The 3Q24 results of companies under coverage largely aligned with our expectations (55% within, 28% below, and 17% above) and the consensus forecast (56% within, 27% below, and 17% above). Year-over-year, earnings grew by 6.7% in the quarter due to improved volumes and demand in the Healthcare, Technology, and Transportation sectors, better cost management in the Telco and Technology sectors, non-recurring contributions in the Property sector, and improved product spread and normalization in volume in the Oil & Gas sector. Following the 3Q results season, we have raised our CY24 and CY25 earnings forecasts by 0.7% and 1.3%, respectively. This marks the first post-results upgrade after 10 consecutive quarters of downgrades. Consequently, we forecast earnings of our stock universe to surge by 16.0% and 10% in CY24 and CY25, respectively. For the FBMKLCI component stocks, we forecast earnings to rise by 12.1% and 8.1%, compared to the consensus forecasts of 11.8% and 9.0%, respectively.

We maintain a cautiously optimistic view on local equities despite the high probability of the FBMKLCI underperforming our end-2024 target of 1,690 due to prevailing concerns. However, we expect better clarity on macro factors and Malaysia’s inherent strengths to contribute to improved investor sentiment next year. The benchmark index is trading at a consensus CY25 price-to-book ratio of 1.3x, lower than comparable developing peers’ 1.4x, providing strong downside support. It is also trading at a consensus CY25 PER of 13.6x, a significant 22.7% discount to its average 5-year PER of 17.6x.

Results Broadly In-Line With Expectations

The 3QCY24 results season generally aligned with our forecasts, as 55% of the 103 Malaysian companies under our coverage met expectations. Sectors performing in line included Automotive, Banking, Consumer, Gaming, Healthcare, Plantations, Power & Utilities, Property, Telecommunications and Transportations.

However, 28% of companies reported weaker-than-expected earnings, notably in the Building Materials (ANNJOO and CSCSTEL), Construction (GADANG, GAMUDA, SUNCON, TRC and WCT), Media (MEDIA and STAR), and Technology (CORAZA, ELSOFT, REXIT and UNISEM) sectors. Several prominent names, such as F&N, NESTLE, GENTING, MISC, KLK, IOIPG, PETGAS, CDB and WPRTS also fell short of our projections.

Positively, 17% of the companies under our coverage achieved earnings that exceeded our expectations. The Oil & Gas sector stood out, with LCTITAN, PANTECH and VELESTO surprising on the upside. Additionally, five large-cap stocks, namely AMBANK, CIMB, IHH, SDG and SUNWAY, outperformed our forecasts.

When comparing actual performances vs. consensus’ expectations (Figure 5) for all stocks within our universe, 56% came within forecasts, 27% underperformed, and the remaining 17% exceeded expectations.

Since the previous quarterly review, we have added two stocks, namely SAMAIDEN and BNSTRA, to our universe of coverage.

We initiate coverage on SAMAIDEN with a Buy rating and a target price of RM1.30. We like the company for its strong track record in RE EPCC and its position as a key beneficiary of the National Energy Transition Roadmap's push for 70% RE penetration. Accelerating orderbook growth from CGPP and LSS5 projects is expected to double revenues by FY26, while recurring income is set to soar with significant capacity expansion in CGPP and biomass FiT.

Additionally, we initiate coverage on BNSTRA with a BUY rating and a target price of RM2.05, supported by: (i) its strong and long-standing relationships with major clients, (ii) its strategic position to benefit from the property sector’s growth momentum, and (iii) robust earnings visibility and growth potential, underpinned by a resilient and expanding order book.

On the other hand, we have ceased coverage on APEX and ELKDESA as part of our resource reallocation. We have also discontinued coverage of CJCEN due to its challenging outlook and low trading liquidity, which has dampened investor interest.

YoY and Cumulative 9MCY24 Earnings Increased 6.7% and 15.8% Respectively, But Declined by 3.7% QoQ

YoY, the 3QCY24 and 9MCY24 aggregate earnings increased 6.7% and 15.8%, respectively. This growth was underpinned by several key factors observed across multiple sectors:

Common Drivers of Growth:

1. Improved Volumes and Demand:

• The Transportation sector experienced strong recovery momentum, driven by increased passenger traffic for Capital A and MAHB as air travel demand rebounded post-pandemic.
• Similarly, the Healthcare sector benefitted from higher hospital occupancy rates, driven by strong patient volumes and increased healthcare service intensity. This was complemented by growth in glove demand supported by higher average selling prices and volumes.

