First Capital Research taking into account the elevated earnings potential, has upgraded its earnings outlook in absolute terms which translates to a growth of +24% for 2021 while a much lower outlook is anticipated for 2022 of +12% considering the risk involved in the system.
Despite the significant risk in the system due to the uncertain economic environment, the higher liquidity in the system and cheaper valuations due to the healthy earnings, we are upgrading the ASPI fair value to a range of 7,500-8,000 from our previous range of 7,000-7,500. It amounts to a market return of +18% for 2021 despite valuations being downgraded to a PER of 12.0x-12.5x (previous 14.0x-14.5x) considering the risks to the economy.
Similar to the performance witnessed in the 3Q2020, earnings continued to surge in 4Q2020 and 1Q2021 as well, with Food Beverage and Tobacco (FB&T) sector generating earnings growth of +73% & +669%, Material sector +153% & +267%, Transportation sector +1930% & +998% and Capital Goods sector +68% & +214% respectively.
Margin expansions led by hefty price increases and lower finance costs have been the primary cause for the earnings growth across the board, amidst the lower competition resulting from the import restrictions. Further, currency depreciation also supported earnings for dollar income companies and companies with foreign assets.
The Government’s revenue shortfall and slower economic growth is resulting in further quantitative easing leading to higher CBSL Holdings and further improvement in liquidity levels in the money market. The 3rd wave of Covid-19 is further supporting the situation with an aggressive lockdown, slowing down the economy yet again. We believe the current pandemic situation may further slowdown the rise in interest rates ensuring the continuity of the low interest rate environment.
In addition, the surge in earnings continues to be the major support for equity investments making overall valuations much cheaper. 1Q2021 earnings rose by an unprecedented 207%YoY building confidence among investors.
