Friday 29 Mar 2024
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"While we still expect corporate earnings to improve in 2022 as revenue growth from the economic reopening effect will more than offset the prosperity tax, there could be downsides to our 2022 corporate earnings forecasts as profit margins may be impacted by sharply higher operating cost (raw materials, energy and labour).”

KUALA LUMPUR (Dec 2): UOB Kay Hian on Thursday (Dec 2) set its year-end 2022 target for the FBM KLCI at 1,635 points as it sees expected policy rate hikes by major central banks and the quickening of US quantitative easing (QE) tapering in the first half of 2022, combined with high inflationary cost, to possibly dampen corporate earnings recovery significantly.

The research house said in a note its KLCI target is based on 16.2 times 2022 price-to-earnings. The index ended at 1,496.93 on Wednesday. 

“Our top-down target is well below our bottom-up target of 1,719. While we still expect corporate earnings to improve in 2022 as revenue growth from the economic reopening effect will more than offset the prosperity tax, there could be downsides to our 2022 corporate earnings forecasts as profit margins may be impacted by sharply higher operating cost (raw materials, energy and labour),” it said.

While the breadth of corporate results for the third quarter of 2021 (3Q21) remained predictably downbeat due to partial Covid-19 lockdown effects, upward revisions for some KLCI component stocks prompted UOB Kay Hian to raise its 2021 earnings forecast for the KLCI by 8% in contrast to a 3.2% downgrade for its coverage universe.

However, it expects the KLCI and its coverage universe’s 2022 earnings to fall 0.6% and 6.8% respectively after factoring in the one-off prosperity tax impact.

The research house also opined Malaysian equities will be mostly range-bound in 2022 as the economic thrust from the ongoing global reopening may not significantly overcome the gravitational pull of inflation and reversal of easy money.

It sees a higher-beta strategy at the year's start, turning defensive going into 2Q22, before taking some trading bets on the 15th general election (GE15). 

It expects a positive lift-off at the year's start, powered by gradual reopening of Malaysia’s borders.

However, it said markets are expected to turn cautious by 2Q22 as the US accelerates its QE tapering programme and prepares to raise its interest rates.

According to UOB Kay Hian, appealing investment themes include the economic reopening, commodity supercycle and high-dividend yielders, with the latter theme expected to gain prominence from 2Q22.

“Domestic investment themes could provide trading opportunities — such as GE15 and the digital economy (cloud migration, digital banking licence awards and e-government [services]). However, we would de-emphasise commodity supercycle plays as we head towards 2Q22,” it said.

Sectors in favour for new year

According to UOB Kay Hian, sectors in favour at the year's start would be tourism-related sectors, such as aviation, gaming (the casino segment), banks, hard and soft commodity companies, and technology (selected stocks).

Moving on to 2Q22, it said sectors in the limelight would continue to be aviation, gaming (the casino segment), commodities and banking, and joining the limelight would be defensive high-yielding companies/sectors, such as Astro Malaysia Holdings Bhd, British American Tobacco (Malaysia) Bhd (BAT), gaming number forecast operators and real estate investment trusts (REITS).

Overall, it has "overweight" on: i) reopening plays, particularly tourism-related stocks, selected banks and MyEG Services Bhd; ii) high-yielders, such as Astro Malaysia, BAT and REITs; and iii) selected exporters — electrical and electronics — and manufacturers, which would not be significantly impacted by Malaysia’s one-off prosperity tax.

Meanwhile, it continued to maintain "underweight" on the glove sector.

Its top picks are Astro Malaysia, CIMB Group Holdings Bhd, Genting Malaysia Bhd, Inari Amertron Bhd, MyEG, Press Metal Aluminium Holdings Bhd, Telekom Malaysia Bhd (TM) and VS Industry Bhd.

It also said rising mid-cap technology and medical equipment stars are particularly appealing.

Other notable timely "buy" calls, it said, include: i) reopening plays, including Axiata Group Bhd, Genting Bhd, Heineken Malaysia Bhd and RHB Bank Bhd; ii) high-yield plays, including BAT, Magnum Bhd and Sunway REIT; iii) cyclical plays, including Kerjaya Prospek Group Bhd, Matrix Concepts Holdings Bhd and UMW Holdings Bhd; and iv) Yinson Holdings Bhd, which is well poised to clinch more significant floating production storage and offloading contracts.

Edited ByJoyce Goh
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