2. Cost Management:

• Better cost controls were evident in sectors such as Telecommunications and Technology, where companies like Axiata, Maxis, and MPI recorded improved earnings. This was achieved through disciplined expense management and operational efficiency, contributing significantly to margin expansion despite moderate revenue growth.

3. One-Off Contributions:

• The Property sector saw impressive cumulative growth primarily fuelled by lucrative one-off land sales and project completions, such as Sunway’s major project in Singapore. These non-recurring contributions provided a substantial uplift to earnings.

4. Market Recovery:

• The Oil & Gas sector experienced a turnaround, with improved product spreads benefiting companies like PCHEM and LCTITAN. Despite short-term challenges from currency fluctuations, the sector benefitted from gradual normalisation in demand.
• Similarly, the Technology sector experienced a recovery in global semiconductor demand, with companies like MPI and SKP recording growth due to higher orders and efficient cost management.

QoQ, 3QCY24 Earnings Contracted by 3.7%, Largely Due to the Following Factors:

1. Weaker Demand and Volumes:

• Automotive: Lower sales volumes for BAUTO and narrower margins for SIME contributed to the decline.
• Oil & Gas: Reduced contributions from key players like MHB and VELESTO due to weaker demand and the strengthening ringgit.

2. Higher Operating Costs:

• Power & Utilities: Temporary normalisation of Power Seraya’s earnings, coupled with elevated operating expenses.
• Media: Increased costs amidst declining advertising expenditure and subdued consumer sentiment.

3. Absence of One-Off Contributions:

• Property: The absence of one-off land sales that boosted the previous quarter's performance led to a QoQ decline.

4. Macroeconomic Challenges:

• The strengthening of the ringgit and ongoing global economic uncertainties further weighed on earnings across sectors, particularly in Oil & Gas and Media.

Changes in Earnings Forecasts

Following the 3QCY24 results, we raised our CY24 and CY25 earnings forecasts by 0.7% and 1.3%, respectively (Figure 11), marking the first postresults upgrade after 10 consecutive quarters of downgrades.

Sectors With Significant Upgrades Include

i) Banking – Earnings upgrades for AFFIN, AMMB, CIMB, MAYBANK, and RHBBANK were driven by lower credit costs and higher income contributions from non-interest income (NII) and Islamic banking operations.

ii) Healthcare – Upgrades reflected adjustments to IHH’s tax rates lower, increased finance income, and improved projections for India’s EBITDA margin (+3.1 points) and inpatient volumes (+3.8%).

iii) Plantations - Upgraded earnings for SDG and FGV were supported by better margins and higher contributions from the Oil & Fats division.

iv) Property - Increased contributions from strategic land monetisation, particularly by SPSETIA, were factored into earnings forecasts.

However, these upgrades were partially offset by downward revisions in the following sectors.

i) Gaming - Earnings forecasts were downgraded due to weaker performance from Genting Singapore and Resorts World Las Vegas.

ii) Telecommunications - Reduced earnings projections for CDB due to lower service revenue and higher operating expenses.

Following the revision, we now project earnings growth of 16.0% for CY24. The primary drivers of earnings growth in CY24, ranked by their absolute contribution, are expected to be the Banking, Power & Utilities, Transportation, Healthcare, and Oil & Gas sectors.

The Banking sector is poised for growth, driven by rising loan demand, stabilising net interest margins, higher non-interest income potential, and accelerated fee income. In the Power & Utilities sector, a recovery is anticipated, supported by receding fuel margin losses for covered power companies and strong earnings contributions from Power Seraya in CY24. The Transportation sector is expected to benefit from a robust recovery in air travel demand, boosting earnings for CAPITAL A and MAHB. In Healthcare, higher average selling prices and volumes for gloves, coupled with consistently high bed occupancy rates, are set to drive significant growth. Lastly, the Oil & Gas sector is projected to deliver stronger earnings, underpinned by improved profitability for PCHEM and LCTITAN as product spreads steadily improve.

