2020 corporate earnings seen falling by 17%
As the Philippine economy reels from one of the harshest lockdown protocols in the region, stock brokerage house Maybank ATR Kim Eng Philippines sees selective picking among consumer staple stocks as the best way for investors to stay “defensive” during this new coronavirus pandemic while catching long-term growth potentials.
This year, local corporate earnings may decline by 17 percent as the full brunt of the two-month enhanced community quarantine in Luzon will be felt in the second quarter, MayBank ATR analyst Romel Francis Libo-on said in a zoom briefing on Friday, which was part of Maybank’s “Invest Asean” series. By next year, he said corporate earnings might recover by 21 percent.
As for the main-share Philippine Stock Exchange index, Libo-on said: “We’ve seen the market recover, surprisingly, despite all earnings report you’ve seen and yet to see,” he said. “Based on this, investors are looking at a quick recovery phase, and the market has recovered faster than the fundamentals we’ve seen across all corporates.”
For Maybank ATR, Libo-on said the consumer staple sector would be one of the sectors that offered defensive investing and upside potential for the year.
“For property, there’s a potential for fourth quarter to be stronger than expected. We are optimistic that the malls’ foot traffic would recover faster than expected, based on trends in other countries upon the removal of restrictions,” he said.
Among consumer staples, Maybank ATR analyst Fredrick Daniel De Guzman said the brokerage house was quite picky. The top three picks are grocery chain operator Puregold Price Club and food manufacturers Universal Robina Corp. (URC) and Century Pacific Food Inc. (CNPF)
“We’re looking for names that have strong robust short-term outlook and can also offer catalysts on the upside for the long term. We think those three names fit the bill,” he said.
Meanwhile, despite the inevitable economic slowdown this year, which in turn could weaken non-interest earnings and cause deterioration on asset quality, Maybank ATR has a positive long-term view on banks. Its top picks are BDO Unibank and Bank of the Philippine Islands.
“These two banks have the most defensive portfolios due to corporate loan contribution. They are in the best position to conserve interest margins and have less to lose in terms of asset yields,” De Guzman said.
On consumer staples, De Guzman said Puregold’s 17-percent revenue growth and 16-percent growth in core income year-on-year in the first quarter would likely be sustained for the rest of the year.
“Even on a longer term basis, this pandemic, in my view, will hasten the shift from traditional to modern retail as a lot of mom-and-pop stores may not be able to survive this pandemic. In that shift, Puregold will be one of the main beneficiaries,” he said.
For URC and CNPF, at least for their domestic business, they would likely be stable this year, De Guzman said.
“Even on a long-term perspective, the catalyst for these two will be market share gains in some of the categories that they play. URC and CNPF are market leaders in their categories and they are gaining market share in other segments,” he said.
“So, in case sentiment turns sour, I don’t think they will go down in share price relative to other companies. And even on a long-term perspective, the catalyst for these two names will be market share gains in some of the categories that they play in. URC and CNPF are market leaders in some of their categories but they are gaining market share in other segments,” he said.
While the projected slowdown in overseas Filipino worker (OFW) remittances could hurt consumer spending, the house view is that the more discretionary consumer formats would be the ones to suffer first.
“For example, non-essentials like apparel, automobiles and housing would be the ones to bear the brunt of this lower OFW remittances,” De Guzman said.
Libo-on pointed out that the middle-income property segment – which was typically supported by OFW remittances – tended to be stable in previous crises, such as during the Asian financial crisis and global financial crisis, as these were used as primary mode of residence.
“But we also see overseas Filipinos buying properties as an investment. That portion is more discretionary. That could slow down,” he said.
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