Lacklustre earnings

Small and mid-caps disappoint but larger firms fare better

PETALING JAYA: The recent quarterly earnings period has so far displayed some disappointing results due to lower-than-expected numbers stemming from small and medium-sized firms while blue-chip counters fared better.

Among the notable mid-capitalised companies that disappointed is condom maker Karex Bhd, which saw its profit nosedive by 76% to RM2.9mil in the fourth quarter ended June 30.

The drop was attributed to higher operating expenses and increases in raw material prices such as latex. Karex’s shares are down 40.25% year-to-date, after more than three months of heavy selling.

Another disappointing number came from construction giant Malaysian Resources Corp Bhd (MRCB).

Kenanga Research pointed out that MRCB’s core profit of RM 17.9mil for the second quarter ended June 30 fell short of its expectations, due to lower-than-expected margins from its construction and property divisions.

“The incoming report cards are disappointing, with no outperformer while four (in Kenanga’s coverage) fell short of expectations and 11 posted results in line with expectations,” the research house said.

Kenanga also listed Power Root Bhd and glove maker Supermax Corp Bhd as underperformers due to these companies seeing a more than 50% year-on-year drop in their bottom line in the latest quarter.

According to Inter-Pacific Securities head of research Pong Teng Siew, earnings of small and mid-cap companies have been disappointing, while blue-chip counters managed to record growth in their profit numbers in this quarter compared to a year earlier.

However, Pong explained that the growth numbers were not that strong.

“Although blue-chip companies were reporting decent quarterly results, the growth is a far cry from what companies achieved in the period between 2013 and 2015,” he said.

The banking sector though did well in the second quarter, largely maintaining their solid earnings despite the challenging busi-

ness environment globally and on the domestic front.

In the latest quarter, banking giants Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd enjoyed a 43% and 26% rise in net profits to RM1.66bil and RM1.01bil, respectively.

Credit Suisse said CIMB would see improvement in its profits in the third and fourth quarters on the back of a pick-up in loans.

“Among the Malaysian banks, we expect CIMB to deliver the best return-on-equity improvement in 2017 to 2018 on the back of earnings turnaround in Thailand and Indonesia,” it said in a report.

It added that CIMB is currently trading at a multiple of 10.7 times 2018 earnings compared with its peer average at price earnings multiple of 12.3 times. On Wednesday, CIMB’s shares rose 38 sen to close at RM7.08 a unit.

However, dealers pointed out that the general lack of earnings uptick among Malaysian corporates is one of the reasons the stock market has also seen lacklustre trades.

The benchmark FTSE Bursa Malaysia KL Composite Index (FBM KLCI) has been trading sideways since May. The KLCI had gained 8.3% from January to April.

“The market has been stuck in a certain range since the first-quarter run. For it to move beyond the current level, corporate earnings need to show significant improvements,” Pong said.

Pong pointed out that there remained some resistance for the FBM KLCI to break beyond its current level.

“The ceiling for the FBM KLCI index seems to be capped at 16 times earnings multiple,” he said.

In the first quarter of this year, the rally in the stock market was in line with the growth of corporate earnings and a robust economic outlook.

Corporate earnings in the first quarter saw its fastest growth in two years. Banking and export-related sectors were boosted by stronger economic expansion.

The economy rebounded strongly by 5.6% in the first quarter ended March 31, compared with the same quarter a year ago. For the second quarter, the economy grew 5.8%, above the consensus estimate of 5.4%. Bank Negara expects 2017 growth to exceed the 4.8% forecast.

Foreign purchases of Malaysian stocks have dwindled, with almost RM382mil in net fund outflows reported last week, according to MIDF Research. “So far, foreign investors have been selling for eight weeks this year and the longest weekly selling stretch was three weeks in a row.”

Despite the recent outflows, there has been a net inflow of RM10bil from foreign investors in the local stock market on a year-to-date basis.

In a separate report, MIDF said among the major beneficiaries of foreign fund inflows this year were banking, oil and gas and gaming-related stocks.

MIDF’s picks were the three top local banks – Maybank, CIMB and Public Bank Bhd – that saw inflows amounting to RM1.43bil, RM1.7bil and RM76mil, respectively, from the fourth quarter of last year to the second quarter of 2017.