Corporate earnings recovery could be short-lived

PETALING JAYA: The fourth-quarter (Q4) corporate earnings reporting period broke the negative earnings growth momentum seen over the past six quarters, however, the recovery could be short-lived, as the impact from Covid-19 weighs on earnings in Q1 this year.

In a note by Affin Hwang Capital Research, broadly, both small and large companies performed better in Q4’19 as reflected by those that beat expectations.

“Telecoms, plantations and banks were among the key sectors that contributed to the year-on-year (yoy) growth, negating the sharply weaker performance in the oil & gas, gaming and utility sectors.

“Among the key companies that caused the earnings drag were Petronas Chemicals Bhd, Tenaga Nasional Bhd and Genting Bhd. Nevertheless, we believe that with the onset of Covid-19 and also partially due to the high base in Q1’19, Q1’20 earnings will likely register a decline on a yoy basis,” it said.

Based on this, the research house has downgraded its 2020 GDP growth forecast to 4% from 4.5% previously, and a year-end KLCI earnings per share forecast of 1.3% from 3.6%.

“We took the pre-emptive measure to factor in supply chain disruptions, weaker consumer sentiment, lower number of tourist arrivals and hence lower consumption spending into our projections,” it said.

On rating calls, Affin Hwang said it has downgraded the construction sector to underweight from overweight, as there could be a high chance of projects stalling including those revolving around the Penang Transport Master Plan, following the takeover of the Perikatan Nasional coalition.

As for its KLCI year end target, Affin Hwang said it was maintaining its neutral weighting with an unchanged year end target of 1,540 points.

“We remain cautious on the market and are positioned in the relatively defensive sectors such as MReits and healthcare. We also like the plantation and rubber glove sectors because of the earnings recovery from better prices for the former and improved demand for the latter. The EMS sector remains a thematic overweight because of the trade tensions,” it said.

Meanwhile, CGS CIMB Research said it had cut earnings projections for corporates under its coverage by 7-11.7% for FY20-21, as well as lowered projected corporates earnings growth for stocks under its coverage to 0.2% in 2020F. It projects KLCI earnings to grow at slower rate of 1.6% for 2020F (from 7%) and 8% for 2021F, with a year-end target to 1,497 points to reflect potential earnings risk from concerns over Covid-19 and political instability.

“Our top three picks continue to be Yinson Holdings Bhd, Pentamaster Corp Bhd and Tenaga Nasional Bhd,” it said.

source https://www.thesundaily.my/business/corporate-earnings-recovery-could-be-short-lived-FA2075160