Declines in average selling prices caused significant distortions to the Plantations, Petrochemicals and Gloves sectors during 9M23. Nevertheless, revenue and earnings momentum improved in 3Q23; 9M23 normalised profits were flat albeit up 20% after adjusting for ASP distortions.
CGSCIMB today (Dec 5) remains constructive on equities and retain an aggressive YE 2024 KLCI target of 1,755. Improved earnings delivery is a potential third catalyst.
Distortions abate whilst domestic exposures continue to deliver
CGSCIMB estimates that revenues picked up close to 7% yoy in 3Q23 (from 5%) and normalised net profit grew by 9% (vs. an 11% yoy drop in 2Q23) for their coverage universe of 106 companies.
In its Strategy Note today, CGSCIMB said margin trends were decent and think topline expansion was helped by price increases and a robust domestic economy.
While revenues were also up 7% yoy over 9M23, normalised net profit was flat. The results were distorted by significant declines in profits for Petrochemical and Plantations companies, while the Gloves sector reported losses. Excluding these distortions, the underlying momentum was strong; revenues were up 11% yoy in 3Q23 and normalised net profit expanded by 21%. For 9M23, profits ex-distortions grew by a commendable 20%.
Second consecutive reporting period of less adjustments
Following the revisions over the results season, 9M23 normalised net profit for their coverage universe made up 75% of our full-year estimate.
Since Sep 23, their overall market estimates have reduced 3% for 2023 and are unchanged for 2024.
The revisions were mainly due to cuts to Plantations and Petrochemicals while there were, once again, a lesser number of adjustments overall. Ex-distortions, their 2023 estimates have not changed since Sep 23 and 2024 is up by 2%.
CGSCIMB’s revised estimates point to flat profits in 2023F and 16% growth in 2024F (17% and 13%, respectively, excluding the three distorted segments).
Sectoral performance
The Auto, Finance, Healthcare, Construction, Real Estate, Transport and Telecoms sectors generated strong earnings growth in 9M23, while Technology, Industrial Goods (mainly Gloves), Agri Business, Media, and Energy saw significant declines.
However, Industrial Goods returned to the black in 3Q23 while declines in Technology profits have reduced.
That said, cumulative Technology profits were still trailing consensus by a wide margin. The Energy and Materials performance masks the improved earnings delivery of the Oil Services sub-segment, overwhelmed by declines for the two Petrochemical stocks.
Domestic conviction unchanged
CGSCIMB preference for domestic-driven stocks since early Jun 23 has generally panned out well; in particular, the bullish calls on Property and Construction. Its conviction on the domestic economy was enhanced on the back of greater policy clarity and continuity.
Along with this, they upgraded Utilities, Telecoms and Consumer discretionary to Overweight.
