Subdued corporate earnings growth reflects soft domestic consumption

Exceeding expectations: AirAsia is among the big-cap stocks with positive growth during the quarter. — Reuters

PETALING JAYA: Corporate earnings growth for the second quarter of the year was relatively subdued, with few positive surprises, reflecting the soft domestic consumption environment.

The sectors which had positive growth in earnings, year-on-year as well as quarter-on-quarter, were banks, aviation, construction, property, technology and gloves.

Among the banks, Maybank Investment Bank Research noted that Hong Leong Bank Bhd’s (HLB) results exceeded expectations for a second consecutive quarter, while other banks’ results came within forecast.

Sectors which saw overall weaker earnings were plantations, oil and gas (O&G) and healthcare, as well as auto and building materials, which fell into the red during the quarter.

Maybank also noted that earnings from the media sector, apart from Astro Malaysia Holdings Bhd, remained “very weak”.

Among the big-cap stocks that were positive surprises during the quarter were AirAsia Bhd, Dialog Group Bhd, Axiata Group Bhd and HLB, as well as Sarawak Oil Palms Bhd, Ta Ann Holdings Bhd and Padini Holdings Bhd among the mid and small-caps.

On the other hand, Barakah Offshore Petroleum Bhd, Lafarge Malaysia Bhd, Tan Chong Motor Holdings Bhd and AirAsia X Bhd, which posted core losses for the period, were among stocks with disappointing earnings.

“Big-caps that disappointed, besides IHH Healthcare Bhd and Kuala Lumpur Kepong Bhd, were Genting Malaysia Bhd and IOI Corp Bhd,” it said in a report.

Moving forward, the research house continued to have an “overweight” stance on utilities, construction, O&G, cement and gaming, which were set to benefit from higher tourist arrivals.

It has revised downwards its 2017 and 2018 FBM KLCI core earnings forecasts by 1.8% and 1.0%.

For 2017, it has forecast FBM KLCI core earnings to grow at a slower but still decent 7.3% compared with an 8.4% growth previously, driven by banks, plantation, gaming and the petrochemical sectors.

According to UOB Kay Hian Research, the corporate results for the quarter were largely in line, but with fewer positive surprises.

“As expected, the second-quarter 2017 results could not sustain the past two quarters’ earnings upgrades and continued to reveal a generally subdued domestic consumption trend,” it said.

Its top picks are large-caps Gamuda Bhd, HLB, Tenaga Nasional Bhd, and mid-small caps Ann Joo Resources Bhd, Bumi Armada Bhd, Ekovest Bhd, Gabungan AQRS Bhd, Tune Protect Group Bhd and VS Industry Bhd.

The research house, however, has raised its 2017 core earnings forecasts by 0.3% and 0.4% for the FBM KLCI and its coverage universe, respectively, purely due to a distortion from Sime Darby Bhd.

This is to reflect the “technical” earnings adjustment for Sime Darby’s one-off impairments reported for the full year, which had also resulted in a 15% earnings upgrade for the plantation sector.

“Without Sime Darby’s provisions/impairments adjustments, our forecasts for the FBM KLCI and our coverage universe would have instead been trimmed, revealing an uninspiring overall corporate earnings trend,” it noted.

Moving forward, the research house expected the market lull to persist, as foreign capital flows turn more cautious, reflecting subdued corporate earnings beyond 2017 and the large expiry of Malaysian Government Securities.

However, selected investment themes such as mega infrastructure, electrical and electronics and the tourism-related sector are expected to gain more traction.