Improvements in 2Q2022 results, but dark clouds persist
BURSA Malaysia-listed companies delivered an improved performance in the second quarter of this year (2Q2022) over the preceding quarter, as more corporates posted better results on both a year-on-year (y-o-y) and quarter-on-quarter (q-o-q) basis, likely owing to the normalisation of economic activities.
In 2Q2022, 60.1% of companies reported better earnings than a year earlier, compared with 55.3% in 1Q2022. The results were also largely improved on a quarterly basis, as 51.9% reported better results in 2Q2022 against 46.6% in 1Q2022.
Normalisation of economic activities, tapering of Covid-19 cases and the high prices of commodities such as crude palm oil (CPO) and crude oil boosted Malaysia’s economy. This, in turn, translated into better corporate earnings.
Challenges remain, however, largely because of persisting inflationary pressures. The latest increase in interest rates last Friday, which pushed the overnight policy rate to 2.5%, could dampen business activities.
Maybank Investment Bank Bhd analysts Anand Pathmakanthan and Wong Chew Hann observed in a Sept 2 report that macro challenges related to surging inflation, sharply rising interest rates and growing recession risks that have weighed on developed markets are now catching up in Southeast Asia.
“Operating margin pressures have been rising across a broad range of sectors, underpinned by increasing labour and raw material input costs, while a damaging combination of rising inflation and interest rates are eroding disposable incomes, and hence demand, going into 2H2022. Further, the tight fiscal situation means concerns about the sustainability of current inflation-capping subsidies are a major market overhang, the latter made worse by policy inertia/U-turns by a fractious governing coalition,” they said in the report.
The Maybank IB analysts add that while resilient external demand and strong bank sector fundamentals are key market supports, the market will struggle to find traction in the face of broadening growth and earnings stresses, as well as negative revisions stemming from an interrelated combination of margin squeeze and weakening end-demand.
“Policy flip-flops relating to subsidies have also raised market risk premium as the implied urgent fiscal situation will raise concerns about further earnings-sapping levies on the corporate sector akin to cukai makmur in Budget 2022,” they said in the report.
Looking back at 2Q2022, corporate earnings largely improved, with more companies reporting results that exceeded analysts’ estimates, compared with the January-to-March quarter.
CGS-CIMB said this led to a higher earnings revision ratio for companies under its coverage. Earnings revision ratio refers to the percentage of companies that reported earnings that exceeded expectations versus the percentage of companies that reported earnings that came in below expectations.
CGS-CIMB says its earnings revision ratio of companies under its coverage improved to 1.34 times in 2Q2022 from 0.92 times in 1Q2022, which was significantly better than the average 0.48 times for 2Q earnings revision ratio over the past 10 years.
“As such, the 2Q2022 revision ratio of 1.34 times is significantly better than the historical trend, which is positive, as analysts may have been cautious in their earnings projections on recovery from Covid-19,” said CGS-CIMB head of research for Malaysia Ivy Ng Lee Fang in the research house’s 2Q2022 earnings wrap report.
The ratio of companies under CGS-CIMB’s coverage that posted results above the research house’s expectations rose to 33% in 2Q2022 compared with 26% in 1Q2022, while the ratio of underperformers fell to 24% during the quarter from 28% in 1Q2022.
“This is broadly in line with our view that 2Q earnings for corporates will likely benefit from high commodity prices (CPO and crude oil) due to the ongoing Russia-Ukraine war and higher consumer spending due to pent-up demand, as well as Hari Raya and one-off EPF special withdrawal of RM10,000,” Ng said in the report.
According to CGS-CIMB, the outperformance came mainly from automotive players, conglomerates, services and transport infrastructure sectors. Sectors that disappointed included chemicals, industrials, shipping, and travel and leisure.
The core net profit of the 131 companies that had released their results as at Sept 3 grew 17% q-o-q on the back of higher CPO prices and improved consumer spending, according to CGS-CIMB. Earnings fell 11% y-o-y, however, owing to weaker earnings from glove players, Lotte Chemical Titan Holding Bhd and MISC Bhd, as well as higher taxes due to the one-off cukai makmur.
