In spite of a turbulent start to 2021 with the MCO 2.0 making a comeback amidst rising cases, MCO 2.0 related measures have been loosened since March.
HAVING gone through a tough financial year with the onslaught of the Covid-19 pandemic in March 2020, economists see a glimmer of hope in the domestic economy with signs of growth in the second quarter of 2021 (2Q21).
In spite of a turbulent start to 2021 with the Movement Control Order (MCO) 2.0 making a comeback amidst rising cases, MCO 2.0 related measures have been loosened since March.
Analysts have projected for corporate performance beginning 2Q21 onwards to characterise a rebound in economic activity. The team at RHB Investment Bank Bhd (RHB Research) said the economy is likely to weaken in 1Q21 as the impact of a stricter MCO 2.0 beginning in mid-January put a brake on consumer, manufacturing and services sectors activities.
“With MCO 2.0 related measures having been loosened since March, a number of sectors are starting to recover,” the research firm said. “As a result, 2Q21 gross domestic product (GDP) growth will rebound.”
From the demand side, the research team expected private consumption GDP to rebound in 2Q21, although 1Q21 consumer spending will be weak.
“In our view, consumer spending will rebound in 2Q21 due to five reasons: First, the continued easing of restrictive Covid-19 related measures is likely to induce pent up demand from being unleashed.
“Second, recent high frequency data and anecdotal evidence suggests that the manufacturing sector may have rebounded in March and in our view suggests early signs of recovery in broad economic activity.
“Third, with the recovery in the manufacturing already ensuing, the balance of risks is skewed towards the unemployment rate dropping sooner rather than later.
“Fourth, we expect the unconditional withdrawal from the pension fund under the i-Sinar programme of over RM33 billion in cash into the economy with a further RM20 billion over the next six-months to provide some support to consumer spending.
“Lastly, the recently announced Pemerkasa package will provide support to the consumer as well.”
Along the same vein, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) foresees Malaysia’s economy to grow this year, reversing the fall of -5.6 per cent year on year (y-o-y) in 2020.
“Besides low base factor in 2020, domestic and global economic activities are expected to gradually resume buoyed by positive elements mentioned above,” MIDF Research said.
However, the research arm reckoned that the growth will be limited due to MCO 2.0 in 1Q20 and Conditional MCO (CMCO) which is likely to continue going into 2Q20.
“International border closure will continue to weigh on the economic performance of tourism related sectors and interstate travel restrictions adds to the call.
“We also foresee a temporary setback to the labour market recovery during the MCO 2.0 period which will affect income prospects.”
Hence, MIDF Research forecasts GDP to expand by 5.4 per cent y-o-y this year.
Looking ahead, MIDF Research projected that expansion is likely to take place from services sector which is the largest contributor to Malaysia’s economy to construction sector, which has the lowest share to total GDP.
“Construction sector will chalk the highest growth at 14.9 per cent y-o-y as significant slowdown in construction activities in 2020 mainly from government’s side due to a shift in priority, will escalate this year. Numerous infrastructure projects which have high multiplier effect to the economy have been highlighted in the Budget 2021 and set to be expedited.”
The research arm recalled that in Pemerkasa, government has reiterated its commitment in implementing small projects nationwide by doubling allocation for it which includes repair works for public facilities and stratified housing, social amenity programs and construction of stalls in local authority areas.
“Manufacturing sector is expected to advance by 6.7 per cent y-o-y, benefiting primarily from improved global trade flows while services sector to grow by five per cent y-o-y buoyed by domestic demand.
“For commodity sectors, agriculture and mining are projected to record growth of 3.9 per cent y-o-y and 3.4 per cent y-o-y respectively, contributed by improving demand and increasing prices.”
As the situation is expected to continue improving this year, MIDF Research maintained its belief that stocks with ties to economic performance will likely benefit the most.
“This is evident by our (and market consensus’) outlook on corporate earnings which is anticipated a long-awaited resumption of positive corporate earnings growth.
“In addition, commodity players will also benefit from an uptrend in the commodity prices.”
Meanwhile, the research arm of Public Investment Bank Bhd (PublicInvest Research) opined that longer-term cyclical recovery plays (on stronger economic growth and gradual return to normalcy) like banking, oil and gas (O&G), and construction look to be back on track, with the recent MCO 2.0 and the declaration of Emergency doing little to dim respective prospects.
