Thursday 28 Mar 2024
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Sectors that the pandemic clobbered hardest such as tourism-related businesses like hotels, airlines and retailers were likely to have continued spilling red ink in 4Q20.

KUALA LUMPUR (Feb 10): Corporate earnings are expected to improve in the October-to-December quarter (4Q20). Besides the glove makers, export-oriented companies, such as electrical and electronics manufacturers, and furniture makers as well as the plantation sector are likely to be the bright spots.

MIDF Amanah Investment Bank Bhd research head Imran Yassin Yusof is expecting the growth to be circa 20% year-on-year (y-o-y), driven by the stellar performance of glove makers, citing that the sector saw earnings skyrocket following the increase in demand due to the Covid-19 pandemic.

“Excluding these earnings from glove companies, we are looking at a contraction of around -2% y-o-y for corporate earnings. This is due to the effect of the ongoing Covid-19 pandemic we saw imposed in 4Q20, which is the main downside risk for corporate earnings,” he said.

As for a sequential quarter basis, Imran is anticipating corporate earnings to be around 2.2% higher against the third quarter last year (3Q20).

RHB Investment Bank Bhd regional equity research head Alexander Chia said while some economic activities picked up in 4Q20, there was slight deflation in growth momentum which occurred due to the re-imposition of the Conditional Movement Control Order (CMCO).

Nonetheless, Chia also concurred that 4Q20 corporate earnings are expected to be generally higher sequentially, although performance could be more sector-dependent.

“It should be noted that 4Q20 generally benefits from seasonality factors,” Chia added.

However, with the onset of MCO 2.0 in 1Q21, Chia said company management may decide to do some house-keeping by doing pre-emptive provisioning (kitchen sinking). This may well result in outsized outcomes for the reported net profit for some sectors.

Sectors that the pandemic clobbered hardest such as tourism-related businesses like hotels, airlines and retailers were likely to have continued spilling red ink in 4Q20.

The pandemic also took its toll on the property sector as it had put a dent on consumer’s appetite for purchasing big ticket items, said Rakuten Trade Sdn Bhd head of research Kenny Yee Shen Pin.

Also, Yee noted that the construction sector will likely report less impressive earnings dragged mainly by fewer new big projects.

Meanwhile, MIDF’s Imran is expecting the banking sector to underperform on a sequential year basis as he sees provisions will continue to be elevated and this will drag earnings in 4Q20.

Double-digit growth corporate earnings growth seen for 2021

For 2021, the market experts believe a strong recovery in corporate earnings is underway amid vaccine hope and low base effect.

Both MIDF’s Imran and Rakuten Trade’s Yee are expecting double-digit corporate profit growth in 2021.

Imran is estimating a circa 28% y-o-y growth in overall corporate earnings as the research house maintains its 7% GDP growth target for 2021.

“Despite MCO 2.0, it is less restrictive and there is 'light at the end of the tunnel' with the vaccine. This will ensure that economic recovery will be underway and hence, corporate earnings,” he said.

Imran’s growth projection for 2021 came after an estimation of 13% contraction in corporate earnings for the stocks under its coverage for the full-year 2020.  

Yee is projecting corporate earnings to grow even stronger at 37% y-o-y across the board, versus an 11% contraction estimate in 2020. With hope of a vaccine-led recovery, he said earnings will be led by the strong rebound in the banking sector, whereby he is projecting the sector to chart growth of 21% after declining 23% last year.

Having said that, they are mindful that there are downside risks to 2021 earnings growth against the backdrop of ongoing movement restrictions and rising daily Covid-19 cases

Meanwhile, RHB’s Chia noted that the ongoing lockdown and the worsening pandemic data would be the downside risk in 2021.

More generous dividends?

In light of improvement in corporate earnings, analysts acknowledged that there are companies willing to declare better dividends, especially from the rubber glove sector.

MIDF’ Imran said dividend payments will depend on the companies' specific financial needs and performance.

"While there may be earnings recovery, companies may want to build some liquidity buffers and may slash dividends at least for this year. But all-in, certainly companies which did very well during the year should be able to reward its shareholders.

“With the pandemic, we have observed some sectors or companies performing better such as rubber glove companies and Bursa Malaysia, which we expect will continue to reward its shareholders. Also, more defensive sectors such as utilities will also likely continue to declare dividends,” he added.

Edited ByKathy Fong
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