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DM BOŚ, Research Report – Polish Equities Monthly: September 2020

Polish Equities Monthly: September 2020

2Q20A earnings: Down in a hole

Whereas the 2Q20 earnings season on the WSE is still not over (it will continue throughout the entire September), it is (in our view) the high time to sketch some re-cap of the 2nd quarter of the year – stricken by the COVID-19 fallout¹: putting it briefly – whereas the corporate earnings did find themselves down in a hole, the hole itself proved shallower than suspected quarter ago.

Our main observations are seven-fold.

• Earnings significantly above the expectations. First, the recurring composite earnings topped our projections (by 18%/9% on the operating/ net level), due to both the large-cap and mid- & small-cap sub-composites. We note that (i) this is second consecutive quarter when composite recurring earnings come out above our forecasts, declining in yoy perspective by less than we had expected, and (ii) the scale of the divergence of actual composite recurring corporate profits from our expectations on the operating level has never before been that large as for 2Q20.
• Second, on the sectoral composite basis the oil & gas, mining, consumer discretionary and construction sectors surprised positively with their quarterly postings, with no material negative surprises on sectoral basis in the quarter.
• Third, for 2Q20 the ‘earnings surprise ratio’ was by all means positive (23 positive surprises versus 12 negative surprises²). Please note that: (i) this is second consecutive quarter of positive value of this parameter, and (ii) the ‘tilt’ towards the positive side is strong.
• Recurring net earnings halving yoy on yoy slide of recurring operating profits by one-fifth. Fourth, the 2nd quarter of the year constituted (most likely) the low-point in this year’s earnings dynamics of the WSE-listed companies, with yoy momentum at the (recurring) operating and net level seen, respectively, at c. -21% and -49% (please refer to Figure 2 for details).
• Earnings stronger outside of the large-cap domain, again. Fifth, the yoy momentum of normalized profits remained – for yet another quarter in a row – much better in the mid- & small-cap sub-universe (yoy weakening of recurring EBIT by mere -3% accompanied by c. -16% yoy slide of recurring NI) than among the large-caps (c. -26% thinner yoy recurring operating profits coupled with c. -59% yoy slump of normalized net earnings).
• Sixth, on the sectoral composite basis, the largest yoy deterioration of recurring profits occurred in the mining (by approx. 50%/ 70% at the operating/net level), chemical (by c. 60%, both at the operating and net level), oil & gas (by >50%, both at the operating and net level) and banking (by c. 60% at the net level) sectors. Among the few sectors bucking the prevailing trend of slumping yoy recurring profits we see TMTs (flattish yoy on EBIT, >10% higher yoy on NI), construction materials (up yoy by c. 50%), and consumer staples (up yoy at a rate of c. 20%).
• Half of the covered companies capable of growing quarterly recurring profits yoy. Seventh, in 2Q20 only c. 53%/47% of the companies we cover managed to grow yoy their recurring EBITs/ NIs; whereas this represents deterioration compared to the ‘pre-pandemic’ period (corresponding proportions at: 68%/72% for 4Q19, 74%/65% for 3Q19, 62%/59% for 2Q19, and 62%/58% for 1Q19), it (i) does not surprise given the fact that we are talking about the quarter spanning (most likely) over the very depth of current recession, and (ii) represents a proportion very similar to the one for the preceding quarter of 1Q20 (56%/45%) when the economic fallout from the COVID-19 pandemic started to be felt.