PETALING JAYA: Analysts argue that the recent lacklustre performance of the FBM KLCI and the broader market presents good buying opportunities, as the sharp appreciation of the ringgit during the third quarter of 2024 (3Q24) had slowed down most of corporate Malaysia’s profit growth to an extent.
In a note to clients yesterday, research house CGS International Research (CGSI Research) said the local currency had appreciated by 13% against the US dollar in 3Q24, from RM4.72 to a dollar at the end of June to RM4.13 three months later, following steady declines over the years.
Notably, it said: “This sharp movement caused distortions to 3Q24 results – both positive and negative – although operationally, the impact appeared to have been negative.
“The negative impact is not hard to explain as it is the US dollar-revenue earners and those with foreign businesses that are impacted faster by the ringgit’s appreciation, whereas the positive impact on companies with meaningful foreign currency costs would only be felt with a three to six-month lag.”
The research house suspects big caps with sizeable translation gains on foreign debt could have taken the opportunity to front-loaded certain costs, before explaining that after removing about RM3.1bil in unrealised or net translation currency gains among this group, net profit growth of its coverage universe slowed from 18% year-on-year (y-o-y) in the first half of 2024 to just 4% in 3Q24.
According to CGSI Research, companies with significant unrealised foreign exchange (forex) or translation net gains include Axiata Group Bhd
, Genting Bhd together with subsidiary, Genting Malaysia Bhd, Tenaga Nasional Bhd (TNB), YTL Corp Bhd and Telekom Malaysia Bhd.
For example, it said TNB took in additional costs of RM482mil to smoothen out its RM1.1bil forex translation gain.
Meanwhile, the research house reported that sectors under its coverage that generated double-digit net profit growth in 3Q24 were construction, financials, oil services, industrial goods, real estate and technology.
CGSI Research noted quarter-on-quarter, profits were down 3% but following an unusually strong 17% cumulative gain in 1Q24 and 2Q24.
“Also, the year-ago base was high as 3Q23 was the strongest reporting quarter in 2023 at 27% of the full year. Revenue growth was decent for 3Q24 at 6% y-o-y, compared to 4.5% a year ago.
“For the first nine months of the year, normalised net profit grew by 13%, making up 75% of our full-year target just prior to the reporting season,” said the research outfit.
More importantly, CGSI Research said corporate valuations continue to track at the lower end of historical ranges, with the growth in share prices since the end of 2023 not keeping up with an improved earnings trajectory.
“We view the recent lacklustre market performance as offering excellent buying opportunities as we see potential price-earnings expansion going into 2025,” it said.
At the same time, Rakuten Trade head of equity sales Vincent Lau told StarBiz that 3Q24 has been a mixed bag for corporate Malaysia, despite reckoning that a significant portion of companies on the Bursa Malaysia had surpassed earnings estimates.
“The third quarter is usually a stronger quarter, but this round we have seen a number of exporting companies being impacted by the strong surge of the ringgit.
“However, if we strip away the ringgit factor, then corporate performance should normalise from the final three months of 2024, especially with the ringgit now at a more ‘reasonable’ level of around RM4.44 to a dollar,” he said.
In addition, Lau opined that the recovery for the technology sector, especially in the semiconductor segment, has yet to take off, although conditions are improving, with most players in the segment anticipating full recovery in 2025.
“We’re confident the FBM KLCI will recover to above 1,600 points by year-end,” he said.
Offering perspective from another angle, investor Ian Yoong said a majority of listed companies had reported lukewarm results which in his view is due more to currency volatility than a ringgit against the dollar per se.
With businesses always seeking currency stability, he observed that the swing from RM4.70 to RM4.12 against the greenback in a short space of two months caused havoc with the hedging strategies of many listed companies.
“Those with high foreign exchange exposure usually hedge 30% to 60% of their foreign exchange exposure. It is unusual for large businesses to fully hedge their foreign exchange exposure,” said Yoong.
Looking ahead, he said the dollar had regained some of its lost strength following billionaire Donald Trump’s victory in the United States election and rebounded to RM4.42.
As such, businesses which were adversely impacted by the weak dollar should report better results in 4Q24.
“If indeed Trump carries out his threat to impose a 60% tariff on imports from China, a majority of Malaysian exports to the United States would become more competitive at a lower 10% tariff.
“The surge in foreign investments should boost the Malaysian economy and stock valuations. Many small mid-cap stocks are trading at low valuations because of the potential global trade war as a result of President-elect Trump’s threat of high tariffs,” said Yoong.
Chief executive for Tradeview Capital Ng Zhu Hann believes an economically strong second quarter for Malaysia may have overshadowed 3Q24 performance, especially coupled by the aforementioned currency volatility.
Casting his view over the immediate future, he is expecting minimal catalysts to rejuvenate the market for the remainder of 2024, as fund managers and investors are now positioning to move into their targeted sectors next year.
“These funds would be eyeing certain ‘whacked down’ industries such as the tech sector,” he said, mirroring Lau’s view.
Of particular interest, although Trump had over the weekend threatened to impose 100% tariffs on the nine nations of the extended Brazil, Russia, India, China and South Africa (BRICS) alliance if they were to create a rival currency to the US dollar, securities firm UOB-Kay Hian (UOBKH) Research is unperturbed.
It said while on the surface this threat can significantly damage Malaysia since the country has applied to be a partner to BRICS, it reckons Trump’s threat as just a negotiation posture.
“In fact, last week we saw pragmatism in Trump’s trade policies, by providing flexibility for semiconductor equipment exports into China.
“This supports our view that while Trump’s ‘disruptive’ policies bring higher trading volatility to equity markets, pragmatism will prevail, that is, not imposing overly burdensome import tariff which could be highly inflationary in the United States,” it said.
Moreover, UOBKH Research said it is looking forward to positives such as the ending of the Russia-Ukraine war, and is expecting Malaysia to thrive as an exporting hub under the current ‘China+1’ and even ‘Taiwan+1’ situation.
The FBM KLCI closed 1.19 points higher at 1,595.48 at the closing bell yesterday.
