This article first appeared in Capital, The Edge Malaysia Weekly on May 22, 2017 - May 28, 2017
THE earnings season for the quarter ended March 31 has been touted as the “defining moment” for the rally seen in the stock market this year. Investors are closely monitoring the numbers to see if they justify the rise in share prices.
Up to May 18, about 60% of the 96 companies listed on Bursa Malaysia that have announced their results have seen better earnings compared with the corresponding quarter a year ago. About 37% saw a decline while the remaining 3% showed a flat performance.
According to Bloomberg data, almost 50% of the companies that are covered by research houses have outperformed expectations.
“The first-quarter earnings will have a big impact on the sustainability of the share price rally. The results are almost certainly better than what we had seen last year. The big problem is that a lot of these recoveries have been priced in. The run-up has been so sharp this year. What I’m more concerned about is if the earnings fail to live up to the high expectations of the market,” says Pong Teng Siew, head of research at Inter-Pacific Research Sdn Bhd.
According to him, earnings are still on firm ground — especially in the first quarter — but investors will now be looking for signs of sustainable growth beyond the quarter’s results.
Etiqa Insurance & Takaful head of research Chris Eng agrees, saying that earnings have been on track and within expectations so far.
However, the market has moved ahead of earnings for some of the companies, he points out.
“Ever since the FBM KLCI breached the 1,770 level, we have not been as bullish about the market and believe that investors should gradually take profit as we expect to see some weakness. Nonetheless, with the results showing positive outlook, it (FBM KLCI) could still head towards the 1,800 level … there’s nothing wrong with the local market and the market sentiment. The concern is more on the global market,” says Eng.
Some of the external factors that he mentions are the investigation into US President Donald Trump’s ties to Russia, and the geopolitical tension involving North Korea.
The stock market appears to have hit a bumpy road as fears of more trouble ahead for the Trump presidency spread across global markets. The FBM KLCI has fallen for three consecutive days up to last Thursday — something that has only happened three times this year before the latest decline.
A fund manager with a local asset management company, however, brushed off the decline as a temporary blip and insists that stronger earnings will keep the market momentum moving into the second half of 2017.
Construction: 2016 contracts translate into better earnings
Jeremy Goh, an analyst with Hong Leong Investment Bank, says the construction sector in general will see strong earnings results for the quarter ended March 31.
“In general, if you look at the contracts that have been announced on Bursa Malaysia, 2016 saw a record high of RM56.4 billion [domestic contracts awarded to listed contractors] and usually, the impact on profit will come in a year later for a span of three years,” says Goh.
He adds that the momentum for the market rally hinges on the performance of corporate earnings.
“The stock market will be a bit jittery if earnings disappoint but if it meets expectations, the momentum will continue. Of course, investors would probably still be hopeful if the first-quarter earnings were not on track as they would probably take a wait-and-see approach. But what’s certain is that the numbers for the first six months will be crucial to keep the momentum going,” says Goh.
Pong concurs but believes that certain companies will perform well in the second half. He highlights Econpile Holdings Bhd as one of the construction companies that is positioned to benefit from the upcoming contracts to be awarded.
Banking: Proxy for economic growth
Public Bank Bhd was one of the first few banks to announce its first-quarter results for the financial year ending Dec 31, 2017 (1QFY2017). Net profit rose a marginal 1.5% to RM1.25 billion from RM1.23 billion a year ago.
With the Malaysian economy expected to improve moving into next year, the banking sector is likely to see better days ahead, says Etiqa’s Eng.
In the first quarter of this year, the economy grew at its fastest pace in two years as gross domestic product rose 5.6%, according to Bank Negara Malaysia.
The banking sector is viewed as a support to economic growth. Thus, the earnings releases of Malayan Banking Bhd, CIMB Group Holdings Bhd, RHB Bank Bhd and Hong Leong Bank Bhd this week will be closely monitored.
The Bursa Malaysia Finance Index has increased 13.6% year to date (up to May 18).
Plantation: Better 1Q but weakness in 2H expected
The plantation sector is also expected to see better earnings this week on a year-on-year basis.
Alan Lim, an analyst at MIDF Research, says the results could be weaker sequentially but better year on year, in tandem with the movement in crude palm oil prices.
Eng says, “While the earnings results are likely to be better in the first quarter as well as the first half, analysts are expecting a weaker second half as a result of weaker CPO prices. On this basis, despite better earnings in the first quarter, most analysts feel that it is in line with expectations.”
The plantation players that will be announcing their results this week include Kuala Lumpur Kepong Bhd and Sime Darby Bhd.
Oil and gas: Gradual recovery but volatile oil price a key risk
An analyst with a local research house says the outlook for the oil and gas sector remains weak and he expects its earnings to remain flattish.
“The oil price is still volatile while the capital expenditure will take some time to come through. Of course, we have seen a strong rally in some of the O&G counters but it’s mainly due to a sharp collapse in some of these companies in the last two years. Currently, some of the shares are already back to their fair value and I wouldn’t advocate chasing after them,” he says.
Petronas Dagangan Bhd is one of the O&G companies that has announced its first-quarter results — it saw a 15.4% growth in net profit to RM253.2 million. Most of the O&G companies that announced their results last week saw better earnings than the year before.
Raymond Yap, of CIMB Research, says in a report that the 1QFY2017 results for Petronas Dagangan were within expectations but a downward surprise was seen in the decline of sales volume by 4% year on year.
Consumer: Weak consumer sentiment persists
After rallying in the last two years, the consumer sector is not looking too bright as sentiment remains weak, according to an analyst from TA Securities.
She says a lot of consumer players have had to raise prices due to the rising cost of commodities. With the pressure from rising inflation as well as the weaker ringgit, this has led to weak consumer sentiment.
“Earnings are expected to be weaker or remain flattish compared with the previous year’s results. [With factors such as] the ringgit remaining low — the house view is at RM4.25 against the US dollar — and rising price of raw materials such as sugar due to the rationalisation of government subsidies, consumer sentiment is expected to remain weak,” she explains.
However, the analyst says sentiment could improve if an early general election were to translate into more goodies for the public. “If that happens, consumer sentiment could improve and this would probably stimulate spending,” she adds.
There are other consumer players that are doing well, such as the poultry players and convenience stores, according to an analyst from a local research house.
Logistics: Long-term growth story
Logistics players are not likely to see excitement from their earnings announcements in the coming week, say analysts.
“Quarter on quarter, we think that there will be a slight decline but overall, it should be flattish results for the logistics players. I think that for them, it will be more of a long-term growth story, driven by the e-commerce boom. But in the near term, we’re not going to see much excitement,” says Hong Leong Investment Bank analyst Lim Sin Kiat.
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