1. Banking Sector: Solid Earnings Growth but Challenging Valuations
Overview:
The banking sector delivered solid earnings growth in 2Q24, with earnings up 11% year-on-year (YoY). This performance was largely driven by lower provisions, as banks reduced their credit risk costs due to better asset quality. Despite this growth, the sector’s overall valuations are starting to look expensive, as it is currently trading at +1 standard deviation (SD) above its historical mean price-to-book (P/B) ratio.
Key Highlights:
- Earnings Growth: Sector earnings grew by 11% YoY in 2Q24, benefiting from lower loan provisions, which reduced credit costs. Banks, particularly in Malaysia, saw improved net interest margins (NIM) and strong cost control, helping to lift pre-provision operating profit (PPOP).
- Valuation Concerns: While the earnings momentum remains positive, the banking sector is now trading at a higher-than-average valuation. Its P/B ratio is at 1.25x, which is +1 SD above its historical mean of 1.13x. This suggests that a lot of the positive macroeconomic factors and earnings recovery have already been priced in, limiting the potential for further upside in the near term.
- Pre-Provision Operating Profit (PPOP): Growth in PPOP was muted at +3% YoY and down 2% quarter-on-quarter (QoQ). This reflects a slowdown in non-interest income (NII) growth, along with a slight decline in loan growth momentum.
Recommendation:
- Maintain Market Weight: The sector’s performance has been priced in, given its current elevated valuation, and thus, the potential for further upside is limited. Investors should consider rebalancing their portfolios toward higher-quality laggards in the sector. High-quality banks like Public Bank and Hong Leong Bank offer attractive valuations and more resilient earnings growth compared to some of their peers, which are trading at higher P/B multiples.
2. Plantation Sector: MPOB August Data Well Within Expectations
Overview:
The Malaysian Palm Oil Board (MPOB) released its data for August 2024, which came in largely within market expectations. There was a slow pace of inventory rebuilding due to modest production growth and a smaller-than-expected decline in exports. The outlook for the remainder of the year suggests that crude palm oil (CPO) prices will remain stable in the RM3,800-4,000/tonne range.
Key MPOB Data (August 2024):
- Production Growth: Production grew by 2.9% month-on-month (MoM), reaching 1.89 million tonnes. This represented an 8% YoY growth. However, the pace of production growth was slower than anticipated due to weaker yields in Sabah and Sarawak, which continued to recover from previous low output.
- Inventory Levels: Despite production growth, inventory levels increased by 7.3% MoM, but they remained down by 10.8% YoY. This suggests that the rebuilding of inventories is progressing slower than usual, reflecting restrained production and strong demand from export markets.
- Exports: Exports declined by 9.7% MoM in August but still recorded a 24.8% YoY increase. The smaller-than-expected decline in exports was primarily supported by robust demand from key importers, including China, India, and Africa.
Outlook:
- CPO Prices: CPO prices are expected to remain stable in the RM3,800-4,000/tonne range in the coming months. While this sideways movement in prices may not generate significant excitement for plantation stock performance, the sector remains attractive for long-term investors due to its stable growth, strong cash flows, and solid dividend yields.
- Slow Inventory Rebuilding: The slow pace of inventory accumulation suggests that the supply-demand balance remains relatively tight. However, the market does not expect any significant price increases unless there is a major supply shock in the coming months.
Recommendation:
- Maintain OVERWEIGHT: The plantation sector continues to offer long-term growth potential, especially for investors seeking dividend income. Stocks like Hap Seng Plantations and Kim Loong Resources offer good yields and stable cash flows, making them attractive picks within the sector. The sector’s steady fundamentals, particularly in CPO pricing and production, support the overweight stance.
These two sectors offer distinct opportunities. The banking sector, while showing strong earnings growth, faces valuation constraints, suggesting a cautious approach. The plantation sector, on the other hand, remains a more defensive play with stable growth and income potential from CPO prices and dividend-paying stocks.
Thank you
