Endemic phase heralds favourable macro environment and earnings prospects

pic by TMR FILE

MALAYSIA’S move into the endemic phase will help revitalise economic activities, restore domestic consumption, business operations, export import trade 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 economic recovery and the economic performance for the coming quarters in 2022 could recover gradually followed by the easing of restrictions.

We have upgraded the 2022 GDP year-on-year growth rate from 5.7% to 6% while retaining a 5% growth rate in 2023 on account of higher net exports of goods and growth in prices of commodities.

Malaysia’s financial market has attracted investors’ interest in recent months despite the prevailing weak sentiment in global markets.

While the global equity markets are overshadowed by the outbreak of the Russia-Ukraine war and overheating inflation, Malaysia equity markets have shown a relatively stable performance in the beginning of 2022.

Bursa Malaysia’s total market capitalisation rose 4.4% month-on-month to RM1.8 trillion with buying interest in the energy and plantation sectors due to soaring commodities prices.

Foreign investors accelerated buying with an inflow of RM2.8 billion in February 2022 compared to RM300 million in January 2022.

FTSE Bursa Malaysia KLCI’s (FBM KLCI) earnings are expected to grow by 2.6% in 2022 and another 7% in 2023. The earnings growth appears sluggish mainly dragged down by glove stocks which are expected to see normalisation in earnings post pandemic.

If we were to strip out glove stocks from the equation, earnings are set to grow at a more palatable level of 12.3% and 9.1% in 2022 and 2023, respectively.

Sector wise, we expect FBM KLCI’s heavy constituent financial sector could benefit from the favourable macro environment including from expectations of hikes in the Overnight Policy Rate this year while the sector’s resilient fundamentals could potentially widen net interest margins.

Due to the uncertainty on how the Russia-Ukraine crisis could disrupt global commodities supply chains, we opine commodity-related companies could benefit from the skyrocketing prices.

This can be seen from the relatively high estimated earnings in the energy sector from 2022 to 2023. The plantation sector earnings estimation is overly pessimistic as we think the elevated commodity prices will likely remain in the near term.

In terms of valuations, Malaysian equities look attractive as the benchmark FBM KLCI is now trading at 13.08 times forward price to earnings (P/E) multiple based on financial year 2024 estimated earnings.

Our fair P/E for the market is 16.0 times. As such, based on our P/E valuation model, our target price for FBM KLCI is 1,946 points by end-2024, reflecting the higher earnings integer for 2024 on the back of a favourable environment of expectation for rising interest rate and commodities supercycle.

We forecast that there is a 22.6% upside potential for the FBM KLCI by end-2024, with additional dividend yields of more than 4% per annum for the next few years boosting the total returns for investors.

We believe valuations are still undemanding as the negative news including political risk has been priced in and the opportunity remains lucrative owing to the attractive earnings shoulder with the solid economic growth.

Thus, we have upgraded Malaysian equities to 3.5 stars ‘Attractive’ due to the compelling upside potential, cheap valuations and attractive dividend yields.

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