Written by Fong Min Hun, Joy Lee, Loong Tse Min & Jenny Ng
Tuesday, 01 September 2009 11:17
KUALA LUMPUR: In line with signs of economic recovery emerging in the second quarter (2Q) as Malaysia recorded a slower pace of contraction in its GDP (-3.9% year-on-year (y-o-y) versus -6.2% in 1Q), listed companies also put in a better quarter. Here is a performance round-up of selected sectors of the market.
Banking
Most of the banks reported surprisingly resilient results in 2Q with more banking results coming in above expectations.
“The results are surprisingly resilient in terms of asset quality. It shows that our banking system is still strong and doing well. Default rates did not spike up as many had expected,” an analyst from a local research house said.
She said of the eight banks under its coverage, four posted results above expectations including BUMIPUTRA-COMMERCE HOLDINGS [] Bhd and AMMB HOLDINGS BHD [].
Two were within expectations and the other two came in below, including MALAYAN BANKING BHD [] which posted net loss of RM1.12 billion due to impairment charge of RM1.62 billion on goodwill arising from Bank Internasional Indonesia’s (BII) banking business operations and an additional impairment loss of RM111 million for the investment in MCB Bank.
“Other than Maybank, banks performed relatively well. We expect further upside to the banking sector with the improved sentiments. The third quarter may likely show similar results. Growth would be stable. We don’t expect strong growth or big dips in the sector for the next quarter,” she said.
She added there would be a risk of higher default rates if the economic recovery or unemployment did not pick up as strongly as expected, but all in all, the Malaysian banking scene was still intact.
PLANTATION [] sector
After the high price levels of 2008, plantation companies are still seeing lower earnings on a y-o-y basis. When compared with the preceding quarter however, most of the plantation companies performed better at the group level in the recent reported quarter. Nevertheless, a closer look shows mixed results within the plantation business depending on forward sales policy and location of estates. Sabah suffered from bad weather early this year, affecting production.
SIME DARBY BHD []’s full-year ended June 30, 2009 (FY06/09) net profit of RM2.3 billion was 34.3% lower than FY08 but beat analysts’ expectations and its own Key Performance Indicators. The lower performance was largely due to lower crude palm oil (CPO) prices and fresh fruit bunches (FFB) production.
The plantation segment saw operating profit decline 56% y-o-y.
Nevertheless, the division improved with operating profit rising eight-fold to RMRM543.1 million from RM61.4 million in the preceding quarter. Analysts say the group’s plantation business was bad in the 3Q09 to begin with as it had to deal with bad weather and labour problems, mainly in its Indonesian estates. In 4Q09, yields recovered while CPO prices rose.
IOI CORPORATION BHD []’s plantation segment reported a 9% quarter-on-quarter (q-o-q) drop in operating profit during 4Q09, due to lower FFB production, but it is much better than the 46% drop in 3Q. KUALA LUMPUR KEPONG BHD []’s plantation earnings dipped marginally q-o-q in its third quarter FY09/09.
Genting Plantations Bhd showed a 53% improvement in its Malaysian plantation segment in the recent reported quarter versus a contraction of 65% previously.
An analyst with a local bank-backed research house noted that all the companies within its universe met expectations with the exception of Sime Darby (above expectations) and IJM PLANTATIONS BHD [] (below expectations).
“We didn’t expect to see improvement given lower prices y-o-y. Q-o-q improvement will depend on whether the company sold forward. Those who did have done better than those who didn’t,” she said.
Looking ahead, the research house maintained its overweight call on the sector and expected price recovery for CPO towards the end of the year when the peak production period ends. It is expecting 2010 to be generally a better year for the sector.
Steel sector
Although steel companies have generally reported poorer results for 2Q in 2009, expectations are high that their performance will soon pick up along with global sentiment on the commodity.
Poorer demand and slumping steel prices have severely affected Malaysian players.
The first six months of 2009 saw steel trade at an average of RM1,193.37 a tonne (according to the benchmark three-month London Metal Exchange Far East steel billet forward prices), after coming off their peaks from 3Q08. It was therefore not unexpected that the earnings of steelmakers for 2Q09 came in the way they did, with poorer y-o-y results.
Steel players that reported earnings results for their financial period ended June 30 included ANN JOO RESOURCES BHD [], KINSTEEL BHD [], Perwaja Holdings Bhd and Malaysia Steel Works Bhd, all of which reported poorer results.
The wild fluctuations in the price of steel could be seen over the last 52 weeks. During that time, the price of steel rose to a high of RM2,340.90 per tonne in September 2008 before plunging to a low of RM890.57 the following month.