Meanwhile, 30% of the companies under MIDF Research’s coverage registered earnings that came in above the research house’s expectations in 2Q2022, compared with 25% in 1Q2022. However, negative surprises edged up slightly at 32% against 31% in 1Q2022. As such, MIDF Research said the percentage of companies with results that met expectations declined to 38% in 2Q2022 from 44% in 1Q2022.
The energy sector registered the highest percentage of positive surprises, at 75% of stocks under its coverage, while the healthcare, telecommunications and media sectors led the underperformers at 57% each.
The construction, consumer products and services, energy, financial services, plantation, property and technology sectors recorded improved earnings in 2Q2022 compared with the preceding quarter and previous corresponding quarter, the research house noted.
On the other hand, telecommunications, media and transport and logistics were sectors that registered both negative sequential and y-o-y earnings (as reported) growth percentages in 2Q2022.
Meanwhile, Maybank IB noted in its 2Q2022 earnings recap report that the core net profit of companies under its coverage declined 17% y-o-y, dragged by the glove, petrochemical, healthcare, non-bank financial institutions and technology sectors.
However, stripping out the impact from the earnings decline in the glove sector, the core net profit of companies under its coverage expanded 9% y-o-y. On a quarterly basis, core net profit increased 5% from 1Q2022.
“Positively, there were fewer PLCs with core earnings that fell short of our expectations compared with the preceding quarter,” Anand and Wong said in the report. “While earnings misses (relative to our forecasts) exceeded beats again, the ratio of misses-to-beats was lower at 1.2 times for 2Q2022 (versus 1.5 times in 1Q2022), with 27% of the core profit below our expectations, 22% above and 51% in line. This compared with 36% below, 25% above and 39% in line in 1Q2022.”
Lower profitability expected in 2023
Despite the largely positive 2Q2022 results, analysts remain cautious about corporate earnings this year. Several research houses have lowered their FY2022 earnings outlook for the companies under their coverage as well as the FBM KLCI.
Maybank IB has projected a higher 1.9% y-o-y core earnings decline for companies under its coverage, compared with an estimated decline of 1% in early June. For the FBM KLCI, the bank estimates a 6.1% decline in core earnings this year, compared with a 5.5% fall earlier.
The higher decline in estimated core earnings this year is because of the glove sector’s huge drop in net profit. For Maybank IB, excluding the glove stocks, its core earnings growth estimate for companies under its coverage is 12.6% in 2022. However, this growth estimate is also lower than the 13.2% pencilled in earlier, indicating that its analysts had been more bullish at the start of the year, until the 2Q2022 results changed their views.
Nevertheless, for 2023, the core earnings of companies under the bank’s coverage, excluding glove stocks, are estimated to grow by a higher quantum of 18.7%, compared with 17.1% estimated previously.
Including glove stocks, the core earnings of companies under Maybank IB’s coverage is estimated to grow 17.4% in 2023, which is still higher than the previously estimated 15.9%. The FBM KLCI’s core earnings are expected to grow 13.5% in 2023.
According to Maybank IB, most sectors are expected to post higher earnings in 2022E except gloves (-86% y-o-y), petrochemicals (-22%), utilities (-7%), non-bank financial institutions (-19%), media (-19%, led by Astro Malaysia Holdings Bhd), shipping (-13%, led by MISC) and ports (-14%, led by Westports Holdings Bhd).
Core profit growth in the banking and plantation sectors is expected to be smaller this year after a strong 2021, Maybank IB forecasts, with the former anticipated to register a growth of 4% y-o-y and the latter, 7%. Meanwhile, core earnings for telcos are expected to be flattish, with a 0.7% y-o-y growth, while gaming counters are expected to return to the black this year from losses in 2020/21. Losses in the aviation sector are expected to narrow this year.
CGS-CIMB also downgraded its core net profit estimates for the component stocks of the FBM KLCI this year, projecting a decline of 1.8%, compared with a decline of 0.1% previously. But it raised its estimates for FY2023, pencilling in a growth of 12.2%, from 10.7% previously.
