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Malaysia Strategy: 3Q21 Results Wrap – Lockdown Impact Misjudged

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Publish date: Wed, 08 Dec 2021, 10:25 AM
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This is a personal investment blog where I keep important research articles relating to KLSE companies.

Malaysia’s 3Q21 reporting season was rather strong with more than 62% of stocks under the Macquarie Equities Research’s (MQ Research) coverage beating/meeting expectations. While  commodity-linked names such as Petronas Chemical (PCHEM) and plantations came in as a positive surprise coupled with the banks delivering solid results, other sectors including property, construction, and selected tech names were impacted by the lockdown.

MQ Research views that the consumer-focused banks are better positioned as recovery plays while being optimistic in domestic-driven consumption. It also forecasted that the CPO price may range between RM4,500-RM5,000 in 4Q21 though they may decline next year.

Expectations still playing catch-up with volatile earnings

  • 3Q21 reporting season saw the number of beats nearly double form 2Q21 as the negative impact of the lockdowns on certain key sectors like banks and telco’s were underestimated. Upside from commodity prices were also underestimated in the quarter with Petronas Chemical (PCHEM) and the plantations companies surprising positively.

Select reopening plays and commodities did well

  • Banks delivered a solid set of results in 3Q21, driven by aggressive cost controls, monetisation of trading books, and lower-than-expected credit cost provisioning. However, MQ Research thinks the quality of the beat could be quite low as elevated provisions could still manifest in FY22 (silver lining: would offset one-off tax). Nonetheless, MQ Research thinks the improving economic outlook places a higher floor under fundamentals and expectations. MQ Research thinks consumer-focused banks are better positioned as recovery plays.
  • In contrast to the banks, the earnings impact of 3Q lockdown was underestimated for sectors like property, construction and selected tech names that were hit by supply chain bottlenecks and/or deferred orders. Additionally, border reopening plays like aviation also continued to lag (even vs low expectations) as the recovery in international travel remains lethargic. However, MQ Research is more optimistic on the rebound in domestic-driven consumption both in leisure and retail.
  • Commodity-linked names (PCHEM & plantations) enjoyed super-normal average selling price (ASP), driven by supply chain constraints and/or inflationary cost pressure. Broadly, the cyclical momentum for these names should persist into 1H22 at least, but with diminishing visibility going forward. For example, with crude palm oil (CPO), the combination of shortages and La Nina weather is propping up CPO prices short-term. MQ Research expects CPO will average RM4,500-RM5,000 in 4Q21, but decline in 2022.

Outlook: muted growth for fundamentals; volatility on sentiment

  • With the bulk of the pandemic’s base-effect normalised in FY21E (transportation, gloves, and oil & gas (O&G) being the exception), earnings growth outlook for FY22E was always set to decelerate. However, with the addition of the one-off “Prosperous tax” in FY22, MQ Research forecasts earnings growth will slow to +2% y/y (+11% excluding gloves). Broadly, there will be limited opportunities for fundamentals to surprise on the upside. The exceptions being the commodity-linked names – PCHEM, Plantations (but not O&G) – as well as transportation. Downside risk of another blanket lockdown is low, in MQ Research’s view.
  • MQ Research reiterates its top picks: tech (Inari Ametron, Frontken), thematics (Telekom Malaysia, Mega First) & exporters (PCHEM, Kossan Rubber), as well as consumer banks (RHB Bank, Hong Leong Bank) as the resilient reopening plays.

Source: Macquarie Research - 8 Dec 2021

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