• A March reporting quarter to forget. Despite already subdued expectations, the Mar 2023 reporting quarter nevertheless disappointed. The misses-to-beats ratio spiked higher to 3.6 with 44.6% of results falling below expectations. Subdued topline growth and persistent cost pressures made for negative operating leverage and weaker margins. With the business environment likely to stay challenging, investor sentiment will remain cautious pending the disposal of the impending six state elections. Our end-2023 FBM KLCI target is cut to 1,500 pts from 1,575 pts.

• Negative earnings revisions. The March quarter saw nine sectors (plantation, technology, oil & gas (O&G), media, construction, gaming, healthcare, rubber products, property, and basic materials) performing below expectations, up from six in the preceding Dec 2022 quarter. No sector performed above expectations. Sectors that contributed the most number of earnings misses include plantation, technology, construction, rubber products, property and consumer. Earnings revisions were decidedly negative with FY23 earnings cut by 3.8% with the biggest reductions from plantations, O&G, rubber products and telecommunications. The misses to-beats ratio crept higher to 3.6 (from 1.0 in the preceding quarter). Only 12.3% of earnings beat with 44.6% missed and 43.1% within expectations. The auto sector is cut to NEUTRAL from Overweight to reflect expectations of softening car sales going into 2024.

• KLCI stocks. The majority (70.4%) of the large caps delivered earnings that were in line with expectations, offset by misses in 25.9% of the KLCI component stocks under coverage. FY23 estimates were cut by 3.8% or MYR2.3bn, mainly contributed by plantation (lower PK prices and higher unit costs) and Petronas Chemicals (weaker margins). While there are lingering concerns on further NIM compression in the banking sector, there were few asset quality concerns, while capital ratios remain comfortable. Forward guidance from the banks remain tentative, reflecting evolving business conditions and weak visibility.

• Strategy. We expect investor sentiment to remain cautious given limited forward visibility on re-rating catalysts for markets, even as global macroeconomic conditions continue to evolve. The results of the impending six state elections may have a bearing on the propensity of the unity government to implement critical fiscal and policy reforms. Forward P/Es remain at a discount to the long-term mean although market headroom will be capped by unexciting earnings growth and persistent risks of further corporate earnings downgrades. Key investment themes centre on a defensive approach coupled with trading strategies to boost alpha and deploying excess cash on weakness in value names for medium term outperformance. Still OVERWEIGHT on the banking, O&G, basic materials, non-bank financial institutions (NBFIs), healthcare and property sectors. End-2023 FBM KLCI target cut to 1,500 pts from 1,575 pts, after ascribing an unchanged 15x (-0.5SD to mean) P/E to our revised FY24F EPS

Source: RHB Securities Research - 2 Jun 2023