Friday 29 Mar 2024
By
main news image

corporate_030315

KUALA LUMPUR: Corporate earnings are expected to pick up momentum this year on the back of low-base effect and the benefits of stabilising fuel costs and the strengthening of the US dollar, according to fund managers and analysts. 

Corporate earnings had been disappointing last year, with some companies revising downwards their key performance indicators (KPIs) for 2015.

Areca Capital Sdn Bhd chief executive officer Danny Wong said some large-cap companies saw their earnings for 2014 weaken but were in line with consensus expectations. However, mid-cap to small-cap corporates, surprisingly, performed better.

“In general, overall corporate earnings across the industries were mostly within our expectations. The trend now shows small- to mid-sized companies performing better than the big caps, which is caused by a low-base effect and versatility to changes in business cost,” he told The Edge Financial Daily yesterday. 

“Some of these smaller companies are also turnaround stories, so they are sensitive on earnings’ contribution which will see percentage growth seeing big jumps,” said Wong.

He added that last year’s overall earnings across sectors saw a drag from subsidy rationalisation, foreign exchange (forex) losses and high oil prices which impacted companies’ costs. 

Plantation companies also took a beating from the downtrend of crude palm oil (CPO) prices, which were initially expected to rise, with an expected El Nino on the horizon.

Apart from plantation companies, telecommunication providers (telcos) saw their growth slowing down as market trends shifted; media firms’ earnings also fell, primarily due to higher costs and lower revenue from advertisements.

“We are neutral on the telco sector. They were supposed to do better last year. But because of changes in the market, which is now on more data usage, earnings also changed. It’s a shift of business trend [and] a paradigm shift to earnings model, so they will need to adjust to that,” said Wong.

This year, he said telcos’ earnings are likely to stay strong but warned that there won’t be as much growth.

“Some are only starting to adjust to new business models, but earnings are still coming in from greater revenue generated from the data side,” said Wong. 

The media sector, on the other hand, should be careful with paper costs as they are in US dollars, he noted.

Earnings for media companies such as Media Chinese International Ltd and Media Prima Bhd in 2014 were brought down by lower advertising expenditure (adex) spending, as weak consumer sentiments and unplanned events like the three tragic airline incidents involving Malaysian airlines last year, resulted in advertisers being more cautious about ads placement.

“The ongoing concerns from the government’s subsidy rationalisation programme, as well as the airline disasters in 2014 had lowered advertiser’s appetite, which saw many advertising events and promotions held back or cancelled throughout the year,” said AmResearch in a note.

For instance, Media Chinese (fundamental:2; valuation: 1.2), which is listed on both Bursa Malaysia and the Hong Kong exchanges, saw its net profit drop 26.4% to RM101.18 million for its nine months ended Dec 31, 2014 (9MFY14) while its revenue was down 7.3% to RM1.2 billion.

“The group’s Hong Kong and China operations were hurt by lower advertisements due to weak retail sales in the luxury and branded segments,” read the note by AmResearch.

Alliance DBS Research said in a report that adex spending for the fourth quarter last year was the worst in recent years, falling 10.7% year-on-year and 4% quarter-on-quarter. “Adex should recover somewhat in 2015 in the absence of major negative events,” it said.

Weak adex growth also hampered earnings for Media Prima (fundamental :1.8; valuation: 1.2), which slipped into the red for its 4QFY14 with a net loss of RM29.49 million from a profit of RM63.44 million previously, due to expenses incurred for its mutual separation scheme. Excluding the one-off MSS effect, the group’s net profit still declined by 13% from 4QFY13.

Moving forward, Wong said the sectors that will perform well this year are those that will benefit from the strengthening of the US dollar as they will see forex gains, which in turn will translate into stronger revenue.

“These include oil and gas companies which have contracts that are denominated in US dollars, export-oriented companies such as electrical and electronic/semiconductor companies, glove makers and chipboard furniture companies,” he said.

“In the next quarter consumer-based companies are expected to see its earnings grow before the goods and services tax comes on stream. The auto sector may also see a boost before GST kicks in,” said Wong.


The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

 

This article first appeared in The Edge Financial Daily, on March 3, 2015.

      Print
      Text Size
      Share