As the earnings tailwind seems to be coming through (as seen over the past three reporting seasons), CGS International (CGS) believes the next major leg up for needs to come from the policy side, with the ringgit’s appreciation providing further impetus in 2H24F.
CGS, In its Strategy Note today (Mar 29), said while we remain encouraged by the significant initiatives put in place by the government in 2H23, they think there is a need for timely and consistent implementation in 2024F.
An overall “A-” with potential for improvement
CGS assesses the progress made in driving the key policy initiatives that matter the most for the equity market. These are fiscal reforms (and a move towards targeted subsidies), accelerated development spending, and the National Energy Transition Roadmap (NETR).
Using the in-depth subject knowledge of our Chief Economist and Senior Construction and Power analysts, CGS assigns an overall A- on the policy side so far, with room for improvement.
CGS believes there has been good progress in pushing through policy reforms, along with a slew of legislative changes to tighten fiscal management and improve the public sector delivery system.
However, more could be done on the latter two. CGS highlights key projects to watch out for as well as specific components of the NETR that needs to be pushed through more aggressively. S
Sifting through the noise
CGS believes the stock market’s improved performance since mid-2023 provides an opportunity to rebalance portfolios.
Taking into account divergent individual share price movements and looking into prospects for 2024F and 2025F, CGS ran several stock screens to get an updated perspective of the expectations built into share prices.
It is important to note that although the KLCI is up 12% from its Jun 2023 lows (FBM100 index: +13% over same period), the prices of several stocks within CGS’ coverage have risen by more than 100% in the past 12 months, while others have fallen 20-60%.
Similarly, several companies reported an over 100% increase in profit for 2023 (and some turned around from losses in the preceding year) whereas others saw declines of as much as 30-90% (with some going into the red vs. a profit in 2022).
Using high-level findings, CGS have created four buckets of 12 stocks each that we believe will help investors make portfolio changes, including potential additions/deletions, namely stocks to “Take Profit”, “Buy on Dips”, “Compelling Rotational Plays”, and “Bottom Fish”.
Changes to key recommendations as domestic focus remains
Within CGS recommended Malaysia weightings, they downgraded Property from Overweight to Neutral whilst retaining Overweight calls on Construction, Banks, Telecoms, Consumer Discretionary, Conglomerates and Healthcare.
In addition, CGS upgraded Plantations from Underweight to Neutral and REITs from Neutral to Overweight.
The KL Property index has risen 44% since CGS’ upgrade to O/W Jun 2023 and individual Property share prices have risen by a lot more.
Several developers under CGS’ coverage are trading north of 20x 2024F P/E despite ROEs still well below COEs.
While CGS remains constructive on the prospects for real estate in Malaysia, they feel tactically it is time to take profit on developers building in high expectations into share prices.
Meanwhile, Construction stays Double Overweight despite share price gains as CGS thinks expectations and valuations of many sector plays are still reasonable.
In addition, CGS makes 6 changes to their top picks list of 20 stocks and 2 changes to the Underperform list of 10 companies. The revised top picks list trades at 12.9x 2024F P/E and offers a 17% 2-year CAGR over 2023-25F and a 4.0% net yield.
Policy pillar needs to drive the next leg up
CGS is clearly encouraged by the KLCI’s over 6% gain YTD to over 1,530 pts, supporting their seemingly optimistic end-2024F target of 1,755 pts.
CGS’ bullishness on Malaysian equities is underpinned by their belief that three key headwinds that affected the market between May 2018 and 2023 could collectively turn into tailwinds as we go into 2024F.
These are: 1. Policy – Inconsistencies and short-term focused policies turning into clear medium-term plans to consolidate the government’s fiscal deficit and yet, aggressively expand development spending to raise the country’s medium term growth profile.
2. Currency – Following a steady weakness from around RM3.80/US$ in 2018 to RM4.72/US$ at the end of last year, our belief is that the domestic currency trend would reverse, mainly underpinned by a shift in global dynamics from a strong dollar to a weak one.
3. Earnings – Following a decline in 2022 and flat profits in 2023, our updated estimates point to a strong 15% pick-up in 2024F and a further 10% rise in 2025F.
On one hand, domestic-driven sectors are already delivering healthy double-digit earnings growth with the overall market trend impacted by the normalisation of profits for selected segments off unusually high pandemic levels.
Therefore, under the assumption that the positive underlying domestic trends sustain and there is stabilisation (and even some recovery) for Plantations, Gloves and Petrochemicals, CGS is confident that double-digit earnings growth is quite reasonable for 2024F.
