Areca Capital's Wong is projecting that sectoral earnings will improve for the rest of the year.
PETALING JAYA: After what appeared to be a commendable first quarter of results for Corporate Malaysia, analysts are keeping a cautiously optimistic stance that the impetus could be sustained moving forward.
Although certain sectors are getting more attention relative to others, including technology, the sectoral outlook is interesting as observers are having differing views.
Based on its coverage of over 100 companies, CIMB Securities reported that normalised net earnings had, as a whole, accelerated to 16.9% year-on-year (y-o-y) in the first quarter of 2024 (1Q24), a significant jump compared with 8.4% in 4Q23.
In a note to clients yesterday, it said: “The double-digit y-o-y profit gain is the first in 10 quarters while the 6.5% quarter-on-quarter (q-o-q) rise in normalised profit is ahead of our 3% preview.
“Margins recovered by 60 basis points q-o-q and we think the top line acceleration was helped by price increases and a robust domestic economy.”
The research house observed that several sectors had generated good growth in 1Q24, including automotive, construction, conglomerates, healthcare, real estate, telecommunications and utilities.
Additionally, it said the tech sector, which was in the limelight, is also one of those seeing a turnaround from a low base.
Encouraged by the overall positive 1Q24 sentiment that saw the FBM KLCI gain 12% from 1,455 points at the end of 2023 to 1,629 two weeks ago, CIMB Securities said it is not unreasonable for the index to hit 1,755 by the end of the year.
“While there is likely to be consolidation in the next few weeks as we are expecting profit-taking on the significant outperformers of the past six to 12 months and some rotation, the FBM KLCI is well supported by good earnings growth and policy tailwinds.
“In addition, we still do not discount the potential ringgit appreciation towards the latter part of the year,” it said.
Despite also factoring in expected profit-taking and routine pullbacks in the market, Vincent Lau, head of equity sales at brokerage firm Rakuten Trade, is hopeful that the 1Q24 momentum can be kept up, as the first quarter is usually not the best seasonally across several industries.
In particular, he is anticipating that 2Q24 and 3Q24 would be more robust for the tech industry, judging by the current white-hot interest around data centres and the investment pledges by a number of global household tech names to channel funds into Malaysia.
Using the just-concluded Computex 2024 event in Taiwan as an example, he told StarBiz that participants at the seminar were already discussing next-generation cheap artificial intelligence (AI) technology even before the event began, as further evidence that AI is sweeping across the globe.“It is something that we should embrace and this will enhance the prospects of Malaysia’s tech sector.
“We expect that it will extend its earnings in the subsequent quarters of 2024, which would back up our optimism,” Lau pointed out.
On the other hand, he is of the view that upside in the construction and property industries will largely be driven by newsflow and the order books of sector players.
Overall, Lau is bullish about the FBM KLCI, noting that retail participation and institutional funds have been returning to the broader market, with much of the interest flowing into the initial public offering space.
Chief investment officer at Tradeview Capital Nixon Wong is counting on banks to be supportive of corporate performance in line with the improvement of the economy with further policy tailwinds aiding the growth of corporates and small and medium enterprises.
Incidentally, he is of the opinion that the tech, industrial production, real estate investment trusts and to a certain extent, utilities sectors, may benefit from any potential US interest rate cuts.
“Selective consumer names and the tourism industry are likely to see a pickup too, following the release of Account 3 funds from the Employees Provident Fund and extension of the China visa-free period,” he remarked.
In addition to the utilities segment, Wong said continued momentum is expected in both the property and construction sectors, due to the progressive rollouts of more mega infrastructure projects and data centres.
Interestingly, he said the recent rally in the tech sector could likely be driven by the recovery of the Chinese tech market.
“Signs of China’s recovery may boost demand for electronic goods such as personal computers, smartphones and electric vehicles (EVs), benefiting semiconductor orders within the supply chain, where Malaysia plays a significant role in the downstream segment.
“However, there are still risks associated with the macroeconomic environment in the United States and Europe, where sentiment influences the valuation of Malaysia’s tech industry, which remains at a premium compared with global front-end players,” he cautioned.
According to Wong, expectations around the data centre theme have risen, making earnings delivery crucial to sustaining the forward movement.
He said the data centre theme supports the utilities and construction sectors more than the local tech equipment players.
“The tech sector outlook is heavily influenced by the Federal Reserve rate policies and economic activities in developed countries, which we reckon may see some near term consolidation post-recent recovery,” he explained.
With the FBM KLCI having experienced a run-up of about 12% so far this year, market valuations have become less attractive compared with earlier in the year.
Despite some upward revisions in earnings after the 1Q24 results, Wong saw a lack of fresh catalysts which could drive the market further, making consolidation likely.“Investors are becoming more selective in trades and we could see more sector rotations to laggards rather than a broad-based rally,” he said.
Areca Capital chief executive Danny Wong is projecting that sectoral earnings will improve for the rest of the year as companies continue to benefit from the impact of post-lockdown economic reopening, supported by lower domestic political and geopolitical risks.
More importantly, in light of the FBM KLCI’s year-to-date appreciation, he deemed the 1Q24 result season as crucial in ascertaining whether the market would continued to be supported by fundamentals and earnings growth.
“We believe the results overall is supportive of better sentiment ahead, particularly aided by strong foreign investments and various government policies such as National Energy Transition Roadmap and the new National Semiconductor Strategy,” he said.According to Danny, the outlook for the tech sector is brighter for 2024 in anticipation of a recovery in 2H24 driven by demand for artificial intelligence, data centres and EVs.
Moreover, he is also optimistic about the utilities industry, underpinned by a higher demand growth in energy consumption as well as the property and construction sectors on the back of new launches, higher property demand in Johor, and the stronger realisation of the players’ respective order books.
In a separate note, CIMB Securities has included companies from across various sectors as its top picks including Tenaga Nasional Bhd
, Hong Leong Bank Bhd, Genting Bhd, Gamuda Bhd, Bermaz Auto Bhd and Econpile Holdings Bhd.
