3QCY23 – Pockets Of Positive Earnings Surprises: Kenanga

The FBMKLCI component stocks reported 3QCY23 results with more positive earnings surprises  compared to the previous quarter.

Kenanga Research Market Strategy cited today (Dec 4) that while cost pressures (from energy, labour and inputs) weighed  down on earnings across sectors, planters benefited from lower fertilizer cost while glove makers  enjoyed lower latex and nitrile butadiene rubber (NBR) costs.

Similarly, while many companies reported disappointing business volumes on slowdown in domestic consumption, port operators saw improved cargo throughput, while oil & gas support service providers were swamped with  new work orders.

Kenanga now projects the benchmark index earnings to contract slightly more by 4.5% in CY23F  (from a 4.0% decline previously), followed by a higher growth of 12.6% in CY24F (from 10.5%  previously).

More Positive Earnings Surprises

The earnings delivery (as against Kenanga’s expectations) of the FBMKLCI component stocks improved sequentially in 3QCY23, with 29%, 43% and 29% beating, meeting and missing their projections compared with 10%, 66% and 24% in 2QCY23, respectively.

Similarly, as against market expectations, there was also sequential improvement with “above”, “within” and “below” at 17%,  43% and 40% vs. 10%, 50% and 40% in 2QCY23, respectively.

Winners and Losers

An encouraging eight FBMKLCI component stocks under Kenanga’s coverage beat projections, namely, AXIATA (strong showing  from South Asian units), CDB (lower O&M cost and regulatory fees), GENTING (strong recovery in Singapore), QL (margin  recovery), RHBBANK (better net interest margin), SIMEPLT (lower costs, better downstream margins), TM (tax credit) and  WPRTS (higher container volume).

On the other hand, eight FBMKLCI component stocks under their coverage universe missed projections, namely, GENM  (weak tourist arrivals), IHH (weak showing from operations in Singapore and Türkiye), IOICORP & KLK (weak downstream  performance), MISC (weak showing from petroleum shipping and offshore segments), PCHEM (low plant utilisation), PETDAG (unfavourable product price movement) and TENAGA (high-cost coal inventory). 

Observations in 3QCY23 Earnings Reports

Within Kenanga’s coverage including non-FBM KLCI component stocks across sectors, a number of companies were hit by cost  pressures, including AEON, AIRPORT, ASTRO, DLADY, GHLSYS, HPPHB, JHM, KIMLUN, LGMS, MKH, PADINI, POS, SLP,  TCHONG and VELESTO. This is not surprising given the rising energy, personnel and input costs. What surprises Kenanga was, this  time around, certain companies actually benefited from the easing of cost pressures, predominantly, planters due to lower fertilizer cost (BPLANT, GENP, TAANN and TSH) and glove makers as latex and nitrile butadiene rubber costs eased (HARTA and KOSSAN). 

A number of companies were hit by disappointing business volumes in terms of sales volumes, orders, progress billings and  adex (media companies) including AEON, ANCOMNY, KERJAYA, KIMLUN, KOTRA, MCIL, MEDIA, NOVA, PADINI,  PWROOT, SLP, STAR, SUNCON, TGUAN and UNISEM.

On a brighter note, stronger-than-expected business volumes were reported by port operators in terms of cargo throughput (BIPORT and WPRTS) and oil & gas support service providers in terms  of work orders (UZMA, WASCO and YINSON).

End-CY23 FBMKLCI Target Maintained

Kenanga projects FBMKLCI earnings to contract slightly more by 4.5% in CY23F (from a 4.0% decline previously), followed by a  higher growth of 12.6% in CY24F (from 10.5% previously) owing to a slightly lower base in CY23F. 

They maintain their end-CY23F FBMKLCI target of 1,520 pts based on an unchanged 16.5x CY23F PER, which is at a 0.5x multiple premium to its historical PER range of 14x-16x post the economy reopening in 2021-2022, on a reduced market risk  premium with improved political stability.

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