KUALA LUMPUR: Corporate earnings had a weak showing in the financial quarter ended June 30 (2Q15) given the adversities thrown at them in the form of falling commodity prices, a weak ringgit, and the implementation of the goods and services tax (GST).

Most research houses concluded that the latest quarterly earnings results were below expectations, with sectors such as plantation, oil and gas (O&G), consumer and banking on the back-burner.

According to Public Invest Research, the financial quarter was another disappointing one for the plantation sector, as it experienced a series of hiccups pertaining to the weaker fresh fruit bunch production, lower crude palm oil (CPO) prices, higher borrowing costs, and foreign exchange translation losses as a result of the weak ringgit.

“We believe the worst is not over yet given the declining CPO trend amid the high production period. At the current CPO prices of RM1,900 per tonne, it will be quite a struggle for small and young planters who have higher operating costs, and we also notice that some planters, who have tight operating cash flow, have started reducing their new planting activities,” said PublicInvest in a note yesterday. The research house maintained its neutral call on the sector, with its preferred exposures to Genting Plantations Bhd and Ta Ann Holdings Bhd.

Kenanga Research said that O&G players did not fare well, in particular offshore support vessel players and jack-up rig asset owners, due to the reduction in asset utilisation and charter rates amid the slump in the industry. “We do not discount the possibility of weaker earnings in the second half of 2015 (2H15) for the O&G sector as the industry has just begun its down cycle in view of weaker China’s demand growth outlook and oil supply surplus,” said Kenanga.

The research house maintains its “outperform” call on Bumi Armada Bhd, Coastal Contracts Bhd and Perisai Petroleum Teknologi Bhd, but maintained its “underperform” call on Alam Maritim Resources Bhd, Malaysia Marine and Heavy Engineering Holdings Bhd and Wah Seong Corp Bhd.

Joining in on the disappointing earnings’ bandwagon was the consumer sector, as AffinHwang Capital noted that the weaker 2Q15 was expected due to consumers pulling back on their spending after the implementation of the GST in 2Q15. “Moving forward, we believe that consumer spending will only pick up by 4Q15 as consumers gradually get used to a higher price environment and as the consumption trend begins to normalise during the festive year-end sales and campaigns,” said AffinHwang. The research house maintained its neutral call on the sector, with Carlsberg Brewery Malaysia Bhd as its top pick.

Etiqa Insurance & Takaful head of research Chris Eng said the banking sector seemed to have “underperformed” consensus in 2Q. “The consensus, with regards to the banking sector, may have been too bullish given the GST and weak sentiment on the ground prior to the results reporting season,” he told the digitalEdge DAILY.

Kenanga Research said it observed that net interest margin was still on a downward trend, mainly from lower yields pressure, and liquidity in the market remained tight. “We maintain our ‘neutral’ call on the sector as we expect muted loans growth, narrowing interest margin, weak capital market activities, and higher credit costs to continue,” it said.

Kenanga Research maintained an “outperform” call on Malayan Banking Bhd, and an “underperform” call on Affin Holdings Bhd and Malaysia Building Society Bhd.

However, there are some sectors that are expected to come out stronger in 2H15, in particular the construction sector.

“We expect construction earnings to accelerate as most contractors have grown their order books over the past year. The prospects for new contracts are good with several large building and infrastructure projects being tendered out in 2H15,” said AffinHwang Capital. The research house picked Gamuda Bhd, IJM Corp Bhd and Malaysian Resources Corp Bhd as its top picks for the sector.

CIMB Research said that it is “overweight” on smaller market capitalisation companies in 2H15. “In August, the FBM Small Cap Index ‘underperformed’ the KLCI, falling 14% compared with the KLCI’s 6.3% decline. Valuation of small caps now offer better value as selected small-cap companies continue to offer superior earnings growth prospects compared to the overall market,” said CIMB in its note yesterday. The research house said that its top picks among the smaller cap are MyEG Services Bhd, Prestariang Bhd, GHL Systems Bhd, Only World Group Holdings Bhd, Signature International Bhd and Evergreen Fibreboard Bhd.

This article first appeared in digitaledge Daily, on September 3, 2015.