Corporate Malaysia delivered a set of mixed 4QCY22 results. Companies in the consumer space still enjoyed strong sales as government subsidies on fuel and staple food items as well as a stable job market buffered consumer spending from the high inflation. Oil & gas service providers were buoyed by increased activity levels while integrated planters saw margin expansion at their downstream operations. On the flip side, cost pressures (including high-cost inventory) hurt planters, oil & gas service providers, manufacturers and even airport operator. Meanwhile, players in the export-oriented tech and EMS space have already started feeling the pinch from the global economic slowdown. Following the results, we lower our CY23F FBMKLCI earnings growth projection to 10.5% (from 12.2%) and cut our end-2023 FBMKLCI target to 1,610pts from 1,640pts.

A Set of Mixed 4QCY22 Results

FBMKLCI 4QCY22 results showed QoQ improvement with 31%, 45% and 25% beating, meeting, and missing our projections, compared with 17%, 52% and 31% in 3QCY22 (Exhibit 1), respectively.

Against the market consensus, similarly, the numbers came in better QoQ with "above", "within" and "below" at 20%, 53% and 27% vs. 13%, 57% and 30% in 3QCY22 (also see Exhibit 1), respectively.

Nine FBM KLCI component stocks under our coverage beat our projections, namely AXIATA (strong performance from regional markets), DIGI (lower tax expenses), IOICORP and KLK (strong downstream performance), MISC (strong petroleum shipping freight rates), PBBANK (strong interest margins) PPB (strong performance from associate Wilmar International), PETDAG (strong sales volume), and QL (strong marine product sales).

On the other hand, seven FBM KLCI component stocks under our coverage missed our projections, namely, GENM (unfavourable currency movements),GENTING (unfavourable currency movements at GENM and high production cost at GENP), IHH (weak performance from operations in Singapore and Turkey), MAXIS (high tax expenses), PCHEM (low spreads),TM (high depreciation and tax charges), and TENAGA (high interest expenses).

Among the common trends (including those in non-FBM KLCI stocks) that we identify were:

• Resilient consumer spending: GHLSYS, KOTRA, KPJ, PADINI and PAVREIT.

• Strong activity levels: KGB, UZMA and WASEONG.

• Margin expansion at downstream palm products: IOICORP and KLK.

• Cost pressures: AIRPORT, BOILRM, BPLANT, HSPLANT, GENP, SCIENTX and VELESTO.

• Margins weighed down by high-cost inventory: DLADY, MBMR and UMW.

• Negatively impacted by the global economic slowdown: D&O, HPPHB, KPS, MPI and SKPRES.

FBM KLCI FY23F Earnings Growth and End-2023 FBM KLCI Target Reduced

Following the mixed results, we lower our CY23F FBM KLCI earnings growth projection to 10.5% (from 12.2%). Consequently, we cut our end-2023 FBM KLCI target to 1,610pts (from 1,640pts) based on 15.5x CY23 PER, which is at a discount to its 5-year historical average of 18x to reflect valuation deflation across asset classes against a backdrop of an aggressive monetary tightening by major policy makers globally.

We continue to advocate investors to seek refuge in sectors with strong earnings resilience amidst rising external headwinds such as banks, telcos, auto makers/distributors, retailers and contractors. These sectors have also emerged clear winners of the new Budget 2023 which is highly supportive of domestic consumption.

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

Source: Kenanga Research - 2 Mar 2023