In a report dated yesterday (7 Jun), Macquarie Equities Research (MQ Research) said the latest 1Q21 earnings reporting season saw 73% of companies meeting or beating estimates, with 2Q21 expected to be impacted by the current lockdown, though focus remains on vaccinations for a positive outlook. Sectors that beat expectations include financials, oil & gas, and properties, while construction and gloves stood out for missing expectations.

Event

• 1Q21 reporting season provided the highest ratio (73%) of companies meeting or beating estimates since MQ Research began tracking them in 3Q16. Suppressed expectations and a general pivot by companies towards a new normal, MQ Research believes, provided this strong ratio. The introduction of a stricter lockdown (1-14 June) will temper expectations for 2Q reporting in July/August, but MQ Research believes the level of earnings may be muted by the increased vaccination of the population in coming months, which in turn will support improved consumer and business sentiment. Consensus expectations of 68% year-on-year (YoY) (MQ 45%) growth in KLCI index earnings per share (EPS) is reflecting an improved earnings trajectory as well as the supernormal profits of the gloves sector. MQ Research’s preference remains with opening up plays, including banks and exporters as well as the digitalisation thematic for the rest of 2021. MQ Research’s end-2021 KLCI index target remains unchanged at 1,780.

Impact

• More sectors joining the beats. 1Q21 saw more sectors beating expectations, with financials, oil & gas, and properties standing out. Meanwhile, construction and gloves stood out for missing. Banks results topped expectations on robust operational drivers (particularly on i-Sinar liquidity boosted net interest margins (NIM)), as well as credit costs coming in on the low-end of guidance. Crucially, banks’ outlook and guidance turned decidedly neutral to positive, despite weathering MCO2.0 and entering the start of MCO3.0. More importantly, MQ Research thinks the good set of results have piqued foreign interest (based on investor feedback) in the sector.
• Points of concern. COVID-related shutdowns, rising raw material costs and freight issues were notable pints of concerns from company calls MQ Research sat in for. Understandably most were also concerned about the duration and extent of the lockdowns, but MCO2.0 in 4Q20 had proven that the economy had pivoted somewhat towards new norms, allowing for a more muted impact form the lockdowns and healthy rebounds once lifted.
• Upgrades? With consensus estimates now looking for a 68% YoY increase in KLCI EPS for 2021E, MQ Research believes the likelihood of further EPS upgrades are limited especially with the potential for further movement restriction in 2H21. MQ Research also sees a limited chance of the -5% (MQ -4%) 2022E EPS growth estimate shifting materially especially as glove sector earnings, which have been a key contributor to 21E growth, retreat.

Outlook

• MQ Research maintains its constructive outlook on the Malaysian equity market. Vaccination progress will in MQ Research’s view outweigh near term Covid related fears (infections/earnings impact) as well as a fluid political scene. MQ Research’s top picks include Malaysia Airports, CIMB Group, GHL Systems, KL Kepong, Maxis, MY E.G. Services, Petronas Chemicals, RHB Bank and Telekom Malaysia.

Source: Macquarie Research - 8 Jun 2021