Investment Highlights

• Sector and stock selection will be key to relative outperformance amid uncertain macro-driven headwinds in 1H2024, as softening global economic growth prospects and continuing subsidy rationalisation policies moderate positive equity sentiments currently being sustained by robust domestic liquidity. Our neutral rating on banking, plantation, telecommunications, automobiles and consumer sectors account for 62% of the FBMKLCI index weightage.
  
  We recently downgraded construction sector to neutral as stocks appear fairly valued amid slowing job wins and constrained margins. However, we upgrade healthcare sector as rising revenue per patient, increasing medical tourism and regional capacity expansion strategies underpin strong earnings prospects for IHH Healthcare (BUY, FV: RM7.35/share). For fertility specialists, a remarkably high pregnancy success rates, superior margins and canny focus on target markets amid rising affluence and low IVF penetration rates in the region position Alpha IVF (BUY, FV: RM0.42/share) ahead of peers.
  
  We remain OVERWEIGHT on technology, oil & gas, manufacturing, ports, power, property, REIT and transportation sectors. We have recently downgraded and switched Gamuda (HOLD, FV: RM6.54/share) from our top picks with our new coverage, Dayang Enterprise (BUY, FV: RM3.80/share) and swapped RHB Bank (HOLD, FV: RM6.00/share) with Public Bank (BUY, FV: RM4.50/share). The other top buys are still Tenaga Nasional, IHH Healthcare, Hong Leong Bank, IOI Properties, Greatech Technology, Telekom Malaysia, Dialog Group, IOI Properties and Yinson.
  
  For small cap ideas, we have initiated coverage on car seat/cover maker Feytech Holdings (BUY, FV: RM1.32/share) and property development-centric/value-engineering contractor, Vestland (BUY, FV: RM0.62/share). We also like stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer (BUY, FV: RM3.19/share) and niche agrichemical producer Ancom Nylex (BUY, FV: RM1.28/share) as well as grossly undervalued companies such as Deleum (BUY, FV: RM1.70/share).
  
  For dividend plays, we like REITS such as YTL Hospitality, Pavilion, UOA, Sunway and IGB as well as RHB Bank, Maybank, Paramount Corp, MBM Resources and CIMB Bank. Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Inari Amertron, Sunway Holdings, Gamuda, Sunway REIT, Westports Holdings and Yinson Holdings.

• 2024F year-end MYR target revised to 4.63. Our economist expects the US Federal Reserve to begin rate cuts following the Federal Open Market Committee (FOMC) September policy meeting. With rate differential (Federal Funds Rate (FFR) upper bound of 5.50% over Malaysia’s OPR of 3.00%) now at 250 bps, we believe that the US Fed would reduce FFR by 25 bps in September and by another 25 bps in December, resulting in a narrow interest rate differential by 50 bps by the end of this year to 200 bps. As such, our economist has revised the end-2024 forecast for MYR to 4.63 from 4.50. Variations to the forecast depends on US Fed policy with the upside to our forecast at 4.50 and the downside at 4.80 . We note that a less bullish MYR outlook towards the end of the year could moderate the direction of foreign equity inflows into the Malaysian market.

• Positive spillover catalysts from government’s FDI-focused promotional campaigns against the backdrop of multinationals diverting trade from China. Back in May this year, the government announced the National Semiconductor Strategy, aiming to draw RM500bil foreign direct investments (FDI) focused on integrated circuit design, advanced packaging and manufacturing equipment, which provide fresh catalysts to further re-rate the technology sector given the country’s relatively established ecosystem comprising outsourced semiconductor assembly & test services and automatic test equipment manufacturers.
  
  Additionally, proximity to Singapore is catalysing data centre and renewable energy excitement into utilities, construction and property counters, with beneficiaries including YTL Power International, YTL Corp, Tenaga, Gamuda, Sunway Construction, IJM Corp, Kimlun Corp, UEM Sunrise, Sime Darby Property and Ecoworld. Together with accelerated progress billings and higher launch targets underpinned by a firm 2024F GDP growth of 4.5%, revival of infrastructural projects and easing labour constraints, these will continue to support our sanguine view on the property sector.

• Why do we like oil & gas, transportation and ports? Oil & gas will continue to remain in play, supported by resilient crude oil prices amid a limited number of service providers with adequate financial and technical resources globally and backlogged maintenance orders. Meanwhile, the transportation sector will benefit from foreign tourist arrivals beating pre-pandemic levels on the back of strong government policy support, ramping up of international air travel capacity and medical tourism while ports could benefit from newsflow on potential tariff hikes for Bintulu Port and Suria Capital.

• FBMKLCI earnings growth prospects dwarfed by regional peers. Our 2024F FBMKLCI earnings growth has been maintained at 15.3% after Sunway replaced AMMB Holdings in the index. This is ahead of Bloomberg’s +7.5%, which has fallen from +11.3% in the previous month. For FY2025F, this is expected to decelerate to +9.3% vs. Bloomberg’s +7.9%. Even based on our more sanguine 2024F corporate earnings growth for FBMKLCI, Malaysia is dwarfed by Bloomberg’s estimate of +66% for Korea, +39% for Indonesia, +36% for Japan, +34% for Vietnam/Taiwan and +18% for Philippines .

