In the first quarter of 2023, the aggregate reported earnings of FBM KLCI 30 current constituents came in at RM15.8b. It slumped sequentially at -34.7%qoq but improved against the corresponding quarter last year at +3.0%yoy. On an adjusted basis, the aggregate normalized earnings of FBM KLCI 30 current constituents in 1QCY23 rose sequentially at +2.3%qoq but declined on-year at -4.8%yoy to RM14.7b.
Within MIDFR Universe, 10% of stocks under coverage reported higher-than-expected earnings. Of the rest, 36% posted earnings that were lower than expected versus 54% which came within expectations. Target price changes involved 19 upward adjustments and 28 downward adjustments. Moreover, MIDF said it made 10 changes to its stock recommendations with 4 upgrades and 6 downgrades.
Divergence in net change to forward earnings between heavyweight and lesser cap stocks. The aggregate FY2023 earnings forecast of the FBM KLCI constituents under the house’s coverage was revised lower by -6.7% to RM64.7b. In contrast, the aggregate FY2023 earnings forecast of non-FBM KLCI constituents under coverage was revised higher by +3.0% to RM17.8b.
In view of the results, MIDF said it maintains both its end-2023 FBM KLCI and FBM70 targets at 1,590 and 15,000 points respectively in anticipation of post-Fed pause valuation recovery.
The divergence in the net change to aggregate forward earnings favouring non-heavyweight stocks was also duly reflected in their relative price performance thus far this year. As of end-May 2023, the year-to-date price return of FBM KLCI stood at -7.2%. In contrast, the midcap FBM70 index registered a year-to-date return of +4.9%.
The heavyweights were bogged down mainly by price underperformance of Financial Services as well as commodity-related Industrial P&S (namely Petronas Chemicals and Press Metal) and Plantation stocks. The former sector was impacted by banking turmoil in the US and Europe while the latter by lower commodity product prices. Nonetheless, going forward, the house does not expect the underperformance of these heavyweight stocks to persist.
Firstly, the banking turmoil in the US and Europe is arguably a consequence of the rapid rise in interest rates during the
past year. As the US Fed is anticipated to pause either in the upcoming June or later July meeting, it can thenceforth
expect to see some recovery in both the valuation and earnings expectation of banking stocks. Secondly, MIDF said it reckons the softening commodity price trend is presaging a slowdown in economic activities which is also arguably a consequence of the rapid rise in interest rates during the past year. Likewise, we can expect to see some improvement in both the valuation and earnings expectation of commodity-related stocks post-Fed pause.
At PER23 of 13.3x, the FBM KLCI is currently trading at depressed valuation (vis-à-vis its historical range of 16.0x to
17.0x). However, we expect its valuation to revert higher during the latter part of this year supported by the reasons stated above and buttressed by the continuing general macro growth.
Going forward, MIDF said it expects the market valuation of FBM70 to improve further supported by macro and corporate earnings growth as well as the end of the interest rate tightening cycle.
