The third quarter of this year has been a disappointing period for Corporate Malaysia as results came in below expectations and analysts believing that the profit trend would unlikely get better anytime soon.
Analysts said the lacklustre corporate third quarter among Bursa Malaysia-listed companies would likely extend into the last three months of the year as downside risks remain elevated.
Up to the end of November 2018, results of all the 30 largest entities on the Malaysian stock exchange showed that decliners trumped advancers in terms of changes in bottom line.
In the third quarter, several key sectors such as property, plantations and logistics have underperformed due to factors such as slowing economic growth, high operating cost environment, volatile commodity prices and looming external uncertainties.
In fact, commodities – specifically oil and gas, crude palm oil, timber and rubber – have had its negative effects on Corporate Malaysia:
O&G: Balancing demand and supply
To combat the issue of oil oversupply in the market, last Friday saw the alliance of Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members, also known as OPEC+, reaching an agreement on the extension of oil output cuts.
A press release by the OPEC revealed that the fifth OPEC and non-OPEC Ministerial Meeting, following deliberations on the immediate oil market prospects and in view of a growing imbalance between global oil supply and demand in 2019, decided to adjust the overall production by 1.2 million barrels per day (mbpd), effective as of January 2019 for an initial period of six months.
“The contributions from OPEC and the voluntary contributions from non-OPEC participating countries of the ‘Declaration of Cooperation’ will correspond to 0.8 mbpd (2.5 per cent), and 0.4 mbpd (two per cent), respectively,” the statement also read.
The ‘Declaration of Cooperation’ was reached on December 10, 2016, between OPEC and non-OPEC producing countries.
“This will, at once, help reduce concerns towards an oversupply situation after the US president exempted eight countries including China from bruising sanctions that the country was re-imposing on Iran against the backdrop of strong supply from US shale oil,” the research arm of Public Investment Bank Bhd (PublicInvest Research) commented on this latest development.
“The OPEC+, which includes Russia and Kazakhstan, possesses unprecedented influence over the world economy, controlling 55 per cent of global oil supplies and 90 per cent of proven reserves.”
The research arm believed oil prices will see some stabilisation at the current US$60 per barrel (bbl) levels for 2019, supported by demand and supply fundamentals.
“Prices for Brent crude added 0.2 per cent, while US West Texas Intermediate (WTI) slightly lower by 0.5 per cent to US$61.67 per bbl and US$52.61 per bbl respectively post-OPEC meeting, but are still 7.8 per cent and 12.9 per cent lower year to date (YTD).”
Following this development, Economic Affairs Minister Datuk Seri Mohamed Azmin Ali said in a statement that Malaysia has agreed to continue its voluntary commitment to reducing total oil output by 15,000 barrels per day from an earlier cut level of 20,000 barrels per day.
Azmin went on to say that this decision was a testament of Malaysia’s commitment to international cooperation to face economic challenges posed by the global oil market.
“Even though we are a small oil producing country, Malaysia stands in solidarity with other oil producing nations in pursuing the strategic objective of achieving global market stability in the interest of all oil producers and consumers, taking into consideration the prevailing market conditions and prospects.”
Hopefully, this move will not only keep in check the oversupply of oil in the market, but also slow down falling oil prices.
Risks on oil reliance
In its economic outlook, RHB Research Institute Sdn Bhd (RHB Research) highlighted the risk of Malaysia’s increasing reliance on oil-related revenue, which will account for 30.9 per cent of revenue in 2019, up from 21.7 per cent in 2018.
“This will pose a risk to the country’s public finances if oil prices drop significantly,” the research house said.
“Indeed, since the Budget 2019 announcement, oil prices (Brent crude) have fallen significantly to below US$60 per bbl in late November 2018, which poses a risk to the budget oil price assumption of US$72 per bbl.
“While the Government has not indicated its plans to recalibrate the 2019 budget any time soon, we think it may need to revisit the budget – if crude oil prices decline further for a protracted period, perhaps to below US$50 per bbl.”
