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Earnings projection

PETALING JAYA: After a gloomy first half, Corporate Malaysia is back on a recovery path as businesses generally expect improved earnings in the July to December period.

There are headwinds but the worst seems to be over, with the disappointing earnings of the second quarter a thing of the past.

While some sectors could potentially witness a weaker earnings recovery before posting more meaningful bottom line improvements in 2021, the glove manufacturing and technology sectors look to be at the forefront of improved earnings.

According to fund manager Danny Wong, (pic below) glovemakers are likely to register stronger net profits compared with the April-June period.

“I think the earnings performance of the glovemakers could outperform expectations, ” he told StarBiz.

Thanks to the sharp surge in demand for medical gloves, all seven listed glove companies on Bursa Malaysia posted Astronomical growth in earnings, including Careplus Group Bhd, which has been loss-making over the past several years.

Careplus leapt into profitability in the April-June 2020 period, with a net profit of RM36.2mil compared with a net loss of RM1.96mil a year earlier.

The two biggest glove players, Top Glove Corp Bhd and Hartalega Holdings Bhd, have recorded a 366% and 134% year-on-year jump in earnings respectively.

Wong, who is also chief executive officer of Areca Capital, said the technology sector would likely see stronger bottom line growth in the second half of the year, mainly due to stronger sales from pent-up demand after Covid-19 containment measures disrupted previous orders.

“In addition to glovemakers and technology players, exporters such as furniture makers could also recover faster than other businesses as product demand returns to normalcy and external conditions improve, ” he said.

Wong also said companies in the plantation sector would likely remain profitable in the second half, with strong crude palm oil prices. However, sectors such as hospitality, construction and property are likely to continue seeing depressed earnings.

Meanwhile, an analyst with a local investment bank said construction players would see a mild recovery in the July-December period.

“Consumer sector earnings will also improve as demand recovers gradually. However, I foresee the glove manufacturing, technology and plantation sectors to be outperformers in the next two earnings seasons, ” he said.

The banking sector, he said, will remain depressed as banks undertake provisions after the six-month loan moratorium which ends in September.

“The potential overnight policy rate cut will also dampen margins, ” he said.

AmInvestment Bank Research analyst Joshua Ng said, in a note, that apart from technology and healthcare sectors, the power, seaport, airport and automotive sectors are poised to benefit from the pent-up demand.

“The recovery in airlines will be bumpier given the urgent need to recapitalise their balance sheets after months of massive losses amid the collapse in air travel.

“Similarly, for the oil and gas industry, while China’s demand for oil is recovering as its economy reopens, the fact remains that the world is chronically over-supplied with oil, ” he added.

Commenting on the second quarter earnings season for the FBM KLCI component stocks, he said the results were more in line with expectations, as compared with the previous quarter.

This was because the market has begun to have a better idea of the impact of the pandemic on corporate earnings.

“Nonetheless, the second quarter results were generally mixed with 21%, 54% and 25% beating, meeting and missing our projections respectively. This compares with 10%, 50% and 40% for ‘above’, ‘within’ and ‘below’ respectively in the first quarter.

“As against the market consensus, similarly, the numbers were also more in line with expectations, ” he said.

After taking into account the second quarter earnings, Ng projected FBM KLCI earnings to contract by 19.1% in 2020 compared with a 13.6% contraction forecast by the research house two months earlier.

“But we expect a stronger rebound of 26% in 2021 from 19.7% (target) previously, led by a broad-based recovery across the sectors, ” he said.

Meanwhile, BIMB Securities Research said the FBM KLCI aggregate earnings are forecast to fall by 14.6% this year, followed by a 21.1% growth in 2021.

“The just-ended earnings season for the second-quarter, not surprisingly, is setting the tone for the stock market in the short-term, ” it said.


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