A Report Card On 4QCY23: Less Positive Earnings Surprises Sequentially

The FBMKLCI component stocks reported fewer positive earnings surprises in 4QCY23 as compared with three months ago.

Kenanga Investment Bank Berhad (Kenanga), in its Market Strategy note today (Mac 4), said the slowdown in consumer demand both locally and globally, coupled  with the prolonged geo-political tensions in the Middle East, particularly the escalating conflict in  the Red Sea, were headwinds to earnings.

On a brighter note, the easing in operating cost, particularly personnel cost, and improved pricing power buoyed earnings of oil & gas support  services providers, while tech players guided for an upbeat outlook for 1QCY24.

Kenanga now projects the  FBM KLCI earnings to grow slightly higher, at 16.3% in CY24F (from 14.4% previously) before  moderating to 6.2% in CY25F.

Less Surprises

The earnings delivery (as against Kenanga’s expectations) of FBMKLCI component stocks moderated sequentially in 4QCY23,with  12%, 62% and 27% beating, meeting and missing our projections compared with 29%, 43% and 29% in 3QCY23 (Exhibit 1), respectively.

Similarly, as against market expectations, there was also sequential moderation with “above”, “within” and “below” at 14%, 52%  and 34% vs. 17%, 43% and 40% in 3QCY23 (also see Exhibit 1), respectively.

Winners and Losers

Three FBM KLCI component stocks under their coverage beat projections, namely AXIATA (strong showing from Indonesian units), CDB (write-back of provisions) and TM (tax credits).

On the other hand, seven FBM KLCI component stocks under their coverage universe missed projections, namely, AMBANK (overlays on repayment assistance book), IHH (weak showing from operations in Singapore and Türkiye), IOICORP, KLK and SIMEPLT (weak downstream performance), MAXIS (accelerated depreciation) and TENAGA (high fuel cost). 

Noticeable Trends in Earnings Reports

Noticeable trends in earnings reports of stocks under coverage including non-FBM KLCI component stocks are as follows:

• The slowdown in consumer demand globally that inflicted pain on the palm oil downstream industry (IOICORP, KLK  and SIMEPLT) as well as consumer electronics EMS players (KPS, SKPRES, with the exception of PIE).

• The slowdown in consumer spending locally that weighed down on performance of consumer discretionary players and  health supplement makers (AEON, KOTRA, NOVAandPADINI).

• The prolonged geo-political tensions in the Middle East, particularly the escalating conflict in the Red Sea that hurt  sales in the Middle East market (PWROOT) and delayed shipments to Europe (HARTA).

• The easing in operating cost, particularly personnel cost and improved pricing power that buoyed earnings of oil & gas  support services providers (ARMADA, UZMA, VELESTO and WASCO).

• Tech players guided for an upbeat outlook for 1QCY24 (D&O, INARI,MPI, NATGATE and UNISEM).

End-CY24 FBMKLCI Target Maintained

Kenanga now project FBMKLCI earnings to grow at 16.3% in CY24F (vs. 14.4% previously largely due to low-base effect as FY23  actual earnings came in slightly lower than their forecast), followed by a 6.2% growth in CY25F.

Kenanga maintains their end-CY24F FBMKLCI target of 1,605 pts based on an unchanged 15x CY24F PER, which is in line with its historical PER range of 14x-16x post the economy reopening in 2021-2022.

With central banks in advanced economies poised to cut rates this year—from Jun 2024 for the Fed based on the latest Fed Funds futures—EM assets will become attractive again given a lower risk-free return of DM assets.

Policy easing in advanced economies will also set in motion a more synchronised global economic recovery, fuelling an export boom in the largely still  export-dependent EM economies.

Kenanga expecs the local market to lift off in a way likened to a rocket propelled by three booster engines in succession. Kenanga will tactically first position themselves in beneficiaries of public spending, gradually also gravitating towards the tech and EMS sectors. 

Kenanga expect consumer spending to get softer before it gets stronger as it takes time for consumers to “internalise” subsidy  rationalisation.

Kenanga picks banks for a proxy to the return of foreign investors given the heavy weighting banking stocks command in various  indices. They are upbeat on contractors given the imminent roll-out of MRT3 (RM45b), Bayan Lepas LRT (RM9.5b) and six flood mitigation projects reportedly to be worth RM13b. 

Kenanga likes consumer staples players and automotive makers/distributors focusing on the affordable segment, given spending power of their target customers, i.e. the B40 group, will remain intact as the group will still fully enjoy various subsidies and cash handouts.

They still lack of clarity over subsidy rationalisation, especially in relation to RON95, will cast a cloud over consumer sentiment  and spending. However, Kenanga believes once it is finally put in place, consumers will gradually “come to terms” with it, which could  happen in 2HCY24 when the local economy and job market start to pick up in-line with the recovery in the global economy.

Kenanga is keeping a close eye on the earnings inflection point of tech and EMS players. For now, they nibble on a large-cap and liquid name, i.e. INARI. 

Among Kenanga’s top conventional picks include RHBBANK, AMBANK, GAMUDA F&N and IJM while top Shariah picks are IHH, CDB and KPJ.

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