Cover Story: Corporate earnings in 3Q point to sustainable V-shaped recovery

Cover Story: Corporate earnings in 3Q point to sustainable V-shaped recovery

THE July-September results reporting season has provided investors with a bit of a confidence boost amid concerns about global headwinds and a potential recession next year.

Calling it an encouraging and decent quarter, analysts say the earnings of Bursa Malaysia-listed companies managed to maintain their growth momentum as business activities continued apace.

Of the 169 companies that have a market capitalisation of at least RM1 billion, 116 or 68.6% recorded a year-on-year (y-o-y) increase in their latest quarterly results, while 97 or 57.4% saw a quarter-on-quarter (q-o-q) rise.

RHB Research says four sectors — banking, oil and gas (O&G), automotive and property — exceeded expectations. Three were in line: utilities, telecommunications and consumer. However, seven sectors, namely plantation, media, construction, gaming, healthcare, rubber glove and basic materials, missed expectations. “Within our coverage universe, earnings estimates for FY2022 were lifted by 1.3% while FY2023 earnings were trimmed 0.2%.”

MIDF Research says the percentage of companies with results that met expectations jumped to 48% in 3Q2022 from 38% in the previous quarter. The consumer products and services sector recorded the highest percentage of positive surprises with 41% of stocks under its coverage, while healthcare continued to register the biggest percentage of underperformers at 86% of companies under its coverage. The healthcare sector’s poorer showing does not come as a surprise, given that the momentum has swung in the opposite direction now that the Covid-19 peak has passed.

In 3Q2022, the aggregate reported quarterly earnings of the FBM KLCI’s 30 constituents improved 2.5% q-o-q and 7% y-o-y to RM15.8 billion. On an adjusted basis, the aggregate normalised earnings grew 4.8% q-o-q and 4.2% y-o-y to RM17 billion.

“The aggregate quarterly earnings in 2021 and thus far in 2022 are superior vis-à-vis the pre-pandemic quarters in 2019. Manifestly, a V-shaped corporate earnings recovery with positive earnings momentum during the most recent two quarters,” the research house notes.
Downside limited for Malaysian equities

While the coming year is expected to be another challenging one for Malaysian equities, PublicInvest Research believes the downside appears to be increasingly limited, unless there is a global meltdown of epic proportions.

With the local stock market remaining undervalued, the earnings growth momentum is likely to fuel further upside to the FBM KLCI, which has slipped 5.34% year to date.

Loui Low, head of research at Malacca Securities, highlights surprises in the consumer segment despite the high feedstock costs. Poultry companies, for example, raked in decent earnings, with some more than decent.

QL Resources Bhd’s net profit more than doubled to RM93.9 million for the July-September quarter from RM45.94 million a year earlier, while Leong Hup International Bhd returned to the black after registering a net profit of RM67.31 million against a net loss of RM53.42 million.

The tech sector’s performance was mixed. For those that posted better earnings, the strengthening of the US dollar was one of the key reasons, says Low.

“Right now, the ringgit is strengthening. If the demand drops, then it will impact tech earnings substantially. If the revenue generated far outweighs the currency effect, then investors should be looking at tech counters,” he explains, adding that the less hawkish tone of the US Federal Reserve is a catalyst to push their share prices.

While banking earnings will continue to grow in line with the economic recovery, Low says net interest income may moderate unless the strong interest rate upward cycle persists.

For the construction sector, Low expects more contract awards, with the retabling of Budget 2023 being a catalyst. With a rebound in property sales, it will benefit the construction sector, as well as a spillover effect on the building materials segment. “Although people say the interest rate upward cycle is negative to the property sector, buyers are actually eyeing affordable homes.”

Overall, he is positive on the O&G, consumer and building materials sectors in 4Q.

Earnings of local firms are forecast to be better in anticipation of the China reopening. There have been reports of Beijing planning to scale back its strict zero-Covid rules to stem losses in its economy.

Meanwhile, Inter-Pacific Securities head of research Victor Wan cautions that the pent-up demand may have eased in 4Q, suggesting a q-o-q moderation in corporate earnings in the last quarter of the year, but is still expected to be better y-o-y.

