Sour earn­ings

Re­search houses trim tar­gets and out­look for cor­po­rate prof­its

The Star Malaysia - StarBiz - - Front Page -

PE­TAL­ING JAYA: The weak third quar­ter cor­po­rate earn­ings sur­prised many bro­kers for the missed es­ti­mates and sig­nalled a step back in the earn­ings growth of the com­pa­nies in the FBM KLCI this year.

The poor show­ing by cor­po­rate Malaysia in the third quar­ter has prompted many re­search houses to trim their tar­gets and out­look for earn­ings as they take a cau­tious stance for 2019.

CGS-CIMB said cor­po­rate earn­ings for the third quar­ter (Q3’18) fell 5.9% year-on-year (y-oy), due to weaker per­for­mances from the agribusi­ness, con­struc­tion, oil and gas, and gam­ing sec­tors.

The ag­gre­gate core net profit of com­pa­nies cov­ered by May­bank In­vest­ment Bank Re­search was down 9.9% y-o-y in Q3’18, which led to core earn­ings for the first nine months of the year con­tract­ing by 2.0% y-o-y.

The re­search house said the last time it saw such size­able set-back in quar­terly re­sults was in the first quar­ter of 2009, when core earn­ings fell 18.9% y-o-y.

“In line with the high num­ber of earn­ings misses, we have low­ered earn­ings fore­casts for half (51%) of our uni­verse, up­graded on just 9%.

“For 2018, we now ex­pect KLCI core earn­ings growth to take a step back, to de­cline 2.8% y-o-y as com­pared with 0.6% pre­vi­ously, for our uni­verse mi­nus 1.3% y-o-y ver­sus 4.1% pre­vi­ously.

“As for 2019, we now es­ti­mate KLCI core earn­ings growth to re­sume at a smaller plus 3.2% y-o-y com­pared to plus 5.8% pre­vi­ously, for our uni­verse plus 7.8% y-o-y ver­sus plus 10.3% pre­vi­ously,” said May­bank IB Re­search.

CGS-CIMB fine­tuned its FBM KLCI tar­get for end-2018 to 1,704 points, which is now based on a higher price-to-earn­ings mul­ti­ple of 16.6 times.

The re­search house es­ti­mated end-2019 KLCI tar­get of 1,674 points, based on a price-to-earn­ings mul­ti­ple of 15.4 times, as the mar­ket has priced in some but not all the po­ten­tial pol­icy risks and may not have fully ap­pre­ci­ated the mar­gin pres­sures af­fect­ing some in­dus­tries due to the in­creased in min­i­mum wages and roll­back of projects.

While cor­po­rate earn­ings can still de­liver pos­i­tive year-on-year growth ahead, the un­der­whelm­ing per­for­mance was ex­pected to con­tinue, sup­press­ing growth rates, said MIDF Re­search.

De­spite the earn­ings weak­ness seen in the oil and gas and man­u­fac­tur­ing sec­tors, PublicIn­vest Re­search saw trading op­por­tu­ni­ties in the mar­ket.

The re­search house also sug­gested se­lec­tive

ex­po­sure in the bank­ing sec­tor.

“Re­cov­ery in the oil and gas sec­tor is fi­nally start­ing to see trac­tion, pock­ets of chal­lenges not­with­stand­ing.

“We an­tic­i­pate prices to re­main at av­er­age US$60 per bar­rel in 2019, with work progress and earn­ings recog­ni­tions sus­tain­ing as a re­sult,” said PublicIn­vest Re­search.

For the bank­ing sec­tor, fi­nan­cial in­sti­tu­tions are ex­pected to see de­cent earn­ings growth in the com­ing year with pro­vi­sion­ing lev­els still on the down­trend.

While PublicIn­vest Re­search main­tains its neu­tral view on the sec­tor, it con­tin­ues to be with a pos­i­tive bias given its lag­ging val­u­a­tions rel­a­tive to the broader mar­ket.

