Uncertainty for corporate earnings as MFRS16 takes effect

TheEdge Mon, May 06, 2019 07:48am - 4 years View Original


KUALA LUMPUR: The Malaysian Financial Reporting Standards 16 (MFRS 16) has added another layer of uncertainty to the first quarter of financial year 2019 (1QFY19) corporate earnings season, on top of the various external factors already hindering the global environment such as the US-China trade war and the uncertain world growth outlook.

The full impact of the MFRS 16, which entails the accounting of leases in a company’s financial statements, has yet to be fully priced in by investors, although the market is aware of some impact it could have on the financial results of companies in the 1Q reporting season.

Under MFRS 16, a company now has to recognise the interest expense on the leases it has taken as well as the depreciation on the asset leased, potentially translating to higher depreciation and interest expense and hence impacting the bottom line of the company.

CIMB Investment Bank head of equity research Ivy Ng told The Edge Financial Daily that the implementation of the new accounting standard, which came into force on Jan 1, 2019, has resulted in some uncertainty among investors.

“The market knows that MFRS 16 could have some effect on earnings but it has not priced in the full extent of the impact. There is some expectation and the market has priced in certain aspects of it but they cannot effectively price in the full impact unless the companies disclose the actual figures.

“There is a little bit of uncertainty, so investors are unable to price this factor in efficiently,” she said.

Some companies’ financials could be more affected than others, said Ng, although she said it is unclear if investors would downgrade stocks due to this factor alone, as MFRS 16 is only a change in accounting treatment of leases.

Meanwhile, she pointed out that the research house had highlighted several companies under its coverage that could be impacted by MFRS 16, which include AirAsia Bhd, 7-Eleven Malaysia Holdings Bhd and KPJ Healthcare Bhd.

In a note dated April 8, CIMB pointed out that AirAsia had sold 79 aircraft to lessor BBAM Ltd Partnership and is expected to sell another 25 aircraft to lessor Castlelake Ltd Partnership by the third quarter of this year.

“Given MFRS 16, together with other existing operating lease aircraft, AirAsia is expected to capitalise RM11.8 billion worth of borrowings related to the above operating leases in FY19, effectively bringing back to the balance sheet what had previously been off-balance sheet,” it said.

The research house said this would increase gross gearing to 198% on a pro forma basis, compared with 19% in FY18 and that the overall impact to earnings would be negative.

For 7-Eleven, which has retail outlets with rental leases, CIMB had previously advised investors to stay on the sidelines pending the impact of MFRS 16, estimating that the accounting treatment could potentially lower the company’s earnings per share by between 0.8% and 9.5% in FY19 and FY20.

As for KPJ, which has 17 hospitals and several healthcare-related properties under the operating lease model, the research house said its net profit could decline 10.9% in FY19, while net gearing ratio could rise to 1.2 times from 0.6 times in FY18, after the adoption of MFRS 16.

“We have indicated that these companies could be affected but these are all just estimates. It is very hard for analysts to adjust forecasts [to account for MFRS 16] because there is not enough information to properly assess the impact at this juncture, unless the companies give their guidance,” said Ng.

One of the companies affected by MFRS 16 so far is DiGi.com Bhd, which reported an 11.6% year-on-year decline in 1QFY19 net profit to RM341.5 million, attributed to higher depreciation and amortisation and finance costs.

In its financial statement for the period, it said its depreciation and amortisation cost increased to RM305 million with MFRS 16, compared with RM216 million without MFRS 16 for the same quarter, while finance cost more than doubled to RM48 million from RM22 million.

Areca Capital Sdn Bhd chief executive officer Danny Wong said there could be impact on companies that lease equipment, such as those in the airline business as well as those in the power sector, in terms of higher gearing.

However, in terms of whether this would be a significant factor for investors, Wong said he does not expect a big impact in terms of the share prices of affected companies solely due to this factor, pointing out that the external headwinds play a bigger role in market sentiment.

“We still expect the first quarter results to be subdued, given the headwinds in the global environment such as the US-China trade war and concerns on global growth. This has been reflected in some of the results, especially those in the export-oriented industries like the electrical and electronics sector,” he said.

Semiconductor player Globetronics Technology Bhd, for example, reported an 80% plunge in its net profit to RM3.09 million for 1QFY19, from RM15.19 million a year earlier, as some of its customers had unexpectedly reduced shipments.

The group said its performance in the first half will continue to reflect unfavourable conditions in the market but expects business recovery in the second half of the year.

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