Serba Dinamik reported very much stronger earnings attributed to robust activities across all segments post movement restrictions globally.
O&G revving up across subsegments
THE O&G sector looks to be on-track for recovery, despite the 4Q20 reporting period for the sector ended mixed, with performances equally balanced between surprising, meeting and missing estimates.
“While we had expected earnings for some O&G players to moderate due to the seasonally bad weather and stricter operating procedures enforced due to higher Covid-19 cases, work orders improved nevertheless, preserving profit margins and bottom-line,” PublicInvest Research said.
“On-going cost reduction initiatives also helped performances somewhat. Companies like Bumi Armada Bhd and Sarawak-based Serba Dinamik Holdings Bhd (Serba Dinamik) saw upward revisions to earnings estimates.
“On an encouraging note, there were no major surprises such as impairments being reported.”
The research arm recapped that Serba Dinamik reported very much stronger earnings attributed to robust activities across all segments post movement restrictions globally.
It also recalled that higher activities were seen in Oman and Malaysia for maintenance, repair and overhaul-related works, and in the UAE, Turkmenistan and Malaysia for its engineering construction segment.
“Oil prices are currently undergoing some minor correction after a stronger than expected recovery since the start of 2021.
“This is on the back of growing uncertainty over rising Covid-19 cases in Europe as vaccine shipments are delayed, while usage of certain others are ceased due to possible side effects.”
Nevertheless, PublicInvest Research foresees this as only a temporary setback with recovery expected to be back on track once vaccination programs progress further.
“Earnings recovery is also on track as oil majors have started their spending, with 2H21 expected to see impacts being greater.
However, despite the recent rally in oil price that resulted in Brent breaching the US$70 per barrel – a level last seen in 2019; MIDF Research opined that oil majors worldwide will continue to withhold its exploration and production (E&P) capital expenditure (capex) spending at least until the end of first half of 2021.
“This is as demand recovery has been rather sluggish and the oil price rally is mainly driven by supply disruptions and deliberate cuts by Opec+ nations,” the research arm said.
On the local front, MIDF Research is expecting Petroliam Nasional Bhd (Petronas) to remain cautious in its 2021 spending hence, a lower capex and opex allocation should not be surprise.
That said, while the research arm initially forecasted that Petronas would commit about RM30 billion to RM35 billion in capex spending for 2021 i.e. similar to that of CY20 at RM33 billion spent on capex.
However, MIDF Research noted that Petronas now plans to increase it to RM40 billion to RM45 billion this year.
“While this is higher than we anticipated, it is still lower than the pre-pandemic level of RM50 billion to RM55 billion committed spending in capex annually.
“This in turn would also potentially mean lesser international E&P spending and more local-centric activities to reduce volatility in its expenses as well as; to support local oil and gas service providers.”
Overall, while Petronas has remained committed in ensuring sustained offshore activities for local O&G players, MIDF Research did take note of the cautious stance that the national oil company is taking given the persistent uncertainty and sluggish demand recovery brought upon by the Covid-19 pandemic over the past few months.
“That said, we are reassured of the Malaysian O&G recovery trajectory given that Petronas is now expected to increase its E&P spending in 2021 to possibly RM40 billion to RM45 billion.
“This is as opposed to the RM33 billion that it has spent in 2020.”
With that in mind, MIDF Research reiterated its view that it continued to favour companies that have been weathering the current pandemic successfully and coming out of it with minimal dent.
At this juncture, the research arm continued to recommend companies with strong fundamentals, stable recurring income, good business segmentation and well-diversified revenue base such as Dialog Group Bhd, Serba Dinamik and Gas Malaysia Bhd.
Production is expected to recover in 2H21, though below its potential, given Malaysia’s high reliance on foreign workers.
Power to plantation as CPO price recuperates
IN the final quarter last year, plantation companies saw a significant improvement in their results compared to the same period last year as majority of planters enjoyed stronger crude palm oil (CPO) prices, driving their margins higher.
However, PublicInvest Research noted that the big letdowns were Genting Plantations Bhd and Ta Ann Holdings Bhd, dragged by the steep discount in Indonesian CPO price and weaker downstream performance, as well as steep losses in the timber business.
