The 1Q24 results of companies under coverage did not disappoint. Core earnings of stocks under coverage rose 9.1% QoQ and 20.7% YoY due to strong contributions from the banking, gaming, power & utilities, and transportation sectors. Post results season, we have trimmed our CY24 and CY25 earnings by 1.5% and 2.1% respectively mainly due to downward revisions in plantation and oil & gas stocks. With that we forecast CY24 and CY25 earnings to grow by 17.1% and 8.6% respectively. Meanwhile, our earnings growth forecasts for FBMKLCI component stocks in CY24 and CY25 are 17.0% and 7.1% vs. consensus’ 16.6% and 7.8%, respectively.

We tweak our end-2024 FBMKLCI target to 1,690, from 1,620, based on CY25 PER of 14x, which is still a 19.5% discount compared to last five years’ average of 17.4x. We believe this discount should narrow gradually as investors get attuned to the facts that 1) the economy is improving, 2) corporate earnings will see a strong double-digit earnings growth this year, 3) sizeable public spending and foreign direct investment inflows in growth sectors will have positive spillover effects on domestic direct investment, economy and corporate earnings, 4) domestic fiscal consolidation and structural reforms will improve the nation’s finance, 6) FBMKLCI’s valuation is undemanding by historical standard, and finally all these factors should boost 7) foreign interest in domestic equities as their shareholding is low at 19.6% as at end May 2024.

Results Met Expectations

The recently concluded 1QCY24 results season largely met our expectations. Out of the 105 companies (Malaysia only) under our coverage, 65 companies (62% of our coverage) reported earnings that aligned with our estimates. The sectors that delivered results in line with our expectations include Banking, Construction, Consumer, Healthcare, Insurance, Media, Oil & Gas, Power & Utilities, Property, Telecommunications and Transportation.

Meanwhile, 23 companies (22%) reported disappointing results. Building Material (ANNJOO, CHINWEL and CMSB) announced earnings that fell short of our projections. Several heavyweights, including GENM, HARTA, PCHEM, KLK, SDG, and CDB, reported weaker-than-expected results.

On the other hand, 16% of our coverage, or 17 companies, posted results that beat our expectations. Auto (MBMR and SIME) demonstrated superior performance during the quarter under review. That said, four large cap stocks, namely, SIME, F&N, QL and GENTING, stood out by exceeding our forecasts.

When comparing actual performances vs. consensus’ expectations (Figure 5) for all stocks within our universe, 60% came within forecasts, 24% underperformed, and the remaining 16% exceeded expectations.

FBMKLCI Target Raised to 1,690

62% of companies under our coverage reported results in line with our projections, 22% came in below our estimates while 16% exceeded our forecasts

1QCY24 Earnings Increased 9.1% QoQ and 20.7% YoY

In 1QCY24, earnings increased by 9.1% QoQ and 20.7% YoY. This robust YoY growth was observed across most sectors, except for Building Materials and Oil & Gas.

The Strong YoY Earnings Were Driven Mainly by the Following Sectors (see Figure 6).

i) Banking - Growth was driven by robust operating income, with net interest income (NII) supported by stronger loan growth, stable net interest margins (NIM), and Accelerated Fee Income.

ii) Gaming - The sector experienced sustained earnings recovery in 1Q24, with margin expansion more than offsetting the impact of the service tax hike.

iii) Power & Utilities – YoY growth was bolstered by a turnaround at MALAKOF, following the easing of negative fuel margins, and stellar performance at Power Seraya for YTLPOWR.

iv) Transportation - Overwhelming Travel Demand Boosted Aviation Sector Results.

However, this positive trend was partially offset by weaker performance in the Oil & Gas sector. Core profit in this sector was dragged down by lower EPCC profit for COASTAL and sluggish product spreads for PCHEM.

Sequentially, 1CY24 earnings transitioned into a growth trajectory of 9.1% QoQ, compared to a 1.9% contraction in 4QCY23. This was primarily driven by stronger earnings in the Banking, Gaming, Power & Utilities, and Transportation sectors.

Several sectors demonstrated earnings expansion on both a QoQ and YoY basis, including Automotive, Banking, Construction, Gaming, Healthcare, Power & Utilities, and Transportation. In contrast, the Building Materials sector experienced a deterioration in earnings on both fronts, attributed to lower average selling prices (ASPs) and sales volumes, stemming from market uncertainty and subdued demand.

Changes in Earnings Forecasts

Post 1QCY24 results, we trimmed our CY24 and CY25 earnings forecasts by 1.5% and 2.1%, respectively (Figure 11).

Some Sectors That Had Sizeable Downgrades Were:

i) Plantations – Earnings reductions mainly stemmed from SDG, KLK, and FGV, reflecting lower margins and decreased contributions from the downstream division.

ii) Oil & Gas - The downgrade was primarily due to lowered ASP assumptions for PCHEM and LCTITAN in anticipation of a prolonged supply glut.

