Consensus EPS likely to be revised down, catalyst for market derating

“We also do not discount the possibility of a country’s financial position being stretched.” Thus, Affin-Hwang Capital said there would be a significant one-off loss of demand that is not replaceable and Covid-19 will have lasting economic damage on the economy while dimming EPS outlook prospects.

“With so much uncertainty at this point, we thus believe it is too premature to factor in a V-shaped recovery as the Covid19 infection and mortality rates are still climbing and without a vaccine in sight,” it added.

“A prolonged pandemic could even lead to a L-shape recovery, in our view.

“As Malaysia’s GDP growth has only contracted twice over the past 20 years – during the Asian Financial Crisis (AFC) and Global Financial Crisis (GFC) – we believe that these would be good references to give a sense to the extent of the corporate earnings contraction during those periods, which fell by 60.1 per cent and 49.1 per cent, respectively.

“Interesting to note, we find that the magnitude of the decline on the KLCI had tracked the quantum of the earnings decline quite closely.” According to Bloomberg consensus, the street is still looking at a 2020E KLCI EPS growth of 2.69 per cent.

Having found that the KLCI tracks EPS growth closely, the KLCI’s year-to-date fall of 15.5 per cent implies either that the street is behind the curve in terms of its earnings cuts, or that the KLCI is expected to recover and end the year with a positive gain.

“In this environment, we however believe the latter is unlikely, given the ongoing downward revisions to global GDP growth and our in-house forecast of a GDP decline for Malaysia.

Consensus EPS is thus likely to be revised down, and be a catalyst for a market derating.

“Taking into account the GD P downgrade, a further OPR cut to 2 per cent, a lower oil price assumption of US$30 and a lower ringgit-US dollar of RM4.30, this leads to a sharper cut in AffinHwang Capital’s KLCI EPS growth to minus 12.7 per cent y-o-y from minus 4.7 per cent previously.

“For the rest of its coverage, the research firm cut its 2020E EPS growth to a decline of minus 14.7 per cent, from minus three per cent previously.”