“During the quarter, the sector experienced worsening worker shortage amid high production season, extreme wet condition in Johor, Pahang and Sarawak, and wider CPO price gap between Indonesia and Malaysia as a result of the sharp upward revision in Indonesia’s CPO export levy and export duty,” PublicInvest Research said.
MIDF Research viewed that the existing landscape will lead to a strong increase in CPO price ahead.
This was in anticipation of tight soybean supply, especially from Argentina, to lead to stronger soybean price which in turn, should drive CPO selling price higher.
“On top of that, the subdued inventory level of palm oil in Malaysia would also act as a catalyst to CPO price,” MIDF Research added.
“We expect the inventory level to stay below the two million level in view of the slower production period.
“We also believe the palm oil supply tightness situation will likely remain until 2Q21, given the weaker output during the post-peak production.”
Nonetheless, MIDF Research expected the production to recover in 2H21, though below its potential, given Malaysia’s high reliance on foreign workers.
Meanwhile, on the export demand front, the research arm posited that the export demand will recover on the back of gradual recovery of economic activities in India and China and restocking activities ahead of the month of Ramadhan.
“In the CPO futures market, prices have rallied to its highest in over 10 years to above RM4,000 per tonne, amid strong market sentiment and the rally in the soybean oil market.”
Moving forward, MIDF Research anticipated the effects of the pandemic to subside in 2H21 given that Malaysia already rolled out its first batch of Covid-19 vaccines in February and there is more relaxation of MCO rules.
All factors considered, MIDF Research maintained its ‘positive’ stance on plantation sector with 2021 CPO price forecast of RM3,000 per metric tonne (mt).
Malaysian banks also have sufficiently strong capital and liquidity buffers relative to their asset risks, although they are not as strong as their regional peers. These factors will enable the Malaysian banks to restore profitability faster than their regional peers.
Banking: Towards resilience
ASSET quality at the largest banks in Malaysia has been more resilient to economic disruptions from the coronavirus outbreak than at their peers in Indonesia , the Philippines and Thailand, major emerging markets in Southeast Asia.
According to Moody’s Investor Service, Malaysian banks also have sufficiently strong capital and liquidity buffers relative to their asset risks, although they are not as strong as their regional peers. These factors will enable the Malaysian banks to restore profitability faster than their regional peers.
“Asset quality of Malaysian banks is less vulnerable to economic disruptions than regional peers. This is because of a greater focus on retail loans that are largely secured, well regulated and supported by ample financial assets held by households,” it said in an April 8 note.
“The largest banks in Malaysia were alone in seeing their average nonperforming loan ratio decline in 2020 among the four countries, and they also have the smallest share of loans under regulatory relief programmes in total loans.
“Moreover, most loans covered by regulatory support measures in Malaysia are collateralized mortgages and auto loans, whereas such loans in the other countries are predominantly to businesses that took a direct cash flow hit and do not provide collaterals that are as liquid.”
Moody’s said stronger asset quality will enable Malaysian banks to restore profitability faster. Bottom-line profitability at banks in the four countries will improve in 2021, given that they have built sufficient loan-loss provisions against anticipated loan losses.
Yet, Malaysian banks will see the fastest recovery because relatively lower asset risks reduces the need to keep provisions as high as their regional peers, it said.
“Malaysian banks’ capital and liquidity buffers are not as strong as regional peers’ but still sufficient to cover any potential financial stress. The largest Malaysian banks’ capital ratios are still sufficiently high, given relatively low asset risks in the country.
“Also, solvency risks that could potentially trigger a liquidity outflow are low, because their asset quality is strong.”
For banks in Malaysia, margin compressions and asset quality issues were the primary causes of earnings degradation in 2020.
“Despite market expectations of macro improvements in the months ahead, banks continued to maintain a cautionary stance with macro overlays (provisioning) still being undertaken in anticipation of potential weaknesses,” recalled PublicInvest Research.
“What is of some note is that cost management initiatives and improved funding profiles of banks appear to be gaining traction in mitigating margin compressions, evidenced in the recent 4Q20 numbers.”
“Short-term volatilities notwithstanding, eventual rate normalisation in 2021 to 2022 and expected economic recoveries which will bring about asset quality improvements and loans growth are a medium- to longer-term boon to the sector.
“We do not see conditions getting significantly worse than 2020 levels barring a multi-wave pandemic outbreak.
