Minor Downward Revision in Forward Earnings

Corporate Malaysia did not disappoint in 2Q24. Companies under our coverage saw their core earnings grow 21.1% YoY and 3.8% QoQ, respectively. The momentum was consistent with the 20.7% YoY expansion that we witnessed in 1Q24 but the QoQ expansion was softer compared to 9.1% QoQ in the previous quarter due to rising base effect but operating margin continued to expand for three consecutive quarters. The strong YoY growth was mainly driven by the oil and gas, power and utilities, plantations, healthcare and property sectors. Post results season, we have trimmed our CY24 and CY25 earnings only marginally by 1.0% and 0.6% respectively mainly due to the downward revisions in gaming, telecommunications and transportation stocks, which were offset by upgrades in power and utilities sector. With that we forecast CY24 and CY25 earnings to grow by 16.5% and 9.3% respectively. Meanwhile, our earnings growth forecasts for FBMKLCI component stocks in CY24 and CY25 are 12.1% and 7.6% vs. consensus’ 14.7% and 7.1%, respectively. No change in our end-2024 FBMKLCI target of 1,690 based on CY25 PER of 14.6x.

Results Largely In-Line With Expectations

The 2QCY24 results season was largely in line with our forecasts. Of the 105 Malaysian companies under our coverage, 69 companies (66% of our coverage) delivered earnings that met our expectations. The sectors that delivered results in line with our expectations include Automotive, Banking, Construction, Consumer, Healthcare, Insurance, Oil & Gas, Plantations, Power & Utilities, Property, Telecommunications and Transportations.

Meanwhile, 21 companies (20%) reported disappointing results. Technology (CORAZA, ELSOFT, INARI, and MPI) announced earnings that fell short of our projections. Several heavyweights, including NESTLE, GENTING, IOIPG, and CDB, reported weaker-than-expected results.

On a positive note, 14% of our coverage, or 15 companies, reported results that exceeded our forecasts. While no single sector outshone the rest, TENAGA was the exception among large-cap stocks, delivering results that surpassed our predictions.

When comparing actual performances vs. consensus’ expectations (Figure 5) for all stocks within our universe, 65% came within forecasts, 17% underperformed, and the remaining 18% exceeded expectations.

Since the previous quarterly review, we have ceased coverage on CMSB (SELL, TP: RM1.15) due to reallocation of our resources.

QoQ, YoY and Cumulative 6MCY24 Earnings Increased 3.8%, 21.1% and 20.8% Respectively.

YoY, the 2QCY24 and 6MCY24 aggregate earnings surged 21.1% and 20.8% respectively.

The strong YoY and 6MCY24 were driven mainly by the following sectors (see Figure 6).

i) Oil & Gas - Earnings surged on the back of increased sales volumes and higher margins in upstream activities, fuelled by a tight supply of OSVs and boosted CAPEX from Petronas.

ii) Power & Utilities - The sector rebounded with stabilising fuel margins, improved generation earnings, and favourable tariff adjustments, supported by better contractual terms for players like PETGAS and YTLPOWR.

iii) Plantations – Boosted by strong palm oil prices, recovery in downstream activities, coupled with higher export volumes and operational efficiencies.

iv) Healthcare - Driven by increased global demand for healthcare products, especially gloves, along with higher patient volumes and improved pricing power.

v) Property - Strong earnings growth supported by lucrative disposals of land by key players like SPSETIA and SIMEPROP.

However, this positive trend was partially offset by weaker performance in the Telecommunications sector, dragged by TM due to the absence of tax credit.

QoQ, 2QCY24 marked the second consecutive quarter of sequential growth, with core earnings increasing by 3.8%. Although this reflects a moderation from the robust 9.1% growth in 1QCY24, the continued momentum is evident, driven by strong performances in Banking, Oil & Gas, Plantations, Property, and Power & Utilities sectors.

