PETALING JAYA: The weak third quarter corporate earnings surprised many brokers for the missed estimates and signalled a step back in the earnings growth of the companies in the FBM KLCI this year.
The poor showing by corporate Malaysia in the third quarter has prompted many research houses to trim their targets and outlook for earnings as they take a cautious stance for 2019.
CGS-CIMB said corporate earnings for the third quarter (Q3’18) fell 5.9% year-on-year (y-o-y), due to weaker performances from the agribusiness, construction, oil and gas, and gaming sectors.
The aggregate core net profit of companies covered by Maybank Investment Bank Research was down 9.9% y-o-y in Q3’18, which led to core earnings for the first nine months of the year contracting by 2.0% y-o-y.
The research house said the last time it saw such sizeable set-back in quarterly results was in the first quarter of 2009, when core earnings fell 18.9% y-o-y.
“In line with the high number of earnings misses, we have lowered earnings forecasts for half (51%) of our universe, upgraded on just 9%.
“For 2018, we now expect KLCI core earnings growth to take a step back, to decline 2.8% y-o-y as compared with 0.6% previously, for our universe minus 1.3% y-o-y versus 4.1% previously.
“As for 2019, we now estimate KLCI core earnings growth to resume at a smaller plus 3.2% y-o-y compared to plus 5.8% previously, for our universe plus 7.8% y-o-y versus plus 10.3% previously,” said Maybank IB Research.
CGS-CIMB finetuned its FBM KLCI target for end-2018 to 1,704 points, which is now based on a higher price-to-earnings multiple of 16.6 times.
The research house estimated end-2019 KLCI target of 1,674 points, based on a price-to-earnings multiple of 15.4 times, as the market has priced in some but not all the potential policy risks and may not have fully appreciated the margin pressures affecting some industries due to the increased in minimum wages and rollback of projects.
While corporate earnings can still deliver positive year-on-year growth ahead, the underwhelming performance was expected to continue, suppressing growth rates, said MIDF Research.
Despite the earnings weakness seen in the oil and gas and manufacturing sectors, PublicInvest Research saw trading opportunities in the market.
The research house also suggested selective exposure in the banking sector.
“Recovery in the oil and gas sector is finally starting to see traction, pockets of challenges notwithstanding.
“We anticipate prices to remain at average US$60 per barrel in 2019, with work progress and earnings recognitions sustaining as a result,” said PublicInvest Research.
For the banking sector, financial institutions are expected to see decent earnings growth in the coming year with provisioning levels still on the downtrend.
While PublicInvest Research maintains its neutral view on the sector, it continues to be with a positive bias given its lagging valuations relative to the broader market.
“The recent pick-up in system loans growth momentum continues to be reflected in numbers. As most financial institutions are also already in compliance with capital and net stable funding requirements, we do not think competitive pressures will be particularly prevalent on the liability front, though the fight for good quality credits may hamper yields on the asset side,” it said.
Apart from that, PublicInvest expected rebounds for the small and mid-cap space despite the pronounced weakness seen this year, due to their unchanged fundamentals.
Going forward, Affin Hwang Capital maintains its overweight rating on the market with its 2018 year-end estimate for the FBM KLCI of 1,845 points, based on an 18.4 times FBM KLCI earnings per share for 2018.
The FBM KLCI is an index constituting Bursa Malaysia’s 30 largest stocks.
Affin Hwang Capital remained positive on the market on the back of structural reforms which would gradually enhance country fundamentals while the weak ringgit against the US dollar shall provides additional upside to capital returns.
“The US-China trade war ceasefire should provide some near-term relief for the market and may overshadow any pessimism on the disappointing third quarter results season.
“Furthermore, with foreign capital outflows easing off since May 2018 and foreign equity holdings having reached a near-term trough, we think that the risk-reward is favourable,” said Affin Hwang Capital.
Meanwhile, MIDF Research estimated the FBM KLCI year-end 2018 target at 1,800 points, while the year-end 2019 target remained at 1,900 points.
This is on the back of favourable external developments such as the US-China trade truce and US Fed’s remark on interest rate being near normal levels, which may generate near-term valuation tailwinds.
The aggregate reported earnings of FBM KLCI 30 constituents totalled RM10.21bil in the third quarter of 2018, representing declines of 10.7% quarter-on-quarter (q-o-q) and 31.2% year-on-year (y-o-y).
On an adjusted level to reflect a fairer picture of the benchmark’s earnings performance, the aggregate normalised third quarter earnings of FBM KLCI 30 constituents were higher at RM14.54bil.
“The adjustments were mainly related to RM1.83bil impairment loss suffered respectively by Genting and Genting Malaysia on investment in the promissory notes issued by the Mashpee Wampanoag Tribe in the United States, RM510mil provision and collective agreement by Tenaga, foreign exchange losses of RM752mil on non-Turkish Lira denominated borrowings by an IHH subsidiary.
“After neutralising the impact of non-operational items, the aggregate normalised growth in the third quarter posted much smaller negative figures at 2.7% q-o-q and 0.2% y-o-y, respectively,” said MIDF Research.
On a net profit basis, 16 constituents of the FBM KLCI have seen their earnings for the third quarter fall between 3% and 871%.
Only 13 companies saw an increase in net profit, ranging from 2% to 108%.
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