PublicInvest Research

Author: PublicInvest   |   Latest post: Wed, 21 Oct 2020, 10:11 AM


2Q 2020 Result Round-Up - Another Weak Quarter

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Another Weak Quarter

What happened: The 2QCY20 reporting cycle coincided with the worst of economic shutdowns as the various movement control orders punched significant holes in business prospects. Earnings reports were unsurprisingly poor, yet again, though it is likely we have seen the worst there is barring a second-wave infection which may entail targeted shutdowns. Earnings surprises from business-related improvements were noticeably lacking, though not a surprise. Earnings disappointments were aplenty despite what we thought had already been sufficiently accounted for post 1QCY20 cuts. Sectors most vulnerable to “economic standstills” like banks (2 misses of 4 under coverage), property (5 misses of 8 under coverage), REITs (2 misses of 3 under coverage), airlines (2 misses of 2 under coverage) and gaming (3 misses of 3 under coverage) were the standouts.

Earnings cuts (22) more or less mirrored the number of disappointments (26) again. Banks’ earnings cuts were to reflect respective managements’ higher credit cost assumptions, suggestive of potentially weaker repayment capabilities ahead and reinforcing the notion of weaker business prospects ahead. This incidentally forms the basis of our many downward earnings adjustments.

What we see: The current result reporting cycle can be deemed as dire, with relatively noticeable cuts to significant market-moving sectors in the benchmark index. Adjustments were seen in banks (due to higher credit cost assumptions) and gaming (due to worse-than-expected impact from movement lockdown and business shutdowns), though partly mitigated by recent upward revisions in plantations (due to higher CPO price assumption). Earnings growth assumption for 2020 and 2021 are now -21.4% (@ 1QCY20: -12.8%) and +26.2% (@ 1QCY20: +15.9%) respectively, revisions more telling in 2020 due to prevailing weak conditions

While adjustments to earnings this current quarter should result in a reduction of our end-2020 FBM KLCI target to 1,430 points, we are maintaining our expectation of a 1,480 point closing this year-end owing to liquidity-driven “exuberances”. The market appears to still be underpinned by expectation at this juncture – expectation of a V shaped recovery in earnings, expectations of a V-shaped recovery in economic growth. The flush liquidity amid interest rates which have been cut to all-time lows, conditions we last saw in 2008/2009, is feeding the hunger for investment returns hence the market not reacting particularly negatively to supposedly “bad” earnings reports, this quarter and the last (1QCY20).

The market remains highly susceptible to external shocks nonetheless. 2020 being a wash-out year, earnings-wise, is a given. With no distinct clarity on economic growth prospects apart from optimism of recoveries, the market will remain a trading-oriented one amid liquidity that remains flush.

For sectors – manufacturing, banks, construction and power (renewables) may garner interest in 2021 (page 18).

For stocks, we retain our preference for smaller-capitalized names with strong growth stories, near-term challenges notwithstanding, namely Johore Tin, Magni-Tech Industries, Mega First, Sarawak Plantations, Serba Dinamik, SKP Resources, Chin Hin Group and D&O Green Technologies.

Source: PublicInvest Research - 2 Sept 2020

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