The earnings of these sectors will get a boost from the weak ringgit

TheEdge Fri, Aug 12, 2022 08:00am - 1 year View Original


KUALA LUMPUR (Aug 12): The weak ringgit, which depreciated by 4.9% in the second quarter of 2022 (2Q22) — from 4.2040 (March 31) to 4.4082 (June 30) — is expected to boost export-oriented companies' earnings.

The sectors that analysts expect to benefit from the soft local currency include manufacturers such as furniture makers and semiconductor-related companies.

When contacted, MIDF Research head of research Imran Yassin Md Yusof said the semiconductor sector stands to benefit from a depreciated ringgit against the greenback, as export demand remains strong.

Meanwhile, OCBC Bank (Malaysia) Bhd executive director of wealth advisory Michael Lai said that the export sector has performed well on the back of the reopening of the economy with the electrical and electronics products segment being a key driver of Malaysia's export growth in 2022.

Unisem (M) Bhd's latest result proved that the company had benefitted from a weak ringgit against the US dollar. The semiconductor assembly and test services provider's net profit for the second quarter ended June 30, 2022 (2QFY22) surged 276.7% to RM205.86 million from RM54.64 million a year earlier, crediting the improvement to an increase in average selling prices as well as the appreciation of the greenback against the ringgit.

On top of that, the plantation sector is also seen to be among the beneficiaries of a weaker ringgit coupled with the elevated crude palm oil (CPO) prices, according to Rakuten Trade Sdn Bhd vice president of equity research Thong Pak Leng.

"We are expecting the plantation sector to chart better corporate earnings growth in 2Q22. Although CPO prices have come down a bit lately, [the companies are] still very profitable as the cost for plantation players is around RM2,000 per tonne," he explained.

At 5pm close, the ringgit was traded at 4.4453 against the US dollar. The ringgit has endured a bumpy ride this year, having depreciated by 6.69% from 4.1665 registered at the end of last year.

Other counters that will do well without relying on weaker ringgit

Nonetheless, there are stocks which do not benefit from a weaker ringgit but are still expected to fare well during the earnings reporting season for 2Q22.

These include banks, retail real estate investment trusts (REITs) as well as those benefitting from economic reopening.

"We expect banks to see better growth given the improved economic activity. Banks' performances are very closely tied to the performance of the economy," said MIDF's Imran.

He added that the overnight policy rate hike is a positive factor for banks as this is expected to improve their net interest margins.

Affin Hwang Asset Management deputy head of equity David Loh also favours banks on the back of rising interest rates and stable non-performing loans, as well as counters that benefit from increased mobility and tourists after local and international borders reopened.

Rakuten Trade's Thong observed that several REITs recorded strong earnings compared with the previous year. For instance, IGB REIT — which owns Mid Valley Megamall and The Gardens Mall — saw its net property income for 2QFY22 jump 67.4% to RM105.715 million from RM63.14 million a year earlier, as revenue grew 57.5% year-on-year to RM133.76 million from RM84.92 million.

In contrast, he said the earnings of food and beverage (F&B) players in the consumer space, as well as automotive and construction companies, would come under pressure in 2Q22.

Besides the weaker ringgit, construction firms will also have to contend with higher building material prices, while automotive companies continue to be affected by the constraint in semiconductor chip supply. Meanwhile, volatile input prices and supply chain issues will hit the earnings of the F&B players.

Better corporate earnings seen in 2Q22 amid economic reopening

Overall, the consensus is that corporate earnings will chart positive growth in 2Q22.

"We are expecting a decent showing for 2Q22, driven by strong consumption on the back of Hari Raya festive season and Employees Provident Fund's withdrawal scheme in that quarter. On top of that, the full reopening of borders from April onwards has also helped to pull in the tourism dollar. All in all, a solid economic recovery has given Bank Negara Malaysia the confidence to increase rates twice in the last couple of months," Loh said.

Compared with 1Q22, corporate earnings for 2Q22 will also improve, Loh added.

"Earnings for 1Q22 were weak as corporate Malaysia had to make provisions for Cukai Makmur, the one-off prosperity tax that was announced by the Ministry of Finance last year. Stripping that out, coupled with the above-mentioned factors, we should see an improvement in 2Q22," Loh explained.

Meanwhile, MIDF's Imran is expecting corporate earnings to chart a 5% quarter-on-quarter improvement in 2Q22, mainly led by banks.

However, he is forecasting a 15% decline year-on-year as the earnings of glove companies fall on normalising average selling prices.

"One thing to note is that although there have been a few headwinds as mentioned, we expect this to be manageable at the current juncture. For example, inflation is still within our expectations. Hence, we expect corporate earnings to continue to be robust," Imran stated.

Corporate earnings and election will boost KLCI performance

The local benchmark index slumped as low as 1,411.32 on July 13, before recovering to 1,505.56 on Thursday (Aug 11). Still, it was down 3.95% from 1,567.53 seen on Dec 31, 2021.

Malacca Securities Sdn Bhd head of research Loui Low Ley Yee said he believes the local bourse could reverse course, however, if earnings continue to improve in 3Q22.

Hence, he expects the KLCI to trend higher from the current level to a range of between 1,550 and 1,600 by end of the year.

Affin Hwang's Loh said the KLCI's movements will be largely driven by macro factors in the near term including the US Federal Reserve's tapering, the Russia-Ukraine war and China's strict zero-Covid strategy.

"Any improvement in the macro front would be a major boost for markets globally," he said.

"For Malaysia specifically, a catalyst could come in the form of early [general election] that would remove any political overhang which has been a drag for the local market. This would lead to increased policy clarity through a stable government in tackling inflation, labour shortage issues and attracting foreign direct investment," he added.

On corporate earnings, Loh expects margin erosion from rising costs to ease in the near term in view of recent weakness in commodity prices, while companies set higher selling prices to defend margins and improve operational efficiency to lower overall costs.

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