RHB Research also highlighted that a sensitivity analysis of government revenue to oil prices showed that every US$1 per bbl drop in the Brent crude price resulted in a decline of about RM0.3 billion in government revenue.
It noted that this excluded the US$30 billion special dividend by Petroliam Nasional Bhd (Petronas), as this one-off amount is obtained from the national oil company’s reserves and is unaffected by changes in international oil prices.
“From the sensitivity analysis above, a US$20 per bbl drop in the oil price is estimated to add 0.4 percentage point (ppt) to the 2019 budget deficit of 3.4 per cent of growth domestic product (GDP), resulting in a new deficit of 3.8 per cent of GDP.
“In such a situation, there is probably a need to revisit the budget again, if it happens.”
Disappointing quarter for O&G
Looking at the overall oil and gas (O&G) sector’s performance for the third quarter of 2018 (3Q18), analysts were generally disappointed by the earnings results of stocks under their coverage.
It has been observed that such ‘disappointments’ were more apparent within the offshore vessel chartering players and upstream contractors.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), nine out of its 17 stocks in its coverage reported results that were within expectations.
“However, this has deteriorated as compared to last quarter’s 11 stocks,” Kenanga Research recapped.
“In fact, this quarter had seen a higher number of six disappointing results which doubled from the preceding quarter, while outperformers remained flat at two counters, namely Dayang Enterprise Holdings Bhd (Dayang) and Petronas Chemicals Group Bhd (Petronas Chemicals).”
“This time round, we noticed that disappointments were apparent within the offshore vessel chartering players and upstream contractors, for example, Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE), MISC Bhd, Sapura Energy Bhd, Yinson Holdings Bhd, while Alam Maritim Resources Bhd recorded widening losses, albeit within expectations.
“This stems from poor vessel utilisations on top of depressing charter rates, and slow jobs flow in the offshore engineering space.”
On the upside, the research arm found that Dayang was a brightspot, delivering better-than-expected results as the group saw higher work orders within the topside maintenance space.
“Petronas Chemicals also saw a positive surprise in results from stronger average selling price (ASP) and favourable forex.”
Contrary to Kenanga Research’s view, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) held a more positive stance on the sector’s latest financial results.
“The downstream oil and gas companies continues to perform favourably as the supply and demand dynamics for both petrochemical and petroleum-derivative products were within expectations.
“Operating margins were relatively stable owing to more favourable average selling prices as a result of increasing crude oil price environment in 3QFY18.
“Service providers on average faired reasonably due to increasing offshore activity levels owing to an encouraging crude oil price environment.
“The outliers registering losses for the quarter were MMHE and Bumi Armada Bhd due to project specific complications.”
Outlook in 2019
Moving forward, Kenanga Research projected that Petronas’ capital expenditure (capex) will dwindle in 2019, given the higher dividend commitment, having already commited a RM30 billion one-off special dividend, on top of the group’s RM24 billion regular payout.
This brought total expected dividends to RM54 billion – more than double of 2018’s RM26 billion, and more than triple of 2017’s RM16 billion.
Additionally, Pengerang Integrated Complex is nearing completion which had lifted capex numbers for the past one or two years.
“Thus, with the backdrop of lower capex, we see activites related to oil and gas greenfields to be slower in the coming years,” the research arm pointed out. “Instead, in its place, we expect a ramp-up in brownfield production as more likely to lift cash flows to accommodate higher dividends.”
Kenanga Research noted that this could benefit local players with high browfield exposures like Uzma Bhd and Dayang while downstream players such as Serba Dinamik Holdings Bhd and Dialog Group Bhd would remain mostly unaffected.
RHB Research also saw that following a gas leak of the Kimanis-Bintulu pipeline since January 2018, it expected the recommencement of this pipeline by around 2Q19, which would lift liquefied natural gas (LNG) output next year.
“More gas production fields commencing operations would likely add onto the production going forward,” the research house said.