Going into 2023, excluding the one-off prosperity tax, core earnings may come in about the same level as in 2022. “Consensus forecast points to stronger earnings growth in 2023. For the big boys, it is mainly due to the absence of the prosperity tax. That’s why we expect to see an increase in earnings,” he says.

Asked about the earnings impact on the stock market, Wan says, “The market is still undervalued, trading below the long-term average. There is some upside against the year-end target of 1,550-1,580 points supported by window-dressing activity. Based on the earnings projection, we can easily reach 1,660 points next year.”

Let’s take a look at how the sectors performed in 3Q.
Banking

Amid the interest rate upward cycle, banking stocks were among the best performers, underpinned by higher net interest income and a reduction in impairment losses.

Malayan Banking Bhd (Maybank) reported a 28.5% y-o-y increase in 3Q net profit to RM2.17 billion, driven by higher net fund and fee-based income as well as lower net impairment losses. Its net operating income increased 20.6% y-o-y to RM7.41 billion as net fee-based income expanded 48% to RM2.12 billion, while net fund-based income rose 12.2% to RM5.3 billion.

CIMB Group Holdings Bhd managed to turn profitable in 3Q, recording a net profit of RM1.41 billion against a net loss of RM100.59 million in the previous corresponding quarter, following a 9.3% rise in its net interest income after modification to RM2.98 billion. This is despite the bank recording a whopping goodwill impairment of RM1.2 billion, which was triggered by the prolonged impact of Covid-19 on Thailand.

Similarly, Public Bank Bhd’s 3Q net profit was up 16.8% to RM1.59 billion, as a result of 16.5% higher net interest income at RM338.1 million while recording a 70.4% drop in loan impairment allowance to RM228.5 million.

CGS-CIMB Research, however, sees minimal scope of an earnings upgrade for banks even if its loan growth projection of 5%-6% for 2022 is surpassed, as the margin of outperformance will not be big, at less than one percentage point (ppt). Moreover, every one ppt increase in loan growth forecast will raise its 2022 net profit only by 0.8%.
Technology

Technology firms posted a mixed set of results. Malaysian Pacific Industries Bhd (MPI) and ViTrox Corp Bhd were among the beneficiaries of a weak ringgit.

MPI suffered from lower demand from the Asian consumer electronics market, resulting in a 35.5% decline in net profit from RM81.68 million a year earlier, but partly offset by the appreciation of the US dollar against the ringgit. Underpinned by the strong greenback and favourable product mix, Vitrox’s net earnings grew 20.4% compared with the previous corresponding quarter.

D&O Green Technologies Bhd, however, felt the pinch of US dollar-denominated loans, causing it to incur a higher foreign exchange (forex) loss of RM17.2 million. With that, its latest quarterly net profit fell 15.3% to RM15.75 million from the previous year.

Inari Amertron Bhd, the country’s largest outsourced semiconductor assembly and test (OSAT) player, reported flat earnings of RM106.25 million, owing to comparatively lower loading volume offset by favourable forex movement.

Nonetheless, Greatech Technology Bhd benefited from several orders from the solar industry under its production line systems segment, with its net profit rising 41.3% to RM40.97 million. Also, a better profit margin lifted Frontken Corp Bhd’s net profit by 27% to RM34.73 million.

RHB cut its tech earnings forecasts by 9.5%, mainly on the revisions made on its estimates for Inari Amertron and MPI in anticipation of a further weakness in the following quarter amid slowing demand.
Gaming

Both Genting Malaysia Bhd and Genting Bhd turned profitable in 3Q2022, driven by the reopening of global economies and international borders that helped boost business volume, particularly in Malaysia and Singapore. PublicInvest maintained an “outperform” call on both companies, hinging on a gradual recovery to pre-pandemic levels by 2023.

However, it was a disappointing quarter for number forecast operators (NFOs). “While Sports Toto Bhd had a lucky quarter and met expectations, Magnum Bhd fell short of estimates for the second consecutive quarter. Sports Toto’s ticket sales remained at 85% of pre-pandemic levels, while Magnum’s ticket sales were still at 75%. It is evident that the illegal NFOs and punters and worsened financial conditions may continue to hamper the NFOs’ ticket sales recovery,” said RHB.
Telecommunications

The one-off prosperity tax continued to take a toll on telecoms players.

