Corporate results will be keenly watched in Q2

PETALING JAYA: The battle against the Covid-19 pandemic is still ongoing with no end in sight yet as Malaysia heads back into a strict movement control order (MCO 3.0), though not as restrictive as last year.
As most economic sectors remain open with strict standard operating procedures (SOPs) in place, one thing that is certain is the lows of the second quarter (Q2) of 2020 will not happen again.
The financial results for Q1 of 2021 that are now starting to trickle in on Bursa Malaysia are pointing towards a positive recovery, some of which may even surpass expectations.
Out of the 184 companies that have posted their results since last month until the market close at 5pm yesterday, 131 or 71.2% recorded a year-on-year (y-o-y) improvement. In terms of a quarter-on-quarter (q-o-q) performance, 104 companies or 56.52% posted an increase.
There were actually 33 record high quarterly revenues and 26 highest quarterly net profits.
Public Bank Bhd, the second-largest bank in the country in terms of market capitalisation, seemed to have set the tone for the sector after posting its highest ever quarterly net profit of RM1.53bil for the period ended March 31, a 15% jump y-o-y.
Livestock producer Leong Hup International Bhd, on the other hand, recorded its highest quarterly revenue of RM1.68bil with a net profit of RM70.33mil, also its highest quarterly result.
MIDF head of research Imran Yassin Md Yusof (pic, below) said in general, corporate earnings for Q1 of 2021 will be better than Q1 of 2020.
Noting that the first MCO was only in the last two weeks of March last year while MCO 2.0 was over a longer period in Q1 of 2021, the latter was less restrictive in terms of allowing economic activities to continue, providing support to earnings in the quarter.
The quarter will be skewed by a strong performance of the glove sector. While Q1 of 2020 saw earnings decline by around 27.7% y-o-y (using the calendarised Q1 of 2020 combined earnings of FBM KLCI component companies as proxy), we expect earnings to approximately double in Q1 of 2021, led by the earnings jump of glove companies.
It will be a mixed quarter. Companies that rely on retail might be affected by MCO 2.0, such as retail REITs and consumer discretionary. We expect earnings of the healthcare and tech sectors to be robust, he told StarBiz yesterday.
Banks are also expected to see an improvement in earnings y-o-y and a sequential quarter basis in Q1 of 2021 according to Imran, due to lower provisions and improvement in net interest income (NII) as the effect of the overnight policy rate (OPR) cuts would have normalised. He added that the strong growth in CASA will also lend support to NII.
Amidst all the optimism from the Q1 of 2021 corporate earnings, this may not flow to Q2 of 2021 with the MCO 3.0 weighing on expectations, but this would only be a temporary setback or a slight delay of an imminent economic recovery.
Rakuten Trade head of equity sales Vincent Lau (pic above) said moving on to Q2, corporate earnings will be impacted slightly by the stricter MCO 3.0 but nothing as bad as Q2 of 2020.
Basically, its just a minor delay in our economic recovery and sectors such as F&B, retail, tourism and hospitality will continue to be affected. The high number of Covid-19 cases daily is worrying but with the stricter SOPs and the ongoing vaccination drive in place, we believe the figures may peak soon and will start tapering off, he said.
Meanwhile, Imran said MIDF postulated that MCO 3.0 would not put too much of a dent on corporate earnings, given that economic activities were allowed to continue.
Having said that, we are cognisant of the fact that markets will likely be volatile at the current juncture. However, with the expectations that MCO 3.0 might alter the trajectory of Malaysias economic recovery in only a slightly negative way and with the trajectory of the FBM KLCI to remain, we do not see any compelling reason to change our view of the market and our stock picks as highlighted in our Q2 of 2021 outlook, he said.
TA Securities Research said in its economic update report yesterday that it assumed a potential loss of RM600mil a day due to MCO 3.0, which could drag the real gross domestic product (GDP) growth lower at 14.5% y-o-y.
Should the MCO 3.0 be extended by another 14 days or until end-June 2021, it predicted a greater adverse impact to the Q2 GDP, which could see a weaker growth of only 11.6% and 9.8% y-o-y, respectively.
The research house added that although no more stimulus plans were predicted in the near term, a key question that remained was, how much the country has left for further direct fiscal support from the government before there is a need to raise the statutory debt ceiling.
The 1.5% of GDP gap between 58.5% and the 60% statutory debt ceiling works out to be roughly RM22.8bil.
Should such a situation be warranted, we expect participation from the private sector, it said.