Corporate Malaysia earnings in 2Q another letdown

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The healthcare, property, utilities and technology sectors saw upgrades in earnings forecasts.

The healthcare, property, utilities and technology sectors saw upgrades in earnings forecasts.

KUCHING: Malaysian corporations see another quarter of disappointments as analysts downgrade corporate earnings forecasts for its18th consecutive quarter on the back of poor market sentiment for the FBM KLCI without any imminent re-rating catalyst.

Sharp capital outflows in the near term may also push the KLCI below the 2015 year-end target of 1,600.

The research arm of Affin Hwang Investment Bank Bhd (AffinHwang Research) noted that although market earnings rebounded sharply, Malaysian corporate earnings continued to disappoint.

“Generally, large absolute cuts in earnings forecasts were seen in the oil & gas, as well as in banks and plantation sectors,” it said in a sector report yesterday.

“This was unsurprising given the weaker commodity prices (both crude oil and CPO), and higher overheads and lower margins as well as non-interest income for the banking sector.

“On a positive note, the healthcare, property, utilities and technology sectors saw upgrades in earnings forecasts. Incidentally, these sectors were the ones that saw modest negative earnings suprises.”

The rubber gloves sector saw a sharp upgrade in 2016E earnings, on new capacity and better margins.

“While the number of companies that beat expectations remained fairly stable at circa 14.6 per cent, 2Q15 saw a spike in companies that reported worse-than-expected results.

“The trend was similar for the 26 FBMKLCI component companies that we cover,” said the research arm.

“Our market earnings growth is lowered down from the May 2015 reporting season. Note that our market earnings forecasts had been lowered to 2.4 per cent and 8.2 per cent in our August 15 Malaysia Strategy Report.

“Notably, our 2015E market earnings growth is approaching the 2014 figure of 0.6 per cent, which had started off at 8.8 per cent earlier this year,” said the research house.

Corporate net gearing in 2Q15 continued to pick up slightly to 42.9 per cent, remaining off the low of circa 30 per cent in 2011 to 2012, AffinHwang Research said, but this was much better than during the Global Financial Crisis.

While the increase has yet to turn alarming, the research house believes that any further deterioration in gearing could be worrying especially once interest rates normalise.

On a brighter note, it said highly geared sectors remain capex intensive including telco, utilities, media, construction and infrastructure, which we think are supported by healthy cash flows.

“We took the opportunity to cease coverage on Sarawak Plant due to poor trading liquidity, and Ann Joo and Tong Herr because of weak fundamentals as a result of an overcapacity situation in the steel industry.

“Our universe of stock coverage is reduced to 96, which also accounts for 74.5 per cent of Bursa market capitalisation,” the research arm stated.

The KLCI is one of the worst performing markets in the region, amidst the sharp depreciation of the ringgit.

Despite this, Affin Hwang Research still sees downside bias for the KLCI in the near term, as several market overhangs remain – soft commodity prices, political uncertainty, corporate earnings disappointment and other domestic issues.

Apart from the recent Chinese yuan devaluation, these were the same factors that led to an acceleration of capital outflows from both the equity and bond markets, it added.

Foreign holdings remain high and concerns over the imposition of capital controls further accentuate the risk of outflows.