For the first quarter of 2018, Malaysia equity market as represented by FBMKLCI Index was the top performing market in Asia and was the runner up among the markets under our coverage (+4.4% in total return, MYR term). The rather outstanding performance of the local equity market was a result of the continuing foreign inflows and the recovering corporate earnings. As we always emphasize that earnings is one of the main drivers for the equity market, in this article, we would like to review how have the Malaysian companies performed in 2017 and the earnings outlook for 2018.
Stronger Earnings Growth in 2017
Last year, although we saw a lower earnings surprise as compared to 2016 (see figure 1), it still remained in the positive territory with the actual earnings for FY 17 outperforming the analysts’ forecast by about 5.18%.
|Figure 1: Earnings Surprise
In term of earnings growth, Malaysian companies posted the strongest earnings growth since 2014 while more than 66% of the companies listed on FBMKLCI Index delivering positive earnings growth for the full year of 2017 with the aggregate earnings growing 6.3% y-o-y.
|Figure 2: FBMKLCI aggregate earnings growth
Positive Earnings Revision Continues
As of 19th April 2018, following the 0.13% of earnings upgrade in 2017, the local equity market saw positive earnings revision of +0.83% on YTD basis. Having said that, the earnings for the local companies are expected to grow by 6.2% and 7.4% for 2018 and 2019 respectively.
The Financial sector, which accounts for almost one-third of the weightage in FBMKLCI Index, was one of the largest contributors (+3.09% earnings upgrade) to the overall earnings upgrade for the local equity market. In other words, analysts are confident and positive on the earnings outlook for the financial sector. Over the first two months of 2018, we continue to witness healthy loan growth for the banking sector, with the industry total loan growing by 4.5% y-o-y in February as compared to the 4.2% y-o-y in the earlier month. Given the improving loan growth coupled with the recent rate hike, the local banking players are expected to achieve a higher interest income and net interest margin.
Similarly, the second highest weighted sector in FBMKLCI Index, the Consumer Staple Industry also saw positive earnings revision (+0.81%) underpinned by several factors such as the improving consumer sentiment, the strengthening Ringgit as well as the moderating inflation which is likely to spur consumer spending moving forward.
On the contrary, the local Telco sector which attributes for about 13% in the local equity market, registered negative earnings revision of -2.84% on YTD basis. However, after experiencing 4 consecutive years of contracting earnings growth, we believe that the Telco counters might see marginal rebound due to the low base effect and the easing price war among the Telco players with the focus shifted from pricing to customer experience and to defend their average revenue per user (Arpu). Hence, given that the price war among Telco companies is possible to abate this year, we believe it will somehow benefit the Telco sector as a whole.
Valuation close to Fair
As of 19th April, the local equity market was trading at 16.8x and 15.7x 2018’s and 2019’s estimated earnings respectively. In comparison with its fair PE of 16x, it is currently trading at a slight premium. However, given the expectation of synchronized global economic growth, we believe Malaysia’s external trade activity is likely to grow at high single or low double-digit growth rate which could continue to support the local economy.
On top of that, the local private consumption and government spending poises to mark respectable growth this year due to the improving consumer sentiment and the higher crude oil price that could also provide the government with a surprise revenue windfall. Hence, with all the above-mentioned factors, they might be translated into higher corporate earnings and would eventually reflect in the share prices of the local companies, hence supporting the valuation of the local equity market.
All in all, we believe that the local equity market is likely to provide investors with a rather reasonable annualized return of about 7.0% over the next two years. As such, we continue to maintain our star ratings for Malaysia at 3.0 stars “Attractive”. Nevertheless, given the upcoming political event in Malaysia, investors are reminded that the forecasted return is made with the assumption of political stability and policy continuity.
For investors who wish to gain exposure into the local equity market, they can consider
Kenanga Growth Fund which invests into the local equity market regardless of the company market capitalization. Besides that, for investors who are looking to capture the opportunity in the small to mid-cap spare given the recent hefty sell-off, they can look into
Eastspring Investment Small-Cap Fund or
Eastspring Investment Islamic Small-Cap Fund.