Cover Story: Softer corporate earnings seen in first half

TheEdge Thu, Feb 24, 2022 02:15pm - 4 months View Original


FACED with the ongoing Omicron wave, which saw new Covid-19 cases per day breach the 20,000 mark in Malaysia last Friday, local corporates may find themselves having to battle a potential decline in earnings because market sentiment has soured.

Loui Low, head of research at Malacca Securities, says most corporates, depending on the sectors they are in, will experience softer earnings for one to two more quarters.

The poor performance is further weighed down by tepid consumer spending, as borders are not fully opened yet.

“Beyond March, should the borders reopen, perhaps we can see gradual recovery. With tourists coming in, the services industry will return to so-called normalcy, but that may take some time,” Low tells The Edge.

Compared with 2020 and 2021, he says, corporate earnings are expected to be neutral to slightly positive but still lower than pre-pandemic levels.

With the reopening, he sees a more meaningful recovery in the second half.

“The [loosening of] quarantine measures … will give some relief to the tourism and services industries, if more people spend money in Malaysia.”

Areca Capital Sdn Bhd CEO Danny Wong believes the Omicron wave will affect only sentiment and not have a significant impact on corporate earnings, unless another lockdown is implemented.

Meanwhile, Victor Wan, head of research at Inter-Pacific Securities, points out that the local stock market is stable despite a spike in the infection rate.

The benchmark FBM KLCI edged higher to close at 1,578.89 points last Friday against 1,515.99 points on Jan 27, when the government announced that the Omicron wave had begun in Malaysia.

“The mitigating factor is that Omicron resolves quite quickly and that would allow the economy to stage a rebound,” Wan says.

In terms of sentiment, Wan says international tourists may delay their plans to travel to Malaysia if there is a huge outbreak of Omicron cases. Still, he is optimistic that Malaysia could enter the endemic stage by the middle of the year.

“Businesses are getting used to the new normal and gearing up for the endemic stage, especially the big boys that have put contingency plans in place in case something happens.”

Much has been said about the recovery theme. With the potential reopening of borders this year, could the market see the strongest rally this time around?

Low suggests it is easier for investors to target the top 30 KLCI constituents for buying opportunities, as most counters, except for gloves, are the beneficiaries of the recovery play.

For one, he recommends Tenaga Nasional Bhd, which has been bashed down by 13% almost to the RM9 level from its recent peak of RM10.56 in August 2021. The key earnings driver is higher electricity consumption from increased economic activities, but the downside risk is the potential hit from US rate hikes, given that the utility giant holds a substantial amount of US dollar bonds and borrowings.

Ivy Ng, head of research at CGS-CIMB Securities, also sees minimal impact from the Omicron wave as restrictive measures have not been implemented.

“The situation is still very much manageable, judging from the hospitalisation rate and the fact that we have very high vaccination and booster rates. The government is more confident that it can withstand the infections.”

She points out that the more pressing issues for corporates are rising operating costs — such as a hike in power tariffs for the commercial and industrial segments — and the ability to pass them on.

As such, she advises investors to pick stocks that have greater pricing power, such as those in the technology and commodity sectors.

“Technology firms have pricing power because of product shortages and strong demand. For commodities, I don’t see anything falling drastically.”

Ng also cautions about the impact from the one-off prosperity tax imposed on companies that earn a chargeable income of more than RM100 million for the Year of Assessment 2022.

Assuming that the Omicron wave is short, Wan suggests investors buy on weakness, focusing on recovery stocks.

He favours Able Global Bhd, Datasonic Group Bhd, Hap Seng Plantations Holdings Bhd and Kelington Group Bhd.

Alexander Chia, head of research at RHB Research Institute, concurs, saying that a “buy on weakness” and momentum trading strategy remains appropriate for now, but also requires that investors remain disciplined enough to top-slice and sell into strength.

“Market valuations are not especially compelling, given the lack of earnings growth … Value investors with a longer-term investment horizon should look to accumulate at lower levels and avoid chasing the rally,” he said in a Feb 11 note.

The following are sectors that could benefit from the reopening amid the Omicron wave.

Travel

While revenge spending may boost the aviation industry, Malacca Securities’ Low says how much it will contribute to earnings remains to be seen.

“Sentiment-wise, people will buy Capital A Bhd (formerly AirAsia Group Bhd), but its earnings are also dependent on crude oil prices, which are quite high right now.”

The pricing of air tickets is another factor that affects aviation players’ profitability.

“Business volume may not be as strong as pre-pandemic levels, unless aviation players can price air tickets higher. Again, if air tickets are higher, then consumers might not spend so much on travel,” says Low.

He believes Malaysia Airports Holdings Bhd is a better proxy under the recovery theme, benefiting from passenger volume at airports. Based on Bloomberg data, the consensus target price of RM6.49 implies a 3.8% upside to its closing price of RM6.25 last Friday.

CGS-CIMB’s Ng notes that the travel industry is very much dependent on whether there will be new variants as well as travellers’ behaviour.

“We don’t know whether people will be more cautious or whether companies will allow their staff to travel. Also, owing to inflation, travel will not be as cheap as before,” he says.

Consumer/Leisure

As countries gear up for full reopening, upside rewards in tourism-related stocks look to be lucrative, with limited downside risk.

“It is very timely to see Genting Malaysia Bhd opening its new theme park,” says Low.

For the consumer sector, the next catalyst that could push earnings higher will be either revenge spending or foreign tourists.

Wong says, however, that investors have to gauge whether the valuations are cheap and how soon things could go back to normal.

According to Bloomberg data, the consensus target prices for Genting and Genting Malaysia are RM6.05 and RM3.45 respectively, representing potential upsides of 29% and 16.9% against last Friday’s closing prices of RM4.69 and RM2.95 respectively.

Oil and gas

Low expects a continuation of the upward cycle in global oil prices, which will spur upstream activities and contract awards.

“Even Hibiscus Petroleum Bhd and Dagang NeXchange Bhd (DNeX) are performing quite well. They are the main players in the exploration and production segment,” he says.

Shares in Hibiscus and DNEX were up 40.8% and 43.8% respectively in the past two months, outperforming the 14.6% gain in the Bursa Malaysia Energy Index.

Real estate investment trusts

Footfall at retail outlets and shopping malls is expected to be affected by rising infections in the country.

In a Feb 10 note, AmInvestment Bank downgraded the REIT sector to “neutral” from “overweight”, as the higher number of Omicron cases may slow down the retail footfall and domestic tourism recovery.

In addition, the rental reversion could be slightly negative, as some tenants may still require rental support in the immediate term.

Nonetheless, Low foresees better earnings for REITs in 4Q2021 versus 3Q2021, after the movement controls were lifted.

While malls and the hospitality sector benefit from the reopening, Wong says investors have to be selective for counters that have not seen a significant rebound.

Gloves

Glove stocks remain on the not-so-hot list of many research outfits because of oversupply.

Inter-Pacific Securities’ Wan says forward guidance is that average selling prices (ASPs) will continue to moderate, with the prosperity tax being a dampener for near-term earnings.

Areca Capital’s Wong notes that it is still uncertain when ASPs will find the stabilising levels. “In the past two quarters, ASPs had been going down … As more players are coming to this industry, ASPs may not go higher than what we thought,” he says.

For the quarter ended Dec 31, 2021, Hartalega Holdings Bhd reported a 74.6% year-on-year plunge in net profit to RM259.06 million, from RM1 billion, on the back of ASP normalisation and lower sales.

 

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