Looking ahead to CY25, we forecast 10% earnings growth as recovery continues across all sectors except Automotive. This decline is attributed to an anticipated decrease in Total Industry Volume (TIV) as car orders normalise.

For the same stock universe, the consensus has made minor adjustments, raising CY24 earnings by 0.2% but reducing CY25 projections by 0.7%. Following these revisions, the consensus now projects earnings growth of 15.0% and 9.5% for CY24 and CY25, respectively.

Upgrades Outnumbered Downgrades

Recommendations for 9 stocks had been upgraded post-results vs. 8 downgrades (Figure 13). In comparison, 15 stocks were upgraded, and 7 stocks were downgraded in the preceding quarter.

The 6 stocks upgraded to Buy were AMMB, ASTRO, NESTLE, RHBBANK, SIME and SPTOTO, while AMWAY, BESHOM and PETDAG were upgraded to Hold.

Conversely, 7 stocks, ANNJOO, BAUTO, COASTAL, FFB, MISC, REXIT and VELESTO were downgraded to Hold. Only 1 stock, STAR was downgraded to Sell.

Sectors Changes Post-Results

Following the 3QCY24 results, we have upgraded our recommendations for two sectors.

The Automotive sector has been revised from Neutral to Overweight, driven by the upgrade of SIME to Buy, given its significant market capitalization weightage. Similarly, the Media sector has been upgraded from Underweight to Overweight after the upgrade of Astro to Buy, also due to its substantial market cap influence.

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

With the upgrade of the Media sector, we currently have no Underweight calls on any sector.

Investment Strategy

The benchmark FBMKLCI failed to sustain its momentum after rallying 230 points from last year’s close of 1,454.66 to a high of 1,684.68 in August. It gave back 90.39 points to close at 1,594.29 on November 29, as the market witnessed heavy foreign selling in the run-up to the US presidential election and the post-trifecta victory of Donald Trump and his Republican party. Daily net foreign selling hit a 12-month high of RM718 million last Thursday, and the total foreign net fund flow for the year turned negative at -RM1.3 billion in the first 11 months of 2024, following net outflows of RM1.8 billion and RM3.1 billion in October and November, respectively. The selling pressure was well absorbed by local institutional funds, which sustained the benchmark index around the 1,600 level.

Sentiment was derailed by fears over Trump’s isolationist and restrictive policies, especially tariff hikes, and worsened by Russian President Putin’s threat to unleash nuclear weapons. This was not a mere warning after Ukraine executed its first strike in Russia using Western missiles, as Russia updated its nuclear doctrine to include aggression against itself or allies by non-nuclear states, supported by nuclear states, as a joint attack.

Despite the lacklustre performance since late October, all eyes are on the final month of this year, hoping that year-end window dressing activities by local institutional funds will lift the FBMKLCI. This possibility is not remote if the Fed continues its dovish monetary policy guidance later this month, China announces more measures to revive its economy, and financial markets are convinced that an escalation in geopolitical tensions, especially between Russia, Ukraine, and their respective allies, can be prevented. This is especially likely after the truce between Israel and Lebanon weakened Iran’s position. Recall that the FBMKLCI witnessed the best average gain of 3.57%, with the index overwhelmingly rising in 30 of the past 34 years, or 88.2% of the time, in December.

Looking past December, the local equity market is expected to remain volatile as we move into an uncertain “Trump 2.0” period starting from January 20 next year. The fear of a tit-for-tat trade war disrupting the global economy and financial markets is a drag, following incoming President Trump’s intention to impose a tax of between 10% and 20% on all imports from the US’ trading partners. He has already announced a much higher tariff of 25% on its top two trading partners, Mexico and Canada, but kept the increase on the third-largest partner, China, to 10%, lower than the 60%-100% indicated during his preelection campaign. Nonetheless, nothing is conclusive as he may still use it as a bargaining tool to obtain more concessions from these countries, especially regarding reducing the trade deficit and other domestic issues affecting the locals, like migrants and drugs.

