THE plantation sector stood out in the first quarter of 2022 (1Q22), as most analysts noted that the stocks generally outperformed expectations, while companies in banking, oil and gas, automobile, to name a few, also performed better than anticipated.
AmInvestment Bank Bhd (AmInvestment Bank) highlighted that it was a mixed 1Q22 report card as 25 per cent of the stocks under its coverage were outperformers, 48 per cent in line and 27 per cent below expectations.
“Amongst all the sectors, plantation stood out as six out of seven stocks in our current coverage outperformed due to higher-than-expected crude palm oil prices,” the research firm said in its review of Corporate Malaysia so far.
“This was followed by real estate investment trusts (REITs) due to stronger rental revenue and a pick-up in the retail sector. Other companies which outperformed were in the oil and gas, automobile and consumer sectors.”
Meanwhile, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) opined that 1Q22 saw mainly weaker set of results, especially in smaller cap stocks. Of the 129 results review reports issued, 25 or 19.4 per cent (versus 40 in the previous quarter) of them came in “above”, 67 or 51.9 per cent of them (versus 55 in 4Q21) were “within” and 37 or 28.7 per cent (versus 34 in 4Q21) came “below” the research arm’s expectation.
“Sector-wise, consumer sin sector saw an overwhelming 2/3 of stock coverage surpassing expectations while gloves and utilities sectors posted outright results disappointment during the quarter,” Kenanga Research said.
“However, despite the generally weaker set of results, we saw positive earnings revisions among big cap stocks especially banking and plantation stocks.”
As for the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), the percentage of companies in MIDF Research Universe that registered earnings above its expectations declined to 25 per cent in 1Q22 as compared to 33 per cent in the prior quarter.
“Likewise, the percentage of negative surprises declined to 31 per cent in 1Q22 from 32 per cent in the prior quarter,” MIDF Research noted.
“Accordingly, the percentage of companies with results which met expectation increased to 44 per cent in 1Q22 from 35 per cent in the prior quarter.
“Moreover, plantation sector registered the highest percentage of positive surprises at 71 per cent of stocks under our coverage while utilities sector led the percentage of underperformers at 83 per cent of companies under our coverage.”
According to MIDF Research, energy, financial services, plantation, REITs and utilities were the sectors which recorded improved total earnings (as reported) in 1Q22 when compared to both the preceding quarter and corresponding period last year.
“On the other hand, construction, consumer products and services, healthcare, and transport and logistics were the sectors which registered both negative sequential and on-year earnings (as reported) growth percentages in 1Q22.”
Banking protected by defensive attributes
RHB Investment Bank Bhd (RHB Investment Bank) noted that banks were up circa nine per cent year to date (YTD) in 1Q22, with the outperformance against the market benchmark (down one per cent YTD) reflecting the sector’s relatively defensive attributes and the country’s gradual economic recovery.
“While underlying momentum is healthy going into 2Q22, banks struck a cautious tone on business growth and asset quality,” RHB Investment Bank said.
“We forecast sector earnings improving by 5.4 per cent y-o-y in 2022, relatively unchanged post-1Q22 results, with ROE stable at 9.4 per cent.”
Of the eight banks under the research firm’s coverage (Malaysia Banks), five had results that were in line.
“AMMB Holdings Bhd (AMMB) and CIMB Group Holdings Bhd (CIMB) posted earnings that beat our expectations on lower-than-expected impairment charges and recognition of tax credits at AMMB.
“Bank Islam Malaysia Bhd (Bank Islam) missed expectations for the second consecutive quarter, attributed to weaker-than-expected non-financing income.”
For Kenanga Research, banks performed better-than-expected during this reporting season, with AMMB reaping higher returns thanks to tax credits while CIMB saw the benefit from write-backs in certain legacy accounts.
“Malaysia Building Society Bhd (MBSB) was the only disappointment due to softer-than-expected financing growth, net interest margin (NIM) performance and heftier operating costs,” the research arm noted.
On the other hand, results of banks were mostly within AmInvestment Bank’s expectations.
The results of Malayan Banking Bhd (Maybank), Public Bank Bhd, RHB Bank Bhd (RHB Bank), Hong Leong Bank Bhd (Hong Leong Bank), Alliance Bank Malaysia Bhd were within AmInvestment Bank’s expectations.