• Substantively lower institutional transactions in June. As the ringgit was slid slightly to MYR4.715=US$1 last month, the FBMKLCI marginally declined MoM as local institutions were substantively less active, being net purchasers of RM264mil in June (from RM2.4bil in May) while foreigners continued to be net sellers albeit at a slight RM61mil from RM1.4bil in May. 68% of net local institutional purchases were in the financial sector, 22% in plantation, 5.4% in healthcare and 4.5% in construction. Conversely, 72% of the June net foreign sales were in the financial sector, followed by plantation (20%), and healthcare (4%).
  
  In June, foreigners sold out of Public Bank, MayBank, CIMB, YTL Power International, KL Kepong, YTL Corp, Hong Leong Bank, RHB Bank and Petronas Chemicals Group . However, they were net buyers of Tenaga, Press Metal, MISC, VS Industry, Inari Amertron, Mah Sing, AMMB Holdings, Malaysia Airports Holdings and IHH Healthcare.
  
  Foreign shareholding level in Malaysian equities remained at 19.6% for 3 consecutive months in May.

• Continued foreign outflows from ASEAN region. In June, foreign equity funds continued to gravitate towards Korea (RM18bil), India (RM13.8bil) and Taiwan (RM8bil) while the ASEAN region experienced a net foreign equity outflow of RM8.3bil, down from RM9.3bil in May. Malaysia’s June net outflow was minor compared to Thailand’s RM4.5bil, followed by Vietnam (RM2.7bil), Philippines (RM491mil) and Indonesia (RM436mil).
  
  YTD2024, ASEAN net foreign outflow reached -RM29.5bil vs. -RM37bil in 2023 with Malaysia at -RM1bil vs. Indonesia’s - RM2.9bil, Thailand’s -RM15bil, Vietnam’s -RM7.9bil Philippines’ -RM2.5bil.

• Near-median Malaysian equity valuations vs. under-valued region. With support from local institutional buying activities which exceeded net foreign selling, FBMKLCI’s YTD gain of 9% was the second-best performer in ASEAN, ahead of Singapore’s +2.9%, Indonesia’s -2.9%, Thailand’s -8.1% but slightly below Vietnam’s +10%. This outpaced China’s -0.3%, Hong Kong’s +3.9% and Korea’s +5%.
  
  The monthly rolling forward of FBMKLCI’s 5-year median forward P/E slid slightly to 14.6x vs. pre-pandemic 2017-2019 median of 17x amid persistently low post-Covid19 valuations. The FBMKLCI’s 2024F PE of 14.6x (Bloomberg’s valuation) currently trades near the latest 5-year median, yet valued significantly higher in contrast to Hong Kong/Philippines’ -1.2 standard deviation below its 5-year median, Thailand’s -0.9, Indonesia/Singapore’s -0.8, Korea’s -0.6, Vietnam’s -0.6 and China’s -0.5 .

• Maintain base-case end-2024 FBM KLCI target at 1,635, pegged to a 2024F P/E of 15.2x – 0.25 standard deviation above the 5-year median of 14.6x, supported by robust domestic liquidity. We remain cautious of:
  
  i) slowing global economic growth prospects,
  
  ii) less-optimistic expectations of the timing of US Federal Reserve cuts, which will drive volatility across all markets, and
  
  iii) moderating domestic consumption amid rising domestic inflation from targeted subsidy rationalisation later in the year.
  
  In our view, these downside risks could be partly mitigated by resilient local institutional liquidity as Malaysian equities offer decent corporate earnings prospects, compelling dividend yields of 4% and low foreign shareholding low of 19.6% amid reinvigorated expectations of infrastructural rollouts on a firm government mandate.
  
  The worst-case scenario from a global recession, new pandemic-driven lockdowns, more US rate hike surprises, bank failures and worsening geopolitical conflicts translates to an end-2024 FBMKLCI target of 1,340, pegged to 2024F P/E of 12.5x at -1 SD below the 5-year median.
  
  The best-case scenario from a faster pace of US Federal Reserve rate cut, stronger domestic government rollout of infrastructural projects and better-than-expected global economic growth would underpin an end-2024 FBMKLCI target of 1,815, pegged to 2024F P/E of 16.9x at 1 SD above the 5-year median.

• Technical analysis: We view the recent pullback on the FBM KLCI, which sent the index below its 50-day exponential moving average (EMA) for the first time in 2024, as a possible signal that the upward momentum may be slowing down. Nevertheless, its 20-day and 50-day EMAs are still trending flat, indicating an ongoing sideways trend. Hence, we believe that it is likely to be a period of consolidation for the KLCI in the near term.

Source: AmInvest Research - 2 Jul 2024