It is important to note that Trump won the presidential election because of American voters’ dissatisfaction with the economy, inflation, and job opportunities. As US manufacturers have a high dependency on these key trading partners, his tariff hikes could backfire by increasing inflation, lowering job prospects, and affecting the economy. As such, he may just want to repeat what he did during his first presidential term to benefit Americans and their economy. Recall that during his first presidency, he raised the “tariff stick” and forged a Phase One trade deal with China, and successfully renegotiated trade agreements with Mexico, Canada, South Korea, and Japan. Besides, the trade war during this period had a muted impact on GDP, inflation, and the stock market. (please refer to our 4Q24 Market Outlook report). https://taresearch.taonline.com.my/rrs/files/2024/10/4Q2024_20241003.pdf

According to the International Monetary Fund’s latest World Economic Outlook report in October, a 10% US tariff on all imports effective mid-2025 and a fullscale retaliation by Europe and China with similar tariff increases on the US would result in a reduction of only -0.1 percentage points from its base case global GDP growth forecast of 3.2% in 2025. The impact on the US would be -0.4 percentage points, which we believe can still be mitigated by tax cuts and deregulations. The report also indicated that the drag on China and Europe would be negligible as trade is not a significant component of their GDP. However, it acknowledged that trade policy uncertainty could have a larger negative impact, though not sufficient to tip any major economies into recession in 2025.

That said, we believe it is difficult to accurately quantify the impact of tariff hikes on the economy without knowing whether there will be any exemptions on services, intermediate goods, and certain commodities like oil and gas. Additionally, exporters and importers’ reactions can also mitigate inflationary pressure if they are willing to absorb the tariff increase and forego some profits. Expectations and the possibility of the US Federal Reserve tightening its monetary policy can contribute to the US dollar’s strength, resulting in improved purchasing power while mitigating inflationary pressure. Note that the probability of a rate cut in the December 18 Fed meeting has fallen to 63.5% currently, compared to 82.7% on November 1, according to the CME FedWatch.

As far as Malaysia is concerned, we believe it has inherent strengths in its strategic direction through sound long-term plans, supported by businessfriendly government policies, abundant natural resources, a multilingual talent pool, and its advantageous location. These factors help Malaysia remain resilient and progress with its growth agenda amid any adversity. Its strong labour market, impending hikes in civil servant salaries and minimum wages, and robust tourism activities are strong catalysts for increased consumption and corresponding rises in private investments. These will be important drivers for growth in corporate earnings of our stock universe, which has risen by 15.8% in the 9M24 period, on target to meet our full-year growth of 16% before continuing to expand by 10% in CY25.

We are keeping our cautiously optimistic view on the local equities despite the high probability of FBMKLCI underperforming our end-2024 target of 1,690 due to prevailing concerns but expect better clarity on macro factors and Malaysia’s inherent strength to contribute to improved investor sentiment next year. The benchmark index is trading at a cheap consensus CY25 price-to-book of 1.3x, lower than comparable developing peers’ 1.4x, providing it a strong support on the downside while trading at consensus CY25 PER of 13.6x, a huge 22.7% discount to its average 5-year PER of 17.6x.

For market exposure, we maintain buy recommendations on CDB, TENAGA, TM, and YTLPOWR as the preferred big-cap growth picks to seize the opportunities from investments in digital economy infrastructures, data centres, networks, servers, 5G, cloud services, national energy transition plans, etc.

We are recommending GAMUDA, IJM, IOIPG, MAHSING, SIMEPROP, SUNCON, 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. In view of the bank’s higher weightage and our expectations for the FBMKLCI to trend higher in 2025, we sustain Maybank, CIMB, PBBANK and ABMB as our top picks. INARI continue to be a top pick in our tech sectors due to growing demand for radio frequency chips, sensors, AI, and memory devices, apart from China's domestic demand, which will benefit its subsidiary, Yiwu Semiconductor. AEON and FOCUSP are top picks to ride on higher domestic consumption. Maintain PGF and SCOMNET as preferred small-cap picks to ride on strong demand for insulation products to reduce carbon emission and exposure to medical products manufacturer, respectively.

Source: TA Research - 3 Dec 2024