WITH the global economy on shaky ground, a situation exacerbated by escalating trade tensions between the US and China, weak commodity prices and a ruling government that is just a year old, it is not surprising that the earnings of Malaysian companies barely improved in the recently concluded results reporting season.
According to Bloomberg data, of the 883 companies listed on the Main and ACE Markets of Bursa Malaysia that reported their latest quarterly results, only 440 recorded a year-on-year improvement in their bottom lines.
Still, this is slightly better than in the first quarter of 2018, when only 397 of 872 Malaysian companies recorded better earnings.
“1Q2019 earnings were fairly subdued with few surprises. Although more companies reported an improvement in their earnings than in 1Q2018, the market had already factored in a weaker corporate performance leading up to the reporting season. Thus, a glass half empty situation,” Fortress Capital Asset Management (M) Sdn Bhd investment adviser and director Geoffrey Ng tells The Edge.
Fourteen or almost half the FBM KLCI companies, including Axiata Group Bhd, AMMB Holdings Bhd, MISC Bhd, Sime Darby Bhd and Petronas Dagangan Bhd, posted better quarterly earnings. However, this was less than the 19 that had recorded improved earnings last year.
Sector-wise, those that recorded notable improvements in 1Q2019 were automotive, energy and consumer. As for the banks, only three of the eight domestic banking groups reported higher earnings (see “Subdued 1Q for banks points to tougher times ahead”).
Conversely, sectors that underperformed during the quarter were steel, plantation and technology.
Five of the six automotive manufacturers listed on Bursa reported an increase in their quarterly earnings with stellar performance by DRB-Hicom Bhd and Tan Chong Motor Holdings Bhd.
DRB-Hicom returned to the black with a net profit of RM127.86 million in its fourth quarter ended March 31, 2019, reversing from a net loss of RM59.4 million a year ago, thanks to higher sales volume, particularly of Proton’s X70 SUV.
Tan Chong, which distributes the Nissan marque, saw its net profit surge to RM15.98 million in its first financial quarter ended March 31, 2019, from RM4.25 million in the previous corresponding period due to a better product mix of new models that were launched in Malaysia and abroad.
In contrast, lower sales and weaker margins saw Mercedes-Benz distributor Cycle & Carriage Bintang Bhd report a wider net loss of RM4.36 million in 1QFY2019, compared with RM3.19 million in 1QFY2018.
In its market strategy note, Kenanga Research says motor vehicle sales volume for 2Q2019 is expected to be stronger than in the first quarter due to the Hari Raya promotions and better financing rates as banks have cut their base lending rates by 20 to 25 basis points.
The research firm maintained its “neutral” rating of the automotive sector and recommended an “outperform” on Tan Chong with a target price of RM2.15 — an upside of 42% from the counter’s closing price of RM1.51 last Friday.
Crude oil prices improved 28% in the first quarter of the year to US$68 per barrel from US$53 at the end of last year. Not surprisingly, the majority of the oil and gas service providers listed on Bursa reported better quarterly earnings.
Sapura Energy Bhd reported a net profit of RM500.4 million in its fourth financial quarter ended Jan 31, 2019, turning around from a net loss of RM2.29 billion a year ago, thanks to a gain on disposal as well as lower provisions for impairment.
Meanwhile, Dialog Group Bhd’s net profit for its third financial quarter ended March 31, 2019, surged 20.9% to RM143.7 million on cost savings realised from completed projects and an increased share of profits from joint ventures and associates.
Floating production, storage and offloading player Bumi Armada Bhd saw a 28.5% improvement in its net profit for its first quarter ended March 31, 2019, to RM62.21 million because of lower impairment losses booked during the quarter.
AmInvestment Bank says it is “neutral” on the sector, given the likely continued volatility of oil prices in the next six months, lingering balance sheet risks of Malaysian operators, the unresolved US-China trade dispute, deteriorating global economic growth outlook and easing of US pipeline constraints.
