Op­ti­mism driv­ing mar­ket val­u­a­tion

High PES de­spite washout sec­ond-quar­ter num­bers

The Star Malaysia - StarBiz - - News - By ROYCE TAN royc­etan@thes­tar.com.my

“By and large for cor­po­rate Malaysia, I won’t ex­pect Q2 re­sults to be a sig­nif­i­cant de­r­at­ing cat­a­lyst. Not yet.”

Vin­cent Khoo

PETALING JAYA: It will be no sur­prise that the sec­ond-quar­ter (Q2) cor­po­rate earn­ings will be a colos­sal washout as listed com­pa­nies start to re­lease their fi­nan­cial re­sults this month.

The months of April to June took on the full im­pact of the move­ment con­trol or­der (MCO) and the global eco­nomic down­turn due to the coro­n­avirus (Covid-19), which will cul­mi­nate in the worst quar­terly re­sults the mar­ket has ever seen.

In such an un­prece­dented sit­u­a­tion, cor­po­rates might also un­der­take kitchen-sink­ing strate­gies since noth­ing is go­ing to look good for most of them.

Given the for­ward-look­ing na­ture of the stock mar­ket, all th­ese neg­a­tiv­i­ties would have been priced in, es­pe­cially dur­ing the crash of March 19, but the FBM KLCI, the bench­mark in­dex of Bursa Malaysia, has re­bounded way off its lows and its val­u­a­tion was at the up­side, ahead of most ma­jor mar­kets in the re­gion.

Go­ing by Bloomberg’s data, the in­dex car­ried with it a price-to-earn­ings (PE) ra­tio of 20.49 times, a level usu­ally seen dur­ing bull run days as com­pared to nor­mal lev­els be­tween 16 and 18 times.

This placed the FBM KLCI ahead of Sin­ga­pore’s Straits Times In­dex (STI) with a PE of 14.38 times, the Jakarta Stock Ex­change Com­pos­ite In­dex (JKSE) at 17.92 times and the Stock Ex­change of Thai­land (SET) In­dex at 19 times.

Even Hong Kong’s Hang Seng In­dex has a PE of only 11 times. The FBM KLCI is only be­hind Ja­pan’s Nikkei 225 and South Korea’s Kospi with PES of 29.50 times and 28.41 times, re­spec­tively.

MIDF head of re­search Im­ran Yassin Md Yu­sof said what will be im­por­tant is the guid­ance given by the cor­po­rates, as this will pro­vide clues on the earn­ings tra­jec­tory go­ing for­ward.

“While the mar­ket has re­bounded strongly, we be­lieve that it is pric­ing in a blue sky sce­nario such as the ces­sa­tion of Covid-19 and the to­tal re­cov­ery of cor­po­rate earn­ings.

“We opine that this is too op­ti­mistic, as the pan­demic con­tin­ues un­abated and this will surely have an eco­nomic im­pact, and thus, af­fect cor­po­rate earn­ings go­ing for­ward,” he said.

Im­ran added that the Q2 cor­po­rate earn­ings are ex­pected to be the weak­est they have seen in many years, with con­trac­tions on both se­quen­tial year and quar­ter ba­sis.

“An­other as­pect of the Q2 cor­po­rate earn­ings is that it might af­fect short-term in­vestor sen­ti­ment. With all th­ese com­bined, we be­lieve that there will be an­other mar­ket correction,” said Im­ran.

UOB Kay Hian head of re­search Vin­cent Khoo shared the same view, say­ing that Q2 be­ing a washout quar­ter was al­ready well an­tic­i­pated and share prices would gen­er­ally re­act neg­a­tively only if the out­look of the com­pa­nies con­tin­ued to de­te­ri­o­rate or highly chal­lenged.

“So that’s the case for in­dus­tries such as aviation, we all know th­ese com­pa­nies are not out of the woods whereas for most com­pa­nies in­clud­ing banks at this stage, I wouldn’t ex­pect much down­side in the near term be­cause their ex­pec­ta­tions are not wors­en­ing yet.

“By and large for cor­po­rate Malaysia, I won’t ex­pect Q2 re­sults to be a sig­nif­i­cant de­r­at­ing cat­a­lyst. Not yet,” he said.

Asked if the earn­ings growth would match FBM KLCI’S high PE, Khoo said 2020 earn­ings would not be a good ref­er­ence point due to two rea­sons, one be­ing that a lot of cor­po­rate earn­ings were ar­ti­fi­cially shell shocked dur­ing the MCO pe­riod.

Sec­ondly, the 2020 earn­ings have not fully cap­tured the sen­sa­tional growth from the glove stocks.

“If you look for­ward to 2021, val­u­a­tions may not look ex­pen­sive, but bear in mind that the earn­ings of glove coun­ters are at the same time, not so sus­tain­able.

“There­fore, in the­ory, if you roll for­ward to 2021, val­u­a­tions should be be­low their means,” he said, adding that per­sonal pro­tec­tive equip­ment (Ppe)-re­lated com­pa­nies will con­tinue to do well for a good part of 2021 due to their for­ward sales that were locked in.

How­ever, in the case of the main street such as banks, the sta­tus is quite un­cer­tain with no clear signs of how the post-mora­to­rium non-per­form­ing loan (NPL) fig­ures were go­ing to look like, and this could post some down­side to the earn­ings forecast.

While the global Covid-19 in­fec­tion rate, es­pe­cially in the United States, is not lev­el­ing off just yet, Khoo noted that it was on a down­trend and if that ac­cel­er­ates, it will take off a bit of hot air from rub­ber glove coun­ters, which would im­pact the in­dex.

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