Underwhelming 2Q earnings set 2H dismal tone

Lower commodity prices, higher provisions and effect of adopting MFRS 16 resulted in lower bottom lines


CORPORATE Malaysia’s below-par earnings performance in the second-quarter of 2019 (2Q19) has led investors to push the benchmark stock gauge 1.28% lower, as fears of an economic slowdown appear to manifest in the weaker corporate numbers.

The IHS Markit Malaysia Manufacturing purchasing managers’ index (PMI) data released yesterday showed that PMI for August fell to its lowest since March on tough demand conditions and increasing cost pressures.

The FTSE Bursa Malaysia KLCI (FBM KLCI) closed 1.28% or 20.62 points lower at 1,591.52 yesterday as the MSCI AC Asia Pacific Index declined 0.3%.

The benchmark index fell as investors sold Petroliam Nasional Bhd (Petronas) linked counters like — Petronas Dagangan Bhd and Petronas Gas Bhd, MISC Bhd and Petronas Chemical Group Bhd — as well as banking heavy-weights like Public Bank Bhd, Hong Leong Bank Bhd, Hong Leong Financial Group Bhd, AMMB Holdings Bhd and Tenaga Nasional Bhd.

Other Asian indices also fell following additional US and China tariffs imposed over the weekend, but Singapore’s FTSE Straits Times Index climbed 0.25% on industrial and utility stocks.

MIDF Amanah Investment Bank Bhd (MIDF Research) head of research Mohd Reza Abdul Rahman said the 2Q19 earnings were “underwhelming”. The plantation, aviation, property, healthcare, telecommunications and finance sectors posted results below expectations.

“Lower commodity prices, higher provisions and the effect of adopting the Malaysian Financial Reporting Standards 16 (MFRS 16) resulted in lower bottom lines. The technology sector also bore the brunt of the ongoing US-China trade war,” he told The Malaysian Reserve (TMR).

The decline in top and bottom lines is cause for concern, following economists’ expectations for the Malaysian economic growth to taper in the second-half of 2019 (2H19).

Escalating trade tensions are set to dampen local exports, while investors continue to hold cash in light of the gloomy outlook.

“2Q19 results were below expectations. Banks’ earnings were very weak — big players especially had a pedestrian pace of growth, with the exception of a few,” Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew told TMR.

Plantation firms’ poor record in 2Q weighed on investor sentiment as the plantation sector, by market capitalisation, comprises a large portion of the stock market, he added. “Pessimism seems to rule in the current economic climate,” Pheim Asset Management Sdn Bhd CEO and CIO Leong Hoe Kit told TMR.

“However, it’s precisely when the stock market gets beaten down to new lows that value would begin to emerge, as there would definitely be situations where certain fundamentally strong counters will be oversold,” he said.

Pong is still holding out for the first signs of a pickup to show in 3Q19, seeing that many companies have implemented measures to mitigate poorer earnings seasons by controlling costs or finding new markets to address weak revenue sources.

“Some companies are making a bit of headway. We did see some companies say they’ve seen a bit of a turnaround, and cost-cutting measures have borne fruit, but it’s by no means universal,” he said.

Mohd Reza said markets will likely “stay on the volatile mode”. The ongoing US-China trade spat, concerns over Japan-South Korea relations and further weakness in Europe have added stress to the already-weakening investor sentiment.

“With the trade war being long from reaching a solution and the oncoming Brexit, plus concern over the need for further interest-rate cuts, we can expect investors to be on cautious mode until at least year-end,” Mohd Reza said.

Pong concurred, noting retail investors are expected to hold back from any serious buying in such volatile times.

For traders, he recommended careful picking of individual stocks with small caps showing more potential than large caps.

Leong also stressed on the importance of being highly selective when investing, saying investors should be ready and “not under-invested” in the event US and China are able to resolve their differences.

“It’s difficult in the current economic climate to forecast a general turnaround in corporate earnings for the rest of 2019. Nevertheless, the trade war has changed and will continue to change the landscape of business going forward, and certain segments will benefit from the relocation of production facilities and supply source diversification,” Leong said.

In the meantime, foreign investors continue to reduce their domestic exposure. Based on Bursa Malaysia data, offshore investors sold RM324.5 million net of local equities last week, the seventh straight week of selling, MIDF Research wrote in a note yesterday.

Total foreign net outflow for August stood at RM2.6 billion — the largest since June 2018, when foreign investors dumped RM4.93 billion net worth of local stocks.

On a year-to-date basis, the foreign net outflow from Malaysia stands at RM7.34 billion, the research house stated.