Corporate Malaysia’s 2Q weighs on market rally

While FBM KLCI has been edging higher in past few days, the real economy is in a challenging period due to the negative impact of the MCO


CORPORATE Malaysia’s woes are unlikely to end anytime soon as earnings, already badly hit in the first quarter of 2020 (1Q20) by the Covid-19 pandemic containment measures, are set to weaken even further in 2Q20 on lockdown extensions.

Domestic economic activities came to a near-complete and sudden halt in March as Malaysia implemented the Movement Control Order (MCO) on March 18, limiting all non-essential movement in a bid to curb the spread of Covid-19.

Some of the initial results of the travel restrictions, limited operating hours and mandatory social distancing have resulted in hotels closing down, food and beverage (F&B) players shuttering and retrenchments across various sectors.

Though restrictions have been somewhat lifted with the imposition of the Conditional MCO (CMCO) on May 4 and certain sectors slowly reopened, the economy is still on extremely wobbly footing.

Whether the CMCO will be extended beyond June 9 — its current end date — remains to be seen, with the country continuing to battle the deadly virus.

“Corporate performances were expected to be disappointing in the 1Q and we expect this could worsen in the 2Q. Earnings for the first half of 2020 could drop almost 50% compared to last year,” Areca Capital Sdn Bhd CEO and ED Danny Wong Teck Meng told The Malaysian Reserve.

“All industries, with retail and F&B in particular, were at their worst during February and March, and their guidance for 2Q will be worse than in 1Q. Taking into consideration the tumultuous times, the market is anticipating more discouraging results for the 2Q.”

A quick glance at public-listed firms’ 1Q results indicate nearly every sector has taken a hit, particularly banking, entertainment, tourism, hospitality, automotive, aviation and construction.

Loan growth across the banking industry contracted 41.4% in April, with retail loans being majorly hit, MIDF Amanah Investment Bank Bhd (MIDF Research) wrote in a report.

Hire purchase loan applications plunged 89.3% year-on-year (YoY) to RM643 billion, while loan applications for residential properties, personal loans and credit cards declined 72.1% to RM6.7 billion, 70.3% to RM1.7 billion and 65.2% to RM1.3 billion respectively.

Cumulatively, loan applications from January to April fell 11.4% YoY, MIDF Research said. Yet, it is staying ‘Neutral’ on the sector as it foresees stable asset quality and strong borrowers’ profiles for its top counters, Malayan Banking Bhd and BIMB Holdings Bhd.

For the automotive industry, the research house is ‘Negative’ following some of its counters’ sensitivity to foreign exchange (forex) volatility.

Domestic automotive sales plunged 99.7% YoY in April with a total industry volume (TIV) of just 141 units sold due to the MCO. The TIV currently stands at 106,569 units, a 45% YoY decline.

MIDF Research has trimmed down its FTSE Bursa Malaysia KLCI (FBM KLCI) 2020 target to 1,320 points from 1,400 points earlier in line with the diminution in consensus earnings per share (EPS) estimate to 77.4 points as of end-May, as well as the downward revision in its GDP target to -2.1% for this year.

The firm raised its price-earnings ratio (PER) valuation target to 17 times from 15.5 times as a sign of near capitulation.

Bloomberg consensus EPS forecasts for FBM KLCI are under downward pressure as the forward earnings expectations were progressively trimmed to reflect the worsening business condition.

MIDF Research strategy head Kifni Kamaruddin, in a strategy report yesterday, noted while short- term equity valuation may be influenced by a change in sentiment and liquidity, equity prices have almost always corresponded to the underlying fundamentals, particularly in earnings performance.

MIDF Research expects the equity market to encounter another wave of selling pressure or a second downward thrust (fallout phase) possibly in the 3Q, as the real extent of economic/corporate earnings impacts of Covid-19 become manifest.

“For the current and ensuing quarters, the economic/corporate earnings data may continue to deteriorate based on a YoY basis.

“The post-lockdown monthly sequential jump may quickly peter out as pent-up demand in the aftermath of the economic reopening is duly satisfied. During this period, we may see the next wave of selling in the equity market,” he stated.

