Seventh Consecutive Earnings Downgrade

The 3Q23 results season does not sprang any excitement. Core earnings of stocks under coverage grew by 9.0% QoQ driven mainly by the Banking, Construction, Gaming, Healthcare, Plantations, and Property sectors. However, on a YoY basis, earnings continued to contract for a second consecutive quarter at -4.2% due to weaker demand, higher operating costs and lower average selling prices. Post 3Q results season, we have cut our CY23 and CY24 earnings by 0.2% and 0.8% respectively, which is the seventh consecutive quarters of downgrade. Post revisions, we forecast earnings of our stock universe to contract by 0.2% (previously +2.5%) in CY23 before rebounding strongly by 19.3% (previously +16.7%) in CY24 respectively. As for the FBMKLCI component stocks, we forecast earnings to rise by 7.2% and 14.4% vs. consensus’ 4.1% and 12.3% respectively. We maintain our end- 2023 target of 1,515 based on CY24 PER of 13x in anticipation of a possible year-end rally that could be driven by the US Federal Reserve’s dovish guidance, stronger outlook for the Ringgit and local institutional funds.

Results Met Expectations

The recently concluded 3QCY23 results season generally aligned with our expectations. Out of the 105 companies (Malaysia only) under our coverage, 55 companies (52% of our coverage) reported earnings in line with our estimates. Sector such as Banking, Construction, Consumer, Gaming, Healthcare, Insurance, Power & Utilities, Property, and Telecommunications delivered earnings that met our expectations.

Meanwhile, 33 companies (32%) reported disappointing results. Building Materials (ANNJOO, CHINWELL and CMSB), Media (ASTRO and STAR), Oil & Gas (LCTITAN, MHB, MISC and PCHEM), Plantations (FGV, IOICORP, KLK and UMCCA) and Technology (CORAZA, ELSOFT, INARI and UNISEM) were the five sectors that announced earnings that fell short of our projects. Additionally, two heavyweights, namely HEIM and MAXIS, reported weaker-than-anticipated results.

In contrast, 16% of our coverage or 17 companies, posted results that beat our expectations. Automotive (BAUTO, MBMR, and UMW) emerged as the sole sector that surpassed earnings projections. Notably, several prominent large-cap stocks, such as CIMB, GAMUDA, IJM, F&N, GENTING, SIMEPLT, and AIRPORT, outperformed by surpassing our forecasts.

When comparing actual performances vs. consensus’ expectations (Figure 5) for all stocks within our universe, 40% of the results fell short of expectations, and another 38% of the results came within forecasts. Meanwhile, the remaining 22% of the results exceeded expectations.

Since the previous quarterly review, we have ceased coverage on N2N (SELL, TP: RM0.35) due to the underwhelming traction in its growth plans. Similarly, we also ceased coverage on Tiong Nam (Sell, RM0.70) citing limited investment appeal and a lack of re-rating catalysts for the stock.

YoY and Cumulative 9MCY23 Earnings Decreased 4.2% and 2.2% Respectively But Increased 9.0% QoQ

YoY, aggregate core earnings for 3QCY23 and 9MCY23 experienced declines of 4.2% and 2.2%, respectively, with specific sectors contributing to this weaker performance, as outlined in Figure 6.

i) Building Materials - Lower steel prices and sluggish export sales impacted Earnings.

ii) Media - Weak adex and non-adex revenues, including Pay-TV subscriptions and home shopping, were affected by ongoing macroeconomic challenges and subdued sentiment.

iii) Oil & Gas - Declining earnings in petrochemical players, such as PCHEM and LCTITAN, due to low demand for olefin products and subdued selling prices, alongside unexpected losses in MHB, contributed to the significant decrease.

iv) Plantations – Challenges from lower palm oil prices and increased operating costs affected performance.

V) Technology - Subdued Performance Was Linked to Softer End-market

Demand and An Ongoing Inventory Correction.

Nonetheless, this was partially cushioned by improved performance in the following sectors:

i) Automotive - Stronger results were driven by higher vehicle deliveries.

ii) Banking - Higher Operating Income and Reduced Loan Allowances Contributed to Improved Results.

iii) Consumer - Robust growth in the F&B segment due to rising demand and eased input costs.

iv) Gaming - Recovery in gross gaming revenue at Resorts World Sentosa and Genting Highlands contributed to positive results.

v) Insurance - Boosted by MFRS17 and Absence of Cukai Makmur.

vi) Telecommunications - Cost management and tax credit recognition lifted earnings.

vii) Transportations - Turnaround driven by the Aviation segment and robust

Growth in Westports' Earnings.

In 3QCY23, sequential earnings demonstrated a robust 9.0% growth, primarily propelled by enhanced performances in the Banking, Construction, Gaming, Healthcare, Plantations, and Property sectors. The growth drivers for Gaming remained consistent with the reasons for YoY and cumulative growth. Banking's stronger performance was driven by reduced overhead expenses and a decline in loan allowances. Construction saw stronger earnings, particularly from GAMUDA's overseas operations. Healthcare and Plantations experienced a sequential rebound, with lower operating costs and increased volumes enhancing healthcare results, while higher Fresh Fruit Bunch (FFB) production benefited Plantations. Property's earnings improved sequentially due to increased on-site development activities and better margins.

However, this positive momentum was partially offset by weakened sequential earnings in the Automotive sector, primarily attributed to SIME's reduced contribution from the Industrial division.

Building Materials and Media reported weaker performance in terms of QoQ, YoY, and cumulative 9MCY23. The reasons for the decline in earnings in Building Materials and Media have been detailed earlier.

Banking, Gaming, and Transportation emerged as the top three sectors, displaying notable earnings improvements in terms of QoQ, YoY, and cumulative 9MCY23 results. These improvements can be largely attributed to increased business activities within these sectors.

Source: TA Research - 4 Dec 2023