Encouraging 4Q earnings paint a brighter outlook for 2021

This article first appeared in Capital, The Edge Malaysia Weekly, on March 8, 2021 - March 14, 2021.
Encouraging 4Q earnings paint a brighter outlook for 2021
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THE earnings season for the fourth and final quarter of 2020 has yet to come to an end — a one-month extension was given by the regulators as a temporary relief measure because of the Covid-19 pandemic — but based on companies that have already submitted their reports, results are encouraging.

A quick look at 270 listed companies on Bursa Malaysia with a market capitalisation of RM500 million or more shows that 151 recorded an improvement in quarterly earnings while 119 reported a decline.

RHB Research, in a March 2 strategy note, describes the December 2020 quarter as encouraging, with 2021-2022 forecast core earnings still largely intact — notwithstanding a last-minute RM2.83 billion global settlement provision by AMMB Holdings Bhd and excluding positive earnings revisions for rubber glove stocks.

“For the first time, no sectors reported disappointing earnings overall, with six (automotive, plantations, technology, non-bank financial institutions (NBFIs), media and rubber products) beating expectations. The misses-to-beats ratio also fell to a record low of 0.6, surpassing the previous best of 1.0 achieved for the preceding September 2020 quarter,” the brokerage says.

TA Securities, in its March 2 market strategy note, says that 32%, or 32 of the companies under its coverage, reported results that beat expectations.

“The outperformers surpassed underperformers for the second consecutive quarter, suggesting the path to a more sustained and robust recovery has started. Large cap stocks that exceeded our expectations were Public Bank Bhd, Bursa Malaysia Bhd, IJM Corp Bhd, IHH Healthcare Bhd, Petronas Dagangan Bhd, YTL Power Bhd and Westports Holdings Bhd.

“Meanwhile, only 20% of the coverage (20 companies) disappointed, the lowest since the first quarter of 2008. Some heavyweights that reported weaker-than-expected results were CIMB Group Holdings Bhd, Gamuda Bhd, Heineken Malaysia Bhd, Kossan Rubber Industries Bhd, Sunway Real Estate Investment Trust (REIT), Tenaga Nasional Bhd, Maxis Bhd, Telekom Malaysia Bhd and Malaysia Airports Holdings Bhd (MAHB),” says TA Securities.

Here, we look at the earnings performance of a number of companies from various sectors based on their market capitalisation.

Super big-cap companies (market capitalisation of RM10 billion or more)

It is no surprise that the healthcare sector — in particular, glove makers — recorded sky-high earnings in 2020 because of abnormally high demand for gloves as a result of the Covid-19 pandemic.

Supermax Corp Bhd saw earnings for the second quarter of its financial year ending June 30, 2021 (2QFY2021), surge to a record RM1.06 billion, compared with RM30.17 million a year ago, on the back of a 418% jump in revenue to RM2 billion. The big leap in its earnings was mainly fuelled by higher average selling prices (ASPs) against the backdrop of the pandemic.

The same factors were attributable to the record earnings and revenue of Top Glove Corp Bhd as its net profit for the first quarter of its financial year ending Aug 31, 2021 (1QFY2021), surged to RM2.38 billion against RM111.43 million a year ago, on the back of a 294% increase in revenue to RM4.76 billion — the group’s highest ever quarterly revenue attained.

As for Hartalega Holdings Bhd, its net profit for the third quarter of its financial year ending March 31, 2021 (3QFY2021), skyrocketed to a record RM1 billion, from RM121.27 million a year ago. Revenue for the quarter increased by 167% to RM2.13 billion.

Top Glove is due to release its 2QFY2021 results on March 9. In a note on the company last Monday, CGS-CIMB Research said it is negative on the glove maker’s plans for a dual primary listing on the Hong Kong stock exchange, as the brokerage says the exercise is dilutive to Top Glove’s earnings per share (EPS).

