FBM KLCI component stocks reported 2QCY23 results that were more in-line with our expectations, after a highly disappointing 1Q. Power companies felt the pinch from high-cost coal inventories; planters and steel players bore the brunt of low commodity prices; and Corporate Malaysia had to confront slowing domestic demand and exports amidst a global economic slowdown while operating cost stayed elevated. Following the 2QCY23 results, we now project FBM KLCI earnings to contract slightly steeper by 1.6% in CY23 (from a 1.1% decline previously), followed by a higher growth of 8.4% in CY24 (from 7.4% previously).

More In-line with Expectations

Earnings delivery (as against our expectations) of FBM KLCI component stocks improved sequentially in 2QCY23, with 10%, 66% and 24% beating, meeting and missing our projections, compared with 7%, 52% and 41%, in 1QCY23, respectively (Exhibit 1).

However, against market expectations, there was no significant sequential improvement with "above", "within" and "below" at 10%, 50% and 40% vs. 7%, 57% and 37% in 1QCY23, respectively (also see Exhibit 1).

Winners and Losers

Three FBM KLCI component stocks under our coverage beat our projections, namely, SIME (strong performance of BMW Malaysia on the economy reopening), SIMEPLT (strong output but lower cost) and TM (tax credit).

On the other hand, seven FBM KLCI component stocks under our coverage universe missed our projections, namely, AMBANK (higher credit cost), AXIATA (accelerated depreciation and higher funding cost), DIALOG (lower contribution from E&P JV), GENM (low visitor spending), GENTING (weak performance of GENM), IHH (weak showing from operations in Singapore and Turkiye), and TENAGA (high-cost coal inventory).

Common Drags on 2QCY23 Earnings

On a cautious note, among the key reasons for companies under our coverage (including non-FBMKLCI component stocks) missing our forecasts were:

1. high-cost coal inventory (TENAGA, MALAKOF);

2. weak commodity prices (ANNJOO, BPLANT, ENGTEX, HSPLANT, TAANN, TSH);

3. slowdown in domestic consumption (AEON, PWROOT, SLP);

4. slowdown in exports (D&O, JHM,KPS, PIE,PWROOT, SLP, TGUAN, UNISEM); and

5. cost escalation (ASTRO, BPLANT, D&O, HSPLANT, IOIPG,JHM, KIMLUN, KPS, MGRC, MYNEWS, PHARMA, PIE, STAR, SWIFT, VELESTO, WASCO).

End-2023 FBM KLCI Target Maintained

Following the 2QCY23 results, we now project FBM KLCI earnings to contract slightly steeper by1.6% in CY23 (from a 1.1% decline previously), followed by a higher growth of 8.4% in CY24 (from 7.4% previously) owing to a slightly lower base in CY23F. We maintain our end-2023 FBM KLCI target of 1,540 based on an unchanged 16.5x CY23F PER, which is at a 0.5x multiple premium to its historical PER range of 14-16x post the economy reopening in 2021-2022 on a reduced market risk premium with the nation sailing into more tranquil political waters after the recent state elections (and the next general election, i.e. the 16th General Election, will only be due in 2027).

Source: Kenanga Research - 4 Sept 2023