Corporate earnings primed for pick-up
Higher commodity prices, construction job flows to support growth
PETALING JAYA: Plantation companies are projected to show strong profit growth in the last quarter of 2016, on the back of the higher price of crude palm oil (CPO), although the sector’s rebound may not be enough to make up for what analysts see as another year of disappointing earnings for corporate Malaysia.
But after three years of profit letdowns, corporate earnings are primed for a pick-up in 2017 on higher commodity prices, rising construction job flows and steady economic conditions.
MIDF Research deputy head Mohd Redza Abdul Rahman reckoned that the fourth-quarter corporate earnings could drag the overall 2016 performance, especially with several sectors affected by high raw material prices.
“Earlier, we expected corporate earnings to grow by 3% in 2016, but the forecast could be slightly lower because of the fourth-quarter results,” he said, adding that the consumer goods sector could be hit the most from higher sugar prices.
Both Redza and CIMB Investment Bank head of equity research Ivy Ng are bullish on the plantation companies for the fourth quarter, underpinned by the rising CPO price.
The CPO price has remained above RM3,000 a tonne for the past four months.
“We expect companies in the plantation and export sectors to do well in their fourth quarter, and vice versa for the automotive and property sectors,” Ng said.
For export-based companies, Ng said rubber glovemakers and electric and electronic manufacturers are expecting to gain from a weaker ringgit against the US dollar, especially in November last year.
The domestic currency has declined by as much as 6.5% against the US dollar since Donald Trump’s unexpected victory in the United States presidential election in November.
Banks and telcos, which make up a large proportion of the FBM KLCI’s component stocks, are expected to remain flat.
Moving into 2017, Redza and Ng said the growth of corporate earnings is to improve by about 10%, supported by the plantation and banking sectors with rising CPO prices and improvement in loans growth.
“I think the banking sector has seen its worst since September 2016.
“A stable gross impairment loan rate, recovery of loan approval numbers and better asset quality, all of which are more dependent on domestic factors rather than external ones, will lead to a stronger earnings growth this year,” Redza said.
Meanwhile, Ng also prefers companies with exposure to the strong US dollar and construction counters.
According to CIMB’s outlook report, Ng has recommended Top Glove Corp Bhd, Sime Darby Bhd, Malayan Banking Bhd and RHB Bank Bhd as top picks for 2017.
In the small-cap space, she has recommended MyEG Services Bhd, Sasbadi Holdings Bhd and Karex Bhd.
On the oil and gas (O&G) sector, analysts are bearish on the sector despite the recent strengthening in the crude oil price.
“Most of the local O&G players in Malaysia are in the upstream sector, which is pretty much dependent on Petroliam Nasional Bhd’s (Petronas) capital expenditure (capex). It is unlikely that Petronas will increase its capex anytime soon, we prefer players in the downstream sector,” an analyst said.
The benchmark FBM KLCI index kick-started 2017 on a positive note, rising by as much as 3.5% as investor confidence improved, compared to a bearish start in early 2016. The question remains if the outlook on corporate earnings would begin to support investors’ anticipation.
TA Securities head of research Kaladher Govindan expects the FBM KLCI to end this year stronger between 1,700 and 1,750 points on the back of stronger corporate earning and economic growth.
The domestic economic growth is expected to register a 4.3% rise in 2017 as compared to the 4.2% estimated for 2016.
MIDF chief economist Dr Kamaruddin Mohd Nor said the slight improvement in the overall gross domestic product growth is supported by the domestic sector, as well as a better contribution from the external sector.
“The recovery signs of improvement in the global economy, such as a gradual increase in the manufacturing Purchasing Managers’ Index in several large economies such as China, the euro and the US, paint a promising picture about the recovery momentum of the global economy,” he said.
He, however, warned that the downside risks such as US policies, Brexit and monetary policy adjustments are weighing on the expected recovery.
“Nevertheless, we are sanguine the export sector will expand at 3% this year as compared to an estimated 1% growth in 2016,” Kamaruddin said.
In terms of the ringgit’s performance, which is said to boost export demand, Kamaruddin said the ringgit is expected to improve in the second half of this year.