However, this was partially cushioned by an upward revision in the following sectors.

i) Construction – Factored in higher revenue recognition and margin assumptions Amid Stabilising Input Costs.

ii) Gaming – Earnings were upgraded, largely driven by revised contributions From Genting Singapore to Genting.

iii) Property - Adjusted CY24 earnings to include SPSETIA land sales proceeds, while CY25 earnings were raised due to improved revenue recognition from SPSETIA ongoing projects.

iv) Transportation – Earnings were upgraded, primarily led by the aviation sector, especially Capital A, which reported stronger-thanexpected earnings in 1Q24.

Following the revisions, we forecast a slightly slower earnings growth of 17.1% in CY24, compared to the previously projected 17.6% expansion as outlined in our 4QCY23 review. The primary contributors to this earnings growth, in descending order, are expected to be Power & Utilities, Gaming, Transportation, Healthcare, Banks, and Oil & Gas.

Power & Utilities earnings are poised for a rebound due to improved fuel margins. Gaming is set for growth, driven by increased visitation following visa relaxation and currency depreciation, bolstering foreign visitation. Transportation is expected to benefit from various factors including a low base effect, higher visitation due to visa relaxation, currency depreciation, and increased freight rates due to trade tensions. Healthcare earnings are anticipated to rise with enhanced glove plant efficiencies and higher patient volumes. Bank earnings are forecasted to improve with stronger loan growth, stable Net Interest Margin (NIM), and growing fee income. Oil & Gas earnings are projected to recover on the back of improving product spreads and increased demand for petrochemical products.

Looking forward to CY25, we anticipate earnings growth of 8.6%, driven by continued recovery across all sectors except for Auto. In the Auto sector, we foresee a contraction in earnings as we project a decrease in Total Industry Volume (TIV), anticipating a normalisation in car orders.

For the same stock universe, the consensus has trimmed CY24 and CY25 earnings by 0.1% and 0.2%, respectively. Following these revisions, the consensus now projects earnings growth of 15.4% and 10.1% for CY24 and CY25, respectively.

Higher Numbers of Upgrades

Recommendations for 13 stocks had been upgraded post-results vs. 9 downgrades (Figure 13). In comparison, 13 stocks were upgraded and 10 stocks were downgraded in the preceding quarter.

The 10 stocks that were upgraded to Buy are ANNJOO, CDB, FFB, IOICORP, KMLOONG, MALAKOF, MAYBANK, SCIENTX, SDG, and TSH, whereas 3 stocks, namely KLK, SPTOTO, and UMCCA were upgraded to Hold.

On the other hand, 3 stocks, ALLIANZ, MISC, and TM were downgraded to Hold, while 6 stocks, namely, AMWAY, APEX, CMSB, ELKDESA, FGV, and MPI, were downgraded to Sell.

It is worth noting that, we have revised our recommendations for SPTOTO, MPI and TM in this quarter review report. SPTOTO has been downgraded to SELL in this results review following a surge in its share price. Conversely, MPI has been upgraded to Hold, with a target PER of 32x (previously 30x), reflecting improved sentiment in the semiconductor sector and resulting in a higher target price of RM41.10 (previously RM38.60). Additionally, TM has been upgraded to Buy with a new DCF-derived target price of RM7.18 (previously RM6.65), after raising the terminal growth rate assumption from 1.0% to 1.5% to account for TM’s position as a key beneficiary of the boom in data centres.

Sectors Changes Post-Results

Following the release of our 1Q24 results, we have revised our sector recommendations, upgrading three sectors and downgrading one.

We upgraded the Banking sector to OVERWEIGHT from Neutral due to anticipated rising loan growth, stabilising NIM, potential for higher net interest income (NII), gradual acceleration in fee income, and strong capital and liquidity buffers.

The Consumer sector was also upgraded to OVERWEIGHT from Neutral, driven by flexible EPF Account 3 withdrawals, increased out-of-home consumption, salary increments for civil servants, and robust tourist arrivals benefiting retail and breweries segments.

The Plantations sector was upgraded to NEUTRAL from Underweight, based on expectations of sustained earnings improvement from higher fresh fruit bunch production and improved margins.

Conversely, we downgraded the Insurance sector to NEUTRAL from Overweight following a revised recommendation for ALLIANZ, changing its rating from Buy to Hold.

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

Investment Strategy

We believe the FBMKLCI is undergoing a healthy consolidation phase after surging 178.13 points to a high of 1,632.79 this year. The significant recovery was driven by net buying of local institutional funds and supported by strong foreign interest last month (+RM1.5bn), which buffered the net outflow of RM2,249mn in the first four months of 2024.

