EPS growth of 2.7% likely to be revised downwards

Socio-Economic Research Centre executive director Lee Heng Guie(pic) highlighted that there will be a higher degree of impact on corporate earnings that will surface after the four-week movement control order (MCO).

PETALING JAYA: Market earnings expectations are currently too optimistic, with consensus expecting FBM KLCI earnings per share (EPS) growth of 2.7% for 2020.

This is largely due to previous expectations of positive market earnings growth for 2020, which have yet to be revised.

According to Affin Hwang Capital, the consensus EPS is likely to be revised down and be a catalyst for a market de-rating.

“Having found that the KLCI tracks EPS growth closely, the KLCI’s year-to-date fall of 15.5% implies that the street is behind the curve in terms of its earnings cuts.

“We project EPS contraction to widen to 12.7% for 2020, ” said Affin Hwang Capital in its strategy report.

The projected EPS contraction for FBM KLCI is on the back of a gross domestic product (GDP) growth downgrade to 3.5%.

The research house has also taken into account a further 25-basis-point cut in the overnight policy rate (OPR) to 2%, a lower oil price assumption of US$30 from US$40 to US$45 previously, as well as a weaker ringgit to US dollar exchange rate of RM4.30 from RM4.20 previously.

As such, this led to a sharper cut in KLCI EPS growth to -12.7% from -4.7% previously.

Socio-Economic Research Centre executive director Lee Heng Guie highlighted that there will be a higher degree of impact on corporate earnings that will surface after the four-week movement control order (MCO).

“It remains to be seen how long it will take for demand to be restored to normalcy.

“Even large corporations will be affected by cashflow issues, as their supply chain would have been disrupted by the MCO and may require a longer credit period, for example.

“It is, therefore, a critical task for Malaysian corporations to contain, stabilise and recover their earnings over the next six to 12 months, ” he said, adding that more accurate revisions to market earnings expectations could only be seen in the third quarter of 2020.

Meanwhile, Affin Hwang Capital noted that the magnitude of the FBM KLCI decline had tracked the quantum of earnings decline quite closely.

The research house said Malaysia’s GDP growth has only contracted twice over the past 20 years, during the Asian financial crisis and global financial crisis (GFC).

During these periods, corporate earnings contracted by 60.1% and 49.1%, respectively.

As earnings become less predictable in a recessionary period, the research house believes that a better identification of a trough for the FBM KLCI is the index’s price-to-book value (P/BV).

“The FBM KLCI’s P/BV has tested the trough level of 1.3 times, last seen during the GFC, thus suggesting a market bottom.

“However, we believe the market is downplaying the large economic impact of the Covid-19 virus and overestimating a revival of the economy once activity resumes.

“With a likely U-shaped EPS recovery, we see more market volatility ahead and expect the FBM KLCI to bottom at 1,008, at a return on equity-adjusted P/BV of one time, ” said Affin Hwang Capital.