Digi.Com Bhd’s net earnings fell 15.45% to RM264.48 million from RM312.82 million a year ago, as it was impacted by higher net finance costs, higher net loss on fixed assets written off and disposed of as well as lower interest income. Maxis Bhd fared relatively better as it only incurred a marginal drop of 3.1% in net profit to RM315 million.

Having recorded the third straight quarterly net loss of RM52.4 million, Axiata Group Bhd booked forex losses of RM346.7 million, higher depreciation and amortisation, one-off additional fees (net of accruals) and penalties charged for the use of microwave equipment in previous years of RM151.6 million recorded by mobile operations in Cambodia as well as higher finance costs and taxes.

MIDF maintained a “neutral” view on the telecom sector, given the uncertainty of the 5G rollout plan under the new government helmed by Prime Minister Datuk Seri Anwar Ibrahim.
Oil and gas

Earnings improvement was seen in the 3Q results, supported by stable crude oil prices of above US$80 a barrel as well as the absence of restrictive Covid-19 standard operating procedures, according to PublicInvest. It is worth noting that Petroliam Nasional Bhd’s (Petronas) commitment of RM60 billion in capital expenditure this year appears to have supported sector activities.

The sector’s core net profit came in lower due to a change in product mix while profit margins were squeezed as a result of inflationary pressures. Having said that, Hibiscus Petroleum Bhd outperformed peers with its net profit more than tripling to RM135.26 million from RM41.52 million a year ago, driven by contribution from its producing assets in Malaysia and the UK.

Increased work orders and contracts from oil majors boosted Dayang Enterprise Holdings Bhd’s net profit by 178.67% to RM52.9 million. Looking ahead, PublicInvest points out that its 4Q2022 results may see lower turnover as offshore oil and gas activities are typically slower during the monsoon season.

“Nevertheless, we foresee the pick-up in O&G activities continuing into 2023 as oil companies look to increase output amid the current crude oil price remaining stable at above US$80 a barrel.”
Plantation

The easing in crude palm oil (CPO) prices weighed on some planters. IOI Corp Bhd reported a 40% decline in net profit to RM167.5 million from RM277.6 million a year ago, due to lower fresh fruit bunch (FFB) production and higher cost of production.

The lacklustre upstream segment also dragged down Sime Darby Plantation Bhd’s net earnings by 34.98% to RM396 million. Likewise, Batu Kawan Bhd and its 47.74%-held Kuala Lumpur Kepong Bhd (KLK) reported lower earnings on the back of lower investment holding and manufacturing profits.

Despite registering weaker palm oil product prices, PublicInvest deemed most of the plantation results to be in line with its and consensus expectations. After seeing a sharp decline in CPO prices in September as Indonesia worked to optimise its inventory levels, CPO prices have since recovered by more than 25% and stayed well above the RM4,000 per tonne level for the last two weeks.

“Most companies guided that the FFB production had peaked in October and that CPO production was projected to stay at current levels as inventories are likely to be lower ahead of festive celebrations amid low production season.”
Consumer

Consumer earnings came in above expectation for the quarter in review. By and large, most of the positive surprises were driven by the more-robust-than-expected consumer spending, notwithstanding the softer seasonality factor in 3Q2022, hence benefiting consumer discretionary companies, said RHB Research.

Padini Holdings Bhd and Aeon Co (M) Bhd turned profitable at RM48.86 million and RM10.97 million respectively against net losses incurred in the same period a year ago. However, on a quarterly basis, their earnings were down 36.92% and 76.96% respectively, possibly due to a lack of festive celebrations during the quarter.

MIDF’s top picks for the consumer sector are QL Resources, Fraser & Neave Holdings Bhd, Leong Hup and Aeon Co (M) Bhd, which operates general merchandise stores.

Meanwhile, RHB continues to favour MR D.I.Y. Group (M) Bhd for its gravity-defying growth, driven by outlet expansion and an effective business model of a comprehensive and competitively-priced range of product offerings in widely accessible locations.

