Macquarie Research Report (MQ Research) summarized that Malaysia’s 1Q20 corporate results recorded the worst performance with 51% companies under its coverage reported missed on preliminary Covid-19 impact and provisions. While MQ Research expects earnings to slow further in 2Q20, they are expected to improve gradually in the next two quarters. MQ Research maintains its KLCI 20E target at 1,533 points with its top picks including Top Glove, Tenaga, CIMB and many others.

Event

• 1Q20 reporting season was the worst since MQ Research’s recording of quarterly results stats, with 51% of companies under MQ Research’s coverage that have reported to date missing estimates. Despite MQ Research’s reduced estimates for banks post 4Q19 results, increasingly lower net interest margins (NIMs) and higher credit costs led to 80% of banks missing estimates. Plantations and property were the other disappointments. Meanwhile telcos, utilities and (defensive segments of) oil & gas provided the positive surprises.

• Covid and the ensuing movement control order (MCO) from mid-March had some impact on most sectors in 1Q, and the full impact is likely to hit 2Q20 results before showing some stability into 3Q and a rise into 4Q. MQ Research is now looking for a 10% year-on-year (YoY) decline in KLCI earnings per share (EPS) for 20E.

Impact

• KLCI target held for now. With 20% of MQ Research’s coverage opting to delay results to June and the heavier-than-expected provisioning at the banks, MQ Research is maintaining its 1,533 (16x 21E price-to-earnings ratio (PER)) end-20E KLCI target for now. MQ Research’s core 20E KLCI EPS estimate for 20E is now -10% from +8.3% post 4Q19 results season. While consensus has reduced estimates as well, it is still expecting 1% YoY 20E EPS from +9% previously. MQ Research would expect material downside risk in coming weeks to EPS estimates.

• The road ahead. As discussed earlier, MQ Research expects earnings to trough in 2Q20 before gradually improving. The key at this point is what happens to 21E estimates. MQ Research believes the impending cut in consensus estimates has been largely priced in and the market is already looking forward to 21E earnings. MQ Research’s estimates currently point to a 21% YoY increase in 21E KLCI earnings. The key risk to this would be a significant second wave of Covid cases – increasingly unlikely – and bank credit costs post the lifting of loan moratoriums in October.

• Banks – the swing. Overall, bank results came in below expectations, but the real focus was on guidance downgrades, in particular, MAY/CIMB guiding credit cost estimates hitting 100bps/120bps, respectively. With most banks now anticipating further rate cuts in the next 12 months, the combination of NIM pressure, higher credit costs and the one-off modification loss telegraphs substantial downside risk to banks earnings in FY20/21.

Outlook

MQ Research remains constructive on the market post 1Q20 results. MQ Research’s top picks list continues to favour global leaders/exporters (TOPG, IHH, PCHEM, SDPL), defensives (TNB, RANH, telcos), construction (GAM, ECON) and selective banks (CIMB, RHBBANK). MAHB meanwhile is a play on the opening up of air travel and a medium-term play on an improved regulatory framework.

Source: Macquarie Research - 3 Jun 2020