IF the Kuala Lumpur Stock Exchange's performance over the last two weeks is anything to go by, the deluge of corporate results released into the market in recent weeks have provided investors with little in the way of encouragement.
Although the October to December quarter is typically a quieter period as most people use that time of the year to unwind and revel in the year-end festivities, the situation was exacerbated by the protracted US-Iraq stand off.
As a result, although eight of the Composite Index's top ten market capitalised companies announced improved results that were generally in line with consensus estimates, it had failed to provide investors with the much-needed impetus.Malayan Banking Bhd
The country's largest banking group reported improved net earnings of RM897.8 million for the half-year ended December 2002, from RM753.2 million in the last comparable period. The group's net non-performing loans (NPLs) ratio increased marginally to 7.25 per cent in December 2002, compared with 7.22 per cent in June 2002.
But the announcement that surprised many was the record interim dividend totalling 35 sen per share, which is the largest to be proposed by the bank thus far. The generosity, which will undoubtedly be well received by shareholders, has nevertheless fuelled speculation that Maybank is unable to find new and attractive businesses and is thus returning the money to shareholders.
It has also set tongues wagging on the possibility that the higher payout ratio will ward off pressure on Maybank to participate in the next round of mergers.
Now that the first round of consolidation has officially drawn to a close with the RHB-Utama merger, observers are anxious to see what form the next wave of mergers will take. The current 10 banking groups are expected to be reduced further to between four and six.
But consolidation isn't the only challenge facing the industry. Margins have come under pressure as a result of fierce competition and subdued credit demand. And though asset quality is expected to remain stable, the ongoing economic uncertainty is preventing banks' NPLs from easing significantly.
The bright spot is that banks have exercised caution in their lending activities in the years following the Asian financial crisis and thus any credit deterioration is likely to be moderate.
Looking ahead, some pundits are inclined to view fee-based services as the way forward.
Telekom Malaysia Bhd and Maxis Communications Bhd
Both Telekom and Maxis reported their full year to Dec 31, 2002 earnings but it was the latter that emerged the talk of the town, having posted stellar results. Maxis reported a 58 per cent growth in net profit to RM949.7 million for the financial year ended Dec 31, 2002, compared with RM600.9 million a year ago.
Turnover was also higher at RM3.8 billion, from RM3 billion previously. As a result, the telecommunications company easily surpassed its net profit forecast of RM825 million in its listing prospectus by 15 per cent.
Telekom, meanwhile, saw stronger performances from its cellular and multimedia divisions with its cellular arm finally returning to the black. For the full year to Dec 31, 2002, it reported net earnings of RM1.08 billion, compared with RM1.84 billion a year ago.
The higher earnings in 2001, however, were attributed to an exceptional gain of RM828 million realised from the sale of its 50 per cent stake in Digital Phone Company of Thailand. Revenue was marginally higher at RM9.8 billion in financial year 2002, against RM9.67 billion in the 2001 financial year.
Earnings aside, analysts are more concerned about the current face-off between Celcom (M) Bhd and its minority shareholder Deutsche Telekom, which they claim could signal the start of a protracted tussle. While Telekom officials have asserted that the differences between two parties are not going to have an impact on the merger process, perception that it will and the distraction such disputes generally provide, may cause doubts to persist.
Further distraction, of course, will work in favour of rivals Digi.com Bhd and Maxis.
With the sector expected to record only a single-digit growth come 2005, it is not surprising that analysts are treading cautiously and are thus betting only on the fittest of the lot – Maxis. As it is, Maxis already commands a clear lead in both the pre- and post-paid segments. It managed to expand its market share from 31 per cent to 34 per cent for the full year while maintaining average subscriber revenue.
Surf88.com reckons that with voice communication entering the mature phase, data will be the way forward for the next phase of cellular expansion.
It says: “Here, we see Maxis as being among the best-positioned to capitalise on the opportunities. Short messaging service is just the tip of the iceberg as far as data communications go, but already Maxis' volume has grown 20 per cent between the latest two quarters, translating into an exponential surge of 215 per cent for the full year.
In addition, unlike Telekom's takeover of Celcom, Maxis' acquisition of TimeCel Sdn Bhd is expected to proceed smoothly and be completed by the first half of this year. Once again, most industry observers are banking on a smooth integration with minimal earnings dilution.
Plus Expressways Bhd
Its year-on-year revenue and operating profits increased by an impressive 36 per cent and 57 per cent, respectively, thanks to traffic volume growth and a 10 per cent increase in toll rates, effective from January 2002. The completion of its debt restructuring and refinancing schemes has also placed the company in a stronger financial position.
