This article first appeared in The Edge Malaysia Weekly, on December 7 - 13, 2015.

THE public may have to dial down its expectation of receiving high dividends from the Employees Provident Fund (EPF) this year as the retirement fund wobbled in the third quarter ended Sept 30, posting a 7.58% year-on-year decline in its investment income.

In fact, CEO Datuk Shahril Ridza Ridzuan has already acknowledged that the EPF is cautious about achieving its annual dividend rate target of inflation plus 2%.

Looking at the share price and earnings performance of the component stocks may shed some light on the EPF’s investment income.

Investment income for 3Q2015 totalled RM9.54 billion compared with RM10.32 billion in the previous corresponding period. 

Equities contributed RM4.71 billion to the total investment income while Malaysian government securities (MGS) accounted for RM1.82 billion. The other contributors were money market instruments (RM220.33 million) and real estate and infrastructure (RM247.12 million).

Since 2011, the EPF has delighted its contributors by paying out dividends of more than 6% every year, far above the guaranteed annual rate of 2.5%. In fact, the rate grew from 6% in 2011 to as high as 6.75% last year.

The generous dividends from the EPF may not have surprised its contributors as there was a bull run on the local bourse from the fourth quarter of 2011 to mid-2014, although there were some hiccups along the way. The influx of foreign liquidity as a result of three rounds of quantitative easing in the US helped fuel the rally. In addition, strong crude oil prices aided local market sentiment as the oil and gas industry was well represented on Bursa Malaysia.

As at Sept 30, the EPF’s total assets amounted to RM667.56 billion, of which 42.8% or RM285.51 billion was invested in equities, followed by MGS (26.6% or RM177.4 billion) and loans and bonds (24.8% or RM165.36 billion). The remaining 5.8% consisted of money market instruments and real estate and infrastructure (see Chart 1).

As a large portion of its portfolio is in equities, the EPF’s return on investment is dictated by the direction of the stock exchange. Simply put, the performance of the benchmark index’s component stocks in terms of price and earnings is a good indication, though not the only one, of how well the EPF’s return on investment will be.

Only 27% of the EPF’s assets is invested abroad. The retirement fund also invests in the mid and small caps on Bursa.

A random check by The Edge indicates that the EPF has invested in all the component stocks of the FBM KLCI except for Genting Bhd, Genting Malaysia Bhd and British American Tobacco (M) Bhd. Of the 27 counters, RHB Capital Bhd is its largest investee (34.65%), followed by CIMB Holdings Group Bhd (17.23%) and 

UMW Holdings Bhd (17.08%).

TA Securities chief investment officer Choo Swee Kee says judging from the EPF’s 3Q2015 corporate earnings, there were more underperformers than outperformers. “The results were not exciting. The key reason for this could be the impact of the Goods and Services Tax implemented in April this year; the effects have not worn off. Earnings could be flat even in 4Q2015. In fact, earnings growth has been flat for the last few quarters. But people are anticipating earnings to pick up next year.”

Uninspiring earnings growth was a common thread running through the 27 component stocks in which the EPF has a stake. Many of the stocks recorded low single-digit growth in revenue in 3Q2015 while more than half saw a contraction in net profit.

UMW Holdings Bhd was the worst hit as its net profit for 3Q2015 shrank 93% from a year ago to RM13.5 million, although revenue barely moved, dipping 4.5%. The conglomerate says it was affected by higher operating cost and provisions for impairment.

Its cumulative net profit for the first nine months of the year also took a beating, falling more than half to RM247.1 million from RM574.5 million, while dividends for the period tumbled to 10 sen from 25 sen previously.

Clearly, it has not been a good year for UMW Holdings, which suffered a double whammy of a downturn in the oil and gas industry and softening automotive sales.

RHB Capital also saw a big drop in net profit — down 64.3% y-o-y to RM194.4 million — while revenue grew just 3.14% to RM1.97 billion. The banking group was affected mainly by one-off career transition scheme expenses amounting to RM308.8 million in 3Q2015. It also saw a reduction in investment banking-related fee income, lower trading income and higher operating expenses.

Such lacklustre earnings growth impacted the dividend paid out by the 27 blue chips. In absolute terms, the companies distributed total dividends of 384.64 sen per share in the first three quarters of 2014 while for the same period this year, the dividends declined to 345.45 sen per share.

The dividends declared, particularly by UMW Holdings, AMMB Holdings Bhd, Kuala Lumpur Kepong Bhd and Maxis Bhd, declined 20% or more for the cumulative nine months of 2015 compared with the previous year. Lower dividend payments naturally translate into less income for the EPF.

In terms of share price performance, many of these stocks were worse off than at the start of the year. AMMB Holdings and UMW Holdings stood out, having lost 25.84% and 23.31% respectively YTD. This should shed some light on the FBM KLCI’s performance over the year, which has been flat YTD as its constituents’ unimpressive share prices dragged it down.

There were some exceptions, like Petronas Dagangan Bhd, whose YTD share price gained 49% in sharp contrast to its 43.4% fall last year.

IHH Healthcare Bhd was another star performer among the component stocks. The stock has jumped 34.11% since the start of the year, having gained 24.15% last year.

While the situation seems bleak, Areca Capital CEO Danny Wong believes corporate earnings could be near the bottom of the down cycle for the component stocks. He is generally positive about earnings growth among the index stocks next year, but does not expect a spurt.

Wong comments that the major constituents of the benchmark index are the banking sector and plantations. “Broadly, the first half of 2016 could continue to be challenging for the banking sector, which has been up against slower loan growth, tighter net margins and a reduction in deposits,” he says, adding that he sees the situation normalising in the second half of the year.

“As for the plantation sector, if crude palm oil prices rebound, things will depend on how the planters manage their cost that will determine their earnings going forward.”

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