Gloomiest corporate earnings season in 11 years

Areca Capital expects a 20% to 50% decline in corporate earnings due to CNY and MCO in 1Q. The impact could be worse in 2Q


CORPORATE Malaysia is bracing for the gloomiest results season in more than a decade as first-quarter (1Q) earnings could drop as much as 50%, while sectors that have been whitewashed by the coronavirus pandemic swim in massive losses.

If the 1Q profit forecast is bad, companies and investors are expecting a worse 2Q as the full impact of the Movement Control Order (MCO) rips through earnings.

Covid-19, first identified in the country in late January, has forced the government to cocoon millions of people in their homes since March 18, lock borders and tank all non-essential businesses.

Malaysia has since started easing the MCO recently and is allowing certain sectors to return to work. But the MCO remains in force until May 12.

Travel, leisure, hospitality, aviation, automotives, household goods, auto parts, building materials, chemical, metal and wood and wood products manufacturers are already badly hit by the pandemic.

“We generally expect a 20% to 50% decline in corporate earnings due to the Chinese New Year (CNY) holiday and the MCO in the 1Q. The impact could be worse in 2Q,” Areca Capital Sdn Bhd CEO and ED Danny Wong told The Malaysian Reserve (TMR).

Corporate Malaysia has started to release their 1Q earnings with early indication of a gloomy season.

It certainly has been a shocking few months. The FTSE Bursa Malaysia KLCI has fallen from 1,604 points early this year to a year-to-date low of 1,214 on March 19.

The index has since recovered and closed yesterday’s trading at 1,380.3 points. But billions of ringgit in wealth have disappeared from the local equity market after the March rout as the country started its MCO.

Over 210,000 retailers have shuttered their operations due to the partial lockdown. Wong said some of the companies in struggling sectors — tourism, hospitality, aviation, consumers and automotive — will record losses.

Hong Leong Investment Bank Bhd (HLIB) forecast the FBM KLCI to post core earnings growth of 3.8% for 2020 and 4.2% for 2021.

It said earnings of 55 of the 110 stocks (50%) under its coverage came in within expectations for 2019, while earnings of 30 (28%) were below and 24 (22%) were above.

“We estimate that 2019 core earnings fell 6.4% year-on-year for our coverage universe and 7.3% for the benchmark index,” HLIB wrote in a recent note.

Public Investment Bank Bhd said component stocks’ earnings 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 most companies said it’s still too early to tell the extent of the damage on earnings.

Travel, leisure and hospitality companies are definitely impacted by the coronavirus. AirAsia Group Bhd, AirAsia X Bhd, Genting Malaysia Bhd, Avillion Bhd, Berjaya Sports Toto, Magnum Bhd and Shangri-la Hotels (M) Bhd are some of the key counters. Plenitude Bhd said it’s closing three of its hotels and downsizing operations. Genting Bhd is already conducting its maiden pay cut exercise across the group.

The Covid-19 pandemic will drag automotive companies’ top line revenues. Vehicles delivery for March 2020 plummeted about 60% compared to a year ago due to the MCO. And with no sales expected for April due to the MCO and a weak May month as movements will remain limited, 2Q earnings for these companies will be all but bleak.

Investors will be looking at companies like Bermaz Auto Bhd, MBM Resources Bhd, Oriental Holdings Bhd, DRB-Hicom Bhd, Tan Chong Motor Holdings Bhd and UMW Holdings Bhd to gauge the sector’s performance. Cycle & Carriage Bintang Bhd has already reported a RM9.7 million 1Q net loss.

Oil and gas (O&G) producers are also weighing on the disappointing quarter. The recent oil price rout had practically almost ground the sector to a halt. Lower demand as almost four billion people are forced to stay home and disappearing storage punished oil prices in recent weeks.

The gloomy outlook of the sector was reinforced when Sapura Energy Bhd posted an almost catastrophic RM4.56 billion net loss for the financial year ended Jan 31, 2020 (FY20). All other O&G-related counters are also expected to deliver lower revenues or higher impairment.

The only bright spot — counters in healthcare equipment and services, healthcare providers and pharmaceuticals. Stocks like Top Glove Corp Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd are already rising in value as global demand for gloves reaches unprecedented levels.

Top Glove’s share price has rocketed from around RM4.50 in early November to RM7.26 yesterday.

Rakuten Trade Sdn Bhd research VP Vincent Lau said the impact of Covid-19 and MCO would likely be reflected in 2Q20.

“As such, the Securities Commission Malaysia and Bursa Malaysia Bhd’s decision to extend the temporary suspension of short-selling to June 30, 2020, is a good move because earnings outlook is weak.

“If short-selling is allowed, we will surely see big drops like the ones recorded in March as there are now expectations of lower corporate earnings,” Lau said.