“Our top picks are still companies with stable and recurring earnings, such as Serba Dinamik Holdings Bhd and Dialog Group. We like their recurring income business model that involves operation and maintenance services. Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone,” it says in a recent report.
It has been a good year for manufacturers of food and beverages, thus far. Wheat miller Malayan Flour Mills Bhd saw a more than tenfold increase in its net profit for the quarter ended March 31, 2019, to RM19.87 million on a higher operating profit in its flour and grain segment.
Egg producers were not too shabby either. Teo Seng Capital Bhd saw its net profit for its first quarter ended March 31, 2019, more than triple to RM22.09 million as poultry farming revenue rose primarily on stable egg prices and improved production efficiency. Similarly, LTKM Bhd saw its net profit spike to RM5.49 million in its fourth financial quarter ended March 31, 2019, from RM1.78 million a year ago due to improved egg prices.
Brewers Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd both recorded higher earnings. Heineken attributed its 8.3% improvement in its first quarter net profit to RM52.8 million to a successful festive season campaign and increased sales in priority channels while Carlsberg said its 8.4% increase in net profit to RM87.6 million was because of higher sales during Chinese New Year in both Malaysia and Singapore.
Cocoa grinder Guan Chong Bhd got off to a good start this year with its net profit for its first quarter ended March 31, 2019, skyrocketing 35% year on year to RM53.14 million on improved margins.
Beverage maker Power Root Bhd returned to the black with a net profit of RM4.96 million, compared with a net loss of RM9.9 million, in its latest quarterly results, thanks to a favourable sales mix, while Fraser & Neave Holdings Bhd saw a 12.8% increase in its net profit to RM104.4 million in its second quarter ended March 31, 2019, driven by a strong performance at its Thailand unit.
Crude palm oil (CPO) prices, crucial for the plantation sector, faltered from RM2,390 per tonne in June last year to RM2,146 per tonne in March this year. This took a toll on the plantation counters with giants IOI Corp Bhd, Sime Darby Plantation Bhd and Genting Plantations Bhd reporting a decline in their earnings.
IOI’s net profit for the third quarter ended March 31, 2019, tumbled 88.12% to RM245.8 million due to foreign exchange losses and lower plantation earnings as a result of lower CPO prices.
Sime Darby Plantation saw its net profit for its third quarter ended March 31, 2019, fall 70.3% to RM74 million due to a sharp fall in CPO and palm kernel prices, as well as higher finance costs.
This was also the fate of Genting Plantations, which saw its net profit for the first quarter ended March 31, 2019, fall to RM41.68 million from RM100.98 million a year ago, dragged by lower palm product selling prices.
Kenanga Research says it expects CPO prices to remain under pressure in the second half of the year, potentially trading in a range of RM1,800 to RM2,100 per tonne, and averaging RM2,000 per tonne this year. The firm has an “underweight” call on the plantation sector.
It was not a good start to the year for steel players with the majority of them reporting a decline in earnings.
Lion Industries Corp Bhd slipped into the red in its third quarter ended March 31, 2019, with a net loss of RM72.2 million compared with a net profit of RM60.7 million a year ago due to lower revenue as a result of lower steel prices.
Ann Joo Resources Bhd suffered the same fate in its first quarter of the year, incurring a net loss of RM6.6 million compared with a net profit of RM61.44 million a year ago.
This sector, which is highly sensitive to developments in the US-China trade war, saw some big names report a decline in earnings in their latest financial quarter.
Inari Amertron Bhd, for example, saw its net profit for its third financial quarter ended March 31, 2019, fall 31% to RM38.19 million due to lower volume loading on a major sensor product.
Meanwhile, KESM Industries Bhd saw its net profit decline 84% to RM870,000 in its third financial quarter ended April 30, 2019, on lower revenue and an increase in raw materials and consumables used.
Kenanga Research says lacklustre smartphone and vehicle sales in China and the EU will continue to depress the near-term prospects for the sector. The firm has a “neutral” call on the sector.