Spike in raw material price may impact profits


PETALING JAYA: Malaysian corporates are likely to post a slowdown in corporate earnings growth this year as inflationary pressures, the spike in raw material prices and the Russia-Ukraine war impact profitability.

Several bigger companies on Bursa Malaysia have already posted their first-quarter 2022 (1Q22) earnings, painting a not-so-rosy picture as some have been impacted by the one-off prosperity tax or Cukai Makmur.

Earnings announcements for 1Q, comprising the January-to-March period, are set to pick up over the next two weeks,

“Corporate earnings for 2022 will be adversely impacted across all sectors with the exception of commodities and the banking sector,” private investor and former investment banker Ian Yoong Kah Yin told StarBiz.

According to him, the earnings of the metal and agricultural commodity sectors should be outstanding in 2022, while there could be increased merger and acquisition activity in the financial services sector. ​​However, he said that the labour shortage issue could also weigh on companies’ results this year.

Rakuten Trade head of equity sales Vincent Lau, meanwhile, maintains the corporate earnings growth for this year, pending the 1Q results announcement.

“We are targeting corporate earnings to chart a high single-digit figure for this year on the back of the reopening of the economy and pent-up demand. And for the financial year 2023, we expect corporate earnings to grow 10%,” he added.

Lau expects companies in the oil and gas, and oil palm plantation sectors to do better this year on the back of elevated commodity prices.

On the other hand, companies in the manufacturing sector could see margin compression, but this could be mitigated by the strong US dollar against the ringgit.

Last week, Hartalega Holdings Bhd posted its first ever quarterly loss, largely because of a provision for the prosperity tax, lower average selling prices of gloves and high raw material prices.

In 4Q ended March 31, 2022, the world’s largest nitrile glove producer made a net loss of RM197.90mil from a net profit of RM1.12bil a year ago on the back of a 58% decline in revenue to RM968.69mil.

Cukai Makmur is a one-off tax introduced by the government under Budget 2022. Companies’ earnings of above RM100mil will be taxed at a rate of 33% instead of the blanket 24% rate previously.

Bursa Malaysia CEO Datuk Muhamad Umar SwiftBursa Malaysia CEO Datuk Muhamad Umar Swift

Meanwhile, Bursa Malaysia chief executive officer Datuk Muhamad Umar Swift said at current valuations, the local stock market was looking attractive on the back of an economic recovery.

“The value of the old economy, a surge in commodity prices, lower foreign ownership and the reopening of the country’s borders are among the factors that will support the market,” he told StarBiz.

“The softening of the ringgit against the US dollar will make the country’s exports more competitive. At the moment, the market is also shielded from the volatility brought on by the Russia-Ukraine war,” he added.

Umar said the liquidity in the market had remained robust judging by the number of new listings for this year.

In 1Q22, the five new listings on Bursa Malaysia raised US$362mil (RM1.5bil) in proceeds, making the local stock market the best performer in Asean in terms of initial public offering proceeds, noted Ernst & Young.

Last week, Bank Negara raised its benchmark interest rate to 2% from a record low of 1.75% in a surprise move aimed at taming global inflationary pressures.

Headline inflation was projected to average between 2.2% and 3.2% this year, unchanged from its earlier estimate.

Being a net exporter of oil, Malaysia was able to subsidise its domestic prices to prevent its prices from rising due to the high oil price. However, many companies import their raw material and may face headwinds.

Earlier in the month, the United States central bank announced its biggest interest rate increase in more than two decades as it toughens the fight against fast rising prices. The move triggered a sell-off in stock markets in the United States and Asia on worries that the intensity of the interest rate hike could affect economic growth in 2022.

A former fund manager said new corporate debt issuances could be costly due to higher interest.

Overall, he thinks that the market has reached the bottom, but it will take awhile for it to rebound due to the heightened external uncertainties.

Yoong, however, believes that the stock market has yet to bottom due to the external uncertainties.

“But it is a good opportunity to start nibbling over the next nine months. There could still be many unpleasant surprises which are mainly external to Malaysia, but it matters little if we take a three to five-year horizon.

“The greater the fear and negativity in the capital markets, the bigger the opportunities,” he said.

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