“Bank Islam reported net earnings that were slightly below our expectation due to lower-than-expected non-fund based income,” the research firm said.
“Meanwhile, AMMB’s earnings were above consensus estimates as a result of its net write-back in provisions with the reversal of some management overlays.”
AmInvestment Bank recapped that banks’ first three months of 2022 (3M22) core calendarised earnings grew by seven per cent y-o-y after stripping out the impact of Cukai Makmur and CIMB’s exceptional item net of tax and minority interest (MI) of RM45 million and modification loss.
The research firm also noted that the stronger 3M22 earnings were driven by higher total income supported by an increase in net interest income (NII), controlled operating expenses (opex) and significant decrease in provisions.
“The sector’s calendarised core earnings growth for 2022 is now revised higher to 11 per cent from 9.6 per cent largely after raising our NIM and lowering our credit cost assumptions for banks.
“On reported net profits with additional taxes from Cukai Makmur, earnings growth for banks in 2022 will be flattish at 1.5 per cent.”
All in, AmInvestment Bank expected banks to report stronger earnings in 2023 supported by higher total income and lower provisions.
“Also, Cukai Makmur will no longer impact banks earnings in 2023.”
Meanwhile, Kenanga Research highlighted that the recent overnight policy rate (OPR) hike serves as a notable sentiment booster for the banks, especially at a time where deposit competition is starting to creep into NIMs.
“This is also telling of BNM’s hawkish stance which could lead to several more hikes during the year.”
Throughout the year, the research arm anticipates the banks to register similar trends of better loans growth arising from Malaysia’s economic recovery, mainly from small and medium enterprises (SMEs).
“Meanwhile, non-interest income (NOII) should continue to mark sequential weakness although this could change quickly with any reversion in trading and investment sentiment.
“Credit costs are also expected to be softer as asset quality concerns ease, but major writebacks should only be anticipated in 2023.”
Kenanga Research’s top picks for the 2Q22 season are RHB Bank and Hong Leong Bank.
“RHB Bank is a solid pick for its high capital reserves and recent digital banking win with Boost could be a medium-term sentiment booster as updates develop.
“Meanwhile, we like Hong Leong Bank as a safe haven pick given their exceptional improvements in gross impaired loans (GIL) and containing asset quality.”
Plantation sees gains from higher CPO
THE plantation sector’s 1Q22 results were generally above expectations, with analysts crediting this to higher crude palm oil (CPO) prices and production.
“On the back of robust CPO prices and production, most of the plantation results in 1Q22 were within market expectations but above ours,” AmInvestment Bank said.
“The exception was Genting Plantations Bhd (Genting Plantations), which was below consensus due to weak downstream earnings.”
AmInvestment Bank gathered that most planters achieved average CPO prices, which were below the Malaysian Palm Oil Board (MPOB) spot price in 1Q22.
“This was due to forward sales locked in at lower prices and the Indonesia price discount.
Plantation companies in the research firm’s coverage realised average CPO prices of RM4,378 per tonne to RM6,019 per tonne in 1Q22 versus RM2,916 per tonne to RM3,854 per tonne in 1Q21.
“Planters with operations in Indonesia recorded average CPO price, which were RM1,272 per tonne to RM1,939 per tonne below the MPOB’s average spot price in 1Q22.
“Sime Darby Plantation Bhd’s (Sime Darby Plantation) average CPO price realised in Indonesia was RM4,112 per tonne in 1QFY22 versus the MPOB average spot price of RM6,051 per tonne.
“TSH Resources Bhd’s (TSH) average CPO price was RM4,779 per tonne in 1QFY22 compared with Malaysia’s average spot price of RM6,051 per tonne.
“Almost 90 per cent of TSH’s fresh fruit bunch (FFB) production are from Indonesia.”
All in, AmInvestment Bank raised its 2022F average CPO price assumption for the large planters to RM4,500 per tonne from RM4,000 per tonne.
Meanwhile, for MIDF Research, 1Q22 performance of stocks under its coverage was mixed with four stocks performing better than expected, while three were within and two came in below expectations.
“The general improvement in earnings was in line with higher CPO price, which hovered at around 6,000 per metric tonne (mt) levels during the period,” MIDF Research noted.