“While we maintain our ‘neutral’ view on the sector, it continues to be with a positive bias given its lagging valuations relative to the broader market.”
Meanwhile, MIDF Research continued to be sanguine of the prospects for the banking sector in 2021. This is premised on the recovery of the economy, made more certain with the vaccine rollout and the government’s target of achieving herd immunity by end 2021.
“We expect credit cost to start normalising while income will stage a rebound. Therefore, we expect earnings will improve in 2021.
“Hence, we maintain our ‘positive’ recommendation for the sector. Nevertheless, we recognise that there short term pressure that banks will have overcome especially in 1Q21.”
Primarily, the potential stress is on asset quality, but MIDF Research opined that banks in general will be able to weather it.
“This is especially the case for banks with large loan loss reserve and/or has been resilient during current challenging environment.”
Earnings outlook for the construction companies should improve this year albeit at a slower pace backed by relatively healthy outstanding orderbook in hand.
Pick and choose within construction
FOR the construction sector, improvements seen in the previous quarter’s results were short-lived. Notably, construction companies under PublicInvest Research’s coverage universe made a u-turn this quarter to mostly report lower-than-expected results.
The research arm gathered that the disappointments were mainly due to re-enforcement of movement restrictions locally given the spike in Covid-19 cases.
PublicInvest Research recapped that Hock Seng Lee Bhd (HSL) showed some steadiness in the group’s earnings as topline continued to improve, mitigating a small contraction in its profit margin.
Overall, the research arm opined that earnings outlook for the construction companies should improve this year albeit at a slower pace backed by relatively healthy outstanding orderbook in hand.
“Contract awards are also expected to improve with the Federal government’s allocation of RM68.2 billion toward development expenditure for 2021,” PublicInvest Research said.
Meanwhile, MIDF Research reaffirmed its view on the solid growth prospects in East Malaysia given the bigger share of the federal budget allocation in 2021 of about RM5.1 billion and RM4.5 billion respectively for the construction and upgrading works for largely water, electricity, and road infrastructure.
“We are also of the view that the numerous continuous upgrading works of potentially over 1,800 projects would provide a fillip to the demand of cement, concrete and steel pipes in the regions in 2Q21,” MIDF Research said.
“Potential major beneficiary would be Cahya Mata Sarawak Bhd (CMS) given it is the sole cement manufacturer currently in the region.”
The research arm noted that the prospects of the local contractors could be promising given the potential roll-out of sizeable projects in 2Q21, ahead of the Sarawak state election by August 1.
“Adding onto that, an additional RM6.3b will also be allocated under the Sarawak’s state budget in 2021 for development expenditure (DE).
“These projects would include the Pan-Borneo Highway (RM16.5 billion), Sarawak-Kalimantan border security road (RM24 billion), Sarawak Petrochemical Hub (RM8 billion), Coastal Road network (RM5 billion), Second Trunk Road (RM6 billion), Baleh Dam (RM9 billion) and various projects under the Regional Corridor Development Authority (RECODA) (RM1.7 billion) and the integrated Regional Samarahan Development Agency (IRSDA) (RM792 million).”
Thus, MIDF Research postulated that the East Malaysia construction players’ order book replenishment and earnings prospects to be bright in 2Q21.
“With the growth story of East Malaysia’s burgeoning infra developments in 2Q21, we remain optimistic on the outlook of the local contractors under our coverage, namely, HSL and CMS.”
Looking ahead, MIDF Research is of the view that the outlook of the overall construction sector in 2Q21 is set to stage for a strong rebound year-over-year in view of the existing mega projects like LRT3 and MRT2 approaching their prime stage and possibly accelerated construction work progress that could help in achieving higher progress billings.
“The potential news-flow on the details, time-line, implementation models of mega public infra projects will be an exciting sectoral development that favours the local contractors with extensive experience in railway and road projects, a healthy track record and strong balance sheet.
“Coupled with a highly likelihood of continuous overseas jobs win which serve as an additional positive catalyst, our top picks under our coverage that fulfil these criteria are Gamuda Bhd, Sunway Construction Group Bhd, and IJM Corporation Bhd.
“Coupled with a solid outstanding order book of construction companies under our coverage that could provide earnings visibility for approximately the next three years, we are positive on the sector’s earnings recovery moving forward.”