The market also appears to ignore the deteriorating US-China relations, as well as geopolitical conflicts in the Middle East and the South China Sea, he added.

While the FBM KLCI has been edging higher in the past few days on record volumes and ample liquidity, the real economy, as reflected in the performance of companies, is in a challenging period with financial results announcements in the past week signalling the negative impact of the MCO on earnings of some major companies on the local exchange.

Public Bank Bhd

In 1Q20, Public Bank — the country’s second-largest bank by market capitalisation and an oft-loved counter for its consistent returns — saw net profit dip 5.7% YoY to RM1.33 billion due to lower net interest income.

EPS for the three months was also lessened at 34.24 sen compared to 36.32 sen in 1Q19.

Quarterly revenue decreased to RM5.52 billion from RM5.57 billion in the same quarter last year.

Hong Leong Bank Bhd

Hong Leong Bank’s earnings for its 3Q ended March 31, 2020 (3QFY20), fell 15.6% YoY to RM534.79 million on lower net income and higher operating expenses and impairment allowances.

Its parent, Hong Leong Financial Group Bhd reported a 26.8% YoY decrease in net profit for the 3Q, bringing earnings to RM339.2 million mainly on lower contribution from all the operating divisions.

Hong Leong Bank’s revenue for the period dipped 3% YoY to RM1.13 billion from RM1.31 billion in the previous year.

EPS for the quarter was 26.13 sen compared to 30.98 sen in 1Q19.

RHB Bank Bhd

RHB Bank’s net profit in 1Q20 declined 9.4% YoY to RM570.88 million resulting from higher allowance for credit losses and lower non-funding income. Revenue for the period dropped from RM3.23 billion and RM3.35 billion previously.

IOI Corp Bhd & IOI Properties Group Bhd

IOI Corp’s net profit in 3QFY20, plunged to RM100,000 from RM245.8 million the same period last year due to total net foreign currency translation loss of RM236.4 million.

Its revenue increased 8% YoY to RM2.03 billion on higher contributions from the plantation segment due to higher crude palm oil and palm kernel prices realised.

IOI Properties recorded a 63.36% YoY decline in earnings to RM71.36 million in 3Q20 as revenue fell 18% YoY to RM401.43 million.

The developer noted the decrease in revenue and profit is attributable to the lower performance from all operating segments due to disruption to the operating environment resulting from the Covid-19 pandemic.

Sime Darby Plantation Bhd

Sime Darby Plantation’s net profit in its 1Q surged to RM394 million from RM90 million in 1Q19 as a result of the higher contribution from its upstream and downstream operations coupled with lower operating costs.

Revenue rose by 2% YoY to RM3.04 billion. Due to the Covid-19 pandemic, the group is expecting a disruption in logistics in its supply chain should the global pandemic prolong.

Kuala Lumpur Kepong Bhd (KLK)

KLK’s earnings plunged 80.48% in 2QFY20, to RM27.89 million due to forex losses of RM178 million.

The forex losses were due to translation of intercompany loans denominated in foreign currencies and translation of bank loans in an Indonesian subsidiary.

Revenue for the period dropped 3.5% YoY to RM3.8 billion. KLK’s plantation segment contributed a 44.4% increase in revenue to RM145.7 million during the quarter. The planter declared an interim dividend of 15 sen per share, payable on Aug 4, 2020.

Malaysia Airports Holdings Bhd (MAHB)

MAHB posted a net loss of RM20.39 million in 1Q against a net profit of RM149.59 million in 1Q19. Revenue for the quarter fell 25.43% YoY to RM933.84 million due to the contraction in passengers’ movement due to the Covid-19 impact.

PPB Group Bhd

PPB Group’s earnings fell 24.6% to RM187.27 million in 1Q mainly due to the lower earnings contributions across all of its segments, including its 18.5%-owned associate company, Wilmar International Ltd.

PPB’s revenue during the quarter fell 7.64% YoY to RM1.07 billion. PPB noted Wilmar contributed RM165 million in earnings to the group, which makes up 82% of the group’s total profit before tax.