The banking sector will be the ‘main culprit’ to drag down corporate earnings, researcher says

by ASILA JALIL / pic by MUHD AMIN NAHARUL

THE manufacturing, construction and plantation sectors should provide investors opportunities as the sectors are boosted by contract awards, resilient commodity prices and resilient earnings.

Rakuten Trade Sdn Bhd head of research Kenny Yee expects the manufacturing sector to post strong earnings recovery, anchored by rubber glovemakers, next year and help reverse the overall corporate earnings contraction this year.

“Manufacturing would be the main sector to pull corporate earnings up for this year and especially next year due to the rubber glove sector,” he said at Rakuten Trade Research’s Market Outlook online media briefing yesterday.

He said although corporate earnings’ outlook remains uncertain, as it has been “drastically” revised this year, it would register a rebound in the calendar year 2021 (CY21) mainly due to a surge in the manufacturing sector earnings.

The overall growth outlook for corporate earnings has been revised to decline by 20.6% this year from 3.9% previously, before registering an estimated rebound of 35.3% next year.

Earnings growth of the manufacturing sector is expected to increase by more than 300% in CY21 from the previous forecast of 73.1% mainly due to the glove counters enjoying swelling demand and improved prices brought by the Covid-19 pandemic.

As for CY20, Rakuten has revised upwards growth forecast for the sector to 39% from the previous forecast of 18.1%.

However, Yee said the banking sector would be the “main culprit” to drag down corporate earnings with sector earnings forecast to decline by 21.7% this year before registering an increase of 14.9% in CY21.

Yee added that the construction sector and plantation sector would also contribute positively to the local bourse moving forward.

“Although we have not seen any interest in these two sectors yet, going forward once the newsflow on projects and contracts rolls out, we should see more participation in the construction sector.

“As for the plantation sector, the price of crude palm oil (CPO) has been rather resilient. The continued spat between the US and China will only spur China to purchase palm oil rather than soybean oil. This should positively affect CPO prices,” he added.

He stated that for the year-to-date (YTD), the Bursa Construction Index has declined by 24%, while the Bursa Plantation Index has dropped by 9.3%.

The online trading brokerage expects market benchmark, FTSE Bursa Malaysia KLCI, to close positively at 1,580 levels by year-end based on 15.5 times of CY21 price-to-earnings (P/E) ratio.

As for FY21, improvement in corporate earnings will also positively affect the local index which is forecasted to test the 1,670 level premised on CY21 P/E ratio of 16.5 times.

Yee noted that foreign shareholding on Bursa Malaysia is at a multi-year low of 12.1% from 20% in 2017 due to net foreign outflows totalled to almost RM21 billion YTD.

The remaining foreign shareholding on Bursa Malaysia depicts a low possibility of another massive net outflow, he said.

Their place will be filled with high retail participation. Retail investors recorded the biggest fund inflow of RM11.18 billion as of September compared to RM9.77 billion registered by local institutional investors.

Retail investors achieved its highest inflow in July with RM2.05 billion recorded.

Yee said retail participation emerged in February and became more apparent in April and May riding on the rubber glove fever.

“The rubber glove fever played a large part in enticing inflows of retail investments. This was supported by the low-interest regime and the sudden interest in equity trading among the younger generation which has enhanced liquidity on the local stock market,” he said.

Retail investors participation on the local bourse reached 43.18% in August, the highest monthly participation recorded to date.

Overall, retail participation has increased by 132% this year compared to 2019 average, said Yee, and as a result, the local bourse has experienced a surge in daily trading volume averaging seven billion securities from 2.5 billion sharecurities last year.

Rakuten’s top three fundamental picks are AHB Holdings Bhd with a target price (TP) of 61 sen, D’nonce Technology Bhd with a TP of 88 sen and Supercomnet Technologies Bhd (Scomnet) with a TP of RM2.68.

For AHB, Rakuten expects its net margin to increase to 13% by the financial year 2021 (FY21) from 8% and is likely to achieve record earnings in FY21 due to increasing demands for “Covid Panels” and “SpaceCom Medical Hubs”.

The firm also expects D’nonce to achieve record earnings in FY21 as its packaging boxes are used by major glove manufacturers, while Scomnet is forecasted to deliver its strongest ever performance on record with supercharged growth in earnings per share of 59% in FY20 and 68.3% in FY21.