2Q earnings came in as bad as expected, but green shoots of recovery seen

This article first appeared in The Edge Malaysia Weekly, on August 31, 2020 - September 06, 2020.
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AS the country’s battle against Covid-19 enters its fifth month, the pandemic has turned into an economic bane the world over, including Malaysia.

In addition to recording the worst GDP performance ever in the second quarter, the pandemic’s impact on the local economy can be seen in the performance of the listed companies on Bursa Malaysia.

Based on their latest quarterly results, 52.5% of the 888 companies that have reported so far have produced poorer performances on a year-on-year (y-o-y) basis. This was a deterioration from the 50.17% that reported a decline in performance in the first quarter of 2019.

On a quarter-on-quarter (q-o-q) basis, a substantial 69.4% of the companies reported deteriorating performances. However, green shoots of recovery did show up on occasions during this earnings reporting season.

Companies such as IHH Healthcare Bhd saw better financial performance in 2QFY2020 than in the previous quarter. The healthcare group posted a net loss of RM120.64 million for the quarter ended June 30, down 165.2% y-o-y on the back of a 29.6% y-o-y drop in revenue to RM2.57 billion.

In announcing the results last Thursday, IHH group managing director Dr Kelvin Loh said its performance reflected the challenges posed by Covid-19, which impacted the company the worst in April and May. “As countries began to reopen their borders in June, we saw a strong rebound in local patient volumes and were net profit positive for that month. We have seen this progressive recovery in occupancy continue across July and August.”

While one swallow does not a summer make, the reopening of the economy in late May may have encouraged those who had put their treatments on hold due to the Movement Control Order (MCO) to return to IHH’s hospitals.

Other companies that registered a q-o-q increase in earnings include Opcom Holdings Bhd, which narrowed its net loss to RM752,000 in the quarter ended June 30 from RM5.94 million in the preceding quarter.

Plantation companies also recorded better results in 2Q2020. Sime Darby Plantation Bhd (SDP) led the pack by posting a 1,300% y-o-y jump in net profit to RM378 million. However, on a q-o-q basis, its net profit slipped 4%.

Kuala Lumpur Kepong Bhd (KLK) trailed SDP after registering a 658.4% y-o-y surge in net profit to RM368.7 million for the April to June period. Other plantation firms that saw strong profit growth included IOI Corp Bhd and KLK’s parent Batu Kawan Bhd. IOI recorded a 411.4% y-o-y gain in net profit to RM238.3 million for the quarter while Batu Kawan’s net profit rose 318.4% y-o-y to RM212.7 million.

Of the top 100 largest companies by market capitalisation, 40% reported an improvement in the latest quarterly results reporting season. Supermax Corp Bhd, whose net profit rose 2,553% y-o-y to RM399.62 million in its fourth quarter ended June 30 (4QFY2020), outperformed the rest.

However, that jump was hardly the best of all the companies listed on Bursa. While glove makers are currently the market darlings due to the increased demand for synthetic and natural rubber gloves the world over, Versatile Creative Bhd came out on top in terms of the company that saw the highest percentage of net profit growth.

The plastic packaging player reported a net profit of RM4.66 million in its first quarter ended June 30 (1QFY2021), a whopping 77,567% y-o-y jump from RM6,000 a year ago. However, this is an anomaly as there was nothing to suggest an improvement in its business during the quarter. In fact, the company reported a 28.6% y-o-y decline in revenue to RM9.84 million in 1QFY2021.

Versatile Creative announced on June 11 that it had disposed of a total of 25.98 million shares in Iris Corp Bhd between Feb 11 and June 3 for a total consideration of RM4.02 million.

Consumer products and services firms performed badly

Of the top 100 companies by market cap on Bursa, those in the consumer products and services sector did quite badly during this earnings reporting season. The sector includes players such as Genting Bhd, Genting Malaysia Bhd (GENM), DRB-Hicom Bhd, Magnum Bhd, Heineken Malaysia Bhd, Carlsberg Brewery Malaysia Bhd and Petronas Dagangan Bhd (PetDag).

DRB-Hicom, whose core business is in the automotive sector, has been hit hard by the pandemic as the MCO halted consumers from buying cars from mid-March to early May. A recovery in demand emerged only in late May.

Heineken and Carlsberg have also been negatively affected by the MCO as nightclubs, pubs, golf courses and other entertainment outlets were not allowed to operate as they were deemed non-essential services.

Of the two companies, Heineken was affected more, recording a net loss of RM18.2 million in 2QFY2020 ended June 30, down 128% y-o-y. Carlsberg still managed to turn in a net profit of RM10.65 million during the quarter, albeit lower by 83.7% y-o-y.

Many people were forced to stay at home during the MCO period, so much less fuel was consumed across the country, resulting in PetDag’s 2QFY2020 net profit plunging 98% y-o-y to RM3.5 million from RM172.75 million.

As the economy reopens, analysts are expecting the earnings of consumer products and services companies to recover sequentially. Nikki Thang, an analyst with Kenanga Investment Bank, had upgraded Carlsberg’s stock to “market perform” from “sell” after its results were announced on Aug 17.

According to Thang, Carlsberg is likely to experience q-o-q improvements moving forward, backed by the resumption of its brewery operations in May. This is coupled with anticipation of a pick-up in overall beer demand in the second half of the year, supported by pent-up demand post-lockdown in Malaysia and Singapore. “Post-results, we pumped our FY2020 and FY2021 earnings forecasts up by 2.4% and 2.2% respectively, pencilling in slightly stronger post-lockdown growth expectations. We also revised our dividend payout assumption to 50% for FY2020 and 97% for FY2021,” she says in a report.

Thang has assigned a target price of RM24.25 on Carlsberg, following the earnings upgrade, as well as adjusted higher the ascribed FY2021 estimated price-earnings ratio, to 26 times from 23 times previously.

 

 

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