KUALA LUMPUR (Dec 2): CGS International views the recent lacklustre market performance as an excellent buying opportunity, as it sees potential price-earnings (P/E) expansion going into 2025. 

"Our list of 20 top picks trade at 12.8 times 2025 P/E, offering an 18% two-year profit compound annual growth rate and 4.1% yield," said the research firm in a note on Monday.

The house said following three consecutive years of declines, the FBM KLCI was up strongly by 15% year-on-year (y-o-y) in the first eight months of the year (8M2024), while the FBM100 was 16% higher.

"However, the rally fizzled out in the past three months, with the KLCI up 10% in 11M2024 and the FBM100 up by 13%. 

"This was despite Budget 2025 highlighting continuity in the Madani reform and growth agenda, double-digit earnings growth, prospects for further ringgit appreciation (despite volatility surrounding a second Trump term in the US), and acceleration in domestic demand."

CGS said valuations continued to track at the lower end of historical ranges, following the expansion in share prices since end-2023, and had not kept up with an improved earnings trajectory.

CGS said there were notable distortions to sectors under its coverage in the third quarter of the year (3Q2024), as the ringgit appreciated by 13% against the US dollar, from 4.72 at end-June to 4.13 at end-September. 

"This sharp movement caused distortions of 3Q2024 results — both positive and negative — although operationally, the impact appeared to have been negative. "

CGS said the negative impact was mostly on US dollar revenue earners and those with foreign businesses that would be 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". 

In addition, it said companies with larger market cap saw sizeable translation gains as foreign debt front-loaded certain costs. 

"After removing about RM3.1 billion in unrealised/translation currency gains (net) and other exceptional items, net profit growth of our coverage universe slowed from 18% y-o-y in the first half of 2024 (1H2024) to just 4% in 3Q2024."

Sequentially, profits were down 3%, following an unusually strong 17% cumulative gain in 1Q2024 and 2Q2024, it added.

Also, the year-ago base was high, as 3Q2023 was the strongest reporting quarter in 2023 (at 27% of the full year).

Revenue growth was decent at 6% y-o-y in 3Q2024, versus 4.5% a year ago. For 9M2024, normalised net profit grew by 13%, making up 75% of CGS' full-year target just prior to the reporting season.

Only five of the 18 sectors under coverage reported double-digit y-o-y normalised profit growth, versus 11 in 2Q2024, while eight reported y-o-y decline compared to five. 

"That said, we do think that several big caps, in particular, took advantage of massive translation gains to front-load certain expenses. Thus, for example, Tenaga Nasional Bhd (KL:TENAGA) took in additional costs of RM482 million (net) to smoothen out a RM1.1 billion translation gain. Other big caps that had large translation gains include Axiata Group Bhd (KL:AXIATA), Genting Bhd (KL:GENTING), Genting Malaysia Bhd (KL:GENM), YTL Corp Bhd (KL:YTL), YTL Power International Bhd (KL:YTLPOWR), and IOI Corporation bhd (KL:IOI)."

Sectors that generated double-digit net profit growth in 3Q2024 were construction, financials, oil services, industrial goods, real estate and technology.

"Interestingly, only agri-business, mainly Kuala Lumpur Kepong Bhd (KL:KLK) and Sarawak Plantation Bhd (KL:SWKPLNT), and consumer discretionary — Genting Malaysia, DXN Holdings Bhd (KL:DXN), Power Root Bhd (KL:PWROOT), etc — seems to be lagging our full-year estimates in a significant way on an annualised basis."

CGS noted that since the start of the reporting season, its overall market net profit estimate had been revised down by 1% each for 2024 and 2025 through the results season, mainly impacted by a 21% to 66% cut to petrochemicals. 

"We have also reduced estimates for transport and consumer discretionary and raised real estate and conglomerates. In our updated estimates, our numbers are pointing to 14% growth in 2024 and 11% in 2025," the house said.