As per the Department of Statistics Malaysia’s (DOSM) external trade statistics for October 2018, LNG exports, which accounted for 4.2 per cent of total exports, increased RM1.1 billion or 38.8 per cent on a year on year (y-o-y) basis to RM4.1 billion.
This was due to the increase in both average unit value (29.5 per cent) and export volume (7.2 per cent).
As for crude petroleum, which contributed 3.9 per cent to total exports, this segment saw an increase RM937 million or 32.8 per cent to RM3.8 billion. This was also due to the increase in average unit value (38.9 per cent) although export volume dropped 4.4 per cent.
“Refined petroleum products, which accounted for 6.9 per cent of total exports, rose RM1.8 billion or 37.3 per cent to RM6.7 billion due to the increase in both average unit value (28.6 per cent) and export volume (6.8 per cent).”
Tough quarter for palm oil
On the other hand, palm oil and palm oil-based products, which accounted for 6.4 per cent of total exports, did not fare as well as its oil and gas counterparts.
According to DOSM’s October 2018 statistics, palm oil and palm oil-based products exports shrank RM807.1 million or 11.6 per cent y-o-y to RM6.2 billion.
“Exports of palm oil, the major commodity in this group of products, declined RM664.6 million or 15.5 per cent due to the decrease in average unit value (18.1 per cent) as export volume increased 3.2 per cent.”
In fact, under the plantation sector, most analysts agreed that companies under their coverage recorded another dismal quarterly result in 3Q18.
For MIDF Research, 3Q of current year 2018 (3QCY18) was a repeat of 2QCY18, with the latter being the worst quarter so far for the plantation sector.
There were seven underperformers, including Sime Darby Plantation Bhd, FGV Holdings Bhd, IJM Plantations Bhd, Fima Corporation Bhd, Genting Plantations Bhd, TSH Resources Bhd and MSM Malaysia Holdings Bhd (MSM).
“All of the underperformers are caused by lower than expected fresh fruit bunch (FFB) volume, except MSM,” the research arm said. “For MSM, the company’s sales volume missed expectations.”
On this sentiment, Kenanga Research also saw that 3Q was a beaten-up quarter where out of 13 companies under its coverage, eight missed forecasts while 11 missed consensus estimates — and none exceeded expectations.
“All planters under our coverage recorded lower year to date (YTD) crude palm oil (CPO) prices received with an average decline of 17.2 per cent, overshadowing the sector’s flat FFB growth (up 0.8 per cent),” Kenanga Research said.
“As a result, all the planters posted softer core earnings with the exception of PPB Group Bhd (PPB), which was lifted by other non-plantation segments.”
CPO price drop the key
As recorded by the Malaysian Palm Oil Board (MPOB), locally-delivered CPO price for July 2018 amounted to an average of RM2,215 per tonne. Prices continued to gradually drop over the next few months, with November recording an average of RM1,830.50 per tonne.
According to Affin Hwang Investment Bank Bhd (AffinHwang Capital) in its plantation sector update, prices of vegetable oils, including CPO, have been under pressure with the improvement in global production and the ongoing trade tensions between the US and China.
“We believe the current CPO price pressure emanates from large palm oil stocks in Malaysia and Indonesia coupled with reserved consumer buying,” the research firm said.
“Nevertheless, the current low CPO price is unlikely to be sustained in 1Q19 when seasonal production declines and world palm oil consumption will likely be in excess of production thereby reducing stocks.”
MPOB’s statistics on the production of CPO for November 2018 showed that the country had produced a total of 1.845 million tonnes, down from 1.943 million tonnes in November 2017. This month’s CPO production was also a decline from the 1.965 million tonnes recorded last month.
In Sarawak and Sabah, CPO production for November 2018 amounted to 375,868 tonnes and 515,601 tonnes, respectively.
For the first 11 months of 2018 (11M18), Malaysia’s total CPO production amounted to 17.708 million, down from 18.085 million in 11M17.
“We think Malaysia’s CPO production could potentially slow down over the next few months due to the seasonal monsoon period.
