Earnings, asset rout to continue

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KUALA LUMPUR: The latest gross domestic product (GDP) data and earnings reports that came in for the last quarter of 2008 showed that the global financial and economic meltdown has caught up on local shores as company after company reported slowing or negative growth in their financial statements.In media briefings throughout the reporting season, corporate management have been warning that 2009 earnings would take a hit as the operational environment has become much tougher.Meanwhile, Bank Negara Malaysia’s (BNM) announcement that real GDP growth had slowed to 0.1% in 4Q08 from 4.7% in the previous quarter and its surprise reduction of the overnight policy rate (OPR) by 50 basis points to 2% last week indicated that the country is more than likely to fall into a recession.So far as the earnings that came in were concerned, downturns could be observed across the board, except for the “recession-proof” food and beverage sector, and banking sector.Analysts said the results were largely expected, as the current financial figures merely reflected the deteriorating economic situation that started in the final quarter of last year. “There have been more negative surprises in 4Q as the deterioration accelerated in the final two months of the year,” said David Ng, chief investment officer at HwangDBS Investment Management Bhd. “The general consensus is that most of the companies are now reporting lower earnings or outright losses, with only an average of 10%-15% recording increases in earnings, while new accounting rules necessitate tighter mark-to-market rule in assets valuation. “Therefore, we are not surprised with the larger number of companies reporting operational losses and we also saw the increase in provision for impairment losses,” said Pong Teng Siew, head of research at Jupiter Securities Sdn Bhd.” HwangDBS’ Ng concurred, saying that further impairments meant that raw materials and inventory prices would decline further and continue to affect asset values, thus necessitating more writedowns.As for commodities-based companies with global exposures such as IOI Corporation Bhd, Kuala Lumpur Kepong Bhd (KLK) and Kulim (M) Bhd, earnings were hit by losses owing to contract defaults and foreign exchange (forex) translation losses.In IOI’s case, even a 26% increase in operating profit in the first half of its fiscal year 2009 amounting to RM1.09 billion could not offset the losses due to forex losses, customer defaults on crude palm oil futures and unrealised translation losses on long-term US dollar borrowings.IOI reported a lower pre-tax profit of RM796 million for 1HFY09, down 44% from RM1.42 billion for the same period the previous year. Its quarterly earnings came in at RM168.59 million, 70% lower from RM581.19 million a year earlier.Plantation company KLK also reported a decline in its quarterly year-on-year (y-o-y) earnings after writing down overseas investments and inventory. KLK also posted forex losses for the quarter. Its earnings for the quarter came in at RM65.85 million, down 77% from RM291.14 million y-o-y.Companies that had gone on acquisition sprees overseas were also hit in their profit and loss (P&L) statements. Pos Malaysia Bhd took an impairment loss of RM107 million after its investment in Transmile, devalued, as did quoted securities.This resulted in a downgrade of the company by Credit Suisse, which in turn sent the counter spiralling to its lowest level in eight months.Large caps Resort Word Bhd and Malayan Banking Bhd also took hits to their balance sheets after the prospects of their foreign acquisitions tumbled.Resorts impaired the value of its subsidiary Star Cruises Ltd by RM781.5 million, which dragged the company into the red. The company netted a loss of RM387.84 million compared to positive earnings of RM344.09 million y-o-y.  However, on a positive note, Pong expected global economy to start showing signs of recovery in the first quarter of next year, and remained bullish that commodity prices would start to recover in the near term.“Key commodity prices such as crude palm oil and petroleum are expected to recover within the next 12 months. Our top picks would be the oil and gas, plantation, healthcare and selected consumer food majors,” he said.   On the banking sector, Pong said based on the latest results, financial institutions seemed to be performing better than most other industries despite the squeeze in margins due to lower interest charges and increase in provision for doubtful debts. Meanwhile, HwangDBS’ Ng said the banking sector was expected to face a tough year ahead, but agreed that Malaysian banks should be able to withstand the current storm.“Not much is seen in NPL (non-performing loan) formation, although operating trends in the last quarter seemed to indicate that this was rising. In short, 2009 should see lower earnings and would be more reflective of the current economic reality. “Banks however, are generally better positioned this time around to weather the storm compared to the time of the Asian financial crisis,” said Ng.