“Assuming that the over-allotment option is exercised, this exercise will reduce our FY2021-23 forecasted EPS by 11.2%-15.1%. In our view, this fundraising exercise is avoidable as Top Glove’s expected stellar FY2021-22 results should be able to support its capex plans, while it has zero gearing currently.”

Nevertheless, CGS-CIMB Research maintained its “add” call on the stock, albeit at a lower target price of RM7.80 compared to RM8.90 before. This was based on a lower price-earnings multiple of 14 times its FY2022 earnings from 16 times previously, due to concerns on its environmental, social and governance issues relating to the treatment of foreign labour, and the US Customs and Border Protection ban on two of Top Glove’s subsidiaries, which has remained unresolved since July last year.

Bloomberg shows that Top Glove’s free cash flow — which is its cash flow of operations after deducting its capex — amounts to RM2.83 billion.

Top Glove shares closed at RM4.90 last Monday, which translates into a market capitalisation of RM39.2 billion. Year to date, its share price has declined by 20%.

Meanwhile private hospital operator IHH Healthcare Bhd appears to be in better health. Its net profit for the fourth financial quarter ended Dec 31, 2020, surged 932% year on year to RM419.36 million, thanks to government grants and relief and higher revaluation gains from its 37.5%-owned Parkway Life REIT, while revenue dropped by 2% year on year to RM3.77 billion.

In a March 1 note on IHH, CGS-CIMB Research opined that while medical tourism remains curtailed in most places, the emergence of a vaccine in FY2021 may continue to boost occupancies at IHH hospitals. The brokerage reiterated its “add” call on IHH with a lower target price of RM6.91 from RM6.98 previously due to minor tweaks to its FY2022 earnings forecast.

IHH shares closed at RM5.29 last Monday, which values the company at RM46.4 billion.

Inari Amertron Bhd, which provides outsourced semiconductor assembly and test services for radio frequency (RF), fibre optic transceivers, optoelectronics and sensors, posted its best quarterly net profit in the second quarter ended Dec 31, 2020 (2QFY2021). Its earnings of RM90.1 million marked a 140% growth year on year, driven by stronger sales volume generated by its RF business. Quarterly revenue grew by 42% year on year to RM376.83 million.

In a Feb 25 note on Inari, RHB Research says the company remains the best proxy for 5G play, and has raised its target price for the stock to RM4, from RM3.28 previously, after ascribing a higher FY2022 forecasted price-earnings ratio of 40 times from 37 times previously.

“We believe our target price-earnings ratio is fair, as Inari is a prime beneficiary of 5G technology which is poised for mid-term structural growth, coupled with unswaying market interest in the technology sector. Maintain ‘buy’,” the brokerage says.

Inari shares closed at RM3.69 last Monday, for a market capitalisation of RM12.2 billion.

However, it was a tough quarter for casinos and theme park operator Genting Malaysia Bhd, which reported a net loss of RM240.85 million in the quarter, from a net profit of RM299.7 million the year before. Revenue for the quarter declined by 57% to RM1.04 billion. This was partly due to lower business volume from its gaming and non-gaming segments in Malaysia following the imposition of travel restrictions in line with the implementation of a Conditional Movement Control Order (CMCO) in most states in the country from Oct 14, 2020.

Maybank IB Research in a Feb 26 note says that Genting Malaysia’s 4QFY2020 and full-year earnings underperformed, but dividends surpassed expectations. For FY2020, Genting Malaysia declared a total dividend per share (DPS) of 14.5 sen, comprising of an interim dividend of 6 sen and special dividend of 8.5 sen, which surpassed Maybank IB’s DPS expectation of only 6 sen.

Maybank IB upgraded its call on the stock from “hold” to “buy”, with a higher target price of RM3.17 from RM2.60 previously.

“The first half of 2021 will likely be difficult due to travel restrictions but the second half ought to be better thanks to Genting SkyWorlds [Genting Malaysia’s newest theme park, which is scheduled to open in the second quarter of this year],” Maybank IB says.

Genting Malaysia shares closed at RM2.95 last Monday, valuing the company at RM16.6 billion.

