CORPORATE earnings growth for 2008, although forecast to be lower than that last year, is expected to remain strong.
CIMB-Principal Asset Management Bhd chief investment officer Raymond Tang said that although corporate earnings growth would probably be lower than in 2007, the outlook was still good, supported mainly by sectors that were relatively independent of the US economic performance.
These sectors include plantation, construction, and oil and gas (O&G). However, he said, it was difficult at this juncture to predict earnings on a quarterly basis.
Tang said earnings of the construction sector were dependent upon the rollout of the Ninth Malaysia Plan (9MP) projects, and any delay may cause earnings to be downgraded.
The company expects corporate earnings this year to grow slightly above 15% compared with around 23% in 2007.
With the slowdown in the US economy, Tang said CIMB-Principal's focus would mainly be on domestic plays with earnings that were insulated from the direction of the US economy. “We believe sectors such as plantations, O&G and construction, with resilient earnings, will outperform this year,” he said in an interview.
Concurring with Tang, AmInvestment Bank Group chief executive officer for funds management, Datin Maznah Mahbob expected positive earnings growth this year although it could be rather subdued compared with last year.
“Corporate Malaysia is looking at earnings for 2007 to show growth in excess of 30% against our expectation of 10% to 15% growth this year.
“The decline in 2008 earnings is due in part to the sub-prime issues in the US, a slowing global economy and its base effect on global markets and economies,” she said.
Given its outlook for near-term volatility and uncertainty, AmInvestment Bank's strategy is to focus on “specific growth sectors with transparent and deliverable earnings”. “One such sector that we prefer is O&G, which would be less impacted by oil price fluctuations as their contracts are generally locked in,” she said.
AmInvestment is also upbeat, at least for this year, on the plantation sector, as the outlook for crude palm oil (CPO) prices remains positive.
Maznah said this was mainly due to the drop in soybean planted area in the US, which should shift demand to palm oil as a substitute.
She added: “We are also beginning to see some pick-up in selected property and auto segments. Incentives given by the Government will inevitably promote demand, which will be positive for banks as well.”
Pacific Mutual Fund Bhd assistant general manager for investment Teh Chi-Cheun said: “Corporate earnings growth for this year would be driven by plantations (on the back of strong CPO prices), property (due to buoyant demand), banking (from loans growth due to consumer spending) and the multiplier effect from 9MP construction projects and the O&G sector (robust oil prices and increased investment and spending in the areas of exploration and production by oil producing countries and companies)”.
As such, Pacific Mutual expected the financial services, O&G, property and building materials sectors to outperform this year.
He said the financial services sector, which currently constitutes 21% of the KL Composite Index weightage, had been weak due to the weakness in global financial services stocks, although the Malaysian financial services companies had little, if any, sub-prime mortgage exposure.
Earnings growth of the financial services sector is expected to be in the mid-teens this year on the back of a robust economic growth, with gross domestic product forecast to grow by 6% to 6.5%, and strong consumer spending.
LEE SWEE ENG
THE capital expenditure (capex) for oil, gas and petrochemicals is influenced by the crude oil prices. Demand for process equipment remains very strong due to high crude oil and metal prices. In view of such strong demand, we anticipate our prospects in 2008 and 2009 to remain good.
KNM has also been very focused on moving up the value chain of the process equipment with strategic presence worldwide. We will achieve this through organic growth and acquisitions of strategic targets.
The current volatile equity market and uncertain global economic climate are not expected to result in a downward cycle in the oil, gas, petrochemicals and minerals mining industries, with the high crude oil and metal prices fuelling unprecedented levels of activity in these sectors.
So far, the committed global capex for oil, gas, petrochemicals and mining remains very strong; hence the demand for our process equipment remains high and is expected to increase.
However, should the oil price fall below US$40 per barrel or prices of metal commodities significantly weaken, we would anticipate a drop in capex. Since typical major capex project cycle is three to five years, the effect to our process equipment sector may be one to two years after the event.
President and CEO
Lafarge Malayan Cement Bhd
WE expect cement demand to increase in the coming two years with the acceleration in project implementations under the Ninth Malaysia Plan and an improved outlook for the residential property market.
While we expect greater contributions from increased volume and higher export prices, the company's corporate earnings in the coming two years will also depend on the price increase and the implementation of the Automatic Pricing Mechanism (APM).
The industry is affected by significant cost increases in coal, paper bags and other raw materials and may suffer from a possible upcoming price increases of diesel and power in 2008. Dividends to shareholders will track closely the earnings.
To counter the potential negative external factors and sustain the corporate earnings, we will continue to focus on cost reductions in all departments, customer satisfaction (consistency and innovativeness of our products and services), industrial performance (particularly reliability) and the development of our people. We will also keep a strong emphasis on safety as our first priority.
The company's corporate earnings in 2008 and 2009 will hinge on cement demand growth, the extent of our ability to pass through market factor cost increases to customers and our efficiency in mobilising the entire population of Lafarge Malayan Cement to carry out the company's strategies and action plans in the five directions mentioned above.
DATUK SERI STANLEY THAI
Group Managing Director
FOR the rubber glove industry, our business prospect remains good as we are in a recession-proof industry. The glove industry is currently facing the volatility of foreign exchange and latex prices, but most of the major players would be able to manage the fluctuations by passing the major cost increases to the customers.
Malaysia remains the major source and major supplier of medical gloves to the global market and is thus able to lead any major shift in market prices of rubber gloves. As such, I expect the earnings and dividend payout by major glove companies to remain consistent.
