Corporate Malaysia: Searching the horizon for answers

It has been a quarter of change for Malaysia in general, with a new government at the helm penning out new rules and policies in their aim to help the country reclaim the potential that it has.

As Corporate Malaysia ponders what this means in terms of business operations, the uncertainty is reflected in the spate of second quarter (2Q) 2018 (FY18) results.

Analysts’ views on the 2Q18 financial reporting results varied, with some seeing improvements during the quarter while others saw slowing growth momentum since 1Q18.

MIDF Amanah Investment Bank Bhd (MIDF Research) was among the first analysts to report this.

According to the group in its monthly economic review on September 3, overall business performance is expected to remain positive albeit at moderate pace given that overall business confidence registered at six per cent – the lowest seen in five quarters.

“The moderation is seen across almost all sectors namely agriculture, mining, construction and manufacturing,” it said.

“On the other hand, services sector scores better result than the previous quarter, indicating positive response of tax holiday period.”

Meanwhile, Malaysia’s GDP growth expanded by 4.5 per cent year on year (y-o-y) in 2Q18 – below MIDF’s forecast of 4.9 per cent and market expectations of 5.2 per cent.

“It is the weakest growth in 6-quarters and less than previous year’s average of 5.4,” it opined. “Among others, domestic demand contributes about 4.3 per cent of the total growth during the quarter.”

Looking back to Corporate Malaysia, the research arm of Public Investment Bank Bhd (PublicInvest Research) believed revenue was not the problem as companies were still selling, with contracts also still flowing through and corresponding earnings recognised, albeit at a slower pace.

However, from a negative viewpoint, PublicInvest Research believed cost considerations continued to weigh on these companies, be it financial or operating-related.

“With Malaysia’s robust 2017 gross domestic product (GDP) growth of 5.8 per cent not noticeably cascading into corporate and consumer Malaysia by way of healthy , we are a little more wary now in light of 2018’s growth expectations having recently been cut from 5.2 per cent to 4.8 per cent to account for possible near-term weaknesses in investment spending,” it said.

“On the balance of things however, the current quarter’s earnings report showed some semblance of improvement following the previous quarter’s letdown, though still inconclusive at this juncture to deem the uptick as structural in nature.”

Bright spots in auto, healthcare

PublicInvest Research went on to highlight that positive surprises were evident in the auto and healthcare sectors, while the bleed in the oil and gas sector seems to have abated.

“Manufacturing remains a disappointment to us and consensus alike, as airlines also surprised on the downside. Of some encouragement is the fact that none of the market-moving economic-defining sectors showed any significant worse for wear.”

It noted that the current quarter’s earnings hits (above and-or in-line) are at 68 per cent:32 per cent, versus the 60 per cent:40 per cent as at 1Q of current year 2018 (1QCY18).

On the other hand, Investment Bank Bhd (AffinHwang Capital) noted that while 2Q18 earnings growth remained positive at 0.1 per cent on a year on year (y-o-y) basis, the momentum has slowed from 1.4 per cent in 1Q18.

“While 10 of the 18 sectors under coverage showed growth, this was negated by the disappointment in other sectors,” the research firm said.

Large cap stocks under AffinHwang Capital’s coverage had continued to deliver better earnings compared to their smaller peers.

In 2Q18, of the 25 KLCI component companies under the research firm’s coverage, 76 per cent came in within expectations (72 per cent in 1Q18) and of the total of 119 companies under coverage, the number of companies falling within expectations shrank to 44.1 per cent (from 48.7 per cent in 1Q18).

Meanwhile, those falling short of expectations widened to 42.4 per cent (from 37.4 per cent in 1Q18) and those exceeding expectations increased to 13.6 per cent from 13 per cent in 1Q18 although the larger companies saw fewer positive surprises (four per cent versus eight per cent in 1Q18).

“Suffice to say that the larger-capitalisation stocks continued to perform better but greater earnings disappointment from the rest resulted in our market earnings growth downgrade,” AffinHwang Capital said.

As for the research arm of Kenanga Investment Bank Bhd (Kenanga Research), it observed that the recent 2Q18 results season still showed some signs of weakness albeit the slight improvement.

