Corporate earnings to rebound further in 2H23

KUALA LUMPUR: Malaysia’s corporate earnings are set to continue recovering and registering further growth in the second half of 2023 (2H 2023), backed by positive economic print projected for the period.

At the same time, Malaysia’s economy is set to retain its growth trajectory for the rest of the year with continuous support from strong households and intact fundamentals, despite various external variables influencing growth in 1H 2023.

Rakuten Trade Sdn Bhd equity research vice-president Thong Pak Leng said earnings growth for 1H 2023 is estimated to be around 6.0-7.0 per cent, while 2H 2023 may see an 11-12 per cent growth track.

“Last year, earnings declined 10 per cent and this year we expect it to grow within 9.3-9.5 per cent.

“More companies are likely to write back provisions in the 2H 2023, and fundamentally, things are getting better with more active economic activities happening in the country,” he told BK.

Nevertheless, Thong said that growth will vary according to sectors.

“We saw a decent growth in 1H 2023 and blue chips were doing well during the period.

“A few sectors will do well in 2H 2023, namely oil and gas, construction, plantation, bank, and real estate investment trust (REIT),” he added.

Meanwhile, in its review of the first quarter of 2023 (1Q 2023), MIDF Research noted that there was a divergence in net change to forward earnings between heavyweights and lesser-cap stocks.

“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,” it said.

As of end-May 2023, the year-to-date (YTD) price return of FBM KLCI stood at -7.2 per cent. In contrast, the midcap FBM70 index registered a YTD return of +4.9 per cent.

In 1Q 2023, the aggregate reported earnings of FBM KLCI 30 current constituents came in at RM15.8 billion, declining sequentially at -34.7 per cent quarter-on-quarter, but improved against 1Q 2022 at +3.0 per cent year-on-year.

MIDF Research said the heavyweights were bogged down mainly by the price underperformance of financial services counters, which was impacted by banking turmoil in the United States (US) and Europe as well as commodity-related industrial products and services and plantation stocks amid lower commodity product prices.

“Nonetheless, going forward, we do not expect the underperformance of these heavyweight stocks to persist, as, firstly, the banking turmoil in the US and Europe is arguably a consequence of the rapid rise in interest rates during the past year.

“Secondly, we reckon 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-US Federal Reserve pause (in rate hikes),” it said.

On the same note, the research house said it has revised the aggregate FY2023 earnings forecast of the FBM KLCI constituents under its coverage down by RM4.6 billion (6.7 per cent) to RM64.7 billion.

In contrast, the aggregate FY2023 earnings forecast of non-FBM KLCI constituents under its coverage was revised higher by +3.0 per cent to RM17.8 billion.

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, thus maintaining the end-2023 target at 15,000 points.

In 1Q 2023, 10 per cent of stocks under MIDF Research’s coverage reported higher-than-expected earnings, a decline compared to 33 per cent in 4Q 2022.

The percentage of companies with results that met expectations increased to 54 per cent in 1Q 2023 from 35 per cent in 4Q 2022.

Meanwhile, the percentage of negative surprises increased to 36 per cent in 1Q 2023 from 32 per cent in 4Q 2022.

“Target price changes involved 19 upward adjustments and 28 downward adjustments, and we made 10 changes to our stock recommendations with four upgrades and six downgrades,” added MIDF Research. – BK