Oil & Gas, Power & Utilities and Plantations were among the top 3 sectors that reported remarkable earnings improvement QoQ, YoY and cumulative 6MCY24. Oil & Gas saw a surge in sales volumes and upstream margins. Power & Utilities gained from stabilising fuel margins, better generation earnings, and favourable tariffs. Meanwhile, Plantations benefited from strong palm oil prices, downstream recovery, and higher export volumes.

The Building Materials and Insurance sectors reported weaker performance across QoQ, YoY, and cumulative 6MCY24 results. Building Materials struggled due to subdued average selling prices (ASP) and reduced sales volumes. Meanwhile, Insurance was dragged down by Tune Protect, which faced one-off losses and the absence of contributions from the Perlindungan Tenang Vouchers.

However, this positive trend was partially offset by weaker performance in the Telecommunications sector, dragged by TM due to the absence of tax credit.

QoQ, 2QCY24 marked the second consecutive quarter of sequential growth, with core earnings increasing by 3.8%. Although this reflects a moderation from the robust 9.1% growth in 1QCY24, the continued momentum is evident, driven by strong performances in Banking, Oil & Gas, Plantations, Property, and Power & Utilities sectors.

Oil & Gas, Power & Utilities and Plantations were among the top 3 sectors that reported remarkable earnings improvement QoQ, YoY and cumulative 6MCY24. Oil & Gas saw a surge in sales volumes and upstream margins. Power & Utilities gained from stabilising fuel margins, better generation earnings, and favourable tariffs. Meanwhile, Plantations benefited from strong palm oil prices, downstream recovery, and higher export volumes.

The Building Materials and Insurance sectors reported weaker performance across QoQ, YoY, and cumulative 6MCY24 results. Building Materials struggled due to subdued average selling prices (ASP) and reduced sales volumes. Meanwhile, Insurance was dragged down by Tune Protect, which faced one-off losses and the absence of contributions from the Perlindungan Tenang Vouchers.

Changes in Earnings Forecasts

Following the 2QCY24 results, we made slight adjustments to our earnings forecasts, trimming our CY24 and CY25 projections by 1.0% and 0.6%, respectively (Figure 11).

Significant downgrades were noted in the following sectors:

i) Gaming – Reduced Genting Singapore's contribution to Genting Group.

ii) Telecommunications – Lowered earnings projections for CDB due to higher operating expenses.

iii) Transportation - Downgraded FY24 earnings after revising fuel costs upward by 5%.

These downgrades were partially offset by upward revisions in the Power & Utilities sector, driven by upgrades for MALAKOF and TENAGA. This adjustment reflects stronger generation earnings, as the impact of negative fuel margins diminishes with stabilising coal prices.

Following the revisions, we forecast a slightly slower earnings growth of 16.5% in CY24, compared to the previously projected 17.1% expansion as outlined in our 1QCY24 review. The key drivers of this growth, in descending order, are expected to be the Power & Utilities, Transportation, Healthcare, Banking, Gaming, and Oil & Gas sectors.

In Power & Utilities, we expect a rebound due to diminishing negative fuel margins, better terms under PETGAS’s 3rd Term GPA with Petronas, and favourable tariff adjustments for YTLPOWR’s Wessex Water, along with stronger margins for Power Seraya. Transportation will benefit from a strong recovery in air travel demand and increased container throughput. With growing demand for gloves and higher patient volumes, healthcare earnings are set to rise. The Banking sector is expected to strengthen with rising loan growth, stable net interest margins, and increased fee income. Gaming will see a boost as gaming volumes recover to pre-pandemic levels. Lastly, Oil & Gas earnings are projected to grow, driven by higher day rates for offshore support vessels amid tight supply and increased CAPEX from Petronas, benefiting upstream activities.

Looking ahead to CY25, we project earnings growth of 9.3%, with recovery continuing across all sectors except Auto. In the Auto sector, we foresee a contraction in earnings due to an anticipated decrease in Total Industry Volume (TIV) as car orders normalise.