Looking ahead for the rest of year, we reckon a continuity in the rally albeit at a smaller pace with intermittent shallow profit taking bouts as investors digest the implementation of domestic subsidy rationalization measures, largely involving fuel subsidies, and the uncertainty over the timing of the US monetary easing decision.

With the recent announcement by the Prime Minister to increase diesel prices soon in Peninsular Malaysia, everyone is anxiously waiting for more details on the quantum of diesel price increase and the implementation date, which will help them to gauge the next increase in the more broadly consumed petrol pump prices. To minimize the inflationary effect on supply channels, the government has committed to targeted subsidies through its “Budi Madani” initiatives where it will benefit public transport, fishermen, selected commercial vehicles under the Subsidised Diesel Control System, individuals and farmers including smallholders. The government has already announced RM200 monthly assistance for eligible individuals who owns diesel vehicles and agriculture smallholders.

As the prime minister has recently said that the government has no intention of unveiling a tax system that burdens the people, Budget 2025 may contain more measures to reduce revenue leakage and cutting subsidies that may have shortterm negative implications on consumption. Nonetheless, it is our view that consumers will adjust to the new norm eventually. While lower income groups will cushion the impact through government handouts and incentives, the flexible withdrawals from the EPF account 3 and higher civil servants pay this December will act as crucial factors to restore and boost consumption. Thus, with more clarity on subsidy rationalization measures that will improve the government’s fiscal position, the steady inflow of FDIs, effective allocations into growth sectors in Budget 2025, possibilities for up to RM25bn worth of additional liquidity from EPF account 3 withdrawals and the 13% increase in civil servants pay in December, we believe the prospect for continued recovery in Malaysia’s economy is bright.

Besides, the high likelihood of the US Federal Reserve cutting its interest rate later this year, assertive measures by China to revive its ailing property sector and rekindle economic growth, possibilities of greater inflow of foreign funds and the eventual strengthening of ringgit are added catalysts for local equities that should lead to a continued recovery in the FBMKLCI in 2H24 and beyond.

Thus, we believe an expansion in valuation multiple for the FBMKLCI is long overdue and investors will gradually attune themselves to reducing the gap between the current CY25 PER of 13.4x and 5-year average of 17.4x. 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 17.1% and 8.6%, and FBMKLCI 17.0% and 7.1% in CY24 and CY25, respectively).

Further narrowing in this valuation gap in coming years is highly likely as Malaysia’s structural reforms gain traction and foreign funds increase their exposure in growth markets. The timing also may be just right for them to slowly switch this year from pricy developed markets equities like the US, whose economy is expected to slow down and subjected to greater uncertainty post its presidential election, especially if Donald Trump is re-elected. This is consistent with our earlier view that the FBMKLCI is midway through a major bull cycle and it should hit a new all-time high before the 5-year term of Malaysia’s 15th parliament expires on 19 November 2027.

In the process, index heavyweight stocks are expected outperform as both foreign and local funds increase their holdings. We like Banks (ABMB, CIMB and PBBANK) particularly in this space due the sector’s attractive 1x P/Bk valuation vis-à-vis the sector’s improving loan growth, stabilizing NIM and rising fee income. Quest for digital economy to improve productivity and efficiency in every aspect of life and businesses have increased adoption of AI, 5G, IoT and cloud technology on a global scale. Data centres are also mushrooming along with this trend to cater for the huge demand for data storage and processing capabilities. We reckon Technology (INARI), Telco (TM) and Power (TENAGA and MALAKOF) sectors are among the key beneficiaries although some Property players have also jumped into the bandwagon, which will provide them a decent recurring income. They also will benefit from the huge inflow of FDIs as demand for industrial land and properties are expected to rise. With added strength from Malaysia’s improving labour market and low interest rate, we perceive SIMEPROP, IOIPG and IBRACO as valid picks. Ibraco, although relatively a small company, we like it for its Sarawak exposure.

Construction (SUNCON and INTA) sector will ride on the same wave due to provision of various related infrastructure, in addition to the huge public spending under various long-term plans such as the National Energy Transition Roadmap. Improved domestic activities, higher consumption, incentives from the government for the B40 group, increase in civil servants pay, withdrawal from EPF account 3 and robust tourist arrivals are positive for the Consumer (AEON, PADINI and FOCUSP) sector. Maintain. Small cap Healthcare stock (DPHARMA) will benefit from government contracts and an expected turnaround in the consumer healthcare segment, while SCOMNET sees a recovery in demand for its medical and automotive products. Building Material player PGF is expected to benefit from potential China investments in Tanjung Malim, where it owns 1,311 acres of development, apart from enjoying strong demand for its building insulation materials that contribute to a reduction in carbon emission.

Source: TA Research - 5 Jun 2024