THE recently ended third quarter (Q3) earnings season has now provided investors a glimpse of what is to come in 2022 as the relatively respectable quarterly results has now been overshadowed by a barrage of downgrades in earnings forecast for next year, mainly due to the one-off effect from Cukai Makmur or Prosperity Tax, which was announced in Budget 2022.
As we are well aware, on a seasonally-adjusted basis, Malaysia entered into a technical recession in Q3 as the economy contracted by 3.6% on a quarter-on-quarter (q-o-q) basis, having registered a contraction of 1.9% q-o-q in the preceding quarter.
Compared with a year ago, the economy declined by 4.5% for the Q3 period and this was also well below the market estimate of a 2.6% year-on-year (y-o-y) contraction.
The key drag on the economy was the slow transition from phase one of the National Recovery Plan (NRP) during the quarterly period.
This impacted several sectors, in particular the construction sector, which saw a contraction of 20.6% y-o-y.
Nevertheless, as the economy is now fully opened up, it is refreshing to note that the economic contraction trend on a monthly basis is on a recovery path as the September 2021 monthly gross domestic product (GDP) data showed a contraction of just 1.1% y-o-y against 4.7% and 7.6% in August and July respectively.
The banking sector, excluding the goodwill impairment carried out by CIMB for its Thai banking unit, showed strong quarterly earnings growth.
With Q3 2021 GDP data coming in well below market forecast, Q3 earnings momentum too were impacted.
On a q-o-q basis, Q3 earnings fell by 21.1%, reversing the preceding quarter’s growth of 3.7% q-o-q, while on a y-o-y basis, earnings momentum eased to just 13.5% from the staggering growth of 157% y-o-y growth in the Q2 quarterly period.
However, despite the relatively weaker earnings momentum, the ratio of companies’ earnings that surprised the market against disappointment improved as some 33% of companies reported earnings that were below expectations against 26% that was above the market forecast.
This translates to an earnings disappointment ratio of 1.28 times, which is slightly better than the preceding quarter’s 1.31 times print but still below the Q1 2021’s reading of 1.07 times.
The q-o-q trend is not unexpected as the Q3 period gives market analysts a better grip on what to expect for the full year and hence the results should show much stronger hits than misses.
Similar to Q2, the recently concluded Q3 earnings saw a big jump in earnings that were well above market forecast, especially among commodity-based companies, led by the plantation sector as crude palm oil prices hit record fresh record highs.
This was also seen among other commodity-based companies like Petronas Chemical, which posted record quarterly net earnings of RM1.96bil, bringing its cumulative nine-month earnings to RM5.28bil.
The banking sector too, excluding the goodwill impairment carried out by CIMB for its Thai banking unit, showed strong quarterly earnings growth.
Disappointingly, and as expected, several sectors were impacted by phase one of the NRP as restricted economic activities derailed the respective sector’s performance.
This was seen in sectors like the aviation sector, construction, selected consumer, and the automotive sector, as well as some property names.
Meanwhile, the gloves sector showed respectable results despite the challenges as revenue and earnings among the top four glove companies fell by 43.5% and 57.5% q-o-q, mainly due to the impact of production disruption and lower average selling prices.
However, when compared to a year ago, revenue was just flat, up 0.6%, but net earnings were lower by 6%.
A cloudy 2022 outlook
Post Q3 report card, there has been an avalanche of earnings cut by brokers for 2022 earnings as most, if not all, have lowered their estimates for next year on the back of impact from the one-off prosperity tax of 33% for companies with chargeable income above RM100mil.
With that, as well as how the market had reacted to the tabling of Budget 2022, most brokers have cut their fair value for the KLCI for the rest of this year to an average of just 1,524 points from about 1,634 points three months ago. In effect, brokers have lowered their estimate by as much as 6.7%.
With the Q3 2021 earnings coming in relatively weak when compared with q-o-q performance, most brokers have lowered their earnings projections for the year with just a minor tweak.
For this year, from the earlier forecasted earnings growth of 50.2% at the end of the Q2 2021 quarterly reporting period, the revised estimate is now at 48.9% y-o-y growth, which is just 1.3 percentage points (pps) lower.
For 2022, imputing the impact of the prosperity tax, brokers are now projecting earnings to fall 3.3% y-o-y which is a 6.4 pps reversal from the previous earnings growth forecast of 3.1%.
The negative earnings growth of 3.3% next year is also dragged by a significant reduction for glove companies’ earnings. Excluding the glove companies, earnings growth momentum would remain positive, at about 4.5% for 2022.
Most broking firms have also introduced earnings for 2023 with the current estimate looking at a growth of 14.3% and a fair KLCI value of 1,641 points based on a forward price earnings ratio of 15.2 times, a 9.3% upside from Thursday’s close of just above 1,500 points.
2022 will not be about earnings, but event-driven
Next year will likely not be about earnings growth for Malaysian listed companies, more so among the larger capitalised companies on the back of the implementation of the prosperity tax mentioned above.
It will also impact some of the corporate’s ability to sustain a high dividend payout as the higher effective tax rate will lower absolute dividends to be paid to shareholders.
With negative earnings growth for 2022, other factors will likely take greater precedence for investors to position their respective portfolios.
Key events to watch that will dictate market direction will be the Federal Reserve’s tapering move between now and mid-2022, a potential hike in United States interest rates by between 25-50bps next year, and the persistently high inflation rate.
On the geopolitical front, the growing tension between the two superpowers, China and the United States, the potential mutating new Covid-19 variant too may have a damaging impact on economic growth expectations while gyrating oil prices, as well as other commodity prices too, may have an impact on our listed companies.
Domestically, the potential dissolution of Parliament to pave the way for the 15th General Election, hike in overnight policy rate, Malaysia’s management of its finances, and environment, social and governance issues will likely dictate investors’ appetite towards risk and market positioning.
These issues will be discussed in greater detail in the upcoming 2022 preview to be published on New Year’s Day.
Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.