This article first appeared in The Edge Financial Daily on December 5, 2018

KUALA LUMPUR: The reported earnings of Bursa Malaysia-listed companies for the third financial quarter of this year (3Q18) have largely disappointed, amid continued weakness seen.

In fact, the earnings posted showed the “sharpest rate of contraction since 1Q16”, led mainly by utilities, plantation, construction, and media companies, according to Affin Hwang Investment Bank Bhd analyst Kevin Low.

Low said a higher number of companies had delivered results that were below expectations this quarter at 47.9% versus 42.4% for 2Q18.

“The negative earnings surprise was largely broad-based, hitting heavyweight sectors like plantations, oil and gas, transport and construction. Building materials and media also continued to disappoint.

“However, surprisingly, there was also a higher number of companies with positive surprises (16% for 3Q18 versus 13.6% for 2Q18) largely from the telecoms and auto sectors, the latter being a key beneficiary of the goods and services tax holiday period.

“Notably, we did not see a similar improvement in the consumer retail space (Bonia Corp Bhd and AEON Co (M) Bhd were subsequently downgraded), although the non-discretionary players such as Nestle (Malaysia) Bhd and Ajinomoto (Malaysia) Bhd did see [a] better quarter-on-quarter performance,” he wrote in a note to round up 3Q18, which he termed “a washout”, yesterday morning.

Kenanga Research’s Chan Ken Yew, in a separate 3Q18 result review entitled “continued weakness”, said the major culprits were building materials, media and the utilities sectors, while construction, consumer and plantation sectors also displayed some signs of weakness.

Nevertheless, he also saw some signs of improvements. While he noted that 45 out of the 146 stocks under the research house’s core coverage delivered weaker-than-expected results for 3Q18, 22 outperformed expectations — compared with 15 stocks in the previous quarter.

“Nonetheless, despite such improvements, we believe the improvements are not enough to excite the market as we continue to see earnings downgrades of 9.1% for this financial year and 6.4% for the next financial year on average for the 146 stocks under our coverage.

“We deem this as continued earnings weakness as we have revised down our earnings estimates since the last two quarters,” Chan added.

Affin Hwang maintains its market “overweight” rating with a 2018 year-end estimate for the benchmark FBM KLCI at 1,845 points.

“We remain positive on the market as we believe that the structural reforms would gradually enhance the country’s fundamentals, while the weak ringgit (vis-à-vis the US dollar) provides [an] additional upside to capital returns,” read the note.

For end-2019, Kenanga Research lowered its index target to 1,805 points, from 1,870 previously, in line with the recent cut in the consensus index target.

The KLCI closed 4.73 points or 0.28% lower at 1,694.99 yesterday.