Lead Story: 2Q2018 earnings unlikely to be exciting

This article first appeared in Capital, The Edge Malaysia Weekly, on August 6, 2018 - August 12, 2018.
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CORPORATE earnings were largely disappointing in the first quarter (1Q2018) and, sadly, the figures are not expected to be any better in 2Q2018.

Nevertheless, the oil and gas (O&G) and export-oriented electrical and electronics (E&E) sectors could be bright spots with decent earnings growth, say analysts.

The first-quarter results were a big let-down, following a poor showing in 4Q2017. Malaysia’s strong economic growth last year did not translate into improved performances for corporations, most of which were hit by cost-related problems.

Areca Capital CEO Danny Wong believes corporate earnings in 2Q2018 will not be much different from the previous quarter’s with the exception of a few sectors. “Sectors such as E&E and maybe even O&G could do better as these are usually beyond domestic factors. E&E relies a lot on exports while O&G is linked to crude oil prices,” he tells The Edge.

Wong adds that selected players in the financial sector could also fare better in view of the lower base in the previous year.

On the other hand, Kenanga Investment head of research Chan Ken Yew says corporate earnings could see some improvement in 2Q2018. “There might be some downgrades but I don’t think it will be as bad as what we saw in the first quarter. We will have to wait and see.”

Downstream O&G player Lotte Chemical Titan Holding Bhd (LCT) has delivered a good set of results. Net profit surged 177% year on year to RM315.03 million in its second quarter ended June 30, 2018 (2QFY2018), mainly due to a reversal of foreign exchange (forex) losses. Revenue grew 28% y-o-y to RM2.27 billion.

In the first half of FY2018, LCT’s net profit rose to RM559.22 million from RM455.77 million in the previous year while revenue increased 22% to RM4.49 billion amid higher sales volume.

Following its strong financial results, LCT should continue to improve in the second half of the year, supported by higher utilisation rates and improved margins for polyethylene and olefins and derivatives, says CIMB Equity Research.

BIMB Securities analyst Azim Faris tells The Edge that most O&G players should be posting “comparable” results quarter on quarter. “Chemical players like LCT and Petronas Chemicals Bhd will benefit from the softer ringgit,” he says.

Players that are more contract-based, such as Velesto Energy Bhd (formerly UMW Oil & Gas Bhd) and Yinson Bhd, should be able to maintain their performance. The two players did not see any new contracts or charters in the second quarter.

“I don’t see O&G players springing any surprises, except maybe Petronas Dagangan Bhd, which might do better compared with 1QFY2018. We are actually quite positive on the counter at the moment as the GST zerorisation would have translated into new car sales, which, in turn, would have boosted fuel consumption in 2Q2018,” says Azim.

An analyst who declines to be named says Velesto could perform better after seeing low utilisation in the first quarter. “Their utilisation level was quite low in the first quarter due to the monsoon season and there were some delays in their rig start-ups.”

He adds that Sapura Energy Bhd could also see improved results as the exploration and production division is expected to benefit from the relatively higher crude oil prices in the second quarter, as well from the solid order book in its engineering and construction division, although this is subject to the timing of revenue recognition.

Other results that have been announced so far include Malaysian Building Society Bhd (MBSB), which reported a 5.9% decline in its net profit for 2QFY2018 to RM85.69 million from RM91.08 million a year earlier on lower gross loans and financing.

Meanwhile, Bursa Malaysia Bhd posted a 2.2% y-o-y decline in its net profit to RM58.21 million as revenue fell 1.5% to RM140.56 million amid lower trading revenue.

In a note, Kenanga Investment analyst Desmond Chong says the results were within expectations but says its performance will remain lacklustre in the following quarter. He forecasts securities average daily value (ADV) of RM2.7 billion.

“In 3QFY2018, our strategist expects the lacklustre trading mood to continue as some investors may stay sidelined while waiting for the release of the new government’s 100-day progress report or its first budget,” writes Chong.

He adds that Bursa Malaysia’s securities ADV started on a soft note in 3QFY2018, hovering at RM2.1 billion with daily trading volume of 2.47 billion shares.

Analysts says there might be some excitement in E&E as the second quarter is historically a stronger period for the sector.

“The smartphone companies, like Apple, are launching new products in the third quarter, which means that the entire smart device supply chain would have to ramp up production several months earlier,” says MIDF Research analyst Martin Foo. “The manufacturing of the components and the assembly of the devices take a few months and it usually commences in the second quarter.”

The E&E players have reported a somewhat mixed bag of results so far.

Globetronics Technology Bhd achieved 32% growth in its net profit to RM9.34 million for 2QFY2018 from RM7.06 million a year ago, attributing it to higher volume loadings of products from certain customers and a forex gain of RM710,000.

ViTrox Corp Bhd posted a 30% increase in net profit to RM27.76 million from RM21.34 million a year earlier, driven by higher revenue contribution from the machine vision system (MVS) and automated board inspection (ABI) segments, which grew 60% and 23% y-o-y respectively.

On the other hand, Unisem Bhd reported a 26% y-o-y decline in net profit to RM31.14 million, attributing it to the depreciation of the ringgit against the US dollar.

While 2Q2018 results may not be exciting, Areca Capital’s Wong says it is largely expected by the market and therefore should not have much bearing on its direction in the near term, unless the figures are severely below expectations.

“The expectation generally is that corporate earnings in the second quarter will be the same as the first quarter, as everyone was anticipating GE14 (14th general election) in 2Q2018.

“GE14 impacted consumer spending and loans, as consumers took a wait-and-see approach prior to the elections. This has already been priced in, I believe. So it [results] wouldn’t affect the market if they are within expectations,” he says.

However, if corporate earnings beat expectations, Wong says this would be a positive catalyst for the local market, but he reiterates that it is unlikely to be an exciting quarter. 

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