Macquarie Equities Research (MQ Research) said 3Q20 saw widespread recovery in earnings. Although 4Q20 is likely to be weaker due to the CMCO since mid-October, outlook for 2021 remains positive with MQ Research’s FBM KLCI target at 1,780, led by banks, telcos, exporters and recovery plays.

Event

• The 3Q20 results season saw a widespread recovery in earnings, and economic activity picked up post the restrictions in 1H20. In fact, the rebound in a number of sectors, including banks, was better than expected on muted expectations. While the Conditional Movement Control Order (CMCO) since mid-October will weigh on 4Q results, MQ Research believes the market is already beginning to position for a post COVID-19 recovery in 2021.
• While the path ahead is likely to be marred by further restrictions, etc., the improving outlook for the availability of COVID-19 vaccines in 2021 will be a multiple-re-rating catalyst for equities in 2021, in MQ Research’s view. MQ Research’s end-2021 KLCI target of 1,780 (17x 22E PER) offers 11% upside, with outperformance likely to come from stock picking.

Impact

• Tempered 4Q20, better 2021. While 3Q20 results could have warranted further upgrades to estimates, the ongoing CMCO (currently until 6 December), will temper 4Q20 earnings. The market is looking past this, and MQ Research currently estimate KLCI’s earnings per share (EPS) to jump 45% in 21E, following a 14% decline in 20E. Further movement restrictions or earnings risks for 2021 cannot be discounted, but the availability of vaccines should support multiple expansion.
• Banks: Low rescheduling and restructuring. Four of six banks under MQ Research’s coverage beat its expectations, as trading income and cost controls helped drive pre-provisioning operating profits (PPOP). While credit cost guidance was downgraded, it mostly fell within expectations, and despite the negative impact of CMCO-induced uncertainty, it was outweighed by the lower-than-expected repayment assistance of 10% (vs Malaysia book) post-moratoria. Banks are guiding credit costs more confidently; may peak in 4QCY20 results (Feb 2021).
• Things to watch out for. While COVID-19 will turn from a headwind into a tailwind in 2021, one cannot ignore the potential pitfalls in 2021. Equity raises would be the first and foremost. The transport, construction and property sectors are potentially at risk here. Environmental, social and governance (ESG) related issues are also likely to make headlines, with the recently established Act 446, which focuses on workers’ welfare. Manufactures and plantations are potentially at risk.

Outlook

• MQ Research remains constructive on the Malaysian equity market in 2021, with banks (CIMB and RHBBANK), digitalisation plays (T, MAXIS and GHLS), exporters (SDPL and PCHEM) and reopening plays (GENM and MAHB) firmly in MQ Research’s top picks list. News flow on infra projects is likely to gather momentum post elections (earliest mid-1H21), leaving GAM as MQ Research’s preferred exposure. The one sector MQ Research believes will drag index upside is gloves, where MQ Research sees a moderating average selling price (ASP) outlook on vaccine availability dragging share prices, even as record profits are registered.

Source: Macquarie Research - 7 Dec 2020