“The average selling price (ASP) of CPO in 1Q22 was RM6,050.7 per mt, representing a huge improvement from RM3,895.2 per mt in 1Q21.”
Among those that reported results that were below MIDF Research’s expectations were PPB Group Bhd (PPB) and MSM Malaysia Holdings Bhd (MSM).
“PPB earnings were dragged by fair value loss of derivates recognition, whilst MSM made losses, affected by higher production cost, mainly attributed by weakening ringgit against the US dollar, higher freight, gas as well as higher refining cost from lower utilisation rate factor (UF).
“While the others, namely Sime Darby Plantation, FGV Holdings Bhd, Ta Ann Holdings Bhd, Kuala Lumpur Kepong Bhd (KLK), IOI Corporation Bhd (IOI), Genting Plantations and TSH recorded stellar performance mainly driven by higher margins owing to the higher average CPO price realised.
“Nevertheless, majority of planters were having lower FFB production due to unusual heavy rainfall during January to early February months compounded by harvester shortage.”
Going forward, the research arm expects production level to slightly improve following high seasonal months, better weather conditions as well as returning of 32,000 foreign workers in June.
In its latest sector update this week, MIDF Research anticipated that the CPO price will retain upward momentum throughout 2022.
According to the research arm, this will be supported by higher price of edibles oil on the back of supply concerns amid Russia – Ukraine prolongs war (latest development the Russians seems to cut off the Ukrainians access to the sea), Indonesia’s widened export ban, subdued production outlook for soybean (2022E: 350.7 million tonnes prior year 367.8 million tonnes according to USDA) on the back of drought in South America such Brazil and Argentina and resilient demand outlook on improved economic activities.
“Despite our positive view on the sector, we do expect the CPO price will ease in the second half (2H22) but at a very slow pace.
“Given the higher-than-expected CPO price in 1H22 as well as above-mentioned factors, we anticipate that the CPO price will remain elevated throughout 2022 supported by tight inventory supply in our local plantation industry.”
As such, MIDF Research revised up its 2022 CPO price forecast by 27.9 per cent to RM5,500 per mt from RM4,300 per mt previously.
Underwhelming O&G outlook
IT was an underwhelming results season for the oil and gas sector, according Kenanga Research.
“While disappointment ratio stayed the same from last quarter (five out of 11 coverage stocks reported earnings disappointment) – this quarter we saw zero positive earnings surprises (versus three in the last quarter),” the research arm recapped in its 1Q22 Results Review.
Kenanga Research highlighted that the biggest earnings underperformer was Petronas Dagangan Bhd.
“While initially expecting stronger quarter on quarter (q-o-q) earnings amidst the borders reopening to drive sales volumes, actual results posted a q-o-q core profit decline of 21 per cent as its commercial segment dipped into losses amidst the higher product costs.”
As such, the research arm downgraded the stock to ‘underperform’ (from market perform), amidst the demandingly high valuation and uncertainty in earnings delivery.
“Another big-cap underperformer is MISC Bhd, which saw overall poorer earnings due to slower progression for its Mero-3 FPSO conversion works following lockdowns in China.
“This has led to some cost escalation coupled with an expected delay in project delivery, although this should improve going forward as lockdown measures in China are easing.”
The research arm also downgraded the stock to ‘market perform’ as the rising interest rate environment might reduce its attractiveness as a blue-chip dividend yield stock.
Kenanga Research recalled that on the back of the elevated oil prices, Petroliam Nasional Bhd (Petronas) posted 1QFY22 core profit after tax and minority interests (PATAMI) of RM21 billion – its strongest ever in at least a decade.
“While capital expenditure (capex) spend saw a marginal 12 per cent increase year on year (y-o-y) to RM7.4 billion, we reckon this figure as still largely underwhelming.”
As such, the research arm believed capex spend must gradually pickup in the coming quarters in order to meet expectations of full-year capex of RM40 billion to RM50 billion in 2022.
“This is backed by Petronas’ strong net-cash position of approximately RM91 billion, with dividend commitments also staying essentially flat from last year (RM25 billion) despite the stronger profit.”
Going forward, Kenanga Research noted that activity levels are expected to recover in 2022.
