Main earnings estimate dragger in 2015

KUALA LUMPUR: MIDF Research, which has maintained its end-2016 target for FBM KLCI at 1,800 points, said index has failed to impress in 2015 with a 4.1% year-on-year decline to close at 1,692.51 points.

Along with this lackluster price performance were the persistent downward revisions in market consensus earnings estimates for the FBM KLCI 30 constituents.

“Based on our calculations, equity market analysts have cut a year-round total of 10.8% off fiscal year 2015 aggregate earnings estimates for the KLCI30,” it said.

MIDF said the equity market analysts have cut their estimates in every quarter, with 40.8% of the total cut took place in third quarter 2015. Sector-wide, banking was the main earnings estimate dragger, accounting for 41.6% of the year-round reduction, followed by plantation sector’s 24.8% and telco’s 14.8%.

According to MIDF, banking industry contributed to 49.8% of the overall earnings estimate reduction in first quarter 2015. It failed to inspire equity market analysts with potential softening signs in its revenue prospects.

Bank Negara’s statistics indicated a moderating loan growth rate in December 2014 and January 2015 to 8.7 and 8.6% year-on-year respectively. The slow-down was partly driven by a softening loan approvals rate.

Apart from the downside risk in revenue prospects, the fear of a potential squeeze in net interest margin (NIM) also dampened market outlook for the industry.

It added that banks’ appetite for deposits had been enlarging due to the tight loan-deposit ratio and liquidity coverage ratio (LCR) requirement. Competition for deposits thereby has been stiff, pointing to more upward pressure on their COF. A slow-down of current and savings accounts (Casa) growth to 4.0%yoy in Dec’14 further reinforced the fear of a deteriorating profit margin.

MIDF said a total of 32.1% of the cut in earnings estimate in first quarter of 2015 was attributed to the oil and gas industry.

“Although Brent crude oil price appeared to have stabilised during the first quarter, the industry services providers were not faring well as major oil companies were announcing plan of capex cut due to the comparatively low oil price. As a result, their profit margins were expected to be squeezed during their contracts renewal/renegotiation.

“At the same time, market for oil & gas final products, such as Ethylene and Polymer, too has been suppressed due to the slowing China market, dampening the prospects for downstream players,” it added.

Meanwhile, MIDF said plantation sector continued to be the main dragger to earnings estimate cut in second quarter 2015 with a contribution of 42.1%.

Though China’s palm oil appetite picked up significantly in April, the tailwind was offset by a more pronounced export decline of 45.7%yoy to India, its weakest demand in almost two years. Despite the fact that the total export volume in second quarter 2015 demonstrated year-on-year growth, the figure was discounted due to the potential oversupply condition.

Monthly crude palm oil production showed year-on-year growth in second quarter 2015 by virtue of higher fresh fruit bunch (FFB) yield. As a result, the supply growth has outpaced that of demand, culminating in a rapid build-up of inventory.

In the third quarter of 2015, banking sector contributed to 55.2 % of the overall earnings estimate reduction, according to MIDF.
 
It said pessimism on the industry’s earnings outlook was rather intense in the third quarter, with the declining interest spread raising equity market analysts’ concern on a squeezed NIM.

Bank Negara’s statistics indicated a downward trend for banks’ interest spread since April 2015. Interest spread narrowed by 13 basis points from May 2015 through July 2015, with much of the drop contributed by a declining average lending rate (ALR).

Pessimism in the Telco industry emerged among equity market analysts in the fourth quarter, with the sector contributed to 52.0% of the cut in the fourth quarter 2015.

“Generally, equity market analysts were getting more pessimistic on the industry growth prospects with the comparatively high market saturation and intensifying competition among the main market players in Malaysia.

“Telco companies have been resorting to price competition by offering cheaper packages in order to expand or defend their market share. As a result, overall earnings outlook was rather uninspiring,” MIDF said.