This article first appeared in Capital, The Edge Malaysia Weekly on March 4, 2024 - March 10, 2024

THE total net earnings of the FBM KLCI’s 30 component stocks for the October to December 2023 period amounted to RM17.7 billion, 27.2% lower than the RM24.4 billion in the last quarter of 2022.

The earnings were mainly dragged down by Axiata Group Bhd, which slipped into the red with a RM695 million net loss that included a one-off RM356.4 million net loss on the disposal of Reynolds Group during the quarter that saw its exit from Nepal.

Quarter on quarter (q-o-q), the total net earnings of the 30 component stocks rose 1.2% from RM17.5 billion in 3Q2023.

Among the FBM KLCI constituents, two-thirds, or 20 companies, posted better earnings on a yearly basis, led by YTL Corp Bhd (+508%), Sime Darby Bhd (+488.2%), YTL Power International Bhd (+325.1%), IHH Healthcare Bhd (+280.3%) and CelcomDigi Bhd (+241.6%).

Apart from Axiata, the other worst-performing companies were Petronas Chemicals Group Bhd (-76.7%), Maxis Bhd (-76%), Sime Darby Plantation Bhd (-64.4%) and IOI Corp Bhd (-52.9%).

On a quarterly basis, 17 firms — a little more than half — reported higher earnings, with Sime Darby expanding 288.5%, mainly due to the RM2 billion gain on the disposal of Ramsay Sime Darby Health Care.

Meanwhile, foreign exchange gains of RM3 million and a RM17.7 million surplus from the sale of land and government acquisitions pushed Kuala Lumpur Kepong Bhd’s net profit 95.1% higher.

Analysts generally believe the FBM KLCI will continue to be supported by corporate earnings growth. Fuelled by encouraging market sentiment and robust foreign fund inflows, the benchmark index had gained 5.7% year to date to close at 1,538.02 points last Friday.

Malacca Securities Sdn Bhd head of research Loui Low sees the local benchmark touching 1,600 to 1,620 points in the long term. Victor Wan, head of research at Inter-Pacific Securities Sdn Bhd, expects a continued expansion in corporate earnings this year, forecasting 10% to 12% growth for FBM KLCI and FBM Emas counters.

“If corporate earnings continue to show improvement, then there is certainly room for upside for the market. This rally seems to be a bit more sustainable,” Wan tells The Edge.

He adds that the market is awaiting fresh impetus for further upside, such as the realisation of promised investments by the government.

Low observes mixed results during the 4Q2023 corporate earnings season, but notes that consumer, oil and gas (O&G) and selected steel firms performed well.

“There’s still room to grow for consumer and O&G counters from the normalisation of costs and higher demand in the consumer sector. The O&G sector will rely on capital expenditure from Petronas (Petroliam Nasional Bhd) and that should bode well for some of the companies under the Petronas proxies,” he says.

Low believes the utility sector will be a key pillar for the FBM KLCI this year.

“The upside may still come from the utility sector. YTL Power and YTL Corp are likely to continue to grow. I feel that the upside may not come from banks, although banks such as Malayan Banking Bhd (Maybank) are still strong,” he notes.

Public Bank Bhd and RHB Bank Bhd were affected by lower net interest income and higher provisions. Low is not concerned about this issue as long as Malaysia’s economy continues to grow.

Wan believes banks will remain selective in lending practices while playing their role in sustaining the nation’s economic growth. Monetary easing, if any, this year could weigh on banks’ net interest margins, he says.

“Even if there is a cut in interest rates in Malaysia, it will be very minor, perhaps one reduction in 3Q or 4Q2024. It will depend on how steep the interest rate cuts are by the US Federal Reserve,” he adds.

Owing to the high allowance for loan impairment and higher operating expenses as well as lower net interest income, Public Bank’s net profit fell 5.7% y-o-y to RM1.62 billion.

RHB Bank suffered a steeper drop of 24% y-o-y to RM585.9 million due to lower net interest income and higher provisions. It booked RM230.12 million in allowance for credit losses on financial assets.

Other banks continued to record earnings growth, with CIMB Group Holdings Bhd even declaring a special dividend of seven sen per share, apart from a second interim dividend of 18.5 sen per share, after its net profit jumped 29.5% y-o-y to RM1.72 billion.

In its March 1 note, Kenanga Research maintained its “overweight” call on the banking sector, thanks to better economic prospects fuelled by infrastructure projects and investments.

