by FAYYADH JAAFAR / pic by BLOOMBERG

THE higher crude palm oil (CPO) has seen Malaysia’s plantation sector outperform in the first quarter (1Q22) along with the oil and gas (O&G), automobile and consumer sectors as having real estate investment trusts (REITs) that have been buoyed by strong rental revenue and a pick-up in retail sales.

AmInvestment Bank Bhd (AmInvest) noted for the 1Q22 earnings report card, 25% of the stocks under its coverage were outperformers, 48% in line and 27% below expectations. Plantation stood out as six out of seven stocks under the investment bank’s coverage outperformed.

Analyst Alex Goh stated while the plantation sector has benefitted from higher CPO prices, the O&G sector’s upward earnings revision stemmed largely from the performance of Petronas Chemicals Group Bhd which enjoyed elevated product prices in tandem with the higher-priced crude oil.

He has, however, cut the plantation sector to “Underweight” on expectations that CPO prices are expected to soften after peaking at RM8,000/tonne amid rising production in the second half of 2022 (2H22).

He added the automobile and consumer sectors were also among the top-performing segments this year.

The bank has maintained an “Overweight” call on the automobile, banking, media, O&G, ports, power and technology sectors with top buys being Malayan Banking Bhd, Tenaga Nasional Bhd, CIMB Group Holdings Bhd, RHB Bank Bhd, Mr DIY Group (M) Bhd, Telekom Malaysia Bhd, Inari Amertron Bhd, Malaysia Pacific Industries Bhd, UMW Holdings Bhd and Dialog Group Bhd.

Sectors with a “Neutral” rating are gloves, healthcare, insurance, property, REITS, telecommunications, electronics manufacturing services (EMS), consumer and construction.

For dividend stocks, AmInvest’s top 5 picks with yields of over 6% are Malakoff Corp Bhd, Astro Malaysia Holdings Bhd, Globetronics Technology Bhd, Lagenda Properties Bhd and YTL REIT.

The FTSE Bursa Malaysia KLCI (FBM KLCI) 1Q22 earnings per share (EPS) has turned around to a growth of 1.1% from an earlier 5.6% contraction due to higher earnings revisions mainly from the plantation and O&G sectors.

“The higher 2022 EPS base also moderated our FBM KLCI 2023F EPS growth from an earlier 14.9% to 8.3%. Even so, this will be the second-highest growth since 2017, coming in after the 30.7% rebound in 2021 in the wake of the 2020 initial pandemic lockdowns.

“Similar to our FY22F EPS growth revisions, we expect positive adjustments to the FY23F earnings cycle moving towards the year-end as reopened borders and supply chain normalisation will underpin a stronger economic outlook together with the tapering impact of a higher interest rate regime and the absence of the 2022 Cukai Makmur,” Goh added.

In terms of valuations, the FBM KLCI’s 2022 price to earnings (PE) of 14.9 times currently implies a significant 9% discount to its five-year median of 16.4 times.

AmInvest has maintain its end-2022 base-case FBM KLCI target at 1,745 points pegged to a 5% discount to its five-year median PE of 16.4 times.

“Our worst-case outlook remains on an FBM KLCI drop to 1,415, pegged to a 2022 PE of 14.8 times, one SD below its five-year median, driven by substantive earnings disappointments, fresh outbreaks of new Covid-19 variants, further geopolitical shocks and a reversal of foreign net flows.

“In this scenario, we assume that foreign net equity outflows would reverse to net sellers as GDP growth slows to 4.8% from stagflationary pressures and intensified supply chain disruptions amid heightened political noises, partly cushioned by local institutional net buying activities,” Goh wrote.