For the same stock universe, the consensus has marginally adjusted CY24 and CY25 earnings higher by 0.3% and 0.2%, respectively. Following these revisions, the consensus now projects earnings growth of 15.7% and 10.8% for CY24 and CY25, respectively.

Higher Numbers of Upgrades

Recommendations for 15 stocks had been upgraded post-results vs. 7 downgrades (Figure 13). In comparison, 13 stocks were upgraded, and 9 stocks were downgraded in the preceding quarter.

The 12 stocks that were upgraded to Buy are ABMB, AMBANK, BAUTO, F&N, KOSSAN, MALAKOF, MHB, PHCHEM, REXIT, RHBBANK, SCIENTX and TRC, whereas 3 stocks, namely AXIATA, ELKDESA, and MAXIS were upgraded to Hold.

On the other hand, 4 stocks, COASTAL, KLK, QL, and WPRTS were downgraded to Hold, while 3 stocks, namely, CJCEN, CSCSTEL, and GADANG, were downgraded to Sell.

Sectors Changes Post-Results

No sectors were upgraded or downgraded in this review.

We maintain NEUTRAL on Automotive, Building Materials, Healthcare, Insurance, Plantations, Telecommunications, and Transportation while OVERWEIGHT on Banking, Construction, Consumer, Gaming, Oil & Gas, Property, Power & Utilities, and Technology. Media retains its UNDERWEIGHT rating.

Investment Strategy

Strong foreign buying interest propelled the FBMKLCI to a high of 1,681.37 last week, increasing the possibility of it rising above our end-2024 target of 1,690 (based on CY25 PER of 14.4x) sooner than expected. We are not perturbed by such possibility as we have highlighted on numerous occasions that the benchmark index is midway through a major bull cycle and is likely to break above 2,000 points before the current parliament’s 5-year term expires on 19 November 2027.

This bullish expectation is premised upon Malaysia’s improving fundamentals. Domestic demand has been resilient benefitting from the strong public spending, private consumption, as the strong labour market and government measures have encouraged spending, and significant rebound in tourism activities. Besides, Malaysia’s stable politics, forward looking policies and structural reforms have attracted sizeable foreign direct investments into new technologies, especially into artificial intelligence related infrastructures like data centre, which had spillover effects on many sectors like power, construction, property, utilities, etc. It was enhanced further by the “China Plus One” strategy, which we believe have contributed to improving exports in recent months as producers diversify away from China into other South-East Asian markets. So, private investments are thriving as well. The cascading impact from these drivers are expected to contribute to better economic and corporate earnings growth.

Budget 2025 that will be unveiled on 18 October will underpin measures to sustain the economic growth momentum next year and should reaffirm the commitment in driving reforms, attracting investments, boosting consumption and accommodating businesses without forgetting measures to boost revenue, lower expenses and supporting the low-income groups. For a start, the planned staggered increase in civil servants’ pay in December and 2026 should have a significant impact on consumption in 2025 and 2026. In our opinion, it is likely to be bolstered further by a possible increase in minimum wages from current RM1,500/month (possibly by another RM300 to RM1,800).

Sensing the growth potential vis-à-vis the FBMKLCI’s undemanding valuation, foreigners have turned strong net buyers in the last three months and have contributed to a net inflow of RM3.04bn in the first eight months of 2024. Still, the foreign shareholding in Malaysian equities is only 19.8% and should rebound to midtwenties (24.3% in 2014 and 23.1% in 2019 before it dropped to a low of 19.5% in 2023) within the next three years as confidence returns and corporate earnings continue to support expansion in valuation multiples. Besides, foreigners are expected to continue accumulating amidst expectations for the Malaysian ringgit to strengthen further against the USD as the Federal Reserve has displayed strong intention to kick off its monetary easing cycle starting this month.