The question now is how does PLUS intend to make the most of this? The excitement that was generated around the time of its listing in July last year has died down. In fact, the company has hardly caused a ripple in the investment community since, as all seems to be very quiet on the PLUS front.
Generally, analysts agree that the country's largest toll operator is on a stronger footing now and will benefit from traffic volume growth as the economic recovery generates higher disposable income. Furthermore, the company is set to benefit from a new toll rate hike schedule of 10 per cent every three years starting from 2002.
According to a sector analyst, PLUS is also looking to expand its business by acquiring existing toll road concessionaires and securing toll road operation and maintenance contracts.
With a dividend payout ratio of between 40 per cent and 60 per cent of net earnings scheduled to commence in the current financial year, analysts reckon PLUS could stir some interest among risk-averse investors with long-term investment horizons.
Malaysia International Shipping Corp Bhd
Based on recent results, it seems to have turned around after reporting dismal performances in the last two financial years.
For the third quarter ended Dec 31, 2002, MISC reported a net profit of RM338.44 million on the back of a RM1.35 billion turnover, against earnings of RM259.39 million and a turnover of RM1.34 billion in the last corresponding period. Its improved performance was attributed to better market conditions in its container and tanker operations.
To date, MISC has consistently managed to produce strong profits in its liquefied natural gas division, which contributes some 80 per cent to the shipping company's earnings, even though the division accounts for only slightly more than 10 per cent of MISC's 124-vessel fleet.
The company's container shipping arm has been badly hit with an all round 50 per cent dip in freight rates, brought about by a situation of overcapacity.
Interestingly, the national carrier is looking to acquire American Eagle Tankers from its rival across the causeway, Neptune Orient Lines. The move is viewed positively as it will give MISC, which is 62.4 per cent owned by Petroliam Nasional Bhd, a foot into the American oil transport market.
The impending war in Iraq, which could cause a surge in oil prices, is not expected to have much of an impact on MISC as bunker fuel costs is traditionally hedged.
It posted a net profit of RM471.85 million for the first nine months to Dec 31, 2002, up from RM359.72 million in the last corresponding period. Turnover was also higher at RM1.69 billion, from RM1.43 billion previously.
Although its share price has experienced a good run up in recent weeks as local institutional funds were seen adjusting their portfolio of funds amid fears of a US-led strike against Iraq, analysts say the company in not likely to benefit much from higher oil and gas prices as it serves as a sort of intermediary for processing and transmitting gas to end-users.
However, it does have the potential to benefit from higher drilling activities by parent Petroliam Nasional Bhd in the region, especially when the planned RM2 billion Malaysia-Thai natural gas pipeline project kicks off.
An analyst believes the company could be a winner in the project as it stands a good chance of securing the contract to process the natural gas.
For the half-year ended Dec 31, 2002, the conglomerate recorded a 12 per cent increase in net profit to RM420.5 million. This was on the back of a 22 per cent rise in turnover to RM7 billion. Profits were driven by the group's plantation and motor vehicle divisions.
Although management is cautious about the outlook for the remaining quarters, it is fairly confident that its plantation division will continue to perform well even in the event of a war. Observers reckon crude palm oil prices will continue to stay firm for at least the next six months.
On the automobile front, however, prospects could be affected somewhat if consumer confidence takes a beating. Here, the group's margins have already come under pressure owing to competition and the strong euro.
Industry-wide, while low interest rates and availability of financing bode well for healthy unit sales this year, the uncertainty over (Asean free trade area) Afta-related changes could result in car buyers holding out for prices to come down.
It recorded a higher net profit of RM662.88 million for the full year to Dec 31, 2002, against RM607.70 million a year ago. This was on the back of a marginal 2 per cent rise in turnover to RM3.07 billion, from RM3.01 billion previously. BAT's revenue, however, declined to RM632.21 million in the fourth quarter to Dec 31, 2002, from RM907.97 million in the preceding quarter due to stocking up activities ahead of the Budget 2003 announcement, which fell in September last year.
With a 70 per cent market share, BAT clearly takes the lead in the local tobacco sector. But like all sectors, this is one with its fair share of challenges. While competition is heating up, demand isn’t exactly headed anywhere fast. In 2001, the industry contracted 1.1 per cent.
For 2002 and 2003, the prognosis is just slightly better – flattish growth. Local players also have to deal with new marketing trends resulting from stricter self-regulatory controls, tougher government regulations, higher taxes and contraband tobacco products.
Overall, the bets are still on BAT. Having established a track record in terms of earnings and dividend payouts and cultivated a reputation for market leadership and good corporate governance, analysts view it as a good defensive stock and a favourite among the blue chips.
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