Crucial Reporting Season Ahead Aiming For Double-Digit Earnings Growth In 2024F, Says CGS

Key Malaysian indices advanced a further 3% in the first five weeks of 2Q24, on top of 6-7% gains in 1Q24. Key market drivers are policy and earnings.

CGS International (CGS) Malaysia Strategy Note today (May 7) said as expectations build, the 1Q24 reporting season is crucial to provide confidence that double-digit earnings growth can be met for 2024F.

Despite the run-up, valuations do not look stretched with KLCI and FBM100 trading at 13.7-14.3x P/E, still at large discounts to past means.

Encouraging market uptrend

Following the 6% and 7% gains in the KLCI and FBM100 in 1Q24, respectively, both indices have advanced a further 3% in the five weeks since end-Mar 2024.

From the end-Jun 2023 lows, the KLCI has advanced 15%, while the FBM100 gained 18%. Improved earnings delivery and much better policy clarity and implementation, CGS believes, have driven equities higher, despite the relative weakness of emerging market currencies, including the ringgit.

In the case of the ringgit, CGS is encouraged by the lack of further weakness over the past month, despite the further 1.5% gain in the dollar index to 106.

Improved growth from Malaysia’s largest trading partner, China, could be a mitigating factor. As share prices move up, expectations are naturally also higher. Therefore, CGS believes the 1Q24 reporting season, which has just got underway, is particularly important in supporting its and Bloomberg consensus’s expectations for double-digit earnings growth in 2024F, following two years of declines.

Equally important is sustained policy follow-through in fiscal consolidation and reforms, accelerated development spending and rollout of the National Energy Transition Roadmap or NETR .

A 3% sequential gain in normalised net profit despite seasonality

The cumulative normalised net profit of CGS’s coverage universe of 105 stocks has hovered between RM17.3bn and RM20.7bn over the past eight quarters (1Q22 to 4Q23) as profit growth improved from a 25% yoy decline in 1Q22 to 7% yoy growth in 4Q23.

CGS is targeting a 3% qoq improvement in normalised net profit in 1Q24F to RM20.2bn, implying a 12% gain from 1Q23.

This would amount to about 23% of CGS’s full-year forecast, which they consider in-line as profits tend to pick up in the second half of the year.

Despite economic activity being seasonally slower in the first quarter, CGS thinks there could be sequential gains from sectors such as energy & materials (recovery in PCHEM), agri business (stable prices, better production and lower costs), industrial goods (from losses to profits), telecom (across the board), banks (margin respite), consumer staples (holiday demand), auto (impact on Sime from UMW acquisition), and utilities (as negative fuel margins disappear).

At the same time, the improved profits seen from sectors such as real estate and construction should be largely sustained

Seasonally, though, sectors such as technology, some consumer discretionary names, and transport may report diminished profit levels compared to those in the preceding quarter.

Valuations are not stretched

Despite the run-up in share prices, CGS believes overall valuations are still reasonable after also taking into consideration the tailwinds from an improved policy landscape (critical to a developing nation like Malaysia) and better earnings growth (16% for 2024F and 10% for 2025F, following a slight decline in 2023).

Based on Bloomberg consensus earnings estimates, the KLCI is trading at a one-year forward P/E of 13.7x (vs. a mean of 16.2x going back to 2010), while the FBM 100 is at 14.3x (vs. a mean of 16.9x).

CGS maintains an end-2024 KLCI target of 1,755 pts. Since the six changes CGS made at end-Mar 2024, their key stock recommendations have remained the same, with a strong domestic focus and taking into account a decent risk-reward balance.

CGS’s highlighted companies include Hong Leong Bank ADD, TP RM26.30, Tenaga Nasional ADD, TP RM15.60, Gamuda Berhad ADD, TP RM6.50 and Telekom Malaysia ADD, TP RM7.30, while key laggards on the list are Genting Malaysia, Axiata, Malakoff, Genetec, Berjaya Foods, Hong Leong Bank, MR DIY, Dialog, and Mynews.

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