KUALA LUMPUR (Dec 20): As the third quarter (3Q) corporate earnings season concludes, a reassessment of valuations of stocks on Bursa Malaysia suggests a recovery in the semiconductor sector, while the renewable energy (RE) sector, with its deeper discounted valuations and growth forecast potential, could continue to entice investors next year.

Of the 14 sectoral indices on Bursa Malaysia, the Energy Index has the largest discount of 46% in its forward price-to-earnings ratio (PER) compared to its historical average, followed by the Technology Index at 12%, as per Bloomberg data as of Dec 19, 2023.

These two sectors are also forecasted to have relatively larger implied year-on-year earnings per share (EPS) growth — 20% for the Energy Index and 57% for the Technology Index — in 2024.

Applying the same two metrics — comparison of forward-to-historical PER and projected EPS to trailing 12-month EPS — on selected sub-sectors reveals significant discounts in several RE sector stocks, as per analyst coverage. These include 59% for Samaiden Group Bhd, 38% for Solarvest Holdings Bhd, and 16% for Pekat Group Bhd.

In terms of EPS growth over the next 12 months, Samaiden is predicted to see an increase of over 140%, Solarvest 62%, and Pekat 19%.

Among the semiconductor-related stocks, Frontken Corp Bhd holds the most significant forward PER discount of 67% compared to its historical average, followed by D&O Green Technologies Bhd. D&O, however, is projected to see an EPS growth of 282%, which is significantly greater than Frontken's 66%.

Malaysian Pacific Industries Bhd's forward PER stands at a 30% discount to its historical average and forecasts a nearly 900% EPS growth.

The widespread discounted valuations on a majority of semiconductor stocks, coupled with their projected high earnings, could signal an expected chip recovery in 2024, following the sector's downturn this year.

Fortress Capital Asset Management chief executive officer Thomas Yong said despite the mixed 3Q results for the electrical and electronic (E&E) sector in 2023, many local semiconductor and technology-related companies are gearing up for the next upcycle.

"These firms are actively expanding capacity and boast resilient balance sheets, capable of withstanding prolonged downturns. Investors may consider picking up local E&E counters with exposure to the Chinese smartphone market as there are signs of recovery," he told The Edge when contacted.

As the Malaysian economy continues to bounce back from global disruptions, Bursa Malaysia indices like Construction and Industrial Products and Services are forecasted to exhibit stronger EPS growth. However, the market seems to have already accounted for this growth, evidenced by their premium trading compared to their historical average PER.

In contrast, the Healthcare Index shows the highest forward PER relative to its historical average, possibly skewed by glove sector constituents in the index.

The four largest glove stocks in Malaysia currently trade at high valuations relative to their historical average PER, displaying limited EPS potential after experiencing negative earnings growth in the past three years.

Other healthcare-related players are generally trading at a discount to their historical average PER, and some, such as UMediC Group Bhd, anticipate nearly 60% EPS growth. However, the EPS outlook for larger entities is less optimistic, with a projected contraction of 28% for IHH Healthcare Bhd and a slight 0.6% decline for KPJ Healthcare Bhd.

Kotra Industries Bhd, despite having the most significant discount of 56% among peers, may only see an 8.2% EPS growth, as per analysts' estimates.

Distinct opportunities also lie in different sub-sectors. For instance, Genting-related hospitality stocks are trading at a discount and are projected to recover earnings next year.

DRB-Hicom Bhd's EPS may register growth, despite the anticipated contraction in profitability for pure automotive plays. Dayang Enterprise Holdings Bhd and Uzma Bhd stand out among oil and gas peers

Looking at blue-chip opportunities, over two-thirds of the 30 constituents in KLCI are trading at a forward PER lower than their historical average, with discounts ranging from 3.87% to 62%.

Two YTL-related stocks stand out here, as they are trading at discounts of above 61% to their historical average PER, despite a year-to-date rally of over 200%. YTL Corp Bhd is projected to see an 11% EPS increase, while YTL Power International Bhd's EPS is expected to drop by 4.1%.

Right behind them are Press Metal Aluminium Holdings Bhd, with a 59.4% discount and a predicted EPS growth of 44%, and QL Resources Bhd, with a 42% discount and a forecasted EPS rise of 14%.

Year-to-date, the KLCI has slipped by 1.99%. While this performance isn't as dismal as its counterparts in Hong Kong (down 16.56%) and Thailand (down 16.41%), it falls short compared to benchmark indices in Japan (up 27.3%) and Indonesia (up 4.92%).

Among the 30 KLCI constituents, telecommunications stocks appear to trade at a premium. Both CelcomDigi Bhd and Maxis Bhd have forward PER higher than their historical averages, with Axiata Group Bhd claiming the highest forward PER valuation among them, at 33 times.

This trend is reflected in Bursa Malaysia's sectoral indices as well. The Telecommunications & Media Index displays a forward PER higher than its decade-long average, with a Bloomberg poll of analysts predicting lower EPS than its trailing 12-month EPS.

Commenting on the local corporate outlook, Fortress Capital's Yong said for the upcoming one to two quarters, earnings for general retailers and food and beverages retailers might pick up, amid the festive seasons.

"The recent relaxation of visa entry for China, India and certain Middle East citizens should see a pick-up in tourist arrivals, and benefit the tourism-related sectors. Investors may also look at sectors that are domestically oriented as they are somewhat shielded from external volatility, for example, the local construction industry. With the anticipation of numerous infrastructure projects being rolled out in 2024, the industry is poised to see a meaningful recovery in the coming quarters," he said.

Yong said recent market performances are largely affected by external factors such as the US inflation data and the Federal Reserve’s guidance, which signalled that the tightening cycle is likely to have ended, and interest rates will be lowered next year.

"We think that the market has largely digested the recent 3Q earnings, which signalled a stabilisation in the economy despite weak exports. At the moment, the KLCI is trading at an attractive valuation of 14 times 2024 PER, when compared to the historical average of about 16 times. We expect corporate earnings to improve, underpinned by stronger economic growth. Hence, we see further upside for Malaysian stocks moving into 2024," he said.

"Generally, we think most sectors are likely to improve. However, given that interest rates and inflation might prevail at high levels for some time despite the expectation of easier monetary policy going forward, we would prefer to look for companies with sound cash flow and balance sheets. Also, we prefer companies with exposure to domestic demand rather than external demand," he added.

In a research note last Friday (Dec 15), RHB Research said the main drivers for equity markets in 2024 will centre on macroeconomic conditions.

"We expect investors to refocus on fundamentals while easing inflation data, a peaking monetary tightening cycle, the potential for easier liquidity conditions, softer US Dollar Index trends and the pace of recovery in China’s macroeconomic conditions will be the key positive influences.

"The fundamental upside for equity markets will also be determined by the ability of corporates to meet earnings growth expectations — considering corporate Malaysia’s poor recent track record in this regard," it said.