The return of a familiar political order has changed the domestic investment landscape. After witnessing three leadership changes in as many years, we believe a semblance of stability has returned. The new leadership’s proposals for institutional reforms have been warmly received by the Opposition. This ruling coalition under the present leadership probably has the support of the grassroots, and the timing of the takeover couldn’t be better given that the worst of the pandemic may well have passed. As it prepares for GE15, this coalition will play to the hearts of the rural heartland and East Malaysians that hold a disproportionately large number of parliamentary constituencies. It is partly this emerging stability that has drawn foreign equity interest back along with a recovery in commodity prices on which Malaysia so depends. Against a backdrop of stabilising oil prices, a theme of interest for 4QCY21 revolves around the long-awaited reopening of the economy that lifts the halt-work order in the sector and the development of East Malaysia’s oil & gas assets, especially those in Sarawak, having been incentivised by its recently hard-won annual state sales tax on oil and gas from Petronas. With Budget 2022 expected to remain expansionary and global monetary accommodation drawing nearer to a close, bond yields should continue rising. Build exposures to value and cyclicals. With corporate earnings expected to rebound 41%/2% in FY21E/FY22E, we value the FBMKLCI on a forward PE multiple of 14.9x FY22E EPS of 108.1 sen, giving a year-end target of 1,611. We have OVERWEIGHT calls on: Building Materials, Gaming, Media, Non-Bank FIs, O&G, REITs, Rubber Gloves, Technology and Utilities. Top picks for 4Q21 are: DIALOG (OP, TP: RM3.50), F&N (OP, TP: RM33.15), GENTING (OP, TP: RM6.47), GHLSYS (OP, TP: RM2.30), KGB (OP, TP: RM2.50), MAYBANK (OP, TP: RM10.65), RHBBANK (OP, TP: RM6.15), TM (OP, TP: RM7.00), UZMA (OP, TP: RM0.75) and YINSON (OP, TP: RM6.00).

The upbeat conclusion to 2QCY21 results season was marred by subsequent downgrades in glove sector’s earnings expectations: Post 2QFY21 results season, TOPGLOV’s disappointing Aug quarterly results led to a reassessment of our ASP assumptions and hence sharp earnings cuts for it and HARTA as well. On the 2QCY21 results, 27% of our research universe fell short of expectations, but this was an improvement over 30% that disappointed in the 1QCY21. And among the bell-weather FBMKLCI components, 61% came within and a quarter were above expectations, outnumbering those that missed by nearly 2 to 1. The sectors that disappointed most were construction, gaming (both for the second straight quarter), brewery and consumer, while plantation, utilities and healthcare outperformed expectations.

Despite FY21E/22E EPS cuts, EPS growth momentum still positive at +41%+2%: Accounting for the cut in forecasts of gloves sectors earnings, which offset the generally positive outlook compared to earlier expectations for the rest of the market, we ended up having to revise down the FBMKLCI’s FY21E/FY22E EPS by 3%/5% to 106.1/108.1 sen from 109.6/113.3 sen, representing EPS growth of +41%/+2%. FY21’s 41% EPS growth was driven mainly by direct exporters in the form of plantation, glovemakers, petrochemicals and aluminium smelter. Sectors exposed to domestic demand fared much more modestly but more consistently with earnings growth of 28% in FY21 and 21% expected in FY22, compared to the exporters’ 71% and -34%, respectively. Exporters’ stellar growth stemmed from Covid-led demand surge for gloves in FY20 and FY21 (but waning momentum is expected in FY22), which coincided with sharp recoveries in commodity prices of palm oil, aluminium and petrochemicals lifting earnings for the likes of PMETAL and PCHEM.

Source: Kenanga Research - 30 Sept 2021