“Power Root Bhd is our pick within the smaller-cap space as we expect the strong earnings recovery momentum to sustain, underpinned by export sales normalisation, improvement in underlying fundamentals and contribution from new products.”
REIT

Earnings of most real estate investment trusts (REITs) met expectations in 3Q2022, with the outlook for retail REITs expected to stay bright due to improving rental reversions, according to MIDF. Sunway REIT managed to beat expectations on the back of stronger-than-expected earnings from its retail and hotel divisions.

PublicInvest expects the sector to recover further towards year end, underpinned by Christmas as well as Chinese New Year in January 2023. However, it points out that the sector is fairly valued for now with interest rates possibly rising further on inflationary concerns.
Glove

Glove players’ earnings remained under pressure in the latest quarterly results on the back of normalisation of demand and average selling prices of gloves, as well as higher energy costs.

In the latest quarterly results, Hartalega Holdings Bhd, Kossan Rubber Industries Bhd and Supermax Corp Bhd saw their earnings slump more than 90%, while Top Glove Corp Bhd even incurred a net loss of RM52.59 million for the June-August period.

PublicInvest is of the view that glove players are unlikely to be able to fully pass on costs to buyers due to the intense competition and depressed average selling prices are likely to persist until 2H2023.
Easing of inflationary pressures to support earnings, but higher minimum wage a drag

With global inflation likely to have peaked in the third quarter, businesses that rely heavily on raw materials may get some reprieve as prices moderate. This will, in turn, bring down the cost of doing business.

Commodity prices in 3Q hit new lows from historic highs in the first half of the year.

Crude palm oil price tumbled to a 20-month low of RM3,200 a tonne against over RM7,000 in March and April this year, while Brent oil price dipped to US$80 a barrel in September.

As at 10pm last Friday, CPO and Brent crude were trading at RM3,952 a tonne and US$87 per barrel respectively.

Malacca Securities head of research Loui Low says businesses are now in a better position to manage their input costs.

“They understand how to do the procurement process and mitigate the risk of overbuying and overselling. Businesses need some time to adjust, but most likely will be able to adjust accordingly. As long as prices are stable, it should be manageable for businesses because they don’t want too much volatility.

“Also, the strengthening of the US dollar won’t last long. Any increase in demand will benefit businesses and their earnings,” he tells The Edge.

In particular, Low is positive on the consumer poultry segment if the price ceiling were revised upward.

PublicInvest Research foresees stronger earnings in 4Q on greater festive spending before softening in 2023 amid higher inflationary pressure.

“However, we think that earnings for consumer companies under our coverage that are mainly involved in staple goods will remain resilient, as consumers will likely prioritise spending from discretionary to staple goods. Additionally, as raw material prices have fallen from their peak in 1H2022, we believe that it should help to support profit margins. Therefore, we maintain our ‘overweight’ call on the sector.”

Inter-Pacific Securities head Victor Wan observes that the less-intense supply chain constraints have contributed to the moderation in production costs, though they are still higher than pre-pandemic levels.

“Judging from the results and some forward-looking statements from companies, we do see some easing of inflationary pressures. At least it won’t go up. In any case, the production cost is probably going to remain, or even turn slightly better.”

However, he cautions that it could be offset by the impact from the higher minimum wage of RM1,500, from RM1,200 previously.

Hap Seng Plantations Holdings Bhd, for one, said higher fertiliser prices and the increase in minimum wage to RM1,500 with effect from May 1 continue to push its production costs higher. To mitigate this, the group is focused on improving fresh fruit bunch yield and extraction rates, while making concerted efforts to improve overall cost efficiencies.

A recent survey by the Malaysian Employers Federation shows that to cope with the minimum wage increase, companies have opted for reducing expenses, increasing prices of products and services, implementing cost-cutting measures, and shifting to technology-intensive production.

MIDF Research points out that energy costs on the back of the increase in natural gas tariff will also continue to impact consumer companies that are both labour- and capital-intensive.

UOB Global Economics & Markets Research expects Malaysia’s inflation to continue its downward trend going into 2023 and to average at 2.8%, assuming that there are no changes in domestic policy, particularly the fuel and electricity subsidies, as well as the price cap for staple food.

This comes after headline inflation decelerated for the second straight month to 4% year on year in October against 4.5% a month ago, due to the base effects in electricity components, cheaper non-subsidised fuels, accommodation services, and furnishing and household appliances.

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