“CPO production in 2018E will likely be slightly lower than the 19.92 million metric tonnes (MT) in 2017,” Affin Hwang Capital opined.
It noted that Oil World forecast for Malaysia’s CPO production in 2018E amounted to 19.5 million MT.
Meanwhile, Kenanga Research projected that December 2018 production will fall by 6.4 per cent month on month (m-o-m) to 1.73 million MT.
The research arm believed that production has likely reached its peak in October and started to slow down in November.
“We expect this trend to continue for the month of December as we enter the height of the monsoon season in the East Coast and Sarawak, followed by a sharp seasonal drop in January.
“As such, we forecast December output to fall by 6.4 per cent m-o-m to 1.73 million MT, representing the median of 2015-2017’s December decline.”
Normal in plantation cycle
On exports, Kenanga Research expected it to retreat slightly in December on seasonality factors.
“Traditionally, exports to China tended to decline in the month of December as it entered the winter season as CPO is prone to solidification in cold temperatures.
“Nevertheless, this should be cushioned by higher seasonal demand from the European Union (EU) and US.”
As such, the research arm forecasted December exports volume to inch down by 1.4 per cent m-o-m to 1.36 million MT.
Kenanga Research anticipated supply of 1.79 million MT to exceed demand of 1.66 million MT in December, leading to higher ending stocks of 3.14 million MT (up 4.3 per cent m-o-m), marking the seventh consecutive monthly increase.
“In spite of that, we believe this will not weigh down CPO prices further given production has already begun to slow down and is anticipated to come off sharply in January.
“In addition, demand is likely to pick up in 1QCY19 on festivities such as Chinese New Year.
“As such, we expect CPO prices to recover to RM2,200 per MT to RM2,250 per MT level in January.”
Deputy Primary Industries Minister Datuk Seri Shamsul Iskandar Mohd Akin recently spoke to reporters on the sidelines of the National Seminar on Palm Oil Milling, Refining, Environment and Quality, describing the low CPO price situation as normal due to a plantation cycle.
According to Bernama, Shamsul Iskandar also said that the global output of edible oils in the last two years was on the rise following good weather, hence resulting in increased stocks.
“The price declined to as low as RM1,500 per tonne in November 2008 and it also dropped in 2009.
“But when this happens, we have to be in continuous engagement with stakeholders to ensure that even when the price is low, we will still strive to ensure the market responds positively.”
In other updates from Bernama, Prime Minister Tun Dr Mahathir Mohamad this week launched the B10 Biodiesel Programme that will see the fuel – comprising 10 per cent palm oil biodiesel and 90 per cent fossil diesel – used by all types of diesel vehicles in the transportation sector beginning February 1, 2019.
“The implementation of the B10 Programme is apt at this time in view of the lower price of palm oil biodiesel compared to petroleum diesel,” he said.
“I believe the B10 Programme for the transportation sector will run smoothly and will increase palm oil demand in the country from December 2018.”
He also urged vehicle manufacturers as well as original equipment manufacturers (OEM) to cooperate with the government in ensuring smooth implementation of the B10 Programme as well as any biodiesel programmes in the future.
According to Dr Mahathir, Malaysia needs to increase the fuel mixture in the future to strengthen domestic demand for palm oil.
“The use of palm oil biodiesel will have a positive impact on the palm oil industry by reducing palm oil stocks and stabilising palm oil prices.
“Through this effort, 650,000 palm oil smallholders will continue to enjoy more stable palm oil prices with increased revenue.”
Timber’s slight decline in 2018
Last month, Primary Industries Minister Teresa Kok revealed that the export value of Malaysia’s timber products is expected to decline slightly this year from the RM23.21 billion chalked up in 2017, against the backdrop of a weak global economy, according to a Bernama article.
Kok had said that the trade dispute between the US and China, which has caused global trade imbalances and volatility, had also dampened demand for commodities, including timber.
“When we see our commodity prices drop, and a slowdown in the economy, (it is) not just for Malaysia, but the whole world. We shouldn’t be too surprised with the decline.”