“We have highlighted the offshore maintenance, construction and modification (MCM) and hook-up and commissioning (HUC) as beneficiaries given the planned increase in demand – benefitting contractor names like Dayang Enterprise Holdings Bhd.
“Meanwhile, the high oil prices could also translate to more works for brownfield players such as Uzma Bhd, given the increased incentive of oil producers for undergo production and well enhancements.”
On Petronas’ RM60 billion capex for 2022, MIDF Research belived that it is fair and necessary as to minimise the higher cost of having deferred and delayed projects, as well as to support upcoming projects in the remaining 2022, including the allocations for the group’s green energy and sustainability initiatives.
At its MIDF Conversation virtual event, Petronas chief financial officer Liza Mustapha revealed that Petronas’ capex is expected to double to RM60 billion (from RM30 billion in 2021), where half would be utilised domestically, and the other half to be used for the group’s businesses outside Malaysia.
“The capex will be used to catch up on existing and new operations, and the group trusts with the new capex, it will be the right time to step into the non-hydrocarbon business option,” the research arm reported.
“It is expected that RM40 billion will be used in for operations with carbonisation impact factored in, while the rest will be used for growth.”
MIDF Research went on to highlight that as discussed in the event, investment in the oil and gas sector is much needed to ensure that oil and gas companies have enough funds to perform a complete, reliable energy transition for the long term, while also maintaining the efficiency and production rate of existing and new oil and gas projects.
“We believe the RM60 billion capex is fair and necessary as to minimise the higher cost of having deferred and delayed projects, as well as to support upcoming projects in the remaining 2022, including the allocations for the group’s green energy and sustainability initiatives.
“The investment in the oil and gas sector ensures that the production rate is maintained. Petronas’s status as a national oil company, energy security and affordability remain to be its top priorities, followed by profitability from lower costings and higher efficiency.
“Hence, we believe the recent capex announcement would be an attractive proposition for other subcompanies to recover and improve, through project tenders and collaborations.”
Additional to this doubling of yearly capex, MIDF Research continued to look at the oil and gas sector with a positive view, as the research arm expects the impact of the Russian sanctions on crude oil price volatility and subsequently the operations of Malaysia’s local oil and gas players will be offset by increased global production.
“Demand for crude oil and natural gas globally will also continue to grow, upon global recovery from the Covid-19 pandemic.”
That said, the research arm still remained cautious on the inflation impact on prices of Petronas’s retail sector.
“As of writing, the price for industrial gas had been nearing parity with the global natural gas.
“Additionally, the risk of fuel subsidiaries being abolished upon the current political climate, also plays a part in securing continuous demand despite the inflation risk.
“Another challenge to Petronas’s operations is the meeting of its sustainability expectations in time.”
On that note, MIDF Research expects the price of the benchmark Brent crude oil to average in a rangebound of US$110 to US$116 per barrel (pb) in 2022.
“The range is set as such to cater for the volatility of the market over the Russian sanctions, the rising inflation and supply chain disruption, as well as the increase in shipping rate, offset by the possibility of increasing production and supply output towards the end year.
“All in all, we maintain our positive view on the sector in our local front.
“The RM60 billion capex is evident of a bright prospect for the oil and gas industry, and will reflect well on the smaller companies operating construction, shipping and technical services for the core sector.”
As such, MIDF Research reiterated Petronas Chemicals Group Bhd as one of its top picks under its coverage.
“The allocated capex and Petronas’ drive towards a seamless energy transition open up opportunities for other players in the mid-long term to recover and perform, namely Dialog Group Bhd for its established technical and maintenance services and Bumi Armada Bhd for its FPSO fleets.”
Mixed reactions for automotive players
THERE were mixed reactions to the automotive sector’s performance for 1Q22, with some stocks stocks outperforming estimates while others came in below expectations.
For MIDF Research, the 1Q22 result season for auto companies under its coverage were commendable, as anticipated in its earnings preview report earlier.
“UMW Holdings Bhd (UMW) outperformed expectations while MBM Resources Bhd (MBM) and Tan Chong Motor Holdings Bhd (Tan Chong) came in-line,” MIDF Research noted. “Bermaz Auto Bhd (Bermaz) will be reporting their 4QFY22 result this month.”
“What is more important is that double-digit and high single-digit earnings growth were registered by the players so far driven by strong demand for vehicles and margin expansion (with the exception of Tan Chong which fell into marginal losses from higher operating cost).
