Outcome of second quarter earnings season expected

Glove makers post astronomical growth

THE second quarter earnings season holds no major surprises for corporate Malaysia.

With the economy grouded to a halt due to the movement control order, most businesses were already anticipated to be badly hit operationally and financially.

However, glove makers are clearly an exception.

The sharp surge in demand for medical gloves led to an astronomical growth in earnings for all seven listed glove companies on Bursa Malaysia.

This includes Careplus Group Bhd, which has been loss-making over the past several years.

Careplus leapt into profitability in the April-June 2020 period, with a net profit of RM36.2mil as compared to a net loss of RM1.96mil a year earlier.

The two biggest glove players, Top Glove Corp Bhd and Hartalega Holdings Bhd, have recorded a 366% and 134% year-on-year jump in earnings respectively.

Meanwhile, companies in the plantation sector also managed to post profitability despite the strict containment measures to combat Covid-19.

This was largely thanks to the stronger crude palm oil prices, driven by higher exports and domestic usage that led to declining palm oil stockpile.

CGS-CIMB Research says average CPO prices rose by 14% y-o-y in the second quarter, with a 7.4% y-o-y improvement in CPO output from Malaysian estates.

Plantation giants namely Sime Darby Plantation Bhd witnessed a 14 times jump in net profit for the April-June 2020 period, while Kuala Lumpur Kepong Bhd recorded a seven-fold increase in bottom line.

The net profit of Genting Plantations Bhd rose by 9.1% y-o-y and FGV Holdings Bhd returned to the black with a net profit of RM20.55mil.

Other sectors

Looking beyond the glove manufacturers and planters, businesses in other sectors have largely faced a significant impact on the financial performance.

Interestingly, while many listed banks have reported a drop in earnings as at press time, the results have been relatively resilient considering the headwinds on the operating environment.For context, the sector has been affected by the three rounds of overnight policy rate cuts in the first half of the year and the six-month loan moratorium, which began on April 1.

The country’s largest listed bank, Malayan Banking Bhd (Maybank), saw a 51.5% y-o-y plunge in net profit. This was on a combination of modification losses of RM314mil, net interest margin squeeze and higher credit cost.

Commenting on the results, Kenanga Research says the banking group’s core net profit dipped to about RM900mil, which brought the first half core net profit to RM3bil and accounts for 46% of its net profit target for the financial year of 2020.

“We consider the results to be in line as 2H earnings would not be dragged by the Day One modification loss of RM314mil as in the second quarter, coupled with management’s revised guidance that appear to be in line with our assumptions.

“More importantly, however, we see sequential results improving and thus, we do not expect major earnings downgrades by consensus, ” it says in a note.

Meanwhile, the net profit of Public Bank Bhd, Hong Leong Bank Bhd and AMMB Holdings Bhd declined by 24.8% y-o-y, 10.5% y-o-y and 6.7% y-o-y respectively in the April-June period.

However, Alliance Bank Malaysia Bhd stood out among the rest as its earnings surged by 36% y-o-y.

The improved performance was mainly due to higher treasury and investment income as well as lower operating expenses, it said in a filing with Bursa Malaysia.

The domestic travel restrictions in the April-June period as a result of the MCO have also been brutal on property developers, that have already been impacted by oversupply and slower growth in demand in recent times.

Key property players such as S P Setia Bhd, Sime Darby Property Bhd and UEM Sunrise Bhd turned loss-making in the quarter. S P Setia posted a net loss of RM141.5mil, while Sime Darby Property and UEM Sunrise were hit by net losses of RM81.8mil and RM93.4mil respectively.

The tourism and hospitality related companies also took a severe beating in the second quarter.

These include Genting Bhd, which is predominantly reliant on its casinos and hotels businesses.

The group slipped into the red after it posted a net loss of RM786.05mil in the second quarter ended June 30, compared with a net profit of RM599.68mil in the same quarter a year earlier.

Low cost carrier AirAsia Group Bhd, which restarted its domestic flights in late April, was hit by a wider net loss of almost RM993mil, following a RM803.8mil net loss in the first quarter.

Speaking with StarBizWeek, Rakuten Trade Research vice-president Vincent Lau says the second quarter earnings season was mixed as many sectors suffered from lower profitability or losses, while some gained.

“However, this was already expected.

“In fact, the market is looking forward for a comfortable recovery in 2021.

“Over the next two quarters, we will surely see some improvements from the second quarter, but the real recovery will likely start next year, ” he says.

In order to further accelerate corporate Malaysia’s recovery to profitability and pre-pandemic operational capacity, Lau says that there is a need for more stimulus injection by the government for the businesses.

“The stimulus injection should be focused on certain sectors that are most hit by the Covid-19 pandemic.

Meanwhile, an analyst says earnings are expected to improve on a month-on-month basis as businesses gradually ramp up their production capacity towards pre-pandemic levels.

“However, on a year-on-year, earnings potential is likely to be dampened due to the high base effect.

“Some industries may recover faster than the others, but those businesses in the export-reliant sectors may continue to feel headwinds.

“Overall, it would naturally take some time before companies could start seeing their performances like how it used to be before Covid-19, ” he says.

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