Earnings seen sustaining recovery momentum in 2H
A mixed bag at the moment, but it could move into progressive strength as the second half of 2022 dawns.
This appears to be the resounding theme for corporate earnings among the investment community as the reporting season for the second quarter of 2022 year comes to an end.
Fund managers who spoke to Starbizweek are cautiously optimistic of corporate earnings moving forward. This is premised on the firm and better management of Covid-19.
However, there might be continued weakness in some other industries, they note.
Fund managers say the second quarter could have seen a greater jump in corporate earnings if not for the one-off Cukai Makmur which tapered off gains from the industries that were able to bounce back from the pandemic.
They point out that earnings appear to be resilient overall despite little pockets of turbulences such as rising input costs, continued supply chain disruptions and the weak ringgit.
CGS-CIMB Research says that out of the 51 companies that have reported results for the second quarter (reported until Aug 19), 29%, 39% and 31% posted results which were above, in-line and below expectations, respectively.
“The recent results were mostly within expectations. It is also a mixed result for the underperformers and those which are above expectations,” asset manager Areca Capital Sdn Bhd’s chief executive officer Danny Wong tells Starbizweek.
Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong says corporate earnings released so far for the second quarter are largely in line with expectations.
“The banks have released decent results with expectation of single digit earnings growth in the year 2022, supported by improving net interest margins. But without any Cukai Makmur next year, the banks are expected to register higher earnings growth,” Yong tells Starbizweek.
However, he says results are mixed for the oil & gas (O&G) sector with companies in the upstream segment, including those providing maintenance services having delivered better than expected results so far.
“Overall, the O&G sector largely delivered earnings well within expectations,” he says.
Meanwhile, Yong says the plantation sector has delivered earnings in-line with expectations despite facing labour shortages that led to lower yields.
“Despite having high crude palm oil (CPO) prices, the plantation sector largely delivered earnings which were in-line. Going forward, the return of foreign labour should revive production output although CPO prices have come off its recent peak,” Yong says.
For the rubber glove makers, he notes that these companies continue to report poor earnings as selling prices continue to deteriorate.
Supply-demand imbalances are likely to continue for some time, and the industry will likely remain unattractive due to stiff price competition, Yong says.
He notes that technology stocks had registered healthy earnings growth and this is largely within the market’s expectation.
“However, there are concerns that growth might slow down due to lower external demand amidst an inventory build up,” Yong says.
Meanwhile the food and beverage (F&B) sector reported commendable earnings, with a number of companies reporting earnings that were above expectations, Yong adds.
“This suggests that the F&B companies were able to pass on higher production costs to their customers. These players will likely benefit if and when raw material costs soften following lower commodity prices and as supply disruptions ease,” Yong says.
Yong expects the year-on-year economic recovery to continue into the third and fourth quarters.
“This would support travel and tourism related companies as more countries are expected to relax their border controls,” he says.
Meanwhile, Areca’s Wong says “The technology sector is likely to deliver slightly better results in the second half from the new smartphone launch cycle, lesser labour constraints and lesser impact from lockdowns in China for those with operations in China”.
He notes that consumer discretionary companies are likely to deliver better results compared to the first half benefiting from the full economic reopening which had only begun in the second quarter.
“Plantations, O&G and other commodity based sectors are dependent on commodity prices of which are expected to be lower in the second half of the year,” Wong points out.
Meanwhile he also agreed that the rubber glove sector will most likely see weaker results for the rest of the year on declining average selling prices.
“I am positive on sectors that benefit from recovery and reopening of economies in the fourth quarter, also selected tech players which will continue to do well,” Wong says.
Rakuten Trade’s head of equity sales Vincent Lau is more optimistic of the outlook moving forward notwithstanding several wildcards such as the Federal Reserve’s decision on interest rates in the United States and Covid-19 lockdowns in China.
“The second quarter results season has seen most companies having either met expectations or beating it. Generally most of the companies are doing alright,” Lau tells Starbizweek.
Lau notes catalysts for better earnings prospects could come from Budget 2023.
Meanwhile abrdn Islamic Malaysia Sdn Bhd’s CEO Gerald Ambrose says while there were some hiccups to earnings such as the Cukai Makmur and the weaker ringgit, there were also signs of strength such as resilient loan demand and the normalised footfall at malls.
“All these things look encouraging for the rest of this year in terms of earnings outlook. Generally, we could see some 13% to 14% growth in earnings per share on average next year with inflation being a wildcard,” said Gerald.
He also notes Malaysia is a diversified country in terms of its economy which is one of its main salient strengths that could support further fund flows.