The research house anticipates that Genting Malaysia Bhd, Press Metal Holdings Bhd, Hartalega Holdings Bhd, Genting Bhd and MISC will post much lower earnings this year. However, the earnings of Hong Leong Bank Bhd, CIMB Group Holdings Bhd, PPB Group Bhd, Telekom Malaysia Bhd and Hong Leong Financial Group Bhd are estimated to be higher than previously forecast.
MIDF Research tweaked higher its aggregate 2022 and 2023 earnings estimate and forecasts for the constituents of the FBM KLCI under its coverage, by 1.4% to RM65.4 billion and 0.6% to RM68.4 billion respectively.
“The higher aggregate figures for FY2022 and FY2023 were contributed mainly by upward earnings revisions of plantation (pursuant to the recent change to CPO target levels), financial services and telecommunications constituents, but moderated by downward revisions of healthcare, transport and utilities constituents. Likewise, the aggregate FY2022 and FY2023 earnings estimate and forecast of the stocks under MIDF Research’s universe were revised higher by 4.3% to RM83.3 billion and by 1.3% to RM88.6 billion respectively,” the research house said.
Recommended sectors and stocks for 2H2022
Maybank IB recommends mid-cap banks and insurers, as well as automotive, aviation, gaming, healthcare, petrochemical and technology players. It remains underweight on glove stocks, following the 2Q2022 results, and neutral on sectors such as construction, consumer, electronic manufacturing services, large-cap banks, media, mid-cap oil and gas, plantations, ports and shipping, real estate investment trusts, property, telecommunications and utilities.
Among the banking stocks, Maybank IB has a “buy” call on Hong Leong Bank, RHB Bank, Alliance Bank (M) Bhd and Allianz Malaysia Bhd. It also has a “buy” call on Bermaz Auto Bhd, Petronas Chemicals Group Bhd, Kuala Lumpur Kepong Bhd and Mega First Corp Bhd, among others.
Over the past three months, CGS-CIMB has upgraded 12 stocks, higher than the three upgrades in the quarter before, Ng said in the 2Q2022 earnings wrap report, mainly because of more attractive valuations, following recent share price retracements or improved earnings prospects.
Stocks that were upgraded to “add” included Affin Bank Bhd, Bumi Armada Bhd, DKSH Holdings (Malaysia) Bhd, Duopharma Biotech Bhd, Eco World Development Group Bhd, Hap Seng Plantation Bhd, KPJ Healthcare Bhd, Maxis Bhd, Power Root Bhd and Velesto Holdings Bhd.
But the research house also downgraded more stocks over the past three months — 15 in total — compared with 11 in the previous results review.
The key downgrades to “reduce” are Hartalega, Lotte Chemical Titan and Panasonic Manufacturing Malaysia Bhd. Stocks that were downgraded to “hold” from “add” include Farm Fresh Bhd, Kossan Rubber Industries Bhd, Malaysia Pacific Industries Bhd and Malayan Cement Bhd.
Earnings estimates upgrade led by plantation and banking stocks
Plantation companies and banking stocks outperformed the broader market — and other FBM KLCI component stocks — in the second quarter (2Q2022) as their earnings benefited from soaring crude palm oil (CPO) prices and rising net interest margins respectively.
CGS-CIMB Securities Research, for instance, listed Hong Leong Bank Bhd (HLBB), CIMB Group Holdings Bhd and Hong Leong Financial Group Bhd (HLFG) among the top five gainers in its earnings forecast upgrades for 2022, alongside PPB Group Bhd and Telekom Malaysia Bhd.
In a Sept 3 strategy note, CGS-CIMB said it had revised upwards the 2022 earnings estimate of HLBB by RM214.2 million and CIMB’s by RM203 million. HLFG’s earnings estimate was raised by RM51.5 million.
The upward revision to the earnings estimates of HLBB and CIMB is expected to impact 0.3% of the FBM KLCI’s earnings this year while the impact of HLFG’s is expected to be 0.1%.
