PETALING JAYA: The third-quarter earnings season was broadly within expectations, although it is no secret that the prolonged Covid-19 restrictions have kept expectations fairly low.
An analyst told StarBiz that while operating restrictions have been eased, companies continue to face challenges such as supply chain disruption and manpower shortage that have weighed on their performance.
“As companies are still adjusting to the new normal, we didn’t have high expectations on earnings, except for certain sectors,” he said.
Interestingly, the earnings disappointments due to the enhanced movement control order in Klang Valley in July were not as bad as expected, according to CGS-CIMB Research.
On the bright side, corporate Malaysia has seen some signs of recovery as the number of underperforming companies reduced in the third quarter of 2021 (Q3’2021).
The corporate earnings momentum is expected to improve in the ongoing fourth quarter as economic activities pick up.
CGS-CIMB Research pointed out that the Q3’2021 earnings revision ratio rose to 0.93 times from 0.53 times in Q2’2021, as positive surprises from higher commodities prices more than offset negative surprises from lockdowns.
Meanwhile, the revision ratio was 1.13 times in Q3’2020.
Revision ratio refers to the percentage of companies that reported higher-than-expected earnings against the percentage of companies that reported below-expectation earnings.
“The quarter-on-quarter improvement was due mainly to a higher ratio – 31% of the companies we cover – posting better-than-expected earnings in Q3’2021 versus 20% in Q2’2021,” said CGS-CIMB Research in a note yesterday.
Among the FBM KLCI constituents under MIDF Research’s coverage, there was also a reduction in the number of underperformers.Only two companies underperformed in 3Q’2021, while eight companies outperformed.In Q2’2021 and Q3’2020, there were four and three underperformers respectively, although the outperformer count was similar at eight.
“In Q3’2021, the outperformers among the FBM KLCI constituents under our coverage comprised two financial counters namely Public Bank Bhd and RHB Bank Bhd, two plantation stocks namely Sime Darby Plantations Bhd and Kuala Lumpur Kepong Bhd, as well Axiata Group Bhd, Hartalega Holdings Bhd, IHH Healthcare Bhd and Petronas Chemicals Group Bhd.
RHB Research Institute said that the results for six sectors namely automotive, non-banking financial institutions, construction, property, basic materials and consumer have disappointed.
This was mainly due to the prolonged movement control order 3.0 that caused utilisation levels to tumble.
“However, plantations and banks surprised on the upside from higher crude palm oil spot prices and lower-than-expected credit costs.
“Overall, 29.8% of the results beat expectations, while 32.5% disappointed.
“The 2021 earnings were tweaked higher by 1.3%, from plantations, oil and gas, gloves and telecoms, offset by lower estimates in the automotive, bank, property and consumer sectors,” it said in a note.
Looking ahead into 2022, corporate earnings would take a hit because of the one-off Cukai Makmur or prosperity tax.
While the tax is only applicable to companies with a chargeable income of over RM100mil, RHB Research Institute said it will wipe out nominal FBM KLCI earnings growth for 2022.
In turn, this would raise market valuation by a one time price-to-earnings ratio.
“While the base case scenario going forward is for a broad-based consumer and export led recovery, headwinds are building up that could thwart equity market performance
“Clarity on the prospects for 2023 will only become apparent in the latter part of 2022, in our view,” it said.
CGS-CIMB Research expects FBM KLCI’s core net profit to decline by 3.4% in 2022, as compared to the earlier forecast of a marginal 0.9% growth.
It has also cut the growth estimate for 2021 to 37% from 40.9% earlier.
“We also introduce our 2023 earnings growth of 9.5%,” it said.
The brokerage lowered its end-2021 FBM KLCI target to 1,495 points from 1,629 points, and introduced an end-2022 FBM KLCI target of 1,637 points.
The cut in the 2021 target was done to reflect the earnings revision post the Q3’2021 results season.
“We expect the market to be lacklustre till year-end as investors assess the potential impact of the Covid-19 Omicron variant and a potential earlier end to bond tapering in the United States. Investors could also stay on the sidelines as they brace for the impact of the proposed 50% increase in stamp duty rates on contract notes, which will make Malaysia the most expensive market to trade in Asean starting Jan 1, as well as the Cukai Makmur and removal of tax exemption on foreign-source income,” it said.
UOB Kay Hian Malaysia Research, in its assessment, said corporate earnings recovery in 2022 could be significantly dampened, amid the expected policy rate hikes by major central banks, the tapering of quantitative easing by the United States and high inflationary costs.
It expects Malaysia equities to be mostly range-bound in 2022, and hence advised investors to go defensive in Q2’2022, before taking some trading bets on the 15th General Election (GE15).
“Appealing investment themes include economic reopening, commodity supercycle and high dividend yielders, with the latter theme expected to gain prominence from Q2’2022.
“Domestic investment themes could provide trading opportunities – GE15 and the digital economy (cloud migration, digital banking licence award, e-government).However, we would de-emphasise commodity supercycle plays as we head towards Q2’2022,” it added.