“The re­cent pick-up in sys­tem loans growth mo­men­tum con­tin­ues to be re­flected in num­bers. As most fi­nan­cial in­sti­tu­tions are also al­ready in com­pli­ance with cap­i­tal and net sta­ble fund­ing re­quire­ments, we do not think com­pet­i­tive pres­sures will be par­tic­u­larly preva­lent on the li­a­bil­ity front, though the fight for good qual­ity cred­its may ham­per yields on the as­set side,” it said.

Apart from that, PublicIn­vest ex­pected re­bounds for the small and mid-cap space de­spite the pro­nounced weak­ness seen this year, due to their un­changed fun­da­men­tals.

The re­search house’s picks for the small and mid-cap sec­tor are EA Tech­nique, Perak Tran­sit, D&O Green Tech­nolo­gies, Mega First, Ta Ann Hold­ings, Uzma, Dayang En­ter­prise and Al­liance Bank.

Go­ing for­ward, Af­fin Hwang Cap­i­tal main­tains its over­weight rat­ing on the mar­ket with its 2018 year-end es­ti­mate for the FBM KLCI of 1,845 points, based on an 18.4 times FBM KLCI earn­ings per share for 2018.

The FBM KLCI is an in­dex con­sti­tut­ing Bursa Malaysia’s 30 largest stocks.

Af­fin Hwang Cap­i­tal re­mained pos­i­tive on the mar­ket on the back of struc­tural re­forms which would grad­u­ally en­hance coun­try fun­da­men­tals while the weak ring­git against the US dol­lar shall pro­vides ad­di­tional up­side to cap­i­tal re­turns.

“The US-China trade war cease­fire should pro­vide some near-term re­lief for the mar­ket and may over­shadow any pes­simism on the dis­ap­point­ing third quar­ter re­sults sea­son.

“Fur­ther­more, with for­eign cap­i­tal out­flows eas­ing off since May 2018 and for­eign eq­uity hold­ings hav­ing reached a near-term trough, we think that the risk-re­ward is favourable,” said Af­fin Hwang Cap­i­tal.

Mean­while, MIDF Re­search es­ti­mated the FBM KLCI year-end 2018 tar­get at 1,800 points, while the year-end 2019 tar­get re­mained at 1,900 points.

This is on the back of favourable ex­ter­nal de­vel­op­ments such as the US-China trade truce and US Fed’s re­mark on in­ter­est rate be­ing near nor­mal lev­els, which may gen­er­ate near-term valu­a­tion tail­winds.

The ag­gre­gate re­ported earn­ings of FBM KLCI 30 con­stituents to­talled RM10.21bil in the third quar­ter of 2018, rep­re­sent­ing de­clines of 10.7% quar­ter-on-quar­ter (q-o-q) and 31.2% year-on-year (y-o-y).

On an ad­justed level to re­flect a fairer pic­ture of the bench­mark’s earn­ings per­for­mance, the ag­gre­gate nor­malised third quar­ter earn­ings of FBM KLCI 30 con­stituents were higher at RM14.54bil.

“The ad­just­ments were mainly re­lated to RM1.83bil im­pair­ment loss suf­fered re­spec­tively by Gent­ing and Gent­ing Malaysia on in­vest­ment in the prom­is­sory notes is­sued by the Mash­pee Wam­panoag Tribe in the United States, RM510mil pro­vi­sion and col­lec­tive agree­ment by Te­naga, for­eign ex­change losses of RM752mil on non-Turk­ish Lira de­nom­i­nated bor­row­ings by an IHH sub­sidiary.

“Af­ter neu­tral­is­ing the im­pact of non-op­er­a­tional items, the ag­gre­gate nor­malised growth in the third quar­ter posted much smaller neg­a­tive fig­ures at 2.7% q-o-q and 0.2% y-o-y, re­spec­tively,” said MIDF Re­search.

On a net profit ba­sis, 16 con­stituents of the FBM KLCI have seen their earn­ings for the third quar­ter fall be­tween 3% and 871%.

Only 13 com­pa­nies saw an in­crease in net profit, rang­ing from 2% to 108%.

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