Corporate earnings in 3Q showed sharpest correction since 1Q16, say analysts

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KUALA LUMPUR (Dec 4): Analysts were mixed on the corporate earnings of Bursa Malaysia-listed companies in the third quarter of this year (3Q18), as earnings showed their sharpest rate of contraction since 1Q16, led mainly by utilities, plantation, construction, and media companies.

Affin Hwang Investment Bank Research analyst Kevin Low said a higher number of companies delivered results that were below expectations this quarter, at 47.9%, versus 42.4% in 2Q18.

“The negative earnings surprise was largely broad based, hitting heavy weight sectors like plantations, oil & gas, transport and construction. building materials and media also continued to disappoint.

“However, surprisingly there was also a higher number of companies with positive surprises (16% in 3Q18 vs 13.6% in 2Q18) largely from the telco and auto sectors, the latter being a key beneficiary from the goods and services tax holiday period.

“Notably, we did not see a similar improvement in the consumer retail space (Bonia Corp Bhd and Aeon Co (M) Bhd were subsequently downgraded) although the non-discretionary players such as Nestle (Malaysia) Bhd and Ajinomoto (Malaysia) Bhd did see better quarter-on-quarter performance,” he wrote in a note this morning.

However, Chan Ken Yew of Kenanga Research said the recently concluded earnings season showed signs of improvement.

He said although 45 out of the 146 stocks (under the research house’s core coverage) delivered weaker-than-expected results, 22 of the stocks outperformed expectations in 3Q. This is compared with the mere 15 stocks in the previous quarter.

“Nonetheless, despite such improvements, we believe the improvements are not enough to excite the market as we continue to see earnings downgrades of 9.1% for this financial year and 6.4% for the next financial year, on average, for the 146 stocks under our coverage.

“We deem this as continued earnings weakness as we have revised down our earnings estimates since the last two quarters,” Chan added.

Affin Hwang maintained its market overweight rating with a 2018 year-end estimate for the benchmark KLCI at 1,845 points.

“We remain positive on the market as we believe that the structural reforms would gradually enhance country fundamentals while the weak ringgit (vis-à-vis the US dollar) provides additional upside to capital returns,” read the note.

For end-2019, Kenanga Research lowered index target to 1,805 points, from 1,870 previously, in line with the recent cut in consensus index target.

As at 9.55 am, the FBM KLCI was down 6.54 points at 1,693.18 points.