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This article first appeared in The Edge Financial Daily on November 19, 2018

KUALA LUMPUR: Corporate earnings for the third quarter of 2018 (3Q18) are generally expected to be better than those for the second quarter, said analysts, citing growth of the consumer, automotive and banking sectors, spurred by improved private-sector spending.

They noted a rise in retail spending during the tax holiday that lasted three months — two of them within 3Q18 — after the abolishment of the goods and services tax (GST) and pending the reintroduction of the sales and services tax.

When contacted, MIDF Research head of research Mohd Redza Abdul Rahman told The Edge Financial Daily the tax-free period which ended in August should bring better results to companies related to consumers and consumer discretionary owing to an increase in demand for their products.

“The automotive TIV (total industry volume) jumped significantly, with some dealers saying they have met their annual quota so early in the year. In addition, with more disposable income, food players also got the spillover effect even though key food items weren’t taxed under the GST regime. Airports continued to see increases in passengers. MAHB (Malaysia Airports Holdings Bhd) is likely to see good numbers, with AirAsia Group [Bhd] expected to maintain its load factor despite increasing its number of planes. A cheaper ringgit could also see reasonable numbers for glove players,” he said.

“But the same cannot be said of plantation players hit by double whammy effects, namely [the] bumper harvest of soy which depressed palm oil prices and a depreciating ringgit. The same goes for construction players, with key projects put on hold pending negotiations to reduce prices as well as the inability to comfortably add new projects to their order books. Thankfully, much of these have seen some clarity recently. [The] media continues to face declining advertising expenditure revenues; luckily, this [has been] mitigated partially by its growing online business venture,” he added.

Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew said he expected a “slight” improvement for the July to September period after the “disastrous” April to June performance.

“There was more consumer spending during the third quarter. We saw the retail trade volume index spiking during the period due to the zero-rated GST tax holiday,” he said.

The Department of Statistics Malaysia reported that the retail trade volume index for 3Q18 grew 12.1% year-on-year (y-o-y) to 178.1 points.

Areca Capital Sdn Bhd chief executive officer Danny Wong Teck Meng said both the corporate sector and consumers were more willing to spend in 3Q18 as uncertainties faded after the 14th general election (GE14) on May 9.

“Many of them were holding back on purchases and investments involving big-ticket items like vehicles and machinery in the second quarter and GE14 period,” he said over the phone.

“Reviews of the new government’s policies were quite positive in general, and that helped in restoring some confidence,” he added.

Wong noted that the tax holiday also propelled some importers and manufacturers to replenish their inventory in advance. “They may have gotten their contracts in hand already. So, they could buy in advance and deliver according to their contracts, a way to manage their costs,” he said.

As spending improved, Wong said, bank loans would also have recorded better growth for 3Q18.

However, Pong cautioned that an increase in bank loans for the quarter may not be entirely due to a rise in economic activity.

“The ringgit weakened in 3Q18, so loan growth may be driven by increased working capital requirements as importers needed to pay more for the same amount of raw materials they imported,” he pointed out.

At the end of the quarter, Public Bank Bhd’s gross loans rose 3.3% to RM314.47 billion compared to a year ago, with financing for working capital rising 0.7% to RM39.23 billion. Public Bank is the only bank that had released its financial results for the July to September quarter so far.

Wong said a weaker ringgit is beneficial to exporters, including glove makers like Kossan Rubber Industries Bhd.

Kossan last week reported an 18.5% y-o-y growth in net profit to RM54.15 million for the July to September quarter, on the back of a 17.3% increase in revenue to RM573.9 million from RM489.18 million.

Wong also noted that the average crude oil price in 3Q18 was relatively higher compared to the previous quarter, and the oil and gas sector was likely to have benefited from this.

“There were more activities on the ground, especially for those players which were active overseas like Yinson Holdings Bhd,” he said.

On the contrary, high crude oil prices might dampen airlines’ earnings, he added.

Meanwhile, Wong said the plantation sector is also unlikely to have performed well for 3Q18 as crude palm oil (CPO) prices remained weak.

“The plantation sector is expected to be bad because CPO prices were weak, [and due to] an increase in minimum wage, generally the sector is expected to be quite bad in the second half of the year,” he said.

Plantation giant IOI Corp Bhd had released the results for the first financial quarter ended Sept 30, 2018, which saw net profit decline 60% to RM143.8 million from RM360 million a year ago. The group attributed this to lower operating profit and foreign exchange losses.

Wong also said the construction and property sector is unlikely to have seen much excitement in 3Q18 due to the government’s decision to review megaprojects and the soft property market.

Meanwhile, MIDF Research analyst Martin Foo did not hold high hopes for telecommunications companies (telcos) and the electrical and electronics industries.

“Globetronics Technology Bhd and Unisem (M) Bhd have released their results. We expect Inari Amertron Bhd’s year-on-year growth to [have] tapered down while iPhone sales growth was flat year-on-year,” he said when contacted.

“For telcos, we are still waiting for Axiata Group Bhd and Telekom Malaysia Bhd’s results, but we don’t expect numbers to be good for both,” he said.

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