Investors remain on the sidelines until they are certain the growth in earnings can be sustained

by MARK RAO / pic by MUHD AMIN NAHARUL

THE latest quarterly earnings of Malaysian-listed corporates improved markedly from the preceding quarter with positive surprises outnumbering the downsides, but this will do little to lift Malaysia’s laggard stock market.

Underwhelming weak corporate earnings in the first half (1H) of 2019 dampened investors’ sentiment towards Malaysian equities against a backdrop of prevailing external uncertainties and an uncertain domestic political environment.

Year-to-date (YTD), the country’s benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) is the weakest performing market in South-East Asia. It’s also on track to record its worst performance for a given year since 2008, when markets were hit by the global financial crisis.

While corporate earnings of Bursa Malaysia-listed companies improved significantly in the third quarter of 2019 (3Q19) from the preceding quarter, investors will likely remain on the sidelines until they are certain the growth in earnings can be sustained, Public Investment Bank Bhd head of research Ching Weng Jin said.

“Investors are not expected to react in a significant manner to the recent performance, but it does draw the line separating what was a weak 1H showing,” he told The Malaysian Reserve (TMR).

Theoretically, the stability in earnings should result in a pick-up in market interest, but investors are waiting to see if the improvements will last.

“A leading indicator of sustainability will be Malaysia’s economic growth as this should filter through corporate earnings,” Ching added.

Thus, apart from corporate earnings themselves, the resiliency of Malaysia’s economy amid a slew of external headwinds and slowing global growth will prove an important gauge of sustainability.

Affin Hwang Investment Bank Bhd concurred that more companies reported 3Q19 earnings above expectations, but corporate results for the quarter still fell 4.9% year-on-year (YoY) for the fifth consecutive time.

It said 3Q19 corporate earnings declined by an absolute RM861 million YoY, mainly driven by the oil and gas (O&G), telecommunications, gaming and transport sectors. This was partially offset by the utilities, banking, media and automotive sectors.

“The FBM KLCI is likely to register its second consecutive year of earnings-per-share (EPS) decline with a 2019 estimated EPS decline of 1.3%. This, along with limited rerating catalysts, has contributed to capital outflows and the FBM KLCI’s YTD performance,” it said in a report yesterday.

Nevertheless, the downside should be limited by ample domestic liquidity and a current dividend yield of 3.6%.

Malaysian companies are generally well-run, but the operating environment has become challenging to navigate due to lingering trade war risks, AxiTrader AsiaPacific market strategist Stephen Innes said.

Speaking to TMR, he said a US-China trade deal, which is currently being negotiated, should provide better economic conditions for Malaysian corporates to operate in, while benefitting the top-tier FBM KLCI constituents.

A key constituency of the FBM KLCI is the financial sector, with banking stocks accounting for over 30% of the index’s weightage. The FBM KLCI tracks the performance of Malaysia’s top 30 listed corporates based on market capitalisation.

Despite moderating loan growth and pressured net interest margins, Malaysian banks managed to remain resilient in the latest quarter, with Malayan Banking Bhd and RHB Bank Bhd registering both topand bottomline growths.

Ching said the results of listed banking groups were largely in line with market expectations, but noted that impaired loans inching higher could be a concern for the sector going forward.

Other challenges facing the sector include softer loan growth, slight weakening of asset quality and a narrowing interest spread, although the impact from the interest rate cut in May this year has largely normalised — resulting in better net income for banks.

A recovery in the FBM KLCI — currently down 7.6% YTD — will be underpinned by the performance of banking stocks, which bore the brunt of investors’ sell-offs during 2019.

At the same time, Bursa Malaysia’s mid-70 and small-cap indices are up by 5.3% and 18.9% respectively, indicating that pockets of opportunities for investors remain outside index-linked counters.

In a report yesterday, Public Investment Bank said the earnings hits (above and/or in line) and misses for 3Q19 came in at 70:30 — encouraging vis-à-vis the 57:43 ratio managed in 2Q19.

Upside surprises were in the O&G and manufacturing — particularly electronics manufacturing services sectors.

Listed O&G service providers, especially those domiciled in the upstream segment, benefitted from the uptick in work orders and contract awards, while improved charter rates boosted the earnings of offshore service providers.

Companies that are impressive in this segment by beating market expectations included Dayang Enterprise Holdings Bhd, Velesto Energy Bhd and Bumi Armada Bhd.

Meanwhile, the results of property developers continued to be weak, while the construction sector turned in a mixed performance overall.

“For the latter, the current outstanding orderbooks are supportive enough, but it is a matter of how these companies manage their costs,” Ching said.

“Similarly, many property developers have a large portion of unbilled sales that they are now running down.”

The ongoing concern is whether companies in these sectors can manage their costs to improve their bottom line as construction- and property-related activities slowed down.