Lead Story: Most analysts projecting high-end single-digit growth

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THE recent slew of corporate earnings reports for the final quarter of 2014 was nothing to rave about and likely led to tepid overall growth for the full year. Analysts are, however, more optimistic about the outlook for corporate earnings growth this year.

Most are projecting high-end single-digit growth for 2015, with the more confident forecasting double-digit growth.  

This may lift investor confidence somewhat, considering that the latest financial reporting season may not have lived up to expectations.

Many had been keeping a close watch on the fourth-quarter results, which concluded last week, as a gauge of how companies would fare amid what was seen as a tougher economic and operating environment. Interestingly though, official data showed that gross domestic product growth had actually improved to 5.8% in the final quarter of 2014, compared with 5.6% in the third quarter.

Prices of commodities declined last year, most notably crude oil prices. Crude oil lost nearly half its value to US$60 to US$70 per barrel — at its lowest, it was just under US$60, in the fourth quarter — from a high of above US$100 in June.

Similarly, crude palm oil (CPO) prices also dropped to RM2,100 to RM2,200 per tonne due in part to extensive floods in the East Coast.

The plunge in crude oil prices had sent the benchmark FBM KLCI, which shed 5.66% last year, crashing to a low of 1,673.94 on Dec 16 as oil and gas stocks took a beating. The index closed at 1,820.87 points last Thursday.

To aggravate matters further, the ringgit has weakened to around 3.50 to the US dollar as the greenback reflected broader strength against most emerging-market currencies on signs of an improving US economy.

BIMB Securities head of research Kenny Yee expects corporate earnings this year to grow 8% to 9% after a likely contraction of 0.6% last year, while UOB Kay Hian head of research Vincent Khoo anticipates 10% to 11% earnings growth this year after a probable expansion of between 2% and 3% last year.

“For 1Q2015 and the rest of 2015, fluctuations in commodity prices, the US dollar/ringgit rate and, to a smaller extent, the temporary cut in electricity tariffs will have a bearing on earnings outlook. While we anticipate some earnings downside to our aggregate earnings growth of around 10% to 11% in 2015 (at the start of the year), we still expect better growth compared with 2014’s depressed level,” Khoo tells The Edge via email.

Yee, meanwhile, expects the equities market to perform better than last year.

From the FBM KLCI perspective, core earnings of index-linked stocks are expected to grow 8.8%, says an analyst from Maybank Investment Bank Research. JF Apex Securities head of research Lee Chung Cheng, however, expects a lower earnings growth of 5% to 6% this year.

Analysts say earnings growth this year will be largely underpinned by the banking, telecommunications (telecoms), export and utility sectors.

The banking industry will be a key sector, given the reasonable analyst consensus forecast of bank earnings, says Yee. He believes that since the sector has the highest weightage in the broad market and the FBM KLCI, it will drive earnings growth this year.

Nevertheless, the Maybank IB analyst cautions that the banking sector may face pressure on margins due to intense competition and a weaker outlook.

On the telecoms sector, he says it is a “steady market”, given the solid balance sheets of the players. “Their ability to come up with package deals should see earnings growth, especially from the data segment, provided margins remain intact.”

He adds that the ability to pass on the cost of the Goods and Services Tax (GST) to the end consumer is a positive factor for telecoms players. “The telecoms sector is a beneficiary of the GST. We expect it to report double-digit earnings growth.”

UOB Kay Hian’s Khoo says the ringgit’s weakness against the US dollar will continue to benefit exporters, particularly electrical and electronic (E&E), glove-making and flexible plastic packaging companies. He cites Kossan Rubber Industries Bhd (fundamental: 2.1; valuation: 0.3) and Carlsberg Brewery Malaysia Bhd (fundamental: 2.3; valuation: 2.1) as “currency winners”.

Etiqa Insurance & Takaful head of research Chris Eng believes E&E firms could be a “positive surprise”. “These companies are beneficiaries of the strong greenback and higher demand for white goods (heavy consumer durables such as refrigerators and air conditioners),” he tells The Edge over the telephone.

Despite the electricity tariff reduction announced early last month, analysts continue to favour the utility sector, particularly Tenaga Nasional Bhd (fundamental: 1.3; valuation: 1.8).

The government has announced a 5.8% or 2.25 sen per kWh electricity tariff reduction for Peninsular Malaysia. This will come into effect between March 1 and June 30. Tariffs in Sabah will also be reduced by 3.5% or 1.2 sen per kWh in the same period.

Eng says Tenaga is likely to perform well despite the temporary rebate. He adds that it will be netted off against the reversals from the “over-recovery” of Tenaga’s fuel costs. “Tenaga still has a strong core net profit. So, it is not an issue.”

Over the long term, Yee says Tenaga will benefit from lower fuel costs and capacity expansion in excess of 1,000mw. “Revision in tariff is only a short-term knee-jerk reaction, as we believe in the longer run.”

On the whole, RHB Research Institute head of research Alexander Chia says companies with expanded capacity will be instrumental in bringing about earnings growth.
“Capital expenditure investment in new capacity is largely completed, therefore, new facilities are beginning to contribute new revenue,” he says, citing examples of Hartalega Holdings Bhd (fundamental: 2.6; valuation: 0.3), Hovid Bhd (fundamental: 2.1; valuation: 0.3) and Cahya Mata Sarawak Bhd (fundamental: 3.0; valuation: 1.5).

Sectors that may underperform this year include plantation and property. These two sectors could see some downside risks due to the lack of growth drivers, says Chia.

BIMB’s Yee says the less efficient plantation companies are most likely to find it tough, given market pressure capping CPO prices. “So long as CPO prices remain at current levels, maintaining margins is of utmost importance.”

He says developers offering properties in “less alluring” locations may suffer from selective demand, given that loans are more restrictive now.

UOB Kay Hian’s Khoo notes that there could be pockets of mild downside risk this year for some companies due to situational triggers. “UMW Holdings Bhd (fundamental: 2.2; valuation: 1.2) could be a loser of a weaker ringgit due to US dollar-denominated costs in its automotive division, and Axiata Group Bhd (fundamental: 0.85; valuation: 0.9) for poor underlying performance at its Indonesian telecoms business and foreign exchange losses. Genting Malaysia Bhd (fundamental: 2.4; valuation: 0.6) would incorporate one-off costs related to its failed New York casino bid.”

He notes that CIMB Group Holdings Bhd (fundamental: 1.35; valuation: 2.1) is also a potential loser amid a likely spike in credit costs, moderating loans growth, funding cost pressures and continued weakness in investment banking deal flows.

The oil and gas sector, which has been snagging headlines since the second half of last year, will continue to be in the spotlight this year as the market will diligently track crude oil prices, Chia opines.

“Much depends on where oil prices are heading — if they make a reversal and go down again, the market will head downwards as a result,” he says. Lower crude oil prices will translate into lower revenue for oil and gas firms, and consequently see margins shrink.

(Note: 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.)

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Yee (Left): So long as CPO prices remain at current levels, maintaining margins is of utmost importance.” Khoo (Middle): ... we still expect better growth compared with 2014’s depressed level.” Chia (Right): Much depends on where oil prices are heading — if they make a reversal and go down again, the market will head downwards as a result.” .

This article first appeared in The Edge Malaysia Weekly, on March 2-8, 2015.