After a stellar Q2, what’s the next step?
For starters, the market is aware that earnings expectations for this year are extremely bullish, mainly due to the weak base effect last year.
Therefore, year over year (year-on-year) profit momentum for the year is expected to be strong assuming Malaysia moves away from lockdowns as the vaccination campaign takes precedence and Malaysia will achieve the much-talked-about goal. on collective immunity by next month.
As we know, the economic performance of the second quarter of 2021 was much better than expected, with the country’s economic output increasing by 16.1% year-on-year, reversing the deep 17.1% drop in the economic contraction there. is one year old.
Nonetheless, the performance of Q2’2021 was somewhat deflated by the government’s announcement to enter a full movement control order since early June, although essential services have been allowed to operate.
Therefore, it was not surprising that on a seasonally adjusted basis, the period Q2’2021 saw a contraction in gross domestic product (GDP) of 2% on a quarterly basis (qoq).
Worse, June saw economic activities reverse the positive momentum with a 4.4% decline yoy.
With second-quarter 2021 GDP data well above the market forecast of a 14.1% year-on-year expansion, compiled by Bloomberg from a survey of 19 economists, the dynamics of second-quarter earnings also followed the recovery of the national economy.
Of course, as last year’s Q2 period was a low point, we saw Q2 profits jump sharply as profits rose 157.2% yoy but just 3.7% higher. on a quarterly basis.
Compared to the previous season of the first quarter 2021, the second quarter performance was much stronger year-on-year, as the period of the first quarter 2021 saw profit growth of 66% year-on-year.
Nonetheless, quarterly momentum has been slower, with 3.9 percent growth in the second quarter being lower than the stronger 18.5 percent quarter-on-quarter growth in the previous quarter.
However, despite the strong earnings momentum, the ratio of profits of companies that surprised the market to disappointments fell again, with around 30% of companies reporting below-expectations versus 24% higher profits.
That translates to a disappointment-to-earnings ratio of 1.28 times, which is higher than the 1.07 times in the previous quarter and the fourth quarter 2020 reading of just 0.48 times.
After the good quarterly performances of Q4’2020 and Q12020, the momentum for earnings surprises is running out of steam, judging by more disappointments than surprises during the Q2 earnings season.
The recent period of the second quarter has seen big surprises among commodity-based companies, led by our plantation sector as crude palm oil prices continued to rise.
Although the sector has been hit by labor issues, which have had an impact on production, almost all companies have managed to post a strong quarterly balance sheet.
The unloved sector, our glove makers, did not disappoint, with spectacular profit growth, driven by respectable Average Selling Prices (AVP).
However, the sector is now seen to be heading towards headwinds as SPAs have peaked and tend to decline as capacity building begins to add to the supply of the equation.
The second quarter performance among the top four glove makers remained relatively strong with revenue up 3.3% quarter-on-quarter to RM12.2 billion, while net profit increased 4.7% in quarterly slide to RM 6.3 billion. The tech sector also performed very well with good earnings momentum while some bank stocks posted remarkable quarterly results.
After the second quarter bulletin, the response from brokers in terms of earnings revision or fair value of FBM KLCI has been mixed. Indeed, before the Q2 earnings season, some brokers had already lowered market expectations in terms of earnings momentum and fair value of FBM KLCI, mainly due to the extended lockdown period and to some extent the political impasse.
With Q2’2021 earnings surprisingly strong on year-over-year and respectable quarter-on-quarter growth, earnings expectations for the year have generally been higher.
Nevertheless, the revision is rather small and insignificant. For this year, compared to previously forecast earnings growth of 48.7% at the end of the quarterly reporting period of Q1 2021, the revised estimate is now 49.5% year-on-year, or just 0 , 8 percentage point (pps) more.
For 2022, brokers forecast profit growth of 3.3%, 1.2 pps higher than the previous growth forecast of 2.1%.
However, caution is in order from this data, as it also includes results for glove makers, which are expected to be significantly higher year-on-year this year but significantly lower next year.
Therefore, if we remove the impact of this gyrating performance of glove manufacturers, the profit dynamics for this year will be much weaker, at around 40%, while for next year, the profit dynamics of the market will be much stronger, with growth of around 16%.
With the small revision, we also see the projected fair market value for the end of the year relatively unchanged as well. Only two brokerage firms had a higher FBM KLCI fair value this time around.
Brokerage firms have now set targets ranging from 1,590 pts to 1,780 pts for next year’s forecasts based on a multiple of the price / earnings ratio (PER) of between 14.2 times and 16, 2 times.
On average, the fair value of the FBM KLCI is estimated at 1,675 pts based on a multiple of 15.3x PER. This is below the level set at the end of the Q1 publishing season three months ago of 1,718 pts, based on a PER of 15.9x.
Positioning for the recovery and in 2022
With the hope that the political temperature has now been lowered with the appointment of Datuk Seri Ismail Sabri Yaakob as the country’s ninth prime minister, it is hoped that we can move forward in the fight against the incidence of Covid cases. 19 by flattening the curve, reaching the 80% vaccination rate soon and moving on to Phase Two, Three and finally Phase Four.
We also hope that the economic issues can be addressed and that the government will have the opportunity to do so when it tables two important documents later this month and next month – the 12th Malaysian Plan (12MP) on September 27 and the budget 2022 on October 29.
The 12MP will give investors a glimpse of where Malaysia is going over the next four years or so, as the country moves closer to the vision of shared prosperity 2030, while the 2022 budget is expected to set out the government’s plan to launch the economic recovery process. this is much needed to return to pre-pandemic levels.
With the planned higher debt-to-GDP ceiling of 65%, the government will now have more firepower to provide financial assistance to the needy and to ensure that we are able to get back on track. growth on a sustainable basis from 2022, with nominal GDP exceeding the level we saw in 2019.
On the market side, we have seen the return of foreign funds over the past four weeks or so as Malaysia catches up with regional markets, being one of the worst performing markets since the start of the year and relatively inexpensive compared to Asia excluding Asia. Japan.
In the past four weeks, net purchase interest among foreign portfolio fund managers has reached RM 2.14 billion and this is certainly a sign that the market is based on positive market sentiment and more. , driven by relatively cheap valuations.
Therefore, by the end of October and through to the third quarter reporting season, the market has several events to look forward to and this will likely dictate the direction of the market in the near term.
By then, investors will start discounting this year’s earnings as the market anxiously awaits next year’s earnings, which, excluding volatile gloves earnings, will rise to a decent growth of 16. % year-on-year.
Applying a 16-fold PER for 2022 earnings, which is based on the average PER of the KLCI FBM over five years, and based on an expectation of market earnings growth of 3.3%, the FBM KLCI is estimated at around 1,810 pts.
Based on Thursday’s FBM KLCI close of 1,579 pts, the fair market value for next year gives investors a good 14.6% rise and they should position themselves for this recovery momentum and positive sentiment. market over the next 12 to 15 months.