KUALA LUMPUR (March 7): Rakuten Trade on Monday (March 7) maintained its year-end FBM KLCI target at 1,700 as it anticipated sentiments on the local bourse to improve gradually amid increasing liquidity provided by foreign fund inflows.

“We believe foreign funds will continue to snap up index-linked counters, thus we have 1,700 as our year-end target for 2022 premised on 14 times market price-earnings, notwithstanding the one-off prosperity tax, which may erode 2022 earnings growth by 1% to 2%,” its head of research Kenny Yee said in a virtual briefing.

According to him, following a record net foreign outflow of RM23.8 billion in 2020, there was a further net foreign outflow of RM3.3 billion in 2021. However, for 2022, the foreign fund flows appeared to have reversed as year-to-date foreign inflows totalled RM3.85 billion.

Besides, following a 2.5% drop in 2020, foreign shareholding on the local bourse continued to decline in 2021. Nevertheless, the situation improved with the foreign shareholding gradually improving to 11.71% in February.

“The performance of the local bourse has taken everyone by surprise with the influx of foreign funds of late.

“We believe concerns over the US Federal Reserve's earlier-than-expected tapering and interest rate hikes have prompted a flight of funds back into Malaysia as our market valuations are alluring, coupled with the fact that our market is under-owned by foreign funds currently,” he said.

According to him, regional volatility is very much dependent on the situation on Wall Street.

“Though volatility may have shrunk for now, we can expect it to heighten as tapering is a reality now in the US plus possible interest rate hikes.

“As such, we expect foreign funds to continue to flow into Malaysia as the anticipated low volatility will act as a cushion against any external vagaries,” he said.

He also noted that in terms of valuations, the KLCI remains attractive as its estimated price-earnings ratio for 2022 stands at 13 times, its steepest discount of 30% from its historical five-year average of 18.5 times.

Meanwhile, although 2022 earnings growth is seen as anaemic, he believes both the banking and plantation sectors will surprise on the upside.

As for 2023, he expects earnings growth to rebound to 7.2%.

He also foresees the ringgit to strengthen against the US dollar amid the crude oil price recovery, coupled with the anticipated homecoming of foreign funds.

“All in all, we expect the ringgit to trend around 4.10 to 4.15 versus the US dollar by the end of this year,” he said.

On sector performance, Yee has "overweight" calls on banking, gaming, technology and utilities.

According to him, banks are expected to see an uplift in earnings on the back of better loan growth in addition to lower credit cost inputs with possible bumps from write-backs from provisions.

While net interest margin pressures are expected due to greater competition for deposits, he said that an imminent rate hike should be a boon to the sector.

Meanwhile, he called the gaming sector a recovery play with the reopening of number forecast operators (NFOs) and Genting Highlands.

“The gaming sector is poised to be a major beneficiary of the recovery in 2022. New outdoor theme park Genting SkyWorlds will drive Genting Malaysia Bhd’s non-gaming revenue. NFOs still offer attractive dividend yields,” he said.

He is also positive on the outlook for the technology sector as he continues to observe aggressive expansion among semiconductor players.

Citing Inari Amertron Bhd as an example, he said the firm recently committed 463 million yuan (RM299 million) cash to form a joint venture with China Fortune-Tech Capital to set up a plant in China, offering outsourced semiconductor assembly and test (OSAT)-related businesses.

While there is still uncertainty over the tech sector, especially for those with higher-than-average valuations, he opined that investors should opt for tech companies with visible earnings growth.  

On the utilities sector, he said that Tenaga Nasional Bhd’s (TNB) earnings will remain resilient in the future as long as the incentive-based regulation (IBR) remains in place.

As for gas utilities, he said earnings should remain resilient given the solid IBR framework as proven during the pandemic period.

He noted that the new RM541 million gas pipeline project in Pulau Indah and RM460 million gas compressor station in Kluang are new earnings growth avenues for Petronas Gas Bhd.

“This remains a defensive sector amid prevailing uncertainties given their earnings defensiveness. Besides, the sector also offers above-average dividend yields of 5% to 7%,” he said.

Meanwhile, Rakuten Trade sees Samchem Holdings Bhd (target price [TP]: RM1.25), SCGM Bhd (TP: RM3.08), Pantech Group Holdings Bhd (TP: 88 sen), Swift Haulage Bhd (TP: RM1.09) and Senheng New Retail Bhd (TP: RM1.27) as its top five picks.

“These stocks not just provide good dividends. They also have good earnings visibility and their valuations are cheap,” said Yee.