“The strong performance comes despite flood-induced supply shortages and Chinese New Year holidays during the January-February 2022 period as these were partly buffered by exceptionally strong March sales and production.”
The research arm anticipated an even stronger 2Q22 as players rush to meet the extended three to six months order backlog ahead of expiry of the sales tax holiday in June 2022.
Meanwhile, Kenanga Resarch noted that despite being the seasonally weakest quarter, 1Q22 came in strong y-o-y.
“For 1Q22 reporting season, almost all players came in within expectation (Bermaz, DRB-Hicom Bhd (DRB-Hicom), MBM, Tan Chong and Sime Darby Bhd (Sime Darby)), with only UMW above expectation on stronger Associates’production supply especially Perodua,” Kenanga Research said.
Out of six companies under AmInvestment Bank’s coverage, three were below expectations, two within and a single outperformer in 1Q22.
According to AmInvestment Bank, the automobile sector’s May quarter earnings were flattish (down one per cent y-o-y) compared to the same period last year as DRB-Hicom’s weaker-than-expected results net off the stronger earnings reported by UMW, MBM and Bermaz.
“The sequentially weaker earnings (down 55 per cent q-o-q) were mainly due to the high base effect of 4Q21’s seasonally stronger earnings,” the research firm said.
“UMW’s earnings outperformed, mainly attributed to the robust automotive division’s sales with both Toyota and Perodua’s sales volume exceeding expectations.
“DRB-Hicom results came in below expectations as Proton’s production was affected by the flash flood in January and chip shortage while Tan Chong dipped into losses due to margin pressure from the ringgit weakening against the US dollar.
“Bermaz’s 3QFY21 (FYE June) results slightly missed expectations due to delays in the Peugeot 2008, 3008 and 5008 deliveries.”
MBM and Sime Darby’s earnings were within the research firm’s and street’s expectations.
Post-1Q22 results, the aggregate 2022 (calendarised) earnings forecasts for stocks under AmInvestment Bank’s universe were adjusted slightly upwards by one per cent as the increase in its Toyota, Perodua, and Honda sales volume forecasts offset the impact of Proton’s lower assumptions.
“We are projecting sector revenue to grow by five per cent and earnings by 10 per cent in 2022, reverting to the pre-pandemic level following a wider economic recovery.
“2Q22 sector earnings are expected to be q-o-q and y-o-y stronger as automakers accelerate deliveries heading towards the end of the sales and services tax (SST) exemption period.”
AmInvestment Bank gathered that some of the automakers or distributors have introduced SST-inclusive pricing for more recent bookings to manage customers’ expectations.
“Given the long booking queue, ranging between two and three months on average, prospective buyers that place their bookings in the past one to two months most likely will only get their cars after the tax-free period has ended.
“Nevertheless, even after the release of the updated prices, auto firms are still seeing a healthy daily order rate which signifies that robust demand for new passenger vehicles is likely to be sustainable beyond the tax-free window.
“A spike in booking cancellations is expected in July but we believe industry sales volume will quickly rebound as demand outweighs supply.”
Looking ahead, AmInvestment Bank revised its 2022 total industry volume (TIV) forecast upwards to 590,000 units (from 555,000 units), with the view that strong demand for new passenger vehicles is sustainable beyond the tax-free period.
“The revised sales volume forecast implies a 16 per cent y-o-y growth.”
To note, the Malaysian Automotive Association (MAA) has forecast 2022 TIV to reach 600,000 units.
“We expect Perodua to be the biggest winner, gaining a 4.1 per cent-point market share in 2022 at the expense of Proton (down 2.5 per cent points), given the resiliency of its supply chain navigating through disruptions.”
As for Kenanga Research’s outlook for 2Q22, the research arm expects most of the auto players to chart a stronger drive on longer working month and to rush production capacity to meet massive back-logged orders (stretched up to six months for certain models) before the supposed ending of SST exemption period by end-June 2022.
“With the re-opening of economic activities, further driven by the SST exemption period until end-June 2202, we expect buoyant recovery in car sales especially with the growing number of back-logged bookings for popular models (up to six months) and stream of new models launches in 2022 (including models launches that were postponed from 2021).”