Lower earnings for corporate Malaysia this year

Companies exposed to tourism, leisure, airlines, consumer and retail sectors to be hit hardest

by DASHVEENJIT KAUR/ pic by TMR FILE

The gaming sector’s FY20 estimated growth was cut from 6.5% previously to -22% – pic by BLOOMBERG

THE corporate earnings drought in Malaysia is likely to extend into 2020, amid the seemingly unstoppable spread of Covid-19 coupled with political uncertainty.

Following a dull fourth quarter of 2019 (4Q19), market watchers believe corporate earnings will continue to deteriorate for the rest of the year, with companies exposed to tourism, leisure, airlines, consumer and retail sectors to be hit hardest.

The recently concluded 4Q19 results season was a mixed bag. Kenanga Investment Bank Bhd (Kenanga Research) said of the 141 stocks in its research universe, 65 (46%) came in within forecast, 29 (21%) exceeded and 47 (33%) did not meet expectations.

The numbers that disappointed also increased from 42 to 47. In terms of performance relative to market expectations, those that exceeded expectations remained at 21, while disappointments fell from 48 to 43.

“The FTSE Bursa Malaysia KLCI (FBM KLCI) 2019 earnings per share (EPS) came in at 95.2 sen by our estimates, as expected. Those that disappointed were gaming and oil and gas (O&G) sectors,” Kenanga Research said in a recent report.

For Hong Leong Investment Bank Bhd (HLIB), earnings of 55 (50%) of the 110 stocks under its coverage came in within expectations, while earnings of 30 (28%) were below and 24 (22%) were above.

Disappointments reduced quarter- on-quarter from 43% to 28%, while positive surprises rose from 14% to 22%. Key sectors shortfall came from auto, aviation, construction and O&G.

“We estimate that 2019 core earnings fell 6.4% year-on-year for our coverage universe and 7.3% for the benchmark index,” it said. Post-4Q19 results adjustments, the research house expects the FBM KLCI to post core earnings growth of 3.8% for 2020 and 4.2% for 2021.

“Our FBM KLCI target is lowered from 1,600 to 1,590,” it added. With the worsening Covid-19 spread outside China, the aviation sector is at risk of another round of results shortfall.

The shift in the Malaysian political scene may lead to some delays in construction project rollouts.

“On a brighter note, the plantation sector which disappointed for the past several quarters has now turned broadly in line for the second consecutive quarter. With the year-to-date crude palm oil price averaging RM2,834 per metric tonne (versus our assumption of RM2,550), we are hopeful for a decent showing, at least for 1Q20,” HLIB said.

Kenanga Research also said disruption from Covid-19 led it to cut its EPS targets for the financial year ending Dec 31, 2020 (FY20).

As a result of Covid-19 and post-4Q19 results adjustments, the gaming sector’s (Genting Malaysia Bhd and Genting Bhd being the two components) FY20 estimated growth was cut from 6.5% previously to -22%.

“Given that both make up circa 7% of the index in earnings terms, the 30% swing effectively takes 2% of KLCI’s EPS growth,” it said. The research house is staying ‘Overweight’ on banking, plantation, property, technology and rubber glove sectors, and ‘Underweight’ on building materials and healthcare.

Its top picks include Malaysia Airports Holdings Bhd, Bermaz Auto Bhd, CIMB Group Holdings Bhd, Gamuda Bhd, Genting Plantations Bhd, Kuala Lumpur Kepong Bhd, Malayan Banking Bhd, Malaysian Pacific Industries Bhd, Padini Holdings Bhd and Pestech International Bhd.

PublicInvestment Bank Bhd reported earnings of FBM KLCI component stocks contracted 5.2% last year, reflective of the significant loss in earnings momentum in the final quarter.

“This is not anticipated to ease any time soon, particularly with the Covid-19 outbreak wreaking havoc on global growth prospects and recent domestic political upheavals throwing uncertainties on policy and growth,” it warned.

It said the current reporting cycle has seen sharp earnings cuts to stocks in heavily-weighted index sectors like banking and plantations, resulting in expectations for 2020 earnings growth to come in at only 4.2%.

“Though companies opine that it is still too early to tell the extent of damage which could be inflicted on earnings, most are expecting some impact and are heightening levels of vigilance.

The shift in the Malaysian political scene may lead to delays in construction project rollouts – pic by MUHD AMIN NAHARUL

“Current expectations, by and large, are factoring in the first half of 2020 (1H20) slowdown with gradual recoveries seen in 2H20 onwards,” it said.

PublicInvestment cut its end-2020 FBM KLCI target to 1,595 points, citing global growth concerns arising from Covid-19 and its eventual impact on earnings, plus heightened political volatility.

While some measure of calm has returned with Tan Sri Muhyiddin Yassin being appointed the eighth prime minister, the absence of a single bloc with an overwhelming majority may still leave the ruling coalition in a relatively fragile state.

“What is patently clear, however, is the fact that Malaysia’s past political stability (rightly or wrongly) can no longer be counted as a key investment consideration.

“All else being equal and purely from a fundamental standpoint, the earnings revision momentum chart suggests the FBM KLCI should trade nearer the 1,550 to 1,580 levels in the near to medium term,” PublicInvestment noted.

Meanwhile, Affin Hwang Investment Bank Bhd maintained its ‘Neutral’ weighting on the FBM KLCI, with an unchanged year-end target of 1,540 points.

Its top 10 picks now include KLCCP Stapled Group, after the removal of Gabungan AQRS Bhd. Apolitical stocks would find appeal under present market conditions.

“We remain cautious on the market and are positioned in the relatively defensive sectors such as Malaysian real estate investment trusts and healthcare.

“We also like the plantation and rubber glove sectors because of the earnings recovery from better prices for the former and improved demand for the latter,” it said.

The electronics manufacturing services sector remains a thematic ‘Overweight’ because of trade tensions, the research firm added.