Telecommunications group Axiata Group Bhd also had to bear a net loss of RM255.96 million in its fourth financial quarter ended December 2020, from a net profit of RM332.56 million a year ago, due to accelerated depreciation and write-off of its assets because of the acceleration of 3G shutdown across all operator companies. Revenue fell slightly by 1.5% year on year to RM6.26 billion.

However, UOB Kay Hian in a Feb 26 note says that stripping out accelerated depreciation for 3G in Malaysia and Indonesia, Axiata’s 4QFY2020 core net profit rose 20% year on year to RM319 million. The brokerage also pointed out that Axiata’s adjusted operating free cash flow for 2020 rose 73% to RM3 billion.

UOB Kay Hian raised its 2021 net profit forecast for Axiata by 7% to reflect a higher earnings base for PT XL Axiata Tbk, Dialog Axiata PLC and Smart Axiata Co Ltd, and maintained its “buy” call on the stock with a higher target of RM4.70, from RM4.50 previously.

Axiata shares closed at RM3.47 last Monday for a market capitalisation of RM31.8 billion.

Big-cap companies (market capitalisation of RM1 billion to less than RM10 billion)

Glove maker Kossan saw its net profit for the fourth financial quarter ended Dec 31, 2020, surge 789% year on year to RM542.5 million, backed by a 126% increase in revenue to RM1.3 billion. In a Feb 16 note, CGS-CIMB Research says Kossan is confident of raising its average selling prices further, until at least the third quarter of this year.

“At this juncture, Kossan expects another 50% quarter on quarter increase in average selling prices in the first quarter of 2021, despite raising prices by 55% quarter on quarter in 4Q2020,” the brokerage says.

CGS-CIMB Research maintained its “add” call on Kossan, with a target price of RM7.64. The brokerage likes Kossan for its “strong earnings prospects as it stands to benefit from the favourable supply-dynamics in the glove sector owing to Covid-19”.

Kossan shares closed at RM3.86 last Monday, which translates into a market capitalisation of RM9.8 billion.

Sarawak-based conglomerate Cahya Mata Sarawak Bhd (CMS) saw its net profit for the fourth quarter of its financial year ended Dec 31, 2020, surge more than 25 times to RM114 million, from RM4.5 million a year ago. This was mainly due to a remeasurement gain from the disposals of interests in SEDC Resources Sdn Bhd and PPES Works (Sarawak) Sdn Bhd. In October last year, CMS completed the 2% equity sale in both companies to Sarawak Economic Development Corp for RM17.5 million cash.

Revenue for the quarter, however, fell 29% year on year to RM206.7 million. In a Feb 17 note, RHB Research says earnings prospects for Cahya Mata Sarawak’s associates OM Materials (OMS) and Kenanga Investment Bank Bhd are turning more upbeat on the ferroalloy selling price rebounds and buoyant equity trading turnover year to date. The brokerage maintained its “buy” call on CMS, with a target price of RM2.90.

CMS shares closed at RM2.28 last Monday for a market capitalisation of RM2.42 billion.

Meanwhile, stock exchange Bursa Malaysia Bhd ended the year on a high, with a 130% year-on-year surge in net profit for the fourth quarter of its financial year ended Dec 31, 2020, to RM104.85 million. Quarterly revenue rose by 78% to RM230.7 million, thanks to growth in its securities and derivatives market segments.

AmInvestment Bank, in a Feb 3 note, raised its FY2021 and FY2022 earnings expectations for Bursa Malaysia by 6.3% and 1.9% respectively, to reflect higher effective clearing fee rate for the securities market.

The firm maintained its “buy” recommendation on Bursa Malaysia, with a fair value of RM10.30. The counter closed at RM9.07 last Monday for a market capitalisation of RM7.3 billion.

Losses continued for MAHB in the fourth quarter ended Dec 31, 2020 (4QFY2020), when it sank further into the red with a net loss of RM685.02 million against a net profit of RM29.51 million a year ago as Covid-19 battered the aviation industry. Quarterly revenue fell 80.4% to RM263.64 million.

