• Another strong quarter, with 4Q20 earnings at their highest level in 3 years. Strong Gloves earnings helped mitigate the drag from Banks and Telcos
• Better demand and higher ASPs contributed to the stronger earnings. Most companies continued to benefit from cost control and automation, which helped further improve EBITDA margins
• Banks and Healthcare raised to Overweight while we downgraded Utilities to Neutral. We add Maybank, MYEG and MPI to our Top Buys. We remain Neutral on the KLCI with an unchanged year-end target of 1,730

Strong Earnings Momentum Sustained Into 4Q20

The strong earnings momentum continued into 4Q20 as cumulative coverage earnings were 11.7% higher sequentially. While 6 companies had delayed the announcement of their quarterly results, the impact is unlikely to be significant as the implied 4Q20 core net loss of RM334.3m for these companies account for merely 1.8% of the coverage earnings for the quarter. Overall, it was another good quarter, as apart from the stronger earnings growth, the number of companies that fell below expectations were far fewer at 20% vs 29% in 3Q20 and hence a lower number of rating downgrades at 19% vs 29% in 3Q20. The relatively better performance was not limited to the size of the companies, indicating a general across-the-board improvement.

Gloves still driving earnings, Banks and Telcos were key drags in 4Q20

Drilling down to the sectors, 5 out of our 21 sectors registered a sequentially weaker quarter. This was led by the Banks and Telcos which saw respective earnings contraction of RM0.9bn and RM0.8bn. The weaker Bank earnings were due to higher net credit costs while Axiata booked a massive RM1bn accelerated depreciation charge. The Non Financials, Consumer and Property sectors also saw earnings contraction. Underpinning the market’s earnings growth during the quarter was the strong surge in earnings from the rubber glove manufacturers. Glove earnings jumped RM2bn or a sharp 67% qoq on the back of higher ASPs while the transport sector registered a smaller loss due to the exclusion of AirAsia’s results. The other sectors with strong notable improvement were Healthcare and Media, which benefited from cost control and an improved operating environment.

4Q20 earnings were the strongest in 3 years, lifted by margin enhancement

Notably, 4Q20 earnings were the highest quarterly earnings since 4Q17. 4Q20 also registered a 19.1% yoy growth, the first annual growth since 4Q19. Apart from Banks, Gaming and Transport that were directly impacted by the Covid-19 pandemic, most of the other sectors contributed to this better performance. We believe this could have been driven by pent-up demand (Autos), stronger ASPs (Building Materials, Gloves, Plantations) and a better outlook (EMS and Technology). Tenaga also posted a strong improvement due to the low base last year. Overall, profitability continued to improve with the coverage EBITDA margin further rising to 25.8% (from 24.7% in 3Q20) underpinned by cost control and increased automation.

Banks and Healthcare Raised to Overweight From Neutral

Results for the banks were broadly within expectations despite the additional provisioning made during the quarter. The surprise was in the banks’ ability to deliver dividends during the quarter, despite the lower earnings. Overall, we raised the ratings for most of the banks given the recent pullback in stock prices. As the majority have Buy ratings, we lift the sector rating to Overweight. Although we cut Apex Healthcare to a Sell, we raised the rating of IHH to a Buy, given its better-thanexpected set of results. By virtue of IHH’s market capitalisation, the sector rating is raised to Overweight. Note that the MREIT rating had been raised to Overweight prior to the results season.

Utilities Downgraded to Neutral

While Tenaga reported results that were broadly within expectations, the dividend payout at 80 sen managed to surprise the street. Without further catalysts, we downgraded Tenaga to a Hold and the sector rating to Neutral.

Revisions to Top 10 Buys – Maybank, MYEG and MPI Added

We remove Tenaga from our Top Buys after the rating downgrade. In its place, we put MYEG on which we had recently initiated coverage. We think that MYEG would make a better recovery play with prospects of a PE multiple re-rating as focus is expected to remain on growth stocks. While we still like Aeon Credit, we think Maybank would make a better recovery play and particularly given its attractive dividend yields. While Scientex has yet to report its earnings, given its different financial year-end, we think the stock has done well over the past 12 months although margins could be impacted in the near term given the rising cost of raw materials. We replace the stock with MPI which is benefiting from a strong upcycle in the semiconductor sector. Key drivers over the near term will be via its exposure to the automotive, datacentre and 5G space, areas in which it will continue to invest capacity and grow. The stock is also trading at a discount to the peer and sector averages.

Maintain Neutral call on the KLCI with an unchanged year-end target of 1,730

We think that our 34% EPS growth forecast for the KLCI for 2021 could be largely priced in already. Although the KLCI is trading at 15.5x or nearly -2SD below its historical mean PE, this has largely to do with the de-rating of the glove sector. Exgloves, the KLCI is trading at 18.4x and closer to its historical mean (Fig 22). Near term, with limited upside for the RM and the ongoing political uncertainty, prospects for a reversal of foreign fund flows is limited. We continue to advocate sticking to growth sectors such as EMS, Technology, Building Materials and Gloves. Banks, Healthcare and MREIT are our picks for recovery plays. We maintain our 2021 KLCI year-end target of 1,730 based on its 5-year mean PE of 18.6x and on the 2022E market earnings. Key risks for the market include a sovereign rating downgrade, further weakness in the US$ that aid fund inflows, a sharp decline in oil prices and geopolitical risk.

Source: Affin Hwang Research - 2 Mar 2021