Short position - Pitiful profits, inflation bites, MyEG

Pitiful profits

PEOPLE have been perplexed as to why stocks on Bursa Malaysia have declined over the past few years.

For most of the past number of years, the benchmark FBM KLCI index has closed lower than when the year started. Year after year, the index seems to be on the losing end that it is almost an anomaly when the FBM KLCI closes higher at the end of the year.

Maybe it was because of politics? Some would say the uncertainty does not help, and it does not. Maybe it’s because our main stock index does not feature many technology stocks, which was the flavour of the past few years? Yes.

Maybe the stocks on the FBM KLCI do not prescribe to environmental, social, and governance (ESG) tenets, and that is increasingly becoming the focus of investors. Sure.

But the one thing that is never brought up until recently is one of the basis as to why stock prices rise and that is corporate earnings.

Bursa Malaysia chairman Tan Sri Abdul Wahid Omar, during the launch of the PLC Transformation Programme earlier on the month, revealed a nugget as to why our share prices have been lethargic.

In a report, Wahid said listed companies have posted a decline in profitability between 2016 and 2019, where the earnings of the FBM KLCI component stocks fell by 4.3% while the earnings for the FBM Emas component stocks, the much broader index with many more stocks, dropped by 1.2% over the four-year period.

Based on the MSCI Country Index between 2020 and 2022, the market’s forecast earnings per share and compound annual growth rate were among the lowest in the region at 2.5% compared with Indonesia and Thailand, which were at 22.5% and 10.3% respectively.

The need for transformation is apparent as it brought about change in terms of how the government-linked companies (GLCs) performed between 2004 and 2015.

Sure, their profitability and market capitalisation expanded dramatically, but it is the same GLCs that are in the main indices that showed faltering growth between 2016 and 2019. And that is before the pandemic hit and hurt corporate Malaysia in a number of debilitating ways.

Corporate Malaysia has to buck up in not just delivering on ESG compliance but even more so in generating growth in earnings that can excite investors and the broader market. There is no point in having so many listed companies when earnings, on average, have disappointed and setting back the process of wealth creation for investors on the stock market.

Inflation bites

IT was a number most were waiting for on Thursday night and when the headline number for inflation came in as expected, there may have been some hurrah but the final diagnosis is that inflation in the United States had hit a 40-year high of 7.9%.

That means that even when the price of crude oil in July of 2008 hit a record US$147 (RM617) a barrel, inflation in February in the United States was not as bad as it is now.

So some will say so what? What has that got to do with Malaysia?

Our inflation at 2.3% in January is still below world levels. Well, it will progressively hurt.

The war in Ukraine will create all sorts of supply chain breakdowns and when the economic system is not working efficiently, there can be friction in the form of inflation.

With sanctions being levied on Russia, that is going to have a knock-on effect in a number of ways from energy to food.

Also the higher prices abroad will eventually translate into high input prices here. Chicken feed will become more expensive and many other products given the price of commodities, which goes into making just about everything we consume, has become costlier.

The flipside to that is interest rate hikes may also be scaled back and that may offer some solace to investors. Regardless, if people say equities or commodities are the best hedge against inflation, the immediate reality is that our take-home pay is not going to rise as fast as inflation.

Wages in Malaysia are projected to rise but the quantum varies and may not be sufficient to overcome the headline inflation. The unfortunate resistance to the higher minimum wage is perplexing as it is not only below the national household hardcore poverty line, it is insufficient to overcome the urban poverty line which is much higher than the proposed hike in the minimum wage to RM1,500 a month. Then there is the inflation-eating crunch that is going to slash everyone’s take-home pay.

If people cannot even afford to pay to have a decent subsistence, then there is something seriously wrong with the overall system.

MyEG’s next big thing, again

MyEG ServicesMyEG Services

NOT failing to miss out on the next big venture, My E.G. Services Bhd (MyEG) is getting into the non-fungible token (NFT) space.

The company has launched a NFT marketplace, known as NFT Pangolin, to support the issuance and trading of NFTs. MyEG said it sees this as a stepping stone into a global market to support the creative arts and unlock future innovations based on smart contracts.

The latest venture comes after MyEG has been busy the last few years venturing into new businesses.

At the height of the Covid-19 pandemic, the company sought to pioneer the introduction of a rapid breath test system for the screening of the Covid-19 virus in the country.

Last November, MyEG entered into a memorandum of understanding with A Tech Insure Sdn Bhd for motor vehicle takaful coverage.

About a month before that, it entered into an equity joint venture with China’s Bubi Technologies Co Ltd to build supernodes around the world based on a blockchain system that will ensure data compatibility with China’s national blockchain infrastructure.

Late last year, MyEG bought a 10% stake in S5 Holdings Inc, a national security solution provider for RM86.5mil, bringing its total interest in the company to 20%.

Recall though that in 2020, MyEG had announced that it would be disposing of its 10% stake in S5 Holdings Inc to Ancom Logistics Bhd, a mere five weeks after announcing its plans to purchase equity in the latter.

You can’t fault MyEG for trying to grow its business and be less reliant on its e-government services.

One research house opines that MyEG’s “health-tech services, blockchain initiatives as well as global presence and partnership are likely to leave a positive impact on the group’s contribution soon”.

Time will tell if the efforts materialise into better earnings for MyEG.

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