Inflation seen to impact 3Q results

Market uncertainty forecast to sustain

“The ratio of companies posting results above our expectations rose to 33% in the 2Q22 results season from 1Q22’s 26%, while the ratio of underperformers fell to 24% compared to 28% earlier.” CGS-CIMB Research

PETALING JAYA: Most companies reported decent second-quarter (2Q22) results, but inflationary pressure is likely to dampen the 3Q22 performance.

In a results’ wrap-up report to clients, Hong Leong Investment Bank (HLIB) Research said for the recently concluded 2Q22 results season, of the 117 stocks within its coverage, 52%

came in within expectations, 26% below and 22% above estimates.

“When stacked against consensus estimates, 49% were in line, 21% below and 30% above,” it said.

It noted that the US Federal Reserve (Fed) had made it clear that fighting inflation was its top priority.

The Fed had said that even if some pain was required, it would continue raising rates and shrinking its balance sheet for some time, said HLIB Research.

“Until a shift in the Fed’s tone happens, coupled with domestic election fluidity, we expect continued market choppiness,” it added.

CGS-CIMB Research in its report said the ratio of companies posting results above its expectations rose to 33% in the 2Q22 results season from 1Q22’s 26%, while the ratio of underperformers fell to 24% compared to 28% earlier.

It said in 2Q22, consumer, property and real estate investment trust companies accounted for 36% of total companies that beat expectations while the glove, shipping, chemical and gaming sectors posted weaker-than-expected earnings.

Our earnings revision ratio (percentage of companies that reported earnings that exceeded expectations as opposed to the percentage of companies that reported earnings that were below expectations) improved to 1.34 times in 2Q22 against 0.92 times in 1Q22 and 0.53 times in 2Q21, CGS-CIMB Research said.

It said the quarter-on-quarter improvement was due mainly to a higher ratio (33% of the companies it covers) posting better-than expected earnings in 2Q22.

Cumulative first-half 2022 aggregate earnings of companies under its coverage declined by 10.9% year-on-year while 70.4% reported an earnings improvement.

“We project more muted sequential earnings in 3Q22 as demand could weaken amid rising inflationary pressure,” CGS-CIMB Research said.

The research house said following its latest earnings revision, it now estimates the FBM KLCI core net profit to be down by 2% for 2022 and higher by 12% for 2023.

HLIB Research, meanwhile, noted in its report that during 2Q22, notable positive result surprises mainly came from sectors related to discretionary spending such as automotive as well as brewers and consumer.

“On the flip side, disappointments largely stemmed from construction due to elevated material costs, the labour shortage and weak job flows; transport, mainly the aviation sector, and to a lesser extent, gloves, property and real estate investment trusts.

“Compared to the preceding quarter of 1Q22, there was a reduction in both disappointments and positive surprises, while the proportion of those coming in line rose from 50% to 52%.

“Consequently, from a ratio perspective, this remained unchanged sequentially at 0.87 times.”

Post-2q22 results, we now project 2022 and 2023 FBM KLCI core earnings growth to be negative 7.5% and 7.7% from negative 4% and 6.6% earlier, HLIB Research said.