Being the third largest bank in the country after Malayan Banking Bhd and Public Bank Bhd, CIMB has a weightage of 10.3% on the benchmark index’s estimated earnings for 2022. HLBB’s earnings are expected to contribute 3.5% to the FBM KLCI’s earnings this year, while HLFG’s earnings are anticipated to contribute 1.6%.
“We regard HLBB’s 2QCY2022 financial performance to be the best among Malaysian banks, with strong performance in almost all areas,” Ivy Ng Lee Fang, head of research for Malaysia at CGS-CIMB, said in the report.
Among the positive takes for HLBB was its loan growth of 8% year on year (y-o-y) as at end-June — the second highest in the sector, an explosive 41.1% y-o-y jump in associate contribution from the Bank of Chengdu, and the credit charge-off rate of seven basis points, which was the lowest in the sector, excluding the net write-backs by certain banks, said Ng.
CGS-CIMB is projecting a healthy core net profit growth of 12.5% for HLBB for the financial year ending June 30, 2023, underpinned by a 13.4% drop in tax expense (without cukai makmur), an 8% rise in Bank of Chengdu’s contribution and a 6.3% increase in net interest income, supported by robust loan growth and positive impact from Bank Negara Malaysia’s policy rate hikes.
“We also see Hong Leong Bank as one of the most defensive banks against the credit risks from various headwinds, including the Covid-19 pandemic and heightened inflation, as its asset quality is one of the best in the sector,” Ng said in the report.
Meanwhile, the plantation sector saw the biggest upwards earnings revisions among the FBM KLCI constituent stocks by MIDF Research. The sector’s earnings were revised upwards by RM2.15 billion for 2022 and RM1.24 billion for 2023.
In total, MIDF Research revised its 2022 earnings estimate for the FBM KLCI to RM65.38 billion from an earlier estimate of RM64.48 billion, or a 1.4% change.
In 2Q2022, the aggregate earnings of the FBM KLCI’s constituent members in the plantation sector increased 18.4% y-o-y and 35.4% q-o-q to RM1.96 billion. After consumer products, the sector recorded the second highest jump in earnings on both an annual and quarterly basis among the FBM KLCI members.
Overall, the performance of the plantation counters under MIDF Research’s coverage was mixed, with 57% within expectations, 29% exceeding expectations and 14% coming in below expectations.
The big planters such as Sime Darby Plantation Bhd, Kuala Lumpur Kepong Bhd, FGV Holdings Bhd, IOI Corp Bhd and Genting Plantations Bhd, as well as TSH Resources Bhd and PPB, posted resilient earnings, driven by fatter margins on the back of higher average CPO prices realised. CPO prices hovered at about RM6,000 per tonne in 2Q2022.
Nevertheless, MIDF Research observed that the majority of palm oil producers experienced lower fresh fruit bunch (FFB) production and yield in the first half of the year due to an unusually heavy rainfall pattern in January to early June, which was compounded by an acute shortage of harvesters.
“We expect the production level to slightly improve tracking high cycle months (three to four quarters ahead), on better weather conditions as well as the return of foreign workers in early August,” MIDF Research said in its 2Q2022 earnings wrap report dated Sept 2.
It noted that the vegetable oil market’s condition is influenced by the subdued production outlook for soybean due to the ongoing drought in the US and South America. However, there is a positive development for sunflower oil as the three Black Sea ports in Ukraine have reopened, prompting the possibility of about 100 to 150 cargo ships allowed out per month, which points to a gradual improvement in the country’s agricultural exports, it added.
“The CPO price is expected to trade sideways at about RM4,000 to RM4,500 per tonne, benefiting from the price disparity between CPO and soybean oil, which [was] around US$531 in July, based on US Department of Agriculture data. However, we also recognised its downside risk on fragile demand outlook on the back of inflationary pressures, coupled with tight household spending on high base interest rate locally and globally,” said MIDF Research.
Note that the CPO price has fallen 43.28% from its all-time high of RM6,326 per tonne on April 29 to RM3,583 per tonne last Thursday. Since September, the CPO price has consistently been trading at below RM4,000 per tonne, and is trending downwards. Will the plantation sector continue to shine in the second half of 2022 and in 2023?
Improvements in 2Q2022 results, but dark clouds persist