Rakuten Trade sees KLCI at 1,800 points, overweight on 9 key sectors

 

Rakuten Trade has an ‘overweight’ call on nine key sectors, neutral for three sectors and only one underweight call. (Bernama pic)

PETALING JAYA: Rakuten Trade sees Bursa Malaysia’s benchmark index FBM KLCI touching 1,800 points some time in 2023 now that political stability has finally been restored coupled with encouraging signs foreign funds are coming back.

The research house recently issued a report card on the performance of the 13 sectors under its coverage. Consistent with its rather optimistic outlook for Bursa Malaysia in 2023, Rakuten Trade made an “overweight” call on nine key sectors, a neutral call for three sectors and only one underweight call.

The overweight sectors are banking, construction, gaming, oil & gas (O&G), plantation, real estate investment trust (REIT), technology, telecommunication, and utilities. The sectors deemed neutral are automotive, consumer and property while the sole underweight call was for the glove sector.

Its head of research, Kenny Yee, says the research house believes the local bourse may see heightened trading activities as retail participation will improve over time, providing the much-required liquidity in the market.

Rakuten Trade anticipates the FBM KLCI to possibly touch 1,560 points by year-end premised on a reasonable 13 times (x) CY2022 price-to-earnings ratio (PER).

“As for 2023, based on prevailing estimates, we believe the index to possibly touch 1,800 points based on 14x PER which is still below its five-year average,” said Yee in its investment report

The FBM KLCI rose 6.33 points to close at 1,474.68 last Friday.

Feel good factor to persist

Yee noted the performance of the local bourse had been affected by domestic issues as well as primarily politics.

“Hence, it is not surprising that the FBM KLCI rebounded post GE-15 especially when Anwar Ibrahim was appointed as PM,” he said, adding it expects this “feel good” factor to persist going forward.

With regards to participation of retail investors, he noted retail participation has been greatly reduced in line with the decreasing market traded volume.

“Year-to-date net inflow from retail amounts to only RM2.2 billion. However, we noticed the number of improving smaller cap stocks is on the increase and may be a precursor of improving retail participation,” he said.

Here are excerpts of Rakuten Trade’s sectoral performance assessment:

Banking (Overweight)

October 2022 loans grew by 6.5% year-on-year (y-o-y) (+0.5% month-on-month) in line with our calendar year 2022 (CY2022) industry loans growth target of 6%-6.5%. At present, we reckon that healthy domestic economic prospects will keep loans demand strong.

We prefer CIMB which has demonstrated defensive performance in non-interest income, contrary to most other banks thanks to its regional operations and Maybank which is preferred for its alluring dividend yield.

Construction (Overweight)

A new wave of awards of public infrastructure projects is more likely to hit the market post-GE15. These will include MRT3, Pan Borneo Sarawak Phase 2, Pan Borneo Sabah, Central Spine Road and various flood mitigation and hospital projects.

We believe the sector has seen the worst and should be poised for improved earnings in FY2023 given the gradual return of foreign workers and recent easing in commodity prices. The construction sector has always been the focal point to revive the nation’s economic activities thus we can only expect more goodies to emerge.

Oil & Gas (Overweight)

This sector should benefit from sustained firm oil prices, spurring capital expenditure (capex) hence improving activities in the O&G industry. The World Bank projects Brent crude oil price to average US$92 (RM407) per barrel in 2023.

Additionally, the recently concluded Q3 CY2022 reporting season saw a vast improvement in corporate earnings. Petronas’ net-cash position currently stands at a healthy RM103 billion, the highest since end-FY18, and we see little difficulty for the group in meeting capex.

Plantation (Overweight)

Palm oil prices have eased by over 30% since early June. Therefore, weaker earnings are expected going forward. We believe consensus has already priced crude palm oil (CPO) of between RM3,500/MT and RM4,000/MT for next year’s earnings forecasts.

Despite y-o-y declining earnings on weaker CPO prices, plantation sector ratings may have already bottomed. Even at CPO prices of RM3,500-4,000/MT, operating margins and cash flows are still good as production cost is estimated to hover between RM2,000-2,500/MT moving into CY23.

Gaming (Overweight)

This sector is seen as a major economy reopening play. We expect visitor arrivals at integrated resorts and ticket sales of number forecast operators (NFOs) to continue to improve in 2023. However, we are mindful of the sustained high inflation that is eating into consumer spending power, potentially hurting visitors’ arrivals and ticket sales of NFOs.

We believe the worst is over for the gaming sector as earnings have been improving every quarter since the reopening.

REIT (Overweight)

Broadly speaking, Malaysian REITs with exposure in the right business segments (particularly in industrial and retail) and/or own property assets in prime locations have been benefiting from resilient rental income streams.

In the most recent quarterly results, retail REITs have seen strong recovery and we expect the earnings will continue to improve in 2023.

Technology (Overweight)

The World Semiconductor Trade Statistics still projects for the worldwide semiconductor market to grow by 4.6% in 2023. Meanwhile, the escalation in the US-China chip war will likely benefit Malaysia.

We understand that MNCs are beginning to relocate out of China and into Malaysia for chip packaging services. This trend is expected to be more prominent for US companies.

Telco (Overweight)

The single wholesale network is no longer an issue as all parties concerned have agreed to the terms of the lease pricing and have signed the Access Agreement (AA). So far, Yes 5G, Unifi Mobile, Celcom, U Mobile and Digi have rolled out their 5G plans. We also see telcos as domestically driven plays, hence will escape external headwinds.

Meanwhile, the merger between Axiata Group and Telenor Group has been completed. Celcom Digi is strategically poised to invest in network expansion and support the growth of Malaysia’s digital ecosystem.

Property (Neutral)

The sector continues to be weighed down by oversupply, eroding purchasing affordability on the back of rising interest rates, and soaring construction cost. We notice certain developers have held back launches amid the high construction cost, more so on labour shortages and a rising interest rate environment.

Consumer (Neutral)

The consumer sector is largely underpinned by our positive view on mid-market retailers as: (i) surge in shopping-in-person, (ii) their customer base is less impacted by higher inflation given a healthy household balance sheet, and (iii) they have been able to pass on higher costs and hence maintain their margins.

Meanwhile, F&B producers are likely to sustain their sales but at the expense of margins. F&B producers have little room to hike prices as their customer base is less immune to inflation. Despite the inflationary pressures, we expect topline for 2023 to be resilient.

Glove (Underweight)

Low average selling prices (ASP) remain the key issue for glove players in 2023 due to massive capacity expansion by incumbent players as well as influx of new players. We estimate that global glove manufacturing capacity has jumped by 22% this year and will result in an excess supply.

In 2023, we estimate that global glove manufacturing capacity will surge by another 16% (as more capacity planned during the pandemic years finally comes online) while the global demand for gloves shall resume its organic growth of 15% annually hence resulting in the excess supply ballooning further. - FMT