Cover Story: A ho-hum reporting season

This article first appeared in The Edge Malaysia Weekly, on September 4, 2017 - September 10, 2017.
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THE second-quarter earnings season ended June 30, 2017 (2Q2017) appears to be missing the excitement of the previous quarter and while most analysts have said that the results of companies listed on Bursa Malaysia have mostly met their expectations, Bloomberg data shows why the stock market is not reacting to the results.

Based on the earnings reported, net profit fell 18.1% from a year ago although revenue improved 8.2% during the same period. This was despite the low base effect in 2Q2016, when net income fell 22.5% year on year (y-o-y) while revenue slipped 2.1%.

Nonetheless, the first half for 2017 should still see strong earnings growth since the first quarter saw a net profit growth of 115.1% while revenue grew 17.2%.

Bloomberg data as at Aug 29 shows that on average, the 2Q2017 reporting season surprised on the negative for both revenue and earnings. Revenue in aggregate failed to meet expectations and fell short of the consensus expectations by 15.8%. Meanwhile, net profits were 73.7% below analysts’ expectations.

Having said that, note that not all the companies that announced their results were covered by analysts.

Alexander Chia, head of Malaysian research at RHB Research Institute, tells The Edge that most sectors have reported earnings that are within expectations. They include automotive, plantations, technology and property. Only two sectors — non-banking financial institutions and logistics — beat expectations.

“Overall, we are 60% of the way through this June reporting quarter. It’s looking somewhat subdued and unexciting. Nonetheless, we are still likely to see earnings recovery year on year in 2017, albeit [there will be] a less-robust rebound,” Chia says in an email exchange with The Edge. He points to positive macro trends supporting growth.

RHB Research Institute chief Asean economist Peck Boon Soon cautions that the strong gross domestic product (GDP) growth in the first half is unlikely to continue into the second half. “First, it was mainly because of the low base effect in the first half of last year and the country’s exports were very strong. However, export growth is likely to moderate. The slowdown in China’s growth is likely to have an impact on us. We should see moderate growth in the second half,” he says.

Areca Capital Sdn Bhd CEO Danny Wong, however, says about two-thirds of the companies covered by the fund house have either met or exceeded expectations. “Global growth is pointing towards recovery and exports have been very strong for Malaysia. With the latest earnings season results of the companies that we cover, it’s quite a positive sign moving forward,” he says.

Affin Hwang Asset Management senior portfolio manager Huang Juin Hao says Malaysian companies’ earnings reports have so far been mixed, with the big index heavyweight — the banking stocks — generally reporting positively while the broader market has been generally in line or come in on the softer side.

Huang notes that the results of the regional banking sector have also been turning positive.

He adds that the stock market rally in the first half has been justified by strong results in the new economy sectors (internet and technology), which have resulted in upward revisions of consensus estimates and brought the sectors’ valuations to be more in line with the upper end of their historical trading ranges.

“The strong rally in the first half was led by old economy sectors (commodities, industrials and financial) alongside the new economy sectors. Asian old economy sectors underwent a significant de-rating in 2015-2016 and were generally trading below their historical averages. The year-to-date rally has since brought valuations to be more in line with historical averages,” Huang adds.

He also thinks that the old economy sectors’ earnings reports have also been positive generally and should provide enough momentum for the rally in the old economy sectors to continue into the second half of the year.

While there appears to be mixed views on the earnings results so far, the stock market has been on a downward trend during the earnings season. On aggregate, returns on stocks listed on Bursa fell 0.8% and 2.3% in the last one week and one month respectively.