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Saturday, October 8, 2022

Business results and stock prices do not always match

By Dang Linh

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Corporate profits are usually the main factor affecting stock prices; however; this may not always be the case.

Divergence within each industry

Export-related companies are expected to achieve positive business results in the second quarter of 2022, particularly those active in the seafood industry. The average profit after tax of seafood exporters is likely to grow 123% against 2021, as per Fiinpro’s data and analysis. Such an expectation is based on the performance of this group in the first quarter, when its profit leaped 264% year-on-year, thanks to revenue growth and improvements in earnings before interest and taxes (EBIT).

Good export prices and the remarkable recovery in consumer demand (especially for tra fish) in several key export markets such as the U.S. and the EU after the peak of the Covid-19 pandemic were supportive factors for the seafood industry in the first half of this year.

However, in reality, not all enterprises with seafood trading as one of their operations have obtained positive growth in profits. Instead, business results are greatly dependent on each export item and each export market. Recently, companies exporting to the EU and the U.S. have benefited more than those exporting to other markets such as China.

Specifically, in the second quarter of 2022, Vinh Hoan Corporation (VHC) reaped VND784 billion in net profit, three times higher than in the same period last year. Meanwhile, Sao Ta Foods Joint Stock Company (FMC) is expected to gain more than VND114 billion in profit, up 50% year-on-year. An Giang Fisheries Import Export Joint Stock Company (AGF), after reporting a loss of VND15.7 billion in the first quarter (taking its accumulated loss to VND863 billion), has reported its Q2 profit would once again be a negative number, marking the seventh consecutive quarter of loss-making. AGF’s main export market is China, where the zero-Covid policy with import restrictions is underway, so companies doing business with this country are grappling with lots of hardships and cannot maintain their production output as planned. In addition, rising raw material prices, soaring freight costs, and difficulties in booking export containers have also affected their export revenue.

As for rubber companies, the divergence of profits is mainly influenced by the financial gains from their subsidiaries, or their earnings from other activities such as the liquidation of rubber trees. According to the Vietnam Rubber Association, the scarcity of raw materials will lead to rubber prices escalating further or hovering at a high level. Therefore, exporters will benefit from both the volume of exports and the value they enjoy.

Phuoc Hoa Rubber Joint Stock Company (PHR) this May predicted its revenue in the second quarter would be VND486 billion, with a profit before tax of VND220 billion. However, the actual results were not as expected when the revenue was only VND239 billion, 31.6% lower, and the profit after tax a mere VND8.7 billion, down 76% from the same period last year. The main export market for rubber is China, where disease control is being tightened, which is one of the main reasons why PHR’s Q2 business results fell short of expectations.

Meanwhile, in the banking industry, the advantage is in the hands of a few major banks with good asset quality. The profit of the entire system was forecast to pick up 20-25% this year, but by the end of June, some banks had already recorded exponential growth. For example, Vietnam Export Import Commercial Joint Stock Bank (Eximbank) estimates its profit for the first six months of 2022 at some VND1.8 trillion, 2.7 times greater than in the same period last year. As for the oil and gas sector, business performance depends on where a particular enterprise is located in the industry value chain. Those at the end or in the middle of the chain prove more “sensitive” to oil price movements than the ones at the start.

Similarly, for securities companies, it is the proportion of proprietary trading, proprietary trading strategies and the structure of revenue sources that are decisive factors. As for realty firms, it all depends on the “climax” of profits from their projects, which usually does not drop in the second quarter.

The market of expectations

On the bourse, the stocks of businesses expected to bring in high profits have recently experienced dramatic price increases. Statistics from Fiinpro reveal that seafood stocks are one of the few groups that have gone against the general market trend with a surge of more than 60% in their prices since the beginning of 2022. In the coming time, holders of these stocks should pay attention to some unfavorable factors. First, shrimp/whitefish exports to the U.S. may slow down due to weakening demand and rising inventory. Second, export prices are expected to drop as a result of abundant supply from other nations such as India, Indonesia and Ecuador (for shrimp) and the possibility of an excess of raw materials at home in the next 3-4 months (for tra fish).

Corporate profits are the main factor affecting stock prices, which, however, may sometimes move in the opposite direction. For example, the DBC shares of Dabaco Vietnam Group Joint Stock Company have hit the ceiling during some recent sessions, despite the company’s disclosure of a year-on-year drop of 93% in their profit for the second quarter of 2022. Now that enterprises are reporting losses but their stock prices are increasing, or they are enjoying impressive profit growth but their stock prices are still tumbling, it is advisable that investors specifically assess the performance and business prospects of each industry, each enterprise, as well as market expectations. The price increase of DBC shares, for instance, is most likely due to the expectations of buyers that surging pork prices will be an excellent source of income for this company in the third quarter.

In general, the stock market often reflects investor expectations. Factors such as the Russia-Ukraine conflict, China’s zero-Covid policy, and the strong growth in Vietnam’s exports are believed to have partly affected stock prices. During the recent upsurge in raw material prices, some industries such as oil and gas, chemicals, and fertilizers have become beneficiaries, but the risk of profit decline these groups are facing may take place in the next few quarters. Meanwhile, the sectors wherein business results went downhill in the first two quarters and stock prices plummeted are likely to soon hit a bottom and rebound. It is because stock price movements heavily depend on such expectations that securing a profit when investing in stocks is never easy.

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