Second-quarter earnings season a litmus test

Revisions likely on impact of inflation, policy responses

“We are expecting a 15% earnings decline in 2Q due to a fall in earnings of glove companies but we expect corporate earnings to be robust and grow by 2.1% in 2H22.”

Imran Yassin Md Yusof

PETALING JAYA : The second quarter (2Q) corporate earning season will act as a litmus test for analysts to revise earnings expectations for the second half of 2022 (2H22) and year 2023, as expectations grow that the inflation and policy responses will have an impact on economic growth.

Despite the FBM KLCI retracing some of its losses since mid-july on improved sentiment, the benchmark could face fresh pressure if index-linked counters’ 2Q earnings underperform analysts expectations.

“We are expecting a 15% earnings decline in 2Q due to a fall in earnings of glove companies but we expect corporate earnings to be robust and grow by 2.1% in 2H22.

“Our projections have factored in the economic developments thus far as we have maintained our 6% real gross domestic product (GDP) growth for this year,” said MIDF Research head Imran Yassin Md Yusof.

True to expectations, Hartalega Holdings Bhd yesterday posted a 96% year-on-year (y-o-y) drop in earnings to Rm88.3mil or 2.58 sen earnings per share (EPS) for its 1Q ended June 30 on lower sales and loss of pricing power.

Another test of earnings performance will come from Bank Negara’s release of 2Q GDP number on Friday, with the Malaysian Institute of Economic Research (MIER) stating that real GDP growth in the quarter must be above 6% y-o-y to ensure the economy is on track to grow by 5.8% in 2022 after growing by 5% in 1Q.

The research outfit noted that it may take more than two years to surpass the pre-covid output level in 2019.

Current investor sentiment is driven by the overarching theme of economic recovery in 2022, Imran said, adding that despite pockets of weakness, the recovery momentum has not stalled as evident by recent data.

Hence, while consensus EPS for FBM KLCI in 2022 remains unchanged, since July, EPS for 2023 has been revised lower by 2.02%, dragged down by the technology and telecommunications sector, which were downgraded by 2.36% and 1.86%, respectively.

Other sectors only saw minor revisions. The downgrade is likely correlated more to the external picture, which has turned softer with growth in the United States and the European Union expected to slow in response to policy measures, possibly tipping into a recession in 2023.

MIER, however, believes that sustained consumer spending will support Malaysia’s real GDP to grow at 5% to 6% in 2023.

Imran of MIDF added that a lower GDP growth number for next year will also be due to the base effect and normalisation of growth.

“As such, we expect at the current juncture that corporate earnings will continue to be robust.

“Of course, this does not take into account unexpected events such as the escalation of geopolitical tensions. Next year, we are looking at earnings growth of circa 15%,” he said.

Putting aside the high cost pressure and Cukai Makmur impact, the earnings outlook for most index-linked corporations remains good, with prices of commodities like crude palm oil remaining elevated while banks look set to benefit from the higher policy rate.

Exporters, meanwhile, could get a boost from the weaker ringgit.

Imran does not foresee the 15th General Election, which is due next year, will have any significant impact on corporate earnings per se.

“Where there is an impact will be the valuation of companies. However, we expect any price action will be after the election,” he added.