 0.66x). Results misses were more prevalent in Media, Tech and Plantation, while positive surprises came from Auto, Gloves and Healthcare. Aggregate core earnings for our coverage universe for 9M23 dipped -2% vs SPLY. We now project KLCI earnings growth of -0.3%/+8.0% for CY23/24. Lower end-2023 KLCI target to 1,490 (from 1,530) and 2024 at 1,540.

3Q23 results wrap up. For the recently concluded 3Q23 results season, out of the 111 stocks under our coverage (excluding 5 on restriction), 48% came in within expectations, 27% below and 25% above. When stacked against consensus, the notable difference was a higher proportion of disappointments at 34%, while 44% and 22% were inline and above expectations, respectively (both lower than us).

Sequentially better. Comparing against the preceding quarter (i.e. 2Q23), there was a reduction in results misses (from 38% to 27%), alongside a higher percentage of those that surprised on the upside (from 14% to 25%). Consequently, from a ratio perspective (% of results above/below), this improved strongly from 0.38x to 0.93x. The same trend was also witnessed for consensus – albeit at a slower quantum – with the ratio recovering from 0.33x to 0.66x.

Flattish earnings. We estimate that 3Q23 aggregate core earnings for our coverage universe rose +6.9% QoQ and +2.2% YoY. However, cumulative 9M23 numbers still showed a slight dip at -2.1% vs SPLY – the drags mainly stemmed from Plantation, PChem, Tenaga, Axiata and to a lesser extent, Gloves.

Beats and misses. From a sectorial perspective, results shortfalls were more prevalent in Media (challenging adex environment and softer consumer sentiment), Tech (recovery was weaker than guided, though we still reckon the worst is likely over) and to some extent, Plantation (production disappointment). On the other hand, sectors that surprised on the upside were Auto (continued strong TIV), Gloves (cost savings after decommissioning plants) and Healthcare.

Outlook. After almost two years of hiking – accelerating in 2022 and decelerating this year – we reckon the Fed has likely reached its peak. Our consensus aligned bet is for the Fed to stay pat next week, marking its third consecutive pause (longest post pandemic) – suggesting that its rate upcycle may be over. Looking ahead, we expect a -50bp FFR pivot from mid-2024 onwards, before the US elections in Nov-24. Alongside our call for a +25bp OPR hike in 2024, this could collectively narrow the FFR-OPR spread by -75bp – a positive for the local bourse given the -52% inverse correlation between the FFR-OPR spread and KLCI, and also aiding in ringgit recovery. In the near term, we expect upside to be driven the by the statistically significant year end window dressing effect (Dec had a 92% positive hit rate since the GFC).

Forecast. We cut CY23/24 KLCI earnings by -2.2%/-1.8%. Our revised CY23/24 KLCI earnings growth forecast stands at -0.3%/+8.0%.

End-2023 KLCI target at 1,490. Following the earnings cut and recalibration of the PE band, our end-2023 KLCI target is revised lower to 1,490 based on 15.2x PE (-0.75SD 5Y) tagged to mid-CY24 EPS. For 2024, our KLCI target stands at 1,540 premised on 15.2x PE pegged to end-CY24 EPS. Our top picks are Public, Tenaga, YTLP, Gamuda, MAHB, Sunway, Armada, OSK, ITMAX, Aeon, SMRT and FocusP.

Source: Hong Leong Investment Bank Research - 5 Dec 2023

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