External events, especially the heightening tension in the Middle East, and slower than expected economic growth in China could exert some downside volatility in the benchmark index but it should be viewed as a golden opportunity to load up on undervalued blue chips, domestic sectors like consumer and construction, and beneficiaries of the new economy like power, property and technology sectors that are benefitting from the proliferation of artificial intelligence and the huge investments that are going into data centres and related infrastructure.

We reiterate that an expansion in valuation multiple for the FBMKLCI is long overdue and anticipate sustained buying interest should gradually reduce the valuation gap between the current consensus CY25 PER of 14.2x and 5-year average of 17.6x. This will be supported by a stronger economy, which we forecast to grow by 4.7% this year versus 3.7% last year, and robust corporate earnings (stocks under our coverage universe 16.5% and 9.3%, and FBMKLCI 12.1% and 7.6% in CY24 and CY25, respectively).

For market exposure, we continue to promote the six key investment themes that we recommended in our “2H24 Market Strategy: On the Cusp of Stronger Recovery”. TM and YTLPOWR remain as the preferred big cap growth picks to seize the opportunities from investments into digital economy infrastructures, data centres, networks, servers, 5G, cloud services etc. The latter will also benefit from higher electricity and water tariff from Singapore and UK respectively apart reaping some synergy from its earnings accretive Ranhill acquisition due to its expertise in managing Wessex Waters.

We are keeping GAMUDA, IOIPG, SIMEPROP, SUNCON, INTA and IBRACO for domestic exposure as apart from benefitting from the huge public spending they too tend to benefit from the government’s long-term plans to drive investments that will be catalysts for transit-oriented developments, new townships, appreciation of real estate prices, rentals, etc. The property players will also benefit from the strong labour market, higher wages and low interest rate. We continue to promote exposure to undervalued blue chip stocks, especially banks due to their still cheap P/Bk valuation of 1.1x versus a peak valuation of 1.9x during the height of the 2014 bull cycle when the FBMKLCI hit a high of 1896.23. The likelihood of significant inflow of foreign funds in future is expected to be a catalyst for banks due to their cheap valuation, high market capitalisation, focus on sustainable development and conformity to best practices. Maintain buy on PBBANK & ABMB.

Despite the recent price corrections in technology stocks due to weaknesses in the US tech stocks and the appreciation of the Ringgit, we believe interest in the sector will return due to proliferation of advanced technologies and strong demand for related products, high likelihood of Fed ending its tight monetary policy soon that will be positive for US tech stocks, and the “China Plus One” strategy, which has increased investments in the Malaysian electrical and electronics sector. INARI will benefit from the growing demand for radio frequency chips, sensors, AI and memory devices, apart from China’s domestic demand that will benefit its subsidiary Yiwu Semiconductor. For defensive consumer plays, we like FFB and AEON. We are optimistic they will benefit from greater domestic activities and higher consumption as government incentives, increase in civil servants pay, withdrawal from EPF account 3 and robust tourist arrivals boost demand. From an operational perspective, the stronger Ringgit, which has appreciated by 6.0% in last eight months to RM4.3155 against the USD should help to lower input costs as well.

Meanwhile, PGF, SCOMNET & VELESTO remain as preferred small cap picks. PGF is seeing increased demand for its glass wool insulation products to reduce carbon emission due to changes in building code in Australia and massive infrastructure spending locally. As a landowner with 1,311 acres of leasehold land adjacent to Proton City in Tanjung Malim, it will benefit from Geely’s investments there. The carrying value of the land is only RM2.57 per square foot (psf) versus market value of RM45psf. SCOMNET is witnessing rising orders for medical devices with the inclusion of new products and shift to whole device products like vascular dialysis catheters that command higher margin. VELESTO will benefit from high DCR, high operational efficiency and robust outlook for crude oil prices as OPEC+ cut production and the Middle East tensions raised supply concerns.

Source: TA Research - 3 Sept 2024