Corporate Malaysia delivered a set of encouraging 3QCY22 results. On one hand, companies in the consumer space enjoyed brisk demand as the pandemic tailed off and life returned to normalcy, while oil & gas players were buoyed by increased activity levels. On the other hand, high inflation reverberated across the economy, hurting companies with weak pricing power. Following the results season, we lower our CY22F FBM KLCI earnings contraction projection slightly to -9.1% (from -9.3%) while moderating CY23F growth to +10.1% (from +11.4%) largely to reflect weaker plantation earnings, and maintain our end-2022 FBM KLCI target of 1,500 pts.

A Set of Encouraging 3QCY22 Results

FBM KLCI component stocks’ 3QCY22 results were encouraging with 17%, 45% and 38% beating, meeting, and missing our projections, compared with 10%, 52%, and 38%, respectively in 2QCY22 (Exhibit 1).

Against the market consensus, the numbers were relatively stable with "above", "within" and "below" at 13%, 50% and 37% vs. 13%, 43% and 43% in 2QCY22, respectively (also see Exhibit 1).

Five FBM KLCI component stocks under our coverage beat our projections, namely AXIATA (strong performance from regional markets), MISC (strong petroleum shipping freight rates), PPB (strong performance across the board), PETDAG (strong volume and favourable product prices), and TM (lower operating cost).

On the other hand, eleven FBM KLCI component stocks under our coverage missed our projections, namely, GENM (higher tax), GENTING (higher tax at GENM and lower plantation profits at GENP), HARTA and TOPGLOV (weak selling price and sales volumes), IHH (weaker performance from operations in Singapore and Turkey), INARI (subdued new smart phone launch of a US client), IOICORP (non-recurring high CPO prices in coming quarters), MRDIY, NESTLE and SIMEPLT (cost pressures), and PMETAL (higher depreciation charges and tax).

Among the key reasons for the results beating or missing our forecasts (including those of non-FBM KLCI stocks) were as follows:

• A strong recovery in demand: AXIATA, BAT, DAYANG, DLADY, DRBHCOM, F&N, HEIM, KGB, KPJ, MEDIAC, MRCB, MYNEWS, PADINI, PETDAG, PPB, STAR, SUNWAY, UZMA, WASEONG and YINSON.

• Margin expansion: GASMSIA, MISC, SCIENTX, ULICORP, WCT and YTLPOWR.

• Cost pressures: AIRPORT, BPLANT, BPPLAS, ENGTEX, GENP, HSPLANT, MRDIY, NESTLE, SIMEPLT, TGUAN, TSH and UMCCA.

• Weak selling prices: ANNJOO, FGV, GENP, HARTA, HSPLANT, IOICORP, PMETAL, POS, SUPERMX, TOPGLOV and TSH.

• Weak demand: HARTA, INARI, KESM, MEDIA, PHARMA, POS, SUPERMX and TOPGLOV

• China lockdowns: MPI and UNISEM

FBM KLCI FY22F Earnings Growth Raised Slightly, End-2022 FBM KLCI Target Maintained

Following the results, we lower our CY22F FBM KLCI earnings contraction projection slightly to -9.1% (from -9.3%) while moderating CY23F growth to +10.1% (from +11.4%) largely to reflect weaker plantation earnings, and maintain our end-2022 FBM KLCI target of 1,500 pts based on 15.5x CY22F PER, which is at a discount to its 5-year historical average of 18x to reflect the inevitable valuation deflation across asset classes against a backdrop of an aggressive monetary tightening by major policy makers globally.

We hold the view that under a new “unity’ government based on a “power sharing” model, the prevailing policy inclinations are likely to remain at least over the immediate term including pro-business stance, protectionism for local industries, business-as-usual for government-linked companies, strong fiscal support to the economy including cash handouts and fuel and food subsidies (to cushion consumers from the rising cost of living amidst sustained high inflation globally) and pump-priming via the rollout of public infrastructure projects (to shield the economy from external slowdown and headwinds).

As such, we continue to advocate investors to seek refuge in domestically-driven sectors including banks, telcos, auto makers/distributors, mid-market retailers and construction, amidst rising external headwinds. We believe the “unity” government will be supportive of domestic consumption.

Our overall top picks and top shariah picks are reflected in Exhibits 2 to 3.

Source: Kenanga Research - 2 Dec 2022