How good is the corporate earnings growth quality in 2021?

Positive signs of earnings growth

Q1-2021 net sales rose 8.3% against Q1-2020, and this is the first time since early 2020 that net sales and earnings grew at the same time, marking the beginning of a new growth cycle. While corporate earnings grew 140.2% thanks to profit margin expansion in certain cyclical sectors, including Real Estate and Steel, and a very low base of comparison in Q1-2020.

Corporate earnings core businesses were also seen improving remarkably in
Q1-2021, which is quite different previous quarters when accounting profits were mostly financial incomes, as follows: Earnings before interest and taxes (EBIT) and Earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 62.2% and 23.9% YoY in Q1-2021, respectively.

It is the first time EBIT and EBITDA of non-financials have risen at the same time since Covid-19 first broke out in Vietnam in March 2020. This showed the strong rebound of core businesses which made a large contribution to the growth of accounting profits, instead of being derived non-core items (mostly financial incomes) as seen in previous quarters, said FiinGroup.

In FiinGroup’s view, the quality of corporate earnings improved as EBIT margin expanded by 2.5 percentage points, contributing 80% of the growth of accounting profits in the first quarter.

However, compared to Q4-2020, net sales and earnings of non-financials dropped by 9.8% and 23.5%, respectively, driven by Residential Real Estate, Construction, Electricity, Foodstuff and Airlines sub-sectors. Milk producers, led by Vinamilk (VNM), recorded an 8.5% decrease in net sales but their earnings rose 28.5% thanks to the reduction of sales costs (including advertising, promotion) and admin costs.

“The QoQ decrease in net sales was mostly due to the seasonal factor (10-day Lunar New Year holiday in February) as well as the spreading of Covid-19 in a number of cities and provinces in January and February. Looking back to previous years, first-quarter growth normally dropped 16-17% against the preceding quarter, except for Q1-2020 when Covid-19 first broke out”, FiinGroup emphasised.

Fiin Group said that in the second quarter, it is difficult for non-financials to repeat such a strong earnings growth as (i) the base of comparison in Q2-2020 was no longer low, (ii) rising prices of input materials are narrowing profit margins of certain major sectors (including Fertilizer, Milk, Construction and Pharmaceuticals) and (iii) Travel & Leisure continues to be hard hit by the Covid-19 return.

Earnings outlook for 2021- 2022

FiinGroup forecasted that earnings prospects for residential property developers look bright in the context that the speculative boom in the local real estate market, spurred by low savings interest rates, are sending property prices up. Earnings are expected to grow 22.4% in 2021 and 19.1% in 2022, reverting a slight decrease of 0.9% in 2020.

As indicated by FiinPro, earnings surprises are projected for property developers in second-tier cities and provinces with convenient transportation infrastructure connecting to inner cities. Those include VHM, NVL, DXG, DIG and NLG.

In Q1-2021, Vinhomes (VHM) had nearly 1,600 units presold to retail customers with a total contracted value of VND6 trillion (97% YoY). Nam Long Group (NLG), a property developer that is focused on affordable and mid-end segments, also reported strong presales. NLG’s presale value in the first four months of 2021 was equal to last year’s figure. In 2021, NLG targets VND13.5 trillion in revenues, five times higher than that of 2020.

Real estate stocks have risen 26.6% YTD. Given the strong earnings prospects, valuation multiples appear attractive with 2021 forward P/E of 20.4x vs. trailing P/E of 22.2x, which are below the 3-year average of 24.8x. Real estate stocks are trading at trailing 12-month P/B of 3.2x, below the 3-year average of 5.7x.

Steel stocks have surged 70% YTD while their earnings growth for 2021 is forecast at 30%, partly driven by a 19.7% increase in net sales. Steel stocks are trading at trailing P/E of 12.6x, above the 3-year average, while forward P/E is 12.7x.

While fertilizer stocks have risen 32.1% YTD. Fertlizer producers earlier targeted their 2021 earnings to fall 40% for fear of the rising prices of natural gas, but the higher gas prices have been in fact offset by increases in selling prices as well as sales volume. Fertilizer shares are trading at trailing P/E of 18.45x, higher than the 3-year average.

FiinGroup revealed that shares of 10 out of 11 oil and gas companies have edged up between 3% and 100%, prompting oil stocks up 39.1% on average YTD. Midstream stocks were among outperformers despite gloomy earnings prospects. In 2021, oil & gas companies target respective growth of 6.3% and 740.8% in net sales and earnings, led by downstreams (including PLX, BSR and OIL). Oil stocks are trading at trailing P/E of 24.6x, which seems to be high compared to 2021 forward P/E of 40.0x.

As for shares of retailers, they have risen 22.8% YTD. In 2021, retailers expect net sales and earnings to grow 16.1% and 32.2%, respectively. Retail stocks are trading at trailing P/E of 17.9x, well above the 3-year average but it remains attractive given positive earnings prospects.

Automobile shares have increased 16.5% YTD while their earnings are forecast to grow 2.8% in 2021 despite an expected strong sales growth of 10.5%. Auto stocks are trading at trailing P/E of 11.2x, below the forward P/E of 12.8x, while their P/B is 1.4x…