Stricter MCO seen raising earnings disappointment risk, says CGS-CIMB

KUALA LUMPUR (May 24): CGS-CIMB Securities Sdn Bhd said today stricter rules under Malaysia’s current movement control order (MCO) to curb the spread of the Covid-19 pandemic may raise the risk of corporate earnings disappointment as the reenforcement of the MCO is likely to reduce manufacturers’ productivity and lower footfall at retail outlets.

On May 10, 2021, news reports, quoting Prime Minister Tan Sri Muhyiddin Yassin's statement, said the whole country would be placed under the MCO again from May 12 to June 7 to curb the spread of Covid-19 infections. The re-enforcement of the current MCO is commonly known as MCO 3.0.

Today, CGS-CIMB analysts Ivy Ng Lee Fang and Nagulan Ravi wrote in a note that the severity of corporate earnings impact will largely depend on how long MCO 3.0 lasts.

"On Saturday (May 22), Malaysia announced that it has decided against a nationwide lockdown similar to MCO 1.0 despite the continued rise in Covid-19 cases. This is because the government wants to balance between lives and livelihoods. It will instead tighten the implementation of the current MCO with more restrictions on social and economic sectors,” the analysts said.

"Anyhow, we expect this news (on stricter MCO rules) to dampen near-term sentiment and will be negative for recovery play stocks (banks, auto, property, construction and tourism-related plays) on concerns of earnings risks in the near term, prompting investors to switch to defensive names (utilities, telcos, glove makers and plantations) until Covid-19 cases subside or there is a significant pick-up in vaccination rate,” they said.

For now, the analysts said CGS-CIMB is maintaining its FBM KLCI target of 1,699 points and that the research firm's top three stock picks are still Inari Amertron Bhd, Public Bank Bhd and Telekom Malaysia Bhd.

At Bursa’s 12:30pm break today, the 30-stock KLCI settled up 11.24 points or 0.72% at 1,573.41.

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