Steel prices have recovered since the end of June, and has been trading above the RM1,400 per tonne mark. Analysts are saying that there is also greater visibility to the prospects of steel in the short- to medium-term.
“The settlement of new iron ore benchmark prices for 2009/2010 has given steel prices a clearer direction in the year ahead,” wrote OSK Research analyst Ng Sem Guan in a recent note on Malaysia Steel Works.
“Also, our market sources suggest there is a possible upward revision in bars and other downstream products selling prices by RM100 to RM200 per tonne in the coming weeks.”
Oil and gas (O&G)
Earnings for players in the O&G sector largely came in within expectations, as their operations are driven by orders secured much earlier.
“The results were more or less generally okay, although there was a disappointment,” said AmResearch senior investment analyst Alex Goh.
“O&G players work on contracts and they got in some orders earlier that will last them up till October, and so far they’re doing well.”
One small point of concern is whether O&G players will be able to replenish their order books but Goh said that market indicators were suggesting there should be no problems in this regard.
“Contract flows for the O&G industry are poised for a resurgence following award deferments of up to nine months against a collapse in oil prices and the global financial crisis,” he had said in an earlier research note.
“Catalysts for a rebound are a run-up in commodity prices, continuing imports by China and India and further contraction of global risk premiums.”
Goh’s picks for the sector include Kencana Petroleum, SapuraCrest Petroleum, BOUSTEAD HEAVY INDUSTRIES CORP [] and Coastal Contracts.
Media
The media sector came in above expectations with big q-o-q improvement as companies that had been in the red during 1Q bounced back to the black with advertising expenditure (adex) for corporates picking up again.
Companies such as The New Straits Times Press (Malaysia) Bhd and Media Chinese International Bhd posted healthy profits in 2Q versus net loss in the previous quarter.
Yin Shao Yang, an analyst at Maybank Investment Bank, said the industry has likely seen the worst during the first three months of the year as consumer sentiment, which is closely tied to adex, has returned to positive territory in recent months.
“1Q was the worst. We saw a big turnaround in 2Q with big improvement in earnings and we should be able to see better results in 3Q. We expect the second half to be off the lows with marginal increase y-o-y,” he said.
He said the sector was starting to see some normalcy again as adex usually peaked toward the end of the year.
However, he noted that the sector was already affected by a contraction in consumer sentiment in the second half of last year.
“Therefore, even if this year’s second half improves y-o-y, it is being measured to a comparatively low second half of last year. Nevertheless, the sector is improving and should do better (by) year-end when the economy is supposed to chart growth, unless something shocks consumer sentiment in the months to come,” he said.
Gloves
The sector maintained its resilience in 2Q with some like Supermax Corp Bhd, HARTALEGA HOLDINGS BHD [] and Top Glove Bhd coming in within or above expectations.
“The glove sector is doing well except for those that suffered from forex losses like ADVENTA BHD [] and KOSSAN RUBBER INDUSTRIES BHD [],” Jason Yap, assistant vice-president of OSK Research said.
He added that although latex prices had rallied recently, manufacturers were quick in transferring the cost to customers and therefore were able to maintain their earnings.
Although most posted strong earnings and consumer demand remained buoyant, Yap said the sector was affected by the economic downturn with less talk of capacity expansion.
He said the sector may see even stronger earnings in 3Q as clients stock up on gloves with the outbreak of the A (H1N1) influenza.
“The results would improve but would moderate in 4Q because a lot of these may be one-off orders. But the sector remains strong and there is definitely more upside to glove sector earnings in 3Q,” he said.
Consumer
Although consumer sentiment was weak towards the end of last year and into early this year, analysts said earnings for 2Q in the consumer sector came in within expectations.
“There were no surprises. The food companies continued to show strong results while the retail sector is very dependent on festivities,” an analyst from AmResearch said.
The analyst said the sector had bottomed and recovered, hence the lack of excitement in earnings.
She said the sector saw a bigger impact in 1Q with retail and tobacco badly hit by a decline in consumer sentiment.
“But the sector has recovered and we don’t expect demand to change much moving forward. It might improve a little with the recovery. Otherwise, demand is already holding up well. Unless something dampens consumer sentiment, it could grow further in the coming quarters,” she said.
Property sector
Earnings results from the property sector were a mixed bag with some coming in above expectations and others below, resulting in overall flattish growth, said an analyst at Kenanga Research.
Although sales volume and unbilled sales had generally picked up strongly, the analyst said that they would not translate to earnings until FY11 at the earliest.
“We weren’t expecting a lot of changes in PE and we did expect to see flattish numbers because it takes some time for sales numbers to be realised in the books,” she said.
