Results for 4Q2008 unlikely to surprise

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From this week to the end of the month, more companies will announce their corporate results for 4Q2008, a period when the global economic meltdown had intensified.Factors like a sharp fall in the prices of commodities such as crude palm oil (CPO) and crude oil, lower demand as a result of weakening consumer confidence, a slowdown in manufacturing activities, a drop in exports and declining growth in the electronics sector will have a huge impact on the corporate earnings for 4Q2008. Already, 3Q2008 had seen a rise in disappointing corporate results due to the global economic crisis.In 4Q2008, CPO prices continued to be depressed, averaging RM1,602 a tonne compared with RM2,809 in the previous quarter. The price at the end of 2008 was RM1,695 a tonne compared with RM2,090 on Sept 30, 2008. Crude light for current month plunged from US$100.64 as at end-September to US$44.60 on Dec 31, 2008, while the ringgit weakened against the US dollar.Still, despite the global economic crisis accelerating in the final quarter of 2008, there are unlikely to be major surprises this reporting season because most research houses would have factored all the bad news into their forecasts. Thus, the results are likely to be within expectations. No country is an island and none is immune to the global economic crisis. Therefore, many expect the full impact of the economic meltdown to be felt this year as the real economy is hit. But how severe the impact will be cannot be ascertained.Even DiGi.Com Bhd decided not to provide the market any financial guidance on how the group would perform in the year ahead — unlike in the past — when it announced an improved net profit of RM1.14 billion for the year ended Dec 31, 2008, against the previous RM1.06 billion.“This is due to the difficulty of giving guidance within an acceptable level of accuracy in view of the challenging and uncertain economic development,” the mobile network operator said on Feb 6.The banking sector, which is seen to have the highest earnings among sectors listed on Bursa Malaysia Securities Bhd last year, may not have been badly affected by the crisis in 4Q2008, given its minimal exposure to toxic assets and the fact that non-performing loans (NPLs) are only expected to rise in 2H2009. This is despite declining earnings in investment banking, which accounts for a small portion of the bottom line of most banking groups.HwangDBS Vickers Research, in its December report, estimates the total net earnings, excluding exceptional items, of banks under its coverage last year at RM10.4 billion.A loan becomes non-performing when no interest and principal are paid for three months or more from due date. NPL ratios declined over the last few years to a low of 2.4% late last year.This year, the banking industry is expected to see a contraction in loan approvals as banks turn more cautious on lending activities.Recently, two banking groups — Public Bank Bhd and Hong Leong Bank Bhd — reported higher net profits for 4Q2008. Last month, Public Bank said it had recorded a more than 12% jump in net profit to RM653.98 million for 4QFY2008 ended Dec 31, from RM579.96 million a year earlier. Hong Leong Bank last week announced a 20% rise in net profit to RM257.43 million from RM213.84 million in the previous corresponding period.Based on the performance of these two banks, there is little likelihood of negative surprises from the financial sector, especially since the market would have already factored in the economic weaknesses. Going forward, any increase in business failure, squeeze on interest margins and rise in NPLs will affect the performance of banks and provide a clearer picture of the health of financial institutions.The 4Q2008 performance of the plantation sector, which was among the top earners in 2008, would not have been much affected if the companies had sold forward most of the CPO contracts and locked in the much higher prices prior to October last year. Parties familiar with the industry estimate the amount sold forward at about 30% of produce. Revenue is recognised once delivery is made.However, those who had sold at spot prices would have been hit hard by the depressed CPO prices. Plantation companies covered by HwangDBS are estimated to have raked in a total net profit, excluding exceptional items, of RM4.07 billion for 2008.For the property sector, weak sales and reduced new launches in 4Q2008 would have dampened the bottom line of most except those who locked in unbilled sales earlier. Although the lower prices of building materials would have provided some relief, property players who had locked in at higher prices may not have benefited.The sharp drop in material prices may have boosted construction firms but the earnings of some companies have been affected by the difficult operating environment and potential delays in project implementation. The least impact would be on construction companies whose work is progressing well. In the manufacturing sector, corporate earnings for 4Q2008 are expected to be among the hardest hit because of the extended holidays, falling exports and weak market demand. Negative demand growth in power in November and December is also an indicator of a slowdown in manufacturing activities. The shutdown of factories is not a good sign for manufacturers.More evidence of the slump in manufacturing production was the sharp contraction in the Industrial Production Index in 4Q2008. The manufacturing sector contracted 18.4% year on year in December 2008 and 10.1% in November — worse than during the Y2K technology bubble burst and 1997/98 Asian financial crisis — because of a substantial decline in the output of electrical and electronic products.In a nutshell, as the earnings reporting season for 4Q2008 gathers momentum this week, the results will not be pretty, but they will be within market expectations.As the world plunges further into recession, the corporate earnings for this period will be closely monitored as they could provide an indication of the companies’ future direction and outlook. The actual impact of the global economic meltdown will be felt this year.