First Capital sees double-digit earnings upside for listed entities in 2021

• Says earnings will be supported by improved consumer demand and lower interest rates 
• Forecasts 19% jump in listed company earnings this year
• Expects stronger earnings to send benchmark ASPI to 7,000-7,500 levels

The listed entries on the Colombo Stock Exchange (CSE) are projected to record double-digit growth in earnings in 2021, supported predominantly by a pickup in consumer demand driven by lower interest rates, which could remain through the first half of 2021, before feeling some upward pressure, according to First Capital Research (FCR). 

The equities and debt capital market researchers forecasted a 19 percent jump in listed company earnings this year, as they saw a strong rebound in economic activities and the third quarter earnings, last year, after lifting restrictions on businesses and individual activities.

This in fact has compelled FCR to revise up their full-year earnings forecast for 2020, from a negative 22 percent to a negative 16 percent with absolute earnings for 2021, expected improving closer to 2019 levels, hinting a quick rebound. 

“The extended period of lower interest rates would have a favourable impact towards consumers. We expect a rise in consumer demand during 1H2021 to positively influence earnings,” said FCR, the research arm of First Capital Holdings, a fully-fledged investment bank. 

Sri Lanka’s listed company earnings turned a corner during the July-September quarter, logging a Rs.61.1 percent increment from the same period in 2019, helped by pent-up demand triggered after the country-wide lockdown measures. 

The earnings were also boosted by extraordinary fiscal and monetary support and political and policy consistency. 
The best earrings record in two years surprised many economists and analysts who vehemently disavowed the possibility of a quick ‘V’-shaped recovery in the economy. 

In fact, the economy too made a similar rebound in the third quarter by registering a 1.5 percent expansion from a 16 percent contraction in the second quarter.  “Despite the temporary lockdown in early October 2020, business activity is expected to continue its upward trajectory amidst the lower interest rates prevailing in the market,” FCR noted. 

Meanwhile, FCR forecasted the stronger earnings to send the benchmark All Share Price Index (ASPI) to 7,000 to 7,500 levels with a market return of 11 percent in the first half of 2021.  “Supported by the strong earnings growth, especially in 1H2021, we expect the ASPI to provide a market return of c.11 percent to reach a range of 7,000-7,500, indicating forward PER of 14.0x-14.5x 2021E earnings. However, a possible steep depreciation in the currency may dampen sentiment from 2Q2021 onwards,” FCR said.