THE market awaits a new dawn in 2022.
After going through a year of disappointing, or at best, mixed result seasons, investors are betting for a rebound in corporate earnings this year.
While the one-off Cukai Makmur or prosperity tax would dent earnings, particularly for companies making chargeable incomes of more than RM100mil, it would not derail the recovery momentum.
This is assuming no major lockdowns are re-introduced.
One could say that the recovery in business activities and as a result, the corporate earnings, is already underway, using the unemployment figure as a gauge.
In October 2021, the national unemployment rate dipped to 4.3%, the lowest level since April 2020. The number of unemployed persons dropped to 705,000 from 778,800 individuals in April 2020.
Economists expect the country’s gross domestic product growth to return to positive territory in the fourth quarter of 2021, following a contraction of 4.5% in the previous third quarter.
The momentum is expected to accelerate, with a stronger full-year growth of 5.5% to 6.5% in 2022.
As for the equities market, analysts are also positive on its performance this year.
The benchmark FBM KLCI, which was the second worst performer among Asia’s key stock exchange indices in 2021, is set for a rebound.
Some analysts say the rebound could be mild, while others say a strong uptrend in FBM KLCI is possible.
Amid the positive market outlook, experts have highlighted how investors can pick the right sectors to bet on for 2022.
Experts say investors should consider sectors with beaten-down valuations or sectors that saw operational interruption or lower footfall in 2021.
In addition, other sectors that can be considered are those benefitting from pent-up demand or delayed orders carried from 2021.
Overall, MIDF Research says all sectors, except for glove manufacturing and plantation, are expected to see stronger aggregate earnings in 2022. This is based on the stocks under its coverage universe.
The glove manufacturing and plantation sectors are forecast to register negative earnings growth in the upcoming financial year, mainly due to weakening average selling prices of glove and lower crude palm oil prices respectively.
Apart from these two sectors, it is also worth noting that analysts are generally neutral on the prospects of the property, construction, real estate investment trust and telecommunication sectors, among others.
This, however, does not mean that these sectors will not experience a recovery in 2022.
Speaking with StarBizWeek, Areca Capital chief executive officer Danny Wong says the two main themes for 2022 would be recovery play and growth.
The recovery play sectors are those that should have recovered in 2021 but were delayed due to the movement restrictions.
The top recovery play sectors include banking, gaming, hospitality and consumer-related, among others.
As for the growth theme, Wong says it includes sectors that are in line with the global mega-trends over the next three to five years.
Among such sectors are technology, industrial products and export-based.
“I’m positive on the market outlook. Because of the challenges seen in the past two years, companies have streamlined their operations, resulting in a low base for their costs.
“So, even with Cukai Makmur, they would be able to digest the additional cost as overall costs have been reduced.
“Product orders that should have been received and delivered in 2021 are also pushed to 2022 due to the previous lockdown. This would boost the sales volume this year,” says Wong.
Rakuten Trade head of research Kenny Yee expects the “real market rebound” to happen in the second half of 2022, as investors take cue from the projected stronger earnings in 2023.
StarBizWeek has compiled some of the sectors that analysts and fund managers say are the best choices for 2022.
Areca Capital’s Wong says that banks’ low valuations at the moment is a key attraction for investors. With the recovery in the overall economy, banking stocks are expected to perform better in 2022.
Meanwhile, Rakuten Trade’s Yee says that with the expected increase in the overnight policy rate (OPR) in 2022, banks’ earnings would also naturally improve.
Echoing a similar stance, Hong Leong Investment Bank (HLIB) Research says that banks’ net interest margin (NIM) will expand in the short term because of an interest rate hike, given quicker loans repricing versus deposits.
“On a full year basis, we estimate that every 25-basis-point OPR increase would widen sector NIM by five to six basis points which in turn, bump up the profit forecast by 4% to 5%.
“From our sensitivity analysis, Alliance Bank Malaysia Bhd and Bank Islam Malaysia Bhd would gain the most if interest rate rises, while Affin Bank Bhd and Public Bank Bhd are poised to benefit the least,” says HLIB Research, which is positive on the sector.
MIDF Research says the sector’s outlook would remain bright throughout 2022, supported by the advent of 5G technology, increasing smartphone shipment, emergence of digital solutions in business and growing electric vehicle market.
“All in all, we are maintaining our positive stance on the sector given, through innovation and invention, this sector continues to benefit from digital proliferation and is now integrated into all other sectors such as healthcare, financial, real estate, logistics and manufacturing,” it says.
Kenanga Research says it remains bullish on the technology sector as it continues to observe aggressive expansions among local and global semiconductor players. Its top picks for the sector are Kelington Group Bhd, GHL Systems Bhd and Inari Amertron Bhd.
On the impact of Cukai Makmur on the technology stocks under its coverage, Kenanga Research described it as “negligible”.
“Given that most of the technology companies under our coverage enjoy exemptions (such as pioneer status, investment tax allowance and reinvestment allowance) which will still be valid even with the prosperity tax implemented, we foresee a negligible impact of about 1% to 3% to our earnings forecasts.
“Such impact could be easily mitigated with initiatives such as an accelerated capital expenditure in the financial year of 2022,” it says.
HLIB Research, which has upgraded its view on the sector to “overweight”, says it is a good reopening recovery play.
