Corporate earnings grow

CIMB says first-quarter profit expansion fastest in recent years

PETALING JAYA: After two years of disappointment, corporate earnings in the first quarter of 2017 grew, as banks and technology firms benefited from stronger economic growth.

At least one analyst described the first-quarter results as the fastest growth in recent years.

Analysts reckoned that the encouraging start to the first-quarter corporate earnings growth in 2017 after two years of decline heralds a positive outlook for corporates.

“This year is the first time we could see a positive growth in corporate earnings after two years of consecutive decline,” CIMB Investment Bank head of equity research Ivy Ng told Star Biz.

She said that from CIMB’s universe of stocks, first-quarter corporate earnings grew 11% year-onyear (y-o-y), the fastest growth since the first quarter of 2013.

However, the research house expects corporate earnings to grow 8% this year, lower than its earlier forecast of between 9% and 10%.

This is because it expects the corporate earnings momentum to taper off in the later part of the year.

“The first quarter is usually the strongest quarter, and there is also a low base effect from last year,” Ng said.

Nonetheless, she said the ratio of companies that underperformed was higher than the outperformers.

“There could be an earnings downgrade in some segments of our universe of stocks,” she said.

Among the companies that underperformed in the first quarter were in the automotive and transportation sectors.

For the coming quarters, Ng reckoned that companies in the construction and utility sectors would be the research house’s top picks.

MIDF Research has also lowered its corporate earnings forecast for this year to 10.7% from 11.2%, as it expects the growth momentum to soften in the coming quarters.

“The first-quarter results were in line, with good export numbers and a weaker ringgit. Sectors such as technology and manufacturing surprised the market,” said MIDF head of research Mohd Redza Abdul Rahman.

He added that the banking sector performed well in the first quarter, backed by a higher-than-expected loan growth of above 5%.

“Moving into the second half of the year, we expect exporters to continue to do well, especially with the stable ringgit againt the US dollar,” Redza said.

Banking stocks, which have gained favour among foreign investors since the beginning of the year, have been the main driver of the rally in the local stock market.

Bursa Malaysia’s leading indicator, the FBM KLCI, has soared 7% year-to-date led by the banking sector, which makes up the largest component of the benchmark index.

Four out of the five largest public-listed banking groups have seen a huge increase in their profits during the quarter, in line with analyst expectations.

However, moving further into the year, several research houses have lowered their expectations on the banking sector on modest earnings and loan growth, and asset quality concerns.

UOB Kay Hian said it has downgraded Malayan Banking Bhd and Affin Holdings Bhd to a “hold” and “sell”, respectively.

“Sharp share price outper- formance and pockets of asset quality concerns were the drivers of our downgrades.

“As for CIMB Group Holdings Bhd, we would advocate a ‘sell into strength’ strategy, as valuations are no longer appealing,” it said in a report.

It has upgraded Hong Leong Bank Bhd to a “buy” on the back of a solid recovery in earnings and attractive valuations.

Meanwhile, CIMB Research said although the industry’s loan growth increase at end-April was a tad higher than its 5%-6% projection, it expected the loan growth to moderate in the coming months.

“The growth in the industry’s loan applications and approvals moderated from 6.4% and 28.9% y-o-y, respectively, in March to less than 1% y-o-y (for both) in April.

“This was mainly due to the slowdown in the indicators for residential mortgages. Also, the approvals of working capital loans even contracted 9.2% y-o-y in April compared to a surge of 35.5% y-o-y in March,” it said in a sector report.

This year is the first time we could see a positive growth in corporate earnings after two years of consecutive decline. Ivy Ng