Patchy earnings recovery in FY20 hints at 'worst being over'

THE worst is over, analysts say, going by the recent bounce-back in corporate earnings.

The recovery was patchy and uneven across sectors. Banks surpassed expectations despite a 28 per cent earnings decline and reported easing net interest margin pressure and lower credit costs, leading analysts to upgrade their earnings forecasts on them.

Plantation players saw earnings supported by higher crude palm oil prices, while healthcare companies saw local patient loads start to return to pre-pandemic levels in the second half of 2020. Some real estate investment trusts (Reits) also outperformed due to their capital distribution.

However, asset-heavy property developers saw their bottom line hit by massive revaluation losses and asset impairments as they put out a "kitchen sinking" end to FY20. CapitaLand and City Developments posted revaluation losses and impairments of around S$1.7 billion and S$1.8 billion in FY20, respectively.

OUE also missed expectations, while UOL's core profit after tax and minority interests beat projections.

Oil and gas counters also underperformed. Keppel Corp posted its first full-year net loss since the Asian Financial Crisis, mainly because of the offshore and marine (O&M) drag. Sembcorp Industries' core profit, excluding O&M losses and impairments (which will be discontinued in its next set of results) was within expectations, while Sembcorp Marine remained mired in significant losses - a trend that is likely to continue.

Data compiled by The Business Times showed that as at March 2, 2021, of the 383 Singapore-listed companies that had released their financial results for FY20, 240 were in the black, while 143 were in the red.

In all, the firms recorded a combined S$15.9 billion in group profit, down 58 per cent over the same period last year.

This dovetailed somewhat with CGS-CIMB's tally of about two companies whose results met or beat expectations, for every one that didn't.

In her report, CGS-CIMB Singapore's research head Lim Siew Khee said that following a 30 per cent decline in earnings per share (EPS) growth in FY20, the brokerage now expects EPS growth of 33 per cent in 2021 and 13 per cent in 2022 for blue chip stocks under its coverage.

She expects controlled reopening of borders from this September onwards, if herd immunity can be reached by then, to boost consumer and business confidence and translate into corporate earnings growth.

"We keep our overweight rating on banks, telco, construction and property sectors as we see them as long-term winners in an economic recovery. We also like technology manufacturers for the strong earnings outlook and robust demand for IT-related infrastructure and life science equipment.

"Capital goods could see a good run from a recalibrated focus among the Temasek-linked companies into sustainability themes - renewable energy, urban solutions - as well as merger and acquisition (M&A) hopes," she added.

There are bright spots even in the bleakness. Shekhar Jaiswal, head of equity research at RHB Bank Singapore, noted that CapitaLand has said it will continue its capital recycling activities and will target new economy sectors for its investments, such as data centres. CityDev will also continue its restructuring of Sincere Property Group and has committed not to inject fresh capital until Sincere's financial position turns healthy.

He expects valuations for the property sector to remain stable in 2021 with no further need for impairments.

"For the telco sector, there was sequential improvement, even though year-on-year declines remained due to the impact of movement restrictions," Carmen Lee, head of OCBC Investment Research, said.

She believes that the upcoming 5G rollout can be accretive to mobile ARPUs (average revenue per user) for Singtel and StarHub, although this would take some time. Fibre network infrastructure operator NetLink Trust continues to deliver a steady set of results for its first nine months, while management seemed optimistic about M&A within the telco infrastructure space.

DBS analyst Janice Chua said healthcare and consumer staples grew their bottom line, thanks to stable or stronger demand as a result of the lockdowns. "Consumers consumed more at home, boosting results of supermarkets and grocery chains like Sheng Siong, and demand for agri-products such as crude palm oil."

While she will not rule out that government grants played a part in their better earnings, she felt confident that their improved performance was driven more by consumer demand.

Among the Reits, subtle details in their financials indicate that their recovery from the pandemic is on track.

Ms Lee noted that out of the 14 Reits under her coverage which reported distributions, median distribution per unit (DPU) fell 14 per cent from a year ago, but suburban retail sales are almost back to pre-Covid-19 levels at malls, and there has been a pick-up in discretionary spending such as on watches and jewellery, driven by locals' indulgence while they are unable to travel.

Hospitality Reits also saw varying pace of recovery. Those with assets in countries with larger domestic markets, more stabilised Covid-19 situations and faster roll-outs of vaccinations led the recovery. Those with assets in the US, Japan and Europe remained affected by a resurgence of Covid-19 cases.

Mr Jaiswal believes that the tapering of government grants will have a limited impact on corporate earnings, as companies have undertaken cost rationalisation in 2020, which will help them to offset the decline in government support.

Ms Chua expects a broadening of economic recovery, starting from consumer staples and banks to industrials, transport and the hospitality sector at a later stage. She expects the aviation sector to take "several more quarters" to recover, while other analysts have longer timelines of up to two years.

Ms Chua also expects demand to return for the oil and gas sector as economies recover, although Opec will continue to hold the card on supply swings, she said.