“Sales have buoyed earnings for some companies this year such as MK Land, which returned to the black, but we will have to wait till FY11 for real exciting growth in the sector.”
Results of EASTERN & ORIENTAL BHD [], MAH SING GROUP BHD [], SUNRISE BHD [] and MK Land Bhd, some of the bigger property players, were a tale of their differing fortunes in 2Q09.
The analyst added that although housing sales are going up, it is still almost entirely driven by promotional schemes designed by developers, which suggests that the home buying sentiment has not yet fully returned.
“If you look at the sales figures of one of the bigger players, you’ll find that its sales figures slipped quite dramatically month-on-month after it stopped its promotional activities,” she said.
Although the low-interest rate environment was attractive to home-buyers, uncertainty over whether there will be a second plunge in the economy has dissuaded them from making a purchase just yet, she said.
CONSTRUCTION []
The story over on the side of the construction sector was not much different from property. An analyst at MIDF Research, Mohd Izhar Mohd Allaudin, said what was unexpected in the sector were government announcements.
“Earnings have come in within expectation as 1H09 was generally softer for the sector. However, surprises came in the way of large-scale projects being announced under the government’s pump-priming measures,” he said in an email reply.
The government announced a number of measures in 2Q in line with its fiscal stimulus spending commitment. This included boosting infrastructure spending in rural areas, particularly in East Malaysia.
AmResearch also noted in a recent report that it expects the government to resume work on some of the Ninth Malaysia Plan projects that had been deferred by the economic crisis.
As for results for 1H09, Mohd Izhar said they were impacted generally by legacy costs from previous years. Earnings could likely trend towards the positive on further recognition of projects and lower input costs, he said.
He noted, however, that government spending was still an essential component for the continued performance of the sector.
“Efforts by the government to pump-prime the economy is imperative for the country’s economy to begin registering growth in 4Q09 as estimated by Bank Negara Malaysia.
“Hence, we are likely to see a ramp-up in construction spending in 2H09 to facilitate economic growth,” Mohd Izhar said.
The rise in government spending may benefit the likes of IJM Corp Bhd, GAMUDA BHD [] and WCT BHD [].
Tech sector
Although results were still worse than a year earlier, chip testers and assemblers the likes of Unisem Bhd, MALAYSIAN PACIFIC INDUSTRIES [] Bhd (MPI) and HONG LEONG INDUSTRIES BHD [] (HLI) saw a recovery in their most recent quarter, relative to the preceding quarter.
MPI saw its losses shrink in the final quarter of its FY06/09, as sales increased and costs fell.
Unisem recorded an operating profit in 2Q09 from a loss in 1Q, and said that the recovery in demand would continue into 3Q. It expects to remain profitable for the rest of the year.
Similarly, HLI posted an operating profit in its 4Q09 after suffering losses in 3Q.
An analyst covering the tech sector said companies on his radar screen generally recorded strong growth in their June quarter, turning around from a poor March quarter, partly due to restocking activities.
He said the performance looked sustainable going into 3Q09 but the longer-term outlook would depend on the economic recovery in the US and EU, despite China picking up some of the slack.
“The risk is a double dip in the global economy,” he added.
Airline and transport
The latest quarterly results of airlines and transportation companies came in mostly below analysts’ estimates, with national carrier MALAYSIAN AIRLINE SYSTEM BHD [] (MAS) falling far short of expectations.
MAS posted a hedging loss of RM350 million in its 2Q to June 30, 2009, surprising most analysts covering the stock.
Hwang-DBS Vickers Research in its Aug 7 report maintained a “fully valued” call on the counter. It estimated that MAS would report FY09 losses at RM2.2 billion (up from RM1.3 billion) “to account for the higher-than-expected realised derivative expenditure/losses.”
However, it expects MAS to report better operating result in 2H09, in anticipation of the load factor improving to 62% for the full year from 60.9% in 1H09.
Hwang-DBS also has a “fully valued” call on AIRASIA BHD [], as the budget carrier’s core net profit fell 26% q-o-q to RM121.6 million in its 2Q09.
It expects a weaker 2H for AirAsia, due to higher interest expense as it gears up to finance new aircraft and due to higher jet fuel costs.
Elsewhere in the sector, Hwang-DBS said Malaysia Airports Holdings Bhd may have enhanced its its long-term earnings visibility after its recent restructuring.
However, it said shipper MALAYSIAN BULK CARRIERS BHD [] may be affected by a possible weakening of drybulk rates.
This article appeared in The Edge Financial Daily, September 1, 2009.