Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily, on January 16, 2017.

 

KUALA LUMPUR: Corporate Malaysia is expected to see earnings growth in 2017, but at the expense of net profit margin as a result of rising production costs, an expected decline in consumption and a weak ringgit against the US dollar.

Public Investment Bank Bhd head of research Ching Weng Jin said that there will be a growth in corporate earnings in 2017, stemming from a low base in the past two years.

“Corporates can expect to see some margin compression due to stiffer competition, the weak ringgit and lower consumption spending,” he told The Edge Financial Daily.

Ching said the consumer goods sector could see some challenges in maintaining their profit margins in 2017.

“[Due to the weak ringgit], there will be a rise in costs for consumer goods companies which import most of their raw materials which will impact margins.

“It will then come down to pricing power, on whether these consumer goods companies can pass down these costs, or afford to absorb the costs,” he said.

In its Jan 11 note on the consumer sector, Hong Leong Investment Bank Research said that it anticipates the consumer sector to experience a slow recovery this year.

“While the effects of the goods and services tax (GST) continue to fade, there is downward pressure on disposable income arising from [a] weak ringgit and decline in corporate profitability.

“Upon the expiry of the Price Control and Anti-Profiteering Act (PCAP) on Dec 31, 2016, a new PCAP Regulation 2016 came into effect on Jan 1, 2017, hence limiting companies’ flexibility in pricing,” the research firm said.

According to a statement from the domestic trade, co-operatives and consumerism ministry, the new PCAP 2016 only applies to food and beverages as well as household goods.

This represents a narrower scope compared with the previous regulation, the PCAP 2014, which included all goods and services.

Nevertheless, large consumer goods companies such as Nestle (M) Bhd and Fraser & Neave Holdings Bhd (F&N) have managed to expand their earnings base, without sacrificing profit margins.

Nestle’s net profit margin improved from 13.49% for its nine-month period ended Sept 30, 2015 (9MFY15) to 14.95% for 9MFY16. The group attributed its increase in margins in 9MFY16 compared to a year ago to favourable commodity prices as well as efficiency increases in its factories and overall supply chain.

F&N’s net profit margin improved to 9.25% in its financial year ended Sept 30, 2016 (FY16) from 6.82% in FY15, which the group attributed to a favourable product portfolio mix and manufacturing efficiencies.

Ching said that other sectors which could see net profit margin compression in 2017 include automotive players, glove makers and property developers.

“Automotive players would also see some pressures on margins due to higher marketing and promotional expenses.

“For the glove sector, a stronger US dollar would help to increase revenue of glove makers, but since about 50% of raw materials are imported, nitrile-focused players would see continued pressures on costs. An improvement in margins for glove makers would depend on volume play, the more they sell the more they can make.

“Property development players may also see some pressure on margins due to the higher marketing costs; players with less strong balance sheets could opt to have healthy cash flow at the expense of profit margins,” he said.

Areca Capital chief executive officer Danny Wong (pic) opined that banks, upstream plantation players, and oil and gas service providers could see an improvement in net profit margin this year.

“Banks for instance may be affected by potential domestic interest rate cut, but due to recovery of loan growth and better managed costs, margins could be better this year.

“Most [plantation] and oil and gas players faced margin pressure last year as a result of low [crude palm oil and crude oil] prices but with the expectation that [the] commodities price may be generally higher this year, these sectors may benefit from margin recovery [and deliver] better earnings,” he said.

From an economist’s point of view, UOB Malaysia senior vice-president Julia Goh said that declining margins amid growing corporate earnings do not affect the economic health of the country.

“Earnings and margins may not rise in same magnitude, but there must be some growth. If the industries continue to face declining earnings or margins, jobs and wages fall, government revenue declines then the economy will suffer.

“If a business suffers margin compression, I suppose questions asked would be is it temporary or are there structural adjustments happening?.

“If it is temporary and businesses are still making profits but just lesser, then I don’t see this as a big problem. They can reinvent or look at new ways to innovate and improve. That will strengthen resilience and allow them to ride the next turn in the business cycle.

“However, if the answer is structural and they only see profits continuing to erode, the environment gets tougher and they see it better to exit because there is no future, then businesses shut down, jobs are lost and economic health deteriorates,” she said in an emailed response to The Edge Financial Daily.

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