Kenanga Research & Investment

2QCY22 Report Card - A Soft Patch

Publish date: Fri, 02 Sep 2022, 09:39 AM

FBM KLCI component stocks as a whole delivered a set of soft 2QCY22 results. A boost to economic activities and spending from the reopening of the economy and international borders was offset by cost inflation, labour shortages, persistent supply-chain disruptions and lower metal commodity prices. Following the results, we tweak our FBMKLCI earnings growth down to -8.2% (from -4.7%) for CY22F, and to +9.2% (from +9.5%) for CY23F, and lower our end-CY22 FBMKLCI target by 2% to 1,580 pts (from 1,610 pts) based on an unchanged 16x PER.

FBM KLCI Stocks Reported Generally Soft 2QCY22 Results

FBM KLCI 2QCY22 results remained subdued with 10%, 52%, and 38% “beating”, “meeting” and “missing” our projections, respectively, compared with 7%, 59% and 34% for "above", "within" and "below", respectively, in 1QCY22 (Exhibit 1).

Against the market consensus estimates, the 2QCY22 numbers were equally not inspiring with "above", "within" and "below" at 13%, 43%, and 43% vs. 10%, 53% and 37% in 1QCY22, respectively, (also see Exhibit 1).

Three FBM KLCI component stocks under our coverage beat our projections, namely, PPB (strong rebound across the board on the economy reopening), CIMB (stronger non-interest income) and HLBANK (stronger performance of associate Bank of Chengdu).

On the other hand, eleven FBM KLCI component stocks under our coverage missed our projections, namely, PETGAS (higher fuel cost), DIALOG and MISC (project cost overrun), TENAGA (greater impact of Cukai Makmur), MRDIY (slowing consumer spending), PMETAL (weak aluminium prices), SIMEPLT (weak CPO production), HARTA and TOPGLOV (weak ASP), GENTING and GENM (visitor arrivals fell short of expectations).

Among the key trends we identified in the results (both positive and negative), and the companies under our universe that were directly and indirectly affected by them are as follows:

  • A stronger-than-expected rebound in the consumption of goods (clothing, beverages and convenience store spending): AEON, PADINI, CARLSBG, HEIM, PWROOT and QL.
  • A weaker-than-expected rebound in the consumption of services (leisure and air travel): GENTING, GENM, AIRPORT and CAPITALA.
  • Labour shortages: SIMEPLT, PIE, KERJAYA, KIMLUN and SLP.
  • Lockdowns in China: MISC, MPI and ANNJOO.
  • Higher fuel and input costs: Across the board, particularly, PETGAS, DLADY, PESTECH, VELESTO and UZMA.

FBM KLCI Earnings Growth Downgraded, End-2022 FBM KLCI Target Cut

Following the results, we tweak our FBMKLCI earnings growth down to -8.2% (from -4.7%) for CY22F, and to +9.2% (from +9.5%) for CY23F, and lower our end-CY22 FBMKLCI target by 2% to 1,580 pts (from 1,610 pts) based on an unchanged 16x PER, which is at a discount to its 5-year historical average of 18x to reflect:

1. inevitable deflation in asset prices across the board against a backdrop of a considerably more aggressive monetary tightening by major policy makers globally in recent months;

2. heightened risk of the global economy slipping into a recession/stagflation if major policy makers globally fail to tame inflation with their existing measures and are forced to prescribe stronger medicine which will inflict even greater collateral damage to global growth; and

3. FBM KLCI earnings in 2022 being weighed down the windfall/prosperity tax dubbed Cukai Makmur.

Key Investment Themes: Pricing Power, Service-based Sectors, Energy, Food Commodity and GE15 

With the impact of high inflation having already crept up in the 2QCY22 results, which can only get more entrenched in coming quarters, we continue to advocate investing in:

1. companies with pricing power or ability to raise prices to pass on the higher costs, directly or indirectly. These include:

(i) local companies in the global supply chain of products that are highly sought-after, typically innovative, of high quality and with a brand that commands very strong customer loyalty. These include local names in the tech/consumer electronics space, more specifically in the fields of out sourced semiconductor assembly and test (OSAT), automated test equipment (ATE) and electronics manufacturing services (EMS); and

(ii) providers of private healthcare service that has a low “price elasticity of demand”.

2. companies in service-based sectors with professional personnel cost being the largest cost component (or one of the largest cost components), as despite the high inflation, wage pressures remain manageable given the slack in the local job market. These include banks and telecommunications players.

3. companies in the energy space and the production of food commodity, i.e. oil & gas and plantation, given the sustained elevated oil and CPO prices vs. historical averages.

4. companies of which share prices could be driven more by news flow (vs. earnings) over the short term, i.e. those in the construction space on expectations public infrastructure jobs being awarded ahead of the 15th General Election (GE15), due in September 2023.

Our sector recommendations, overall top picks and top shariah picks are reflected in Exhibits 2 to 4.

Source: Kenanga Research - 2 Sept 2022

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