CORPORATE earnings for the second quarter of 2016 (2Q2016) were as bad as expected, analysts say, with the lacklustre performance of most Malaysian corporates expected to continue into the second half.

“The number of companies that saw a drop in earnings drastically outnumbered those that made gains,” says Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew. “Roughly, the ratio is about 1.5:1, which means there were about 50% more companies that saw lower earnings. It turned out just as bad as we expected it to be,” he tells The Edge. Companies in the oil and gas (O&G) segment were among the worst performers against a backdrop of low crude oil prices that hovered below the US$50 per barrel mark, which is expected to be the new norm.

Bumi Armada Bhd saw a wider net loss of RM518.32 million for the second quarter ended June 30 (2QFY2016), its worst quarterly loss since its listing in July 2011, dragged down by non-cash impairment charges of RM575.5 million. The group posted a RM291.53 million net loss in the previous corresponding quarter.

Wah Seong Corp Bhd swung into a net loss of RM6.91 million for the quarter, compared with a net profit of RM11.37 million a year earlier, due to a lack of projects as oil majors cut their capital expenditure.

“The O&G sector had a lot of disappointments in terms of the results, with companies such as Bumi Armada, Wah Seong and KNM Group Bhd. The 2Q2016 results were poor, as we had expected,” says Etiqa Insurance & Takaful head of research Chris Eng.

However, he notes that there were a few strong surprises, notably garment manufacturer and retailer Padini Holdings Bhd, which doubled its net profit to a record RM37.36 million for the fourth quarter ended June 30, 2016, and low-cost carrier AirAsia Bhd, which saw a 41% y-o-y jump in net profit to RM342.12 million.

Following the weak quarter, MIDF Research cut its target prices for 22 companies under its coverage, and upgraded the target prices of 11. “Under the MIDF universe, we made 12 changes to our stock recommendations with three upgrades and nine downgrades. Moreover, target price changes involved 11 upward against 22 downward adjustments,” says MIDF Research equity head Syed Muhammed Kifni.

He notes that the insurance, media, technology and utility segments saw higher total earnings in 2Q2016, quarter on quarter as well as year on year.

The banking, glove, healthcare, O&G, plantation, telecommunication and tobacco sectors showed negative sequential and y-o-y earnings growth.

Among the 2Q2016 outperformers under MIDF’s coverage were Tune Protect Group Bhd, Malaysia Building Society Bhd, IOI Properties Group Bhd and UOA Development Bhd.

The underperformers included Hartalega Holdings Bhd, Supermax Corp Bhd, Media Prima Bhd and Dayang Enterprise.

For the FBM KLCI component stocks, the sole outperformer was SapuraKencana Petroleum Bhd, while there were four underperformers: British American Tobacco (M) Bhd, IHH Healthcare Bhd, IOI Corp Bhd and MISC Bhd.

“It is also notable that the ratio of outperformers against underperformers among the KLCI constituents improved somewhat to 1:4 in 2Q2016. Recall that there were zero outperformers in 1Q2016 against eight underperformers. In the preceding year, the ratio stood at 7:7 in 4QCY2015, 5:8 in 3QCY2015, 4:9 in 2Q2015 and 0:10 at its nadir in 1Q2015,” says Syed Muhammed.

The construction segment, which is usually hailed as a bright spot amid the current challenging environment, did not fare as well as expected either, relative to the market’s high expectations, AmInvestment Research says in a recent note.

Four of the seven construction companies under its coverage missed expectations (IJM Corp Bhd, WCT Holdings Bhd, Hock Seng Lee Bhd and KKB Engineering Bhd) while two (Econpile Holdings Bhd and Ikhmas Jaya Group Bhd) met them. Only Kimlun Corp Bhd outperformed forecasts, it adds.

“The key culprit was lower-than-expected profit being booked for the April–June period from new construction jobs. This occurred for IJM Corp, WCT and Hock Seng Lee. We believe the market had been too optimistic with how quickly profits could be recognised from the new jobs.

“It had overlooked common teething problems such as delays in the handover of the sites, unexpected ground conditions as well as challenges encountered in the relocation of utilities and traffic diversion in mature and densely populated areas,” says the research house.

Going forward, the analysts are not expecting the second half to be better as 3Q has been rather flat so far.

Pong is maintaining his outlook for an overall flat year as no catalysts are seen on the horizon.

“The outlook for 2H2016 is the same as 1H2016. We entered the third quarter and it has so far been a flat period. There was a bit of an uptick towards the end of 1Q2016 going into 2Q2016, during which foreign funds flowed in after a long spell of selling. That was the only time there was a spark in the market.

“There has been a bit of foreign inflow since the end of June but it seems to be tapering off now. Local funds are selling too, so the foreign inflows were somewhat offset by domestic selling. We will be ending 3Q2016 at the end of the month and it doesn’t look like it will be a good quarter,” he says.

Eng believes 3Q2016 earnings should disappoint less as earnings expectations continue to be lowered.

“3Q2016 should disappoint less as expectations continue to be cut. At risk would be impairments linked to the O&G sector but we think consumer demand will return gradually to support other earnings,” he adds.

AmInvestment Research says the construction segment remains a bright spot, despite the disappointing 2Q2016 performance, backed by major infrastructure projects, including the Mass Rapid Transit 2, Light Rail Transit 3, Pan Borneo Highway, Tun Razak Exchange and Bukit Bintang City Centre.

“Key projects rolled out recently, particularly the MRT2 and Pan Borneo Highway, have helped propel order backlogs of key players to record highs — RM8.2 billion for Gamuda and RM8.6 billion for IJM Corp, for instance,” it says. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.