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

KUALA LUMPUR: Despite a strong gross domestic product (GDP) growth in 2017, it did not translate to stronger earnings for corporates in the just concluded reporting season as analysts saw more companies reporting lower-than-expected results.

Based on data compiled from Bloomberg, 102 companies had “underperformed” research houses’ estimates, while 86 companies “outperformed”. In terms of year-on-year (y-o-y) net profit growth, the number of companies reporting growth for the fourth-quarter 2017 earnings season was about the same as that of those reporting declines in profitability.

Public Investment Bank Bhd research head Ching Weng Jin said the latest earnings season was a disappointing one, despite strong GDP growth for the year, with the oil and gas sector (O&G) as the major underperformer.

Malaysia’s GDP growth posted a significant improvement in 2017, averaging 5.9% y-o-y, versus a 4.2% expansion in 2016.

“The fourth quarter 2017 earnings season was not too good. Most companies’ poor financial performances were not due to challenges on the business front, but rather due to cost pressures,” he told The Edge Financial Daily over the phone. Generally, he said companies were affected by cost pressures, adding that the small-cap stocks took a bigger hit than their larger counterparts.

A look at the small-cap companies (with market capitalisation of below RM500 million) showed the number of companies that posted a decline in fourth quarter 2017 net profit almost doubled those that posted earnings growth. Similarly among the mid-cap companies (with market caps of between RM500 million and RM1 billion), over 60 companies posted earnings contraction versus 38 that posted growth. Out of the big-cap companies (with market caps of above RM1 billion), about 70 companies posted positive growth while 80 reported declines in net profit.

Ching said the major underperformer for the quarter was the O&G sector, with nine companies under the research house’s coverage reporting lower-than-expected earnings, versus two companies that beat expectations.

Some of the O&G players that saw lower performance during the quarter include MISC Bhd, which saw its 4QFY17 net profit plunging 87% to RM68.2 million amid an impairment loss of RM553.9 million.

Meanwhile, Sapura Energy Bhd fell into the red, with a net loss of RM274.41 million in the third quarter ended Oct 31, 2017 (3QFY18) compared with a net profit of RM158.06 million a year ago, partly due to a share of loss on disposal of a vessel by its joint-venture company SapuraAcergy Sdn Bhd. Ching attributed the missed estimates to the slow pickup in work flows despite the gradual stabilisation in crude oil prices seen since the second half of 2017. Moreover, some companies were still booking impairment provisions, an indicator that the operating environment for the O&G sector remains challenging.However, he noted that works are starting to flow again albeit gradually, and should have more telling effects this year.

The research house is maintaining an “overweight” call on the sector as it expects crude oil prices to remain above the US$60 per (RM234) barrel mark, which should encourage a return of activity for O&G majors.Despite the generally disappointing 4Q, Ching said there is no cause for worry as he expects earnings to pick up this year.

“The results were disappointing and there were pockets of weakness here and there, but it’s nothing too alarming. We are not heading into tough times or anything like that.

“GDP growth was strong in 2017, but it has not cascaded into corporate earnings as the growth was largely externally driven seeing from the strong export numbers. Hopefully, we will see the stronger economic numbers reflected in corporate earnings growth in 2018,” he said.

Meanwhile, the banking sector saw better performance with several financial institutions performing better- than-expected despite weaker loans growth during the quarter.

CIMB Group Holdings Bhd saw its net profit grow 24% to RM1.06 billion for its 4Q ended Dec 31, 2017 (4QFY17), from RM854.39 million a year ago, while revenue increased 5% y-o-y to RM4.52 billion. For full-year FY17, it saw net profit climb 26% to RM4.48 billion from RM3.56 billion a year earlier. Revenue rose 10% to RM17.63 billion from RM16.07 billion.

Another bank that posted significant top-line growth was RHB Bank Bhd, with a net profit of RM460.08 million for 4QFY17, up 76% from RM261.24 million in the previous year. Quarterly revenue increased 6% to RM2.7 billion from RM2.56 billion a year ago. Its full-year net profit increased 16% to RM1.95 billion from RM1.68 billion in FY16, while revenue was flat at RM10.57 billion.

Maybank Investment Bank Bhd (Maybank IB) research head Wong Chew Hann said banks were the main driver for earnings growth in 2017, noting that core net profit (CNP) for the sector increased 13% y-o-y. “On aggregate, banks within our coverage saw (CNP) jump 13% y-o-y in 2017 which was a refreshing development given three consecutive years of non-growth previously.

“Earnings expansion was driven by higher net interest margins (NIMs) which offset slower loan growth, positive JAWS ratio (income growth exceeding expense growth) and lower credit costs,” she said in a recent note.

Maybank IB said the banking sector could be driving market earnings in 2018, expecting 8% growth in core earnings driven by faster loan growth, stable NIMs and lower credit costs.

Another potential earnings driver is the healthcare sector, with an expected core earnings growth of 42%, mainly due to a ramp up in activity in IHH Healthcare Bhd’s two new hospitals in Hong Kong and Turkey. Other sectors that are seen as major earnings contributors are automotive (36% core earnings growth), gaming (23% earnings growth), rubber gloves (20% earnings growth) and technology (33% earnings growth). Meanwhile, the research house expects the utility sector to be the dampener, forecasting 4% earnings contraction in 2018 due to the step down in Regulatory Period 2 earnings for Tenaga Nasional Bhd.

MIDF Research noted that the ratio of outperformer against underperformer among the FBM KLCI constituents under its coverage has always been skewed towards the latter, at least since the beginning of 2016. “However, the inauspicious streak has finally ended as the number of outperformers trumped underperformers at 3:1 in fourth quarter 2017,” it said in its earnings wrap-up report last Friday.

“With the expectations of continued healthy macro-environment (that is, sustained domestic and external demands) as well as continued recovery in corporate earnings performance this year, we thereby reiterate our (FBM) KLCI year-end 2018 target at 1,900 points,” it added.

The benchmark index closed down 4.79 points or 0.26% at 1,856.07 last Friday.