Higher and higher

What is most telling is the sharp increase in the FBM KLCI forecast with the market now looking at a year-end level of 1,704 points, against just 1,618 points three months ago.

BASED on past trends, the quarterly performance of corporate Malaysia in any first-quarter period is usually the weakest as analyst forecasts are typically well ahead of reality.

At the last quarterly result three months ago, consensus already had high expectations for earnings growth this year with the market expecting a multi-year high earnings growth of 14.1% year-on-year (y-o-y) for 2024.

Not anymore! In the recently concluded earnings season, normalised corporate profits rose strongly, with earnings rising by 17.5% y-o-y.

This is well ahead of the full-year forecast growth, while on a quarter-on-quarter (q-o-q) basis, earnings expanded by 10.1%.

The FBM KLCI above 1,700 points?

While there have been minor tweaks to growth expectations for this year and next year, what is most telling is the sharp increase in the FBM KLCI forecast with the market now looking at a year-end level of 1,704 points, against just 1,618 points three months ago, a good 86 points or 5.3% uptick.

The increase in the FBM KLCI’s fair value ranges from as low as 50 points to as high as 120 points among broking firms.

However, two brokers had already upped their forecast way before the recent quarterly results season and hence have maintained their current forecast.

The increase in the FBM KLCI fair value is mainly driven by an expansion in the price-to-earnings multiple as brokers see results in terms of not only a better-than-expected first quarter economic report card but also liquidity factors as well as the relatively inexpensive ringgit.

Earnings multiples among brokers have been expanded from an average of 14.6 times to 15.3 times now – an increase of 0.7 times.

The earnings revision that took place during the quarter was also positive with the consensus now looking at earnings growth of 14.7% for 2024 from 14.1% previously before slowing down to 8.4% next year from the previous estimate of 8.2% growth.

A good quarter

The consumer sector came in within expectations while the construction sector saw strong outperformance among larger construction companies, led by IJM Corp.

However, some smaller companies within the construction sector fell short of forecast.

Glove companies remain underperformers mainly due to higher cost structures, while among property names, the stand-out performance was certainly from Sime Darby Property, while the rest were largely in-line.

Selected oil and gas sector companies did surprise the market on the upside, especially among the smaller players, while PETRONAS Chemicals and Lotte Chemicals fell short of forecast.

Plantation companies showed disappointing performance in the first quarter period, especially among larger companies.

Gaming stocks, in particular Genting and Sports Toto, saw a strong first quarter momentum in terms of earnings performance but the utility sector was relatively flat due largely to the already high expectations placed on companies carrying the current market momentum – YTL Power and its parent company, YTL Corp.

Banking stocks again showed resilience with Maybank and AMMB delivering better than expected profit for the quarterly period.

The technology sector is exhibiting what has already been priced-in by the market, which is the hope of a recovery, especially in the semiconductor sector.

Some big names among FBM KLCI index-linked companies during the quarter were quarterly performance from Press Metal, Sime Darby, and MISC.

A 4.8% nominal growth

After expanding by just 2.9% y-o-y in the fourth quarter of financial year 2023 (4Q23) last year, the Malaysian economy regained some momentum as the economy expanded by 4.2% y-o-y, marginally ahead of the advanced estimate growth of 3.9% y-o-y.

On a seasonal-adjusted basis, Malaysia recorded a 1.4% q-o-q expansion against the preceding quarter’s contraction of 1%. In nominal terms, the Malaysian economy contracted by 2.5% q-o-q but grew by 4.8% y-o-y to RM464.8bil in the 1Q24 period. Clearly, corporate Malaysia’s earnings growth on a q-o-q basis easily beat the economic contraction that was seen during the quarter, while on a y-o-y basis, earnings growth in the first quarter period was more than three and a half times faster than the economic growth momentum.

Improved performance

Despite traditionally showing poor performance in the first quarter period, the number of companies reporting earnings that met the consensus forecast jumped to almost 60% from 47% in the preceding quarter.

About 18.1% of companies reported earnings that were above expectations against 22.7% that were below consensus estimates.

This was slightly weaker than the preceding quarter whereby 24.1% of companies reported results that were above expectations but much better than the 28.9% of companies that reported quarterly results that were below expectations.

Hence, the earnings disappointment ratio deteriorated marginally to 1.25 times from 1.20 times in the preceding quarter.

Riding high

Since the start of the year, the FBM KLCI has gained 11%, making it one of the best-performing markets in Asia this year and clearly supported by the strong earnings growth momentum that we had observed from the first quarter reporting season.

The market too has seen a strong rotational play that has lifted many sectors with key themes that the market perceived to be positive.

While the early momentum was build-up with the Johor-Singapore Economic Zone, benefitting inflows into the property sector, we have now seen a broader theme playing out riding on data centre themes as well as renewable energy.

Property stocks continued to hog the limelight while the spillover impact into other sectors like construction, building materials, banking and other consumer stocks too have allowed the market momentum to remain bullish.

Newly listed companies too have been having it good with most recent listings giving investors much to cheer about as investors are willing to pay a good premium for them on the back of growth expectations and unique business models for some.

A word of caution

As the market rides on these themes, investors should also be wary of companies venturing into certain sectors just to get a lift-off in their share price as we had seen this before during the pandemic when many companies jumped on the glove bandwagon then.

There is a limit as to how many data centres Malaysia could host as these are not only power guzzlers but also require a massive amount of water supply for cooling purposes.

The biggest winner of the massive data centre investments that we are seeing today is Tenaga Nasional (TNB). While TNB has the capacity to provide power supply to an estimated 1,335 megawatt (MW) of demand by the end of this year from data centres that are coming into operations, the future demand, which is estimated to hit 5,000 MW within the next 10 years, is another challenge.

For companies that are just venturing into this lucrative sector or even those going into artificial intelligence ought to be mindful of going into something that they are not familiar with as it may look good on paper today, the reality could be very different when the market reaches saturation point. Just ask the failed glove venturing companies during the pandemic.

Hence, with the market receptive to the data centre theme, we are indeed seeing increasing interest in the sector, especially among property companies.

This is mainly on the back of their ability to provide landbank for data centre ventures but the real test is whether they have the off-takers and whether they can secure the energy and water needed to set-up a data centre.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.