“MAHB 4QFY2020’s core earnings, excluding a RM500 million impairment, was below expectations. The losses were also aided by substantial deferred tax credits, which are likely to be recognised over the next few years. While the street is focused on a recovery and a potential favourable new operating agreement with the Malaysian government, we believe this is fully priced in,” says UOB Kay Hian in a March 1 note on MAHB.

The brokerage maintained a “hold” call on the stock, with a target price of RM5.50. MAHB shares closed at RM6.01 last Monday for a market capitalisation of RM9.9 billion.

Mid-cap companies (market capitalisation of RM500 million to less than RM1 billion)

Glove maker Careplus Group Bhd was another beneficiary of the pandemic as its net profit expanded by a whopping 54-fold to RM42.2 million in the fourth quarter ended Dec 31, 2020, from RM783,000 last year. Revenue for the quarter rose 19% to RM129.33 million

Careplus shares closed at RM1.61 last Monday, valuing the company at RM885 million. Year to date, its share price has declined by 22%.

As for glove maker Rubberex Corp (M) Bhd, its net profit multiplied by 15 times to RM59.44 million in the fourth quarter ended Dec 31, 2020, from RM3.88 million last year. Revenue for the quarter more than tripled to RM152.83 million, from RM50.3 million a year ago.

Meanwhile, integrated building materials provider Chin Hin Group Bhd saw its net profit surge more than seven times to RM8.25 million in the fourth quarter ended Dec 31, 2020, from RM1.13 million a year ago, due to the progress of construction works which were earlier halted during the Movement Control Order (MCO) last year. Revenue for the quarter increased by 11% to RM311.26 million.

In a March 1 note, PublicInvest Research says it remains optimistic about the group’s prospects owing to the government’s planned focus on construction and infrastructure-related activities in the coming year, with growth also underpinned by a recovery in Chin Hin’s autoclaved aerated concrete (AAC) exports and precast concrete businesses, increased contributions from its associate, Solarvest Holdings Bhd, and the potentially synergistic acquisition of Chin Hin Group Property Bhd.

PublicInvest retained its “neutral” call on the stock, but with a higher target price of RM1.52, from RM1.24 previously. Chin Hin shares closed at RM1.72 last Monday for a market capitalisation of RM960 million.

Meanwhile, property developer Eastern & Oriental Bhd (E&O) saw its net profit for the third quarter of its financial year ending March 31, 2021, plunge 96% year on year to RM832,000, on the back of a 69% drop in revenue to RM36.52 million. This was due to a decline in its properties and hospitality segments, both impacted by the MCO and CMCO last year.

In a Feb 23 note, CGS-CIMB Research cut its FY2021 EPS forecast for E&O by 265% due to delays in core land sales but raised its FY2022 and FY2023 forecasted EPS by 19% to 36% to reflect the timing of land sale recognition and changes in project development timeline.

The firm maintained its “hold” call on E&O with a target price of 44 sen.

“We retain our ‘hold’ call despite its anticipated higher earnings in FY2022 and FY2023, given the challenging domestic property market, especially as E&O positions itself as a premium residential developer,” says CGS-CIMB Research.

E&O shares closed at 44.5 sen last Monday for a market capitalisation of RM636 million.

Light at the end of the tunnel

Further kitchen-sinking exercises and downgrades for corporates on Bursa cannot be ruled out in the near term, says RHB Research.

“Even so, such risks should be viewed as a postponement of economic and corporate earnings growth by up to two quarters. Equity markets remain supported by accommodative monetary policies, robust liquidity conditions and, further out, genuine light at the end of the tunnel — that is the vaccine — with the immunisation programme slated for completion by the first quarter of 2022.

“This falls well within our investment horizon. As inoculations gain traction, market psychology will start re-pivoting towards a post-pandemic scenario. We expect markets to be supported on the downside, but corrections should be seen as opportunities to gradually reposition into cyclical and value stocks,” the firm says.


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