FBM KLCI’s earnings growth will be at 13.9% and 7.7% in 2022 and 2023, respectively, if glove stocks are from the equation

by IFAST RESEARCH TEAM / Pic by BLOOMBERG

THE unprecedented Covid-19 pandemic has dealt a blow to the Malaysian economy as the prolonged lockdowns and resulting economic slowdown has led to business closures and job losses.

With the ramped-up speed of Covid-19 vaccination, overall daily Covid-19 cases have dropped to below 5,000 cases now and Covid19 restrictions have been eased gradually in most areas.

That said, we expect the prolonged Covid-led disruption to alleviate in 2022. The economic reopening would revitalise economic activities, restore domestic consumption, business operations, exports and imports, and thereby underpin the recovery in 2022.

Based on the recent positive economic data and latest Covid-19 developments, we believe Malaysia is now on the right track to full recovery.

We expect corporate earnings to improve. At this juncture, we think the earnings revisions have bottomed and priced in most of the negatives.

After being downgraded throughout 2021, downward revisions have stabilised in October, coinciding with the tapering of Covid cases in the country which allowed the government to fully reopen the economy and remove lockdown measures.

In fact, in November, we saw slight upgrades to 2021 and 2023 earnings, which reflects better optimism from analysts.

The benchmark FTSE Bursa Malaysia KLCI’s (FBM KLCI) earnings are expected to grow by 6.9% in 2022 and another 8.3% in 2023. Overall, it may seem the FBM KLCI’s earnings growth is sluggish, mainly dragged down by glove stocks that are expected to see a normalisation in earnings post-pandemic.

If we were to strip out glove stocks from the equation, FBM KLCI’s earnings growth would be at a much more palatable level of 13.9% and 7.7% in 2022 and 2023, respectively.

On another positive note, we are seeing broad based positive earnings growth in 2022 across most sectors except for the healthcare sector.

Earnings growth for the FBM KLCI Index will be mainly driven by the financial sector — the biggest sector with a weight of 30.7%.

The financial sector is expected to grow earnings by an impressive 10.8% in 2022 and 7% in 2023 amid a few key catalysts for growth including higher net interest margins as Bank Negara Malaysia finally starts to raise interest rates in 2022 and 2023, respectively, after cutting rates to a record low of 1.75% in 2020 and improving nonperforming loan ratio and easing loan loss provisions as the economy recovers.

Another key driver for FBM KLCI’s earnings growth is the consumer products and services sector, which are expected to grow strongly in 2022.

We think the sectors will benefit from the reopening of the economy after lockdowns were finally relaxed recently.

We foresee pent up consumer demand will be unleashed as consumers will finally be able to spend in brick-and-mortar stores whereas holiday makers can resort to domestic travel to satisfy their travel itch.

In terms of valuations, Malaysian equities look attractive as the FBM KLCI is now trading at 13.3 times forward price-to-earnings (P/E) multiple based on financial year 2023 estimated earnings.

We believe the market is pricing in some political uncertainty as the much-anticipated general elections could be held in 2022.

That said, for value investors, the current entry level does provide a good opportunity. Our fair P/E for the market is 16 times.

As such, our target price for FBM KLCI is 1,815 points by end-2023, which represents a decent 20% upside potential from the current level of around 1,500.

On top of that, the estimated dividend yield of more than 4% in the coming two years is set to bulk up the total return for investors.

Thus, we have upgraded our Star Ratings for Malaysian equities to 3.0 stars ‘Attractive’ due to the attractive upside potential, cheap valuations and attractive dividend yields.

Perhaps it is time for investors to reconsider this underappreciated market.

The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.