KUALA LUMPUR: Malaysian companies are expected to shake off the trend of disappointing earnings in the past four years from 2016 onwards, said CIMB Investment Bank Bhd head of research Terence Wong.

That’s when crude oil prices should stabilise and the ringgit will trend towards a level reflecting the economy’s fundamentals, he added.

“Consumption spending in Malaysia would also have normalised by then, following the implementation of the goods and services tax [on April 1 this year],” he told The Edge Financial Daily in an interview on the sidelines of Invest Malaysia 2015 recently.

Wong noted that corporate earnings in Malaysia have been disappointing for the last 16 quarters — companies that surprised on the upside in earnings were fewer compared with those that underperformed.

Earnings delivery in the fourth quarter of 2014 (4Q14) accentuated the trend due to the slump in commodity prices, most notably crude oil, as well as the weaker ringgit against the US dollar.

“I think it (disappointing earnings) could start to reverse next year,” said Wong.

Wong expects earnings for the first quarter of 2015 to likely disappoint again.

“I think the [disappointing] trend will likely continue. I expect a not-so-great quarter coming up,” he said.

Whether the first-quarter earnings will disappoint slightly or significantly is anybody’s guess, but Wong said it will reflect the financial resilience of Malaysian companies.

He pointed out CIMB IB had concerns about last year’s fourth-quarter results, but as it turned out, corporate earnings were not as bad as the research house had initially feared.

“There seems to be some resilience. But the first-quarter earnings will probably be a big indication because it is the start of 2015,” he said.

Wong’s preferred sector picks remain the construction, transportation and export-oriented as well as selective smaller-capitalisation stocks.

He sees the construction sector being a major beneficiary of the country’s mega projects related to transportation infrastructure such as the Klang Valley mass rapid transit lines 1 and 2, the light rail transit line three and the high-speed rail project linking Kuala Lumpur to Singapore.

“All of these are construction-related, which are positive for contractors,” he said, citing Gamuda Bhd (fundamental: 2.2; valuation: 1.2) and IJM Corp Bhd (fundamental: 1.1; valuation: 1.4) as its top picks.

Wong also likes transport-related stocks such as MISC Bhd (fundamental: 2; valuation: 1) and Westports Holdings Bhd (fundamental: N/A; valuation: N/A) as they are beneficiaries of lower fuel costs due to lower crude oil prices.

He also prefers export-oriented stocks such as rubber glove and furniture makers, given the relatively stronger US dollar which would translate into higher earnings in ringgit. The ringgit was trading at 3.5700 against the US dollar last Thursday compared with around 3.20 six months ago.

Apart from sector-related stocks, Wong is also positive on small-cap stocks as they have largely outperformed bigger-cap stocks last year. However, he is selective on small-cap companies that reflect solid business models with positive cash flow positions.

He cited stocks like MyEG Services Bhd (fundamental: 3; valuation: 1.1), Prestariang Bhd (fundamental: 1.95; valuation: 0.5), GHL Systems Bhd (fundamental: 1.2; valuation: 0.2), Karex Bhd (fundamental: N/A; valuation: N/A) and IFCA MSC Bhd (fundamental: 3; valuation: 0.8).

“These stocks outperformed last year. Year-to-date, they have also been big outperformers,” he said.

“Eight out of 10 of our smaller- cap stock picks have a net cash position. So, even in the worst situation, they will still be around,” said Wong.

As for the oil and gas (O&G) sector, Wong has an “overweight” call on the sector given the cheap valuations — a consequence of lower crude oil prices.

He described the sector as “tricky” given the strong correlation between crude oil prices and Malaysian O&G stocks.

Wong was baffled that although most Malaysian O&G companies are service providers and are not operating in the upstream segment, their stocks still took a hit when crude oil prices plunged last year.

“They are just servicing [the sector], yet their share prices took a big hit as though their earnings are a function of oil prices. Oil prices may fall by half, but their earnings don’t fall by half,” he said.

Even so, Wong is cognisant that if crude oil prices continue to remain low, Petroliam Nasional Bhd might review its contracts and margins in the sector.

Meanwhile, Wong remains cautious about the banking sector as net interest margins continue to see pressure, while crude palm oil prices that fluctuate with oil prices could hamper the plantation sector.

He is also cautious about the property sector as cooling measures under Budget 2014 and the GST implementation would curb property demand this year.

Wong said property demand might track in tandem with retail and consumer spending patterns, noting that this is likely to take six to nine months to normalise.

Still, Wong is positive on property developers with strong execution capabilities whether through “rain or shine” such as Mah Sing Group Bhd (fundamental: 2; valuation: 2.4) and Eco World Development Group Bhd (fundamental: 0.5; valuation: 0).

“You will probably see six to nine months of low sales. If developers don’t see increasing sales, after a while their earnings will also start to decrease. So, we have to be quite selective on property stocks,” he said.

However, he is of the view that the property sector will be a “big winner” over the long term of 10 to 15 years as there will be more demand for property, especially first-time homebuyers.

Wong said Malaysia’s demographic dividend would increase as more young people enter the workforce while dependents such as young children and the ageing folks decrease.

“The first-time homebuyer’s age is from 25 to 35. So, [there is] this huge group of people [who] are moving into that age range when they will buy their first home. The next 10 to 15 years are going to be positive [for the property sector],” he added.

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. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Financial Daily, on May 5, 2015.