Weaker corporate earnings loom for 2Q results

The current reporting cycle is unsurprisingly poor given the ravages of the Covid-19 pandemic on global economic conditions, says PublicInvest Research

by SHAZNI ONG/ pic by MUHD AMIN NAHARUL

THE Covid-19 pandemic that affected corporate earnings in the first quarter of 2020 (1Q20), is expected to extend to a much weaker 2Q20, as more companies will be pushed into debt and seeking bailouts.

Public Investment Bank Bhd (PublicInvest Research) said the current reporting cycle is unsurprisingly poor given the ravages of the Covid-19 pandemic and its negative effects on global economic conditions.

“What is of some worry is the fact that we are yet to see the worst of its impact on corporate earnings, though sufficiently prudent cuts (for now) to expectations have already been undertaken. Are they enough?

“Only time will tell, more so given the fact that the pandemic continues to rear its ugly head amid the absence of a vaccine,” the firm said in a market strategy report yesterday.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid concurs, adding it should be weak from a macroeconomics point of view.

“We are projecting GDP to decline by 7% year-on-year in 2Q20. So, we could expect corporate earnings to be weak,” he told The Malaysian Reserve recently.

This, he said, can be seen where banks’ earnings are negatively affected by net interest margin compression following the 50 basis points cut in Overnight Policy Rate during May, while total industry volume (TIV) for the automotive sector fell dramatically to 141 units in April before rebounding to 22,960 units in May.

“Oil and gas industry is badly impacted by the lower crude oil prices following the supply glut. This has led oil majors to revisit their capital expenditure requirement. Therefore, the 2Q20 earnings are expected to be lethargic,” he said.

PublicInvest Research noted that earnings surprises were noticeably lacking, with the only standout sector being glove manufacturing, which met expectations by posting supernormal profits.

“Disappointments were aplenty, principally in cyclical like banks, property and construction. Earnings cuts were more or less in line with the number of disappointments.

“A number of downward revisions are to account for the lack of business activity during the Movement Control Order period (and its many extensions), though many are also to account for weaker business prospects.

“We continue to caution for further downside to earnings expectations, depending on the degree to which the pandemic is contained globally,” the firm said.

Hong Leong Investment Bank Bhd (HLIB) said deteriorating 2Q20 corporate results, alongside worst-on-record quarterly GDP, should send a reality check.

This, as the firm noted, 27% of companies within its coverage are expected to be in the red for 2Q20, increasing from 16% in 1Q20 and 6% in 4Q19.

The firm noted that of 108 companies within HLIB’s coverage that reported results for the 1Q20 period, 65 came in below expectations, 30 within and 13 above.

“This was pretty similar to consensus at 59% below, 29% inline and 12% above. The proportion of disappointments was the highest seen in the past decade.

MIDF Amanah Investment Bank Bhd (MIDF Research) said the firm made 17 changes to its stock recommendations with five upgrades and 12 downgrades, while target price changes involved 23 upward against 54 downward adjustments.

The percentage of companies within MIDF Research coverage, which registered earnings that came below expectations, jumped to 43% in 1Q20 from 25% in the prior quarter.

Cumulatively, MIDF Research said the reported earnings of companies under the firm’s coverage slumped to RM5.82 billion in 1Q20 mainly due to huge provisions by Sapura Energy Bhd and MISC Bhd, among others.

“Technology was the only sector that recorded improved total earnings (as reported) in 1Q20 when compared to both the preceding quarter and corresponding period last year,” it said.