Analyst cutting Vincent Khoo
PETALING JAYA: The extension of the movement control order (MCO) to May 12 will give rise to serious economic consequences.
Apart from the economy losing RM2.4bil for each day of the MCO, analysts initially assumed a third quarter return to normalcy but most are now cutting their earnings forecast.
The latest MCO extension is the fourth phase. There is widespread believe the MCO will be extended till the end of May.
“The extension of the MCO has grave consequences for our economy but what could be more grave than death, in the event there is no extension. Lives are more important than money, ” said former investment banker Ian Yoong.
UOB KayHian research head Vincent Khoo sees serious consequences of the Covid-19 prescription.
Former investment banker Ian YoongFormer investment banker Ian Yoong
“We will need to assess the depth of economic destruction in the coming weeks before reintroducing new earnings forecasts. Most companies are no longer able to provide profit guidance for the year, ” he said.
He foresees business failures and consolidations manifesting in the months to come.
How severe is the economic damage from MCO?
Globally, equities have most likely bottomed from the Covid-19 pandemic.
“However, the Malaysian government may have chosen an extraordinarily risky path of inflicting huge long-term economic repercussions by extending the lockdown to two months.
“Expect steep downgrade of our FBM KLCI target. Brace for further foreign selldown and a market meltdown, ” said Khoo.
Furthermore, the question now is whether the government would provide more flexibility for more companies to commence operations. Plans to allow for more companies to operate under a standard operating procedure to deal with the Covid-19 pandemic is in the works.
Khoo has earlier reduced his FBM KLCI growth forecast by 8.4 percentage points (-2.1%) due to the lockdown imposed in most parts of the world, including Malaysia’s six-week MCO.
“Now with Malaysia’s MCO being extended to eight weeks and potentially beyond – which surprisingly did not exempt Penang island which has recorded zero new-infection cases for the past week – we expect a grave downside to our economic and corporate earnings growth trajectory, ” said Khoo.
He explains that the government’s direct fiscal injection, which amounts to about 2.4% of GDP, already pales in comparison to many developed countries, and these countries have shorter lockdown periods.
Yoong said it is clear that the vast majority of businesses would report losses in 2020.
“Malaysia and the rest of the world will experience an economic recession this year. We will suffer an economic slowdown from the Covid-19 pandemic and devastatingly low oil prices, ” said Yoong.
Khoo said it was hard to assume a U-shaped economic recovery and near-full recovery in the fourth quarter of 2020 even if the government threw in more financial lifelines for the deeply wounded small and medium enterprises.
He fears it could be too little too late.
Khoo believes the country’s unemployment rate will spike well beyond the 4% baseline assumed by the government.
Thus, there is a potentially significant downside to market earnings forecasts through 2021, as there is a big reverse multiplier to the economic and financial impact from the MCO extension.
“The long MCO period will also be destructive to post-MCO consumption recovery trends as consumers now fear job losses and salary cuts, ” said Khoo.
Yoong said the greater concern is cashflow, which is more important that profit.
“A business can survive when it loses money but it will not last long without cashflow. Listed companies with weak balance sheets and poor cashflow are suffering. A number will require restructuring, ” said Yoong.
An indicator Yoong likes to use is the net debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) metric.
The higher the ratio, the less cash the company has in hand and coming in to pay its debts. The lower the number the better.
“It would be preferable that the net debt/EBITDA, based on the 2021 calendar year estimates, is less than one, ” said Yoong.
Apart from rubber gloves makers, the other sector Yoong believes may do well are packaged food and beverage manufacturers such as Nestle.
“My focus, going forward, will be on cyclical stocks. The market prices of many cyclical stocks are not reflective of the abysmal business conditions over the next six to nine months, on the assumption the worst of the pandemic is over by the fourth quarter of 2020, ” explained Yoong.
He said the cyclical businesses that survived the economic recession would have less competition. “Profitability will most likely be higher post-turmoil than pre-turmoil, ” he said.
Hong Leong Investment Bank Bhd research head Jeremy Goh believes the FBM KLCI rebound that Malaysia witnessed from its low of 1,220 points on March 19 is what he would call “a dead cat bounce effect”.
“All past four bear markets had a ‘dead cat bounce effect’ ranging 10% to 13% (dotcom bubble, global financial crisis and oil glut) while the Asian financial crisis was the largest, at a 55% rebound. (see charts)
“The point is, once the dead cat bounce effect fizzles off, the market falls even lower than before, ” explained Goh.
For now, the FBM KLCI has rebounded 12.2% as of April 24 from its recent low of 1,220 on March 19.
With the exception of the Asian financial crisis, Goh pointed out that this recent rebound is higher than what was seen in previous bear markets.
Goh has an earnings forecast of -3.9% for his 2020 FBM KLCI outlook, followed by a 7.7% growth in 2021.
He believes that current valuations aren’t exactly compelling, especially with a price-to-earnings (PE) ratio that is near mean.
Goh presently has four possible FBM KLCI bottoms which are 1,037 based on -45.3% decline, similar to the global financial crisis’ magnitude.
His other possibilities based on valuation metrics are for the FBM KLCI to hit 1,029 based on 11.6 times PE (global financial crisis low) tagged to 2020 earnings, 1,236 points based on 1.22 times price-to-book (P/B) ratio, which is the global financial crisis low, and 1,094 points based on 1.08 P/B ratio.
Having said that, Goh has a year-end FBM KLCI target of 1,350 points based on 14.6 times PE tagged to mid-2021 earnings.
He explains that a PE 14.6 times is the global financial crisis mean; which reflects both a downturn and rebound.
“We will only turn buyers at levels closer to our bottom estimate. Top picks are those with relatively more defensive business models or balance sheet, yielders with reasonable certainty and ‘beneficiaries’ of Covid-19, ” said Goh.
https://www.thestar.com.my/business/business-news/2020/04/27/analysts-cutting-corporate-earnings-forecast