For Supermax, it is our policy to pay out 25% to 30% of our earnings as dividends every year. The balance of the earnings would be used to repay borrowings, part of the capital expenditure and for working capital purposes. Supermax will revise the dividend policy upward once the remaining expansion of capacity is completed.
To have sustainable earnings and reduced earnings risk, going forward, we have started in year 2000 to invest in distribution in selected market segments and selected countries, and to be part of the supply chain networks.
To date, we have four main sources of income. With the diversified sources of income, we are more prepared to withstand any downside in earnings and rely less on manufacturing income, especially from the original equipment manufacturing business where prices are more competitive.
We continue to monitor closely and manage all risk factors that could compromise our business and earnings prospects. We do not believe in commodity price and foreign exchange speculation, so there won't be speculative losses.
Adopting, practicing and enforcing risk management practices is part of the management's approach to minimise downside risks that could affect corporate earnings.
DATUK JAGAN SABAPATHY
Chief Executive Officer
Bandar Raya Developments Bhd
WE are positive about 2008 and 2009. The underpinning factors are our projects – One Menerung in Bangsar and the iconic Foster and Partners-designed Troika in Kuala Lumpur City Centre.
Both projects have garnered a very high level of sales from local and foreign buyers. Both developments are ongoing and have set new benchmarks for design, quality and price in high-end residential living.
Furthermore, the recent en bloc sale of the 41-storey office building (Office Tower 2) at the integrated commercial, retail and residential enclave of CapSquare to Union Investment Real Estate AG for RM439.32mil will have a positive impact on our earnings for 2008 to 2010.
We expect the high-end and niche market to continue to do well, as the demand-supply situation is more favourable. Bandar Raya Developments Bhd (BRDB) has a strong brand and unblemished track record in delivering quality homes to satisfied purchasers.
We are planning to launch a number of high-end, premium projects in very much-sought-after locations in the Klang Valley later this year. They consist of a luxurious development in Bangsar, premium residences in Taman Duta and the second condominium residence at CapSquare in mid-town Kuala Lumpur.
We expect positive results despite the current volatility in the stock market. This volatility is largely due to external factors, including the subprime crisis in the US.
Our prestigious projects – Troika and One Menerung – along with the sale of Office Tower 2 as well as the launch of new projects will underpin our earnings growth.
In the medium term of two to three years, BRDB will be diversifying to other regional markets. We believe that in emerging markets, there will be a demand for such lifestyle developments that we’re developing here – high-end niche products aimed at discerning, high-income purchasers.
Expanding our presence in the global market will spur greater earnings growth and, in the process, shore up our credibility as an international property player.
However, the rising cost of oil, steel and labour will impact costs. Additionally, with so many choices available from developers in the market, buyers are increasingly demanding the very best in product offering, quality and service standards.
These will lead to rising cost of delivery, which will inevitably be passed on to the consumer.
We are optimistic that our dividends will be in tandem with our earnings. Since we’re projecting positive earnings, we expect an improved dividend payout over the coming years.
DATUK YUSLI MOHAMED YUSOFF
Chief Executive Officer
THE outlook of corporate earnings for public listed companies has been positive. We hope this trend will continue, given that the domestic economic indicators are positive.
The country’s strong fundamentals, coupled with the Government’s pump-priming efforts and expected continuing global demand for our commodities, will certainly offer more opportunities for corporations to grow in the market.
In addition, the liberalisations of the Employees Provident Fund and increase in the salaries of civil servants can further spur the consumer sector.
Our market has been resilient in the face of external factors and will continue to be driven by the Government’s progressive pump-priming measures and strong domestic demand, all of which is underscored by strong fundamentals.
These positive drivers are expected to stimulate several sectors such as energy, plantation, utility and construction, which in turn can have a good impact on corporate earnings.
On the part of Bursa Malaysia, we are focused on improving our internal efficiencies and market access as well as broadening and internationalising our products.
Bursa Malaysia’s corporate earnings have been stellar year-on-year and we are optimistic that we can sustain the positive performance by focusing on, among other things, growing the derivatives and retail equities markets.
Investor sentiment, albeit cautious, is all around positive. The crude palm oil sector is seeing a healthy demand as demonstrated by the upward trend in prices. This potentially spells stronger earnings growth for plantation stocks specifically.
Moreover, the increase in motor vehicle sales and demand for residential properties are indicators of active consumer spending, all of which can potentially boost corporate earnings growth.
TEOH KOK LIN
Chief Investment Officer
Singular Asset Management Sdn Bhd
CORPORATE earnings for Malaysian companies, as a group, are expected to be strong for 2008 and 2009. However, the performance of individual sectors and companies will vary significantly.
The plantation sector, buoyed by high crude palm oil (CPO) prices, is expected to do extremely well in 2008. Their performance in 2009 will depend on the CPO prices then.
Construction and building material companies are also expected to report strong profit growth, while manufacturing companies are likely to suffer from higher raw material/petroleum prices.
In short, overall, strong growth is expected – but very diverse performances between sectors and companies.
As for the factors that will affect the corporate earnings in 2008 and 2009, global economic environment and commodity prices are two of the most important factors.
Head of Equity Research
IN our universe of coverage, we expect corporate earnings to grow by 14% with upside bias, due to rising crude palm oil prices. Plantation companies now make up about 20% of our universe of coverage's earnings.
In general, corporate strategies (in view of global market volatility and uncertain economic climate) should include seeking new markets to serve, strengthening brand equity and service levels to allow for raising prices, and raising efficiencies by reducing wastage with the help of technology.
Two major factors affecting 2008 to 2009 (earnings) prospects would be global inflation and economic slowdown, including a potentially significant slowdown in China's manufacturing sector. All these factors serve to dampen demand and potentially squeeze profit margins.
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