“For 1Q2024, we highlight: (i) Maybank (“outperform”; target price: RM11) for its market leader positioning likely to tap into the above-mentioned economic drivers; and (ii) Alliance Bank Malaysia Bhd (“outperform”; target price: RM4.30) as a small cap favourite given its largely comparable fundamentals which beat certain large caps,” it added.

For the consumer sector, the 16.6% y-o-y growth in MR DIY Group (M) Bhd’s net profit to RM158.6 million came as a surprise. The home improvement retailer attributed the earnings expansion to the expiry of a one-off corporate windfall tax. Gross profit margin for the quarter in review rose 2.1 percentage points y-o-y to 45.8%, mainly because of lower freight costs as well as price adjustments carried out in FY2022.

Looking ahead, Mr DIY is looking to open 180 new stores this year. As at end-December 2023, it was operating 1,255 stores.

Nestlé (Malaysia) Bhd saw its net profit rise 11.5% y-o-y to RM148.1 million, driven by positive domestic growth despite some correction in export sales.

QL Resources Bhd’s quarterly net earnings surged to a record high of RM123.62 million after increasing 27.2% y-o-y, on the back of higher contribution from all business segments, namely marine product manufacturing, palm oil and clean energy, integrated livestock farming and convenience store chain.

Low is of the view that the improved market sentiment should provide upside to the consumer sector, while Wan sees easing inflation being a key factor

Although the plantation sector delivered lacklustre performance in 4Q2023, Low expects crude palm oil (CPO) demand to remain strong until the Hari Raya Aidil Fitri festivities that fall in mid-April this year.

“I think the first four months should be quite decent and provide some upside to the 1Q results. The CPO price should be about the RM4,000 level,” he says.

Sime Darby Plantation Bhd’s net profit tumbled 64.4% y-o-y to RM200 million as it sold CPO at an average of RM3,688 per tonne during the quarter in review, which was 8% lower than the RM4,005 per tonne a year earlier.

The plantation giant cautioned that seasonally high stockpiles in key destination countries may impact short-term demand along with geopolitical risks and slower global economic growth. That said, volatile weather conditions are likely to raise supply concerns, providing support for palm oil prices this year.

Another plantation firm, IOI Corp Bhd, saw its net earnings slip 52.9% y-o-y to RM335.4 million, mainly due to lower contribution from the resource-based manufacturing segment, as a result of lower margins from oleochemical and refining subsegments, as well as lower sales volume from the refining subsegment.

Telecommunications players delivered mixed results. Telekom Malaysia Bhd (TM) and CelcomDigi Bhd were the top performers. Fixed-line operator TM’s net profit more than doubled y-o-y to RM433.53 million, thanks to tax credits and higher data revenue as well as lower costs. Following its merger, CelcomDigi’s net profit more than tripled y-o-y to RM435.1 million, but it flagged higher costs ahead.

Low says with the rising data centre theme, it could become a catalyst for the telecoms sector for the time being.

Maxis Bhd’s financials were dragged down by tax settlement and penalties imposed by the Inland Revenue Board. This resulted in its net profit plunging 76% y-o-y to RM56 million.

Meanwhile, loss-making Axiata is seeking to exit a sale of its telecommunications tower business in Myanmar in view of the worsening macroeconomic parameters and business conditions there.

Despite O&G firms across the board delivering better results, Petronas Chemicals Group Bhd’s net profit contracted 76.7% y-o-y to RM112 million, due to lower product spreads and sales volume.

Petronas Dagangan Bhd and Petronas Gas Bhd posted higher earnings, with the former’s net profit rising 25.2% y-o-y to RM180.81 million as higher demand drove higher volume growth. Petronas Gas’ y-o-y net profit growth of 7% to RM441.6 million was underpinned by lower expenses and financing costs and higher contributions from joint-venture companies.

O&G shipping firm MISC Bhd’s net earnings slipped 2.7% in the fourth quarter ended Dec 31, 2023 (4QFY2023) from a year earlier, dragged by higher vessel operating costs and lower billings for its offshore business.

While Genting Bhd was in the black in 4Q2023 compared with the previous corresponding quarter, its net profit tumbled 71.2% q-o-q due to lower adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda), higher impairment losses and a share of loss from joint ventures and associates, as well as a loss on disposal of an associate in the current quarter. Lower adjusted Ebitda was recorded by the leisure and hospitality businesses in the UK and Egypt, mainly due to higher operating costs.

Genting’s 49.3%-owned Genting Malaysia Bhd posted a 35.1% q-o-q rise in net profit to RM239.6 million on the back of higher adjusted Ebitda by RM158.8 million from investments and other income, mainly due to net unrealised foreign exchange translation gains of RM130.4 million on US dollar-denominated borrowings. 

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