Bernama also reported that from January to August this year, the total export of timber and timber products declined 5.7 per cent to RM14.6 billion compared with the same period of 2017 due to weather factors.
In 2017, the export value amounted to RM23.21 billion. Among the major contributor to the export earnings were wooden furniture (RM4.95 billion).
Meanwhile, DOSM’s external trade statistics for October 2018 revealed that timber and timber-based products were among the main products which contributed to the increase in Malaysia’s overall exports on a y-o-y basis.
Timber and timber-based products, contributed 2.2 per cent to total exports, recorded an increase of RM133.9 million or 6.6 per cent y-o-y to RM2.2 billion in October 2018.
In Sarawak, Second Minister of Urban Development and Natural Resources Datuk Amar Awang Tengah Ali Hasan disclosed that for January until August 2018, the timber sector registered export earnings of RM3.58 billion. This was a decrease of 14 per cent compared to RM4.17 billion in the corresponding period of 2017.
“The decline was mainly due to the reduction in the supply of raw materials and the inability of the current mills to process the type of raw materials that are currently available in the market as well as slower demand from major market,” he said in his ministerial winding up speech at the State Legislative Assembly.
He also said the production of logs from natural forest has decreased by 18 per cent from 3.8 million cubic meters in the first eight months of 2017 to 3.1 million cubic meters in the same period of 2018.
Awang Tengah went on to note that in order to sustain the timber industry, the local manufacturers need to undertake the retooling process in line with the changes on the type of raw materials available in the future.
To supplement the supply of raw materials, he said the government will ensure successful implementation of the industrial forest in the state.
“The annual production of logs from industrial forest is expected to increase to at least two million cubic meters to meet the shortfall of logs from natural forest.”
Rubber: Incentives to boost business
Rubber was another commodity which has also been highlighted in November, whereby it was reported by Bernama that the Primary Industries Ministry will conduct a study on the Rubber Production Incentive (IPG) floor price, which is currently set at RM2.20.
According to Bernama, Kok said the government has proposed to allocate RM50 million under the 2019 Budget to implement the IPG to help smallholders and rubber tappers, but has yet to determine its floor price.
“The problem is the quantum, the floor price, which is RM2.20, and the ministry will be conducting a study to see if it should remain at RM2.20 or increase it.
“We need to calculate the number of rubber tappers who are eligible for the incentive, so this will take a bit of time.”
Later on during the month, Kok revealed an initiative to stabilise rubber prices and increase productivity, in which the government had allocated RM100 million for the use of the cuplump modified bitumen technology in the construction of roads in port and industrial areas.
“In addition, planters and smallholders are encouraged to cultivate mixed cropping so that they would have an alternative revenue stream during the Monsoon season,” she said.
As per DOSM’s October 2018 statistics, natural rubber (0.3 per cent of total exports) decreased RM9.2 million or 2.8 per cent y-o-y to RM314.7 million due to the 15.4 per cent decline in average unit value as export volume increased 14.9 per cent.
Looking at the rubber gloves sector, Kenanga Research noted that the just concluded 3QCY18 results of glove makers under its coverage came in within expectations.
Kenanga Research further noted that Hartalega Holdings Bhd’s 3Q18 results showed a declining sequential volume for the first time over the past several quarters potentially indicating that strong demand is tapering off.
As for Kossan Rubber Industries Bhd’s 3Q18 results, these were a solid indication of a strong growth trajectory in subsequent quarters with the commercial production of plant 16 and plant 17, the research arm said.
“Our analysis suggests a potential oversupply situation is looming. Note that previous two oversupply occurs back in 2014 and 2016.”
Meanwhile, Affin Hwang said that apart from Karex Bhd, all the glove manufacturers within its coverage delivered positive y-o-y growth.
“We believe that the earnings growth momentum for the glove manufacturers can be sustained, benefiting from strong demand from the switch from vinyl gloves to latex/nitrile gloves.”