Corporate Malaysia Q2 earnings a huge letdown

PETALING JAYA: Corporate Malaysia’s second quarter reporting season was by far most disappointing for investors, falling way below analysts’ expectations for the seventeenth consecutive quarter.
The top 30 companies on Bursa Malaysia reported an aggregate earnings of RM13.56 billion in the three months ended June 30, which was lower by 2.1% quarter-on-quarter and 8.5% year-on-year respectively.
The biggest disappointments were the plantation, banking and consumer sectors.
Analysts noted that plantation- related earnings took a greater toll from weaker than anticipated crude palm oil prices, banks were impacted with higher provisioning levels while greater cost pressures since the implemetation of the Goods and Services Tax has started to bite consumer-related stocks.
Hong Leong Investment Bank (HLIB) said 54% of its universe fell short of expectations while only 9% surprised on the upside in Q2.
“Both this and earnings revision ratio are the worst since we started tracking in CY2Q’11,” its analyst Low Yee Huap said.
Due to the uninspiring Q2 results, Low expects 2015 earnings per share (EPS) to contract by 1.6% from 2.6% initially forecast, the second consecutive year of contraction. However, he noted that due to a lower base, the 2016 EPS growth has been revised higher to 8.3% from 7%.
Low believes that headwinds have not blown over and investors may have to continue to endure volatility, at least in the short-term.
External factors like the timing of the Fed’s interest rate hike, slump in oil prices and China’s economic slowdown as well as internal factors like 1Malaysia Development Bhd, political glitches and slower economic growth are expected to linger. Also, concerns persist due to ringgit weakness and foreign outflows.
Due to the headwinds, Maybank Investment Bank (IB) Research has cut its end-2015 FBM KLCI target to 1,610 and expects it to hit 1,750 in end-2016.
With downside risk still faced by listed companies, its analyst Wong Chew Hann said the early end-2015 target of 1,830 was “no longer realistic”.
MaybankIB continues to advocate a defensive strategy for the near term, and advised investors to buy at lower levels. It said the FBM KLCI could reach 1,720 points if commodity prices manage to rebound.
PublicInvestment Research meanwhile, said its preferred stocks that are skewed more toward the mid-to small-cap segments as they offers more growth opportunities and greater capital appreciation over the medium term.
Among the large caps it picked Tenaga Nasional Bhd, Digi.Com Bhd and Genting Bhd while Star Publications Bhd, Ta Ann Holdings Bhd, SKP Resources Bhd, Hock Seng Lee Bhd and Uzma Bhd are its preferred exposures in the small-to-mid cap space.