A recovery in advertising expenditure (adex) is expected as business activities pick up. Other segments such as newsprint, radio, events and out-of-home advertising are also likely to recover, following the easing of movement restrictions.
Similarly, Kenanga Research expects an improved adex outlook in 2022 as the stronger domestic demand would encourage more advertising activities.
Meanwhile, MIDF Research believes that companies with traditional media businesses such as Star Media Group Bhd would benefit, should the 15th General Election (GE15) be called in 2022.
“The GE15 could serve as a catalyst in driving up the adex for traditional media, namely publishing and broadcasting in 2022.
“We also foresee an upward trajectory in the home shopping and digital segments in tandem with the paradigm shift in consumer behaviour.
“Considering the healthy cash balance of the media companies, we do not discount any potential merger and acquisition exercises that may take place to expedite the transformation process of the media companies and to exploit market opportunities,” it says.
Areca Capital’s Wong and Rakuten Trade’s Yee are positive on the gaming sector, expecting it to be one of the outperforming sectors this year.
Following business interruption for the most part of 2021 due to the movement restrictions, gaming-related companies such as casino and number forecast operators have once again seen increasing footfall.
“Genting Malaysia is our top pick for Malaysian casinos due to its lower reliance on international tourism, while Magnum Bhd is our pick for NFOs as it has purer exposure to the strong cashflow generating NFO business and due to the potential monetisation of its stake in U Mobile.
“We see NFOs’ revenues recovering to pre-Covid-19 levels faster versus casinos’ due to NFOs’ closer proximity to customers, zero reliance on foreign tourism and fewer constraints from Covid-19 standard operating procedures,” it says.
Healthcare excluding gloves
CGS-CIMB Research expects the healthcare sector, especially the pharmaceutical segment, to see a further recovery in 2022 as patients return to clinics and hospitals to seek treatment post-movement restrictions.
“We maintain sector “overweight”, with full recovery in patient volumes and revenue intensity, as well as strong earnings boost from Covid-19 vaccine fill-and-finish works, as key re-rating catalysts.
“Pharmaniaga Bhd is our top pick for the Malaysian pharma sector given near-term earnings contributions from Covid-19 vaccine supply, while IHH Healthcare Bhd is our hospital sector pick due to resilient earnings and undemanding valuations,” it says.
HLIB Research is also positive on the sector, adding that it is one of the good reopening recovery plays.
Meanwhile, RHB Research Institute says that the sector remains appealing, premised upon new growth drivers and structurally higher cost of care.
It believes that given the continued patient backlogs in government hospitals, the outsourcing of services to private hospitals will continue in 2022.
RHB Research Institute says that increased vaccination rates and countries accepting endemicity should allow the easing of international border restrictions, which in turn would spur the recovery of medical tourism.
“The recovery, however, will be gradual, as cautiousness will linger – against the backdrop of tapering Covid-19-related revenue.
“That said, we believe certain elements of the latter will persist throughout 2022, notably on border testing, and hospital operators as a whole should continue to benefit from the recovery in domestic patient flows,” it says.
The brokerage’s top pick for the sector is IHH Healthcare, although it also likes Duopharma Biotech Bhd.
HLIB Research is “overweight” on the sector given its stable earnings, despite the market or economic uncertainties.
Meanwhile, CGS-CIMB Research says the sector is poised to benefit from the country’s energy transition.
It also sees the environmental, social and governance (ESG) risks for the utilities industry as opportunities, given the rapid growth in renewable energy, rising electricity demand and continuous grid investments.
“We reiterate “overweight” on the sector given our expectations of stronger earnings per share growth for the sector in 2021 to 2023 versus 2020, its undemanding 2022 sector average price-to-earnings of 13.2 times versus 16.6 times in 2020, decent FY21-22 dividend yields of 5%, limited foreign outflows as foreign shareholdings are near historical lows at 20.2% as of October 21 and overplayed ESG concerns as we see growth potential from ESG,” says CGS-CIMB Research.
Kenanga Research, on the other hand, points out that the utilities sector remains a good investment avenue for investors looking for defensive earnings, thanks largely to their regulated business environment.
“This also helped sustain their above average yield of 4% to 7%,” it says, adding that the sector will continue to see stable earnings by the independent power producers in 2022.
Areca Capital’s Wong expects the consumer sector to be one of the key recovery plays in 2022, boosted by the reopening of the economy and improving household and business sentiment.
AmInvestment Bank Research also says that the country’s economic recovery would “energise” the sector, with ultra-low rate environment and cash assistance to support consumer spending.
“With economic activities picking up and Covid-19 daily cases remaining low, we noticed optimism in consumers’ future spending as reflected in the Consumer Sentiment Index.
“The sector is ripe for transformation and growth with the large number of small-to-mid cap companies with expansionary potential, coupled with pivoting opportunities underpinned by changing consumer preferences,” according to the brokerage.
Meanwhile, MIDF Research expects the food and beverage players to rebound strongly in 2022 and improve their earnings, given the reopening of the hotel, restaurant and cafe segment.
“In addition to the consumer staples, we expect the consumer discretionary stocks to perform better as well. While an increase in footfall can be attributed to this, we believe that greater online engagements also will contribute to better performance of the retail segment as consumers have adapted to online shopping,’ it adds.