CT CLSA sees upside for earnings in 2023 on potential rate cuts, economic rebound

• Earnings to climb 25% in 2023 after an estimated 66% surge in 2022 
• Third quarter earnings slowed sharply on back of a declining economy 
• Expects financials, consumer, conglomerates converting EBITDA into cash to offer better returns  
• Says CSE at its current five times multiples offers a good entry point  

The stock market participants expect a continuous upside for earnings in 2023, although it comes as a mark down from last year’s levels, as corporates have been battling a host of challenges, including persistent foreign exchange shortages, soaring costs and sharply elevated interest rates. 

Colombo-based stockbroking firm CT CLSA Securities estimates a 25 percent upside for corporate earnings in 2023, on the back of a potential easing in the monetary policy and a resulting recovery in the economy in the back half of the year. While CT CLSA expects the economy to stage a slight recovery in the second half, it estimates the full-year economic growth to come still at a negative 2.1 percent, an upward revision from its earlier estimate of 3.1 percent contraction.     

However, the potential delay in obtaining the Board level approval for the International Monetary Fund (IMF) bailout package remains the single biggest risk to the economic outlook, among others. 
It appears that the talks are dragging on with the country’s foreign creditors without being able to reach a consensus on how to treat the outstanding debt owed to them.  According to some commentators, both China, which accounts for a significant share of Sri Lanka’s debt and the demands by some to treat both foreign and domestic debt equally during a restructure, remain key sticking points that prevent reaching an agreement by both parties. While the fourth quarter earnings season is expected to kick off this month, the third quarter earnings showed a 32.2 percent deceleration, from 120.3 percent in the previous quarter, as sectors such as banking and telecommunications, which showed resilience even during the pandemic, declined sharply.

Despite the deceleration in the third quarter earnings, CT CLSA expects the fourth quarter earnings season to end with an overall 66 percent growth in earnings in 2022.
CT CLSA sees upside for financials in 2023 among others such as leisure, consumer staples, conglomerates and companies that convert EBITDA into cash on a consistent basis, providing better total shareholder return on potential easing in the monetary policy this year. 

The consumer staples and retail sectors also act as defensives in times of crisis and runaway inflation, due to their essential nature and ability to pass on the prices to the consumer. 
Consumer demand was nearly decimated when the Central Bank raised rates by unprecedented levels to quell inflation, which rose to hyperinflationary levels last year, mostly after the rupee collapsed from Rs.200 to Rs.370 against the US dollar. 

However, the companies that are into consumer staples and retail still make higher top and bottom lines, as they can charge higher prices, despite the shallow basket values.
Meanwhile, CT CLSA also said the current valuations offer a good entry point for the investors, as the Colombo Stock Exchange is trading at five times its earnings.

“Whilst the Sri Lankan CSE’s All Share index fell -31 percent in 2022 (the second highest drop after Vietnam’s -33 percent fall in 2022), its 5X market PER offers a good entry point with many top blue chips exhibiting upside potential on the anticipated IMF BLA in early 2023E. We expect market earnings growth to hit +25 percent in 2023E (vs +66 percent : 2022E),” it said.