“Out of 146 stocks under our core coverage, 49 of them delivered weaker-than-expected results, implying a ‘disappointment ratio’ of 33.6 per cent, vis-à-vis 37.8 per cent in 1Q18.

“On a y-o-y basis, the ratio also deteriorated from 28.8 per cent in 2Q17,” Kenanga Research said.

On the other end, merely 10.3 per cent of the stocks under the research arm’s coverage (or 15 stocks) outperformed its expectations in this reporting season, as opposed to 10.8 per cent and 10.1 per cent seen in 1Q18 and 2Q17, respectively.

“Sector wise, building materials, construction, media, plantations and plastic packaging have been disappointed while gaming, property, telco, utilities as well as transportation and logistics also showed some signs of weakness.

“On another extreme, automotive sector was an outright outperformer. This is expected due to the commencement of zero-rated tax holiday since June 1, 2018 and further supported by pre-Hari Raya festive season sales. Other sectors are largely mixed or neutral in nature.”


It was an unsurprisingly strong 2Q18 for this sector, due to festive season sales and the three-month ‘tax holiday’ which led to a surge in automotive sales, particularly in the month of June.

“Strong performance this quarter, as expected from the commencement of zero-rated tax holiday in June 1, 2018, and supported by pre-Hari Raya festive season sales,” Kenanga Research observed.

The research arm went on to project that car sales volume for 3Q18 is expected to be higher than 2Q18 boosted by the remainder of the zero-rated Goods and Services Tax (GST) tax holiday transition period.

Affin Hwang shared similar sentiments, expecting the auto sector’s 3Q18 earnings to stay robust, riding on the temporary boost from cheaper zero-rated GST car prices.

“Based on ‘Guide on Proposed Sales Tax Rates’ prepared by Royal Malaysian Customs Department, cars will be charged 10 per cent sales tax effective September 1, 2018, which will be passed down to consumer by the auto players, in our view.

“Correspondingly, the changes in pricing may vary based on the localisation rate,” Kenanga Research said, explaining that completely knocked down (CKD) packs are SST-exempted but the full assembled cars will still charge by the new SST.

“Nevertheless, the prices will still be higher from the zero-rated tax holiday, which may weaken the car sales volume.”


Reactions to the latest quarter results from the plantation sector ranged from less than satisfactory to mixed, as what can be gathered from research firms’ sector reports.

For MIDF Research, 2QCY18 was one of the worst quarters so far for the sector as stocks under its coverage mostly underperformed while Kenanga Research also opined that it was the weakest quarter since 2QCY14.

From PublicInvest Research’s viewpoint, it was a mixed performance for the plantation companies under its coverage amid a sharp decline in crude palm oil (CPO) prices.

“Some Malaysian plantation companies suffered unexpected dips in fresh fruit bunch (FFB) production due to unusual cropping patterns in Malaysia as a result of high rainfall during the December – period which had affected the fruit formation,” the research arm said.

“During the quarter, the sector experienced a decline in CPO product prices on a quarter on quarter (q-o-q) and year on year (y-o-y) basis as inventories in Indonesia and Malaysia remained high, higher operating costs due to higher fertilizer cost (about 10 per cent y-o-y higher) and weaker palm kernel price recorded, which is part of the by-product to be offset under operating costs and unusual decline in Malaysian FFB production.”

On its outlook on the sector, Kenanga Research expected limited CPO price downside in the short term, supported by a wide CPO-gas oil discount of more than US$130.

Kenanga Research noted that this level renders biodiesel blending profitable, which spurs discretionary demand for the alternative fuel.

The research arm further noted that India’s recent move to raise import taxes on other vegetable oils (crude soyoil: from 30 per cent to 35 per cent, crude canola and sunflower oils: from 25 per cent to 35 per cent) improves the competitiveness of CPO, which is supportive of its demand and prices.

“However, we do not see significant upside potential either given an expected seasonal production pickup in 2H18, which limits CPO price improvements,” Kenanga Research said.

“We expect only minor CPO price improvements in the near term. While planters’ earnings should see improvement in 2HCY18 as production picks up, the effect is dampened by a y-o-y decline in CPO price.”

The research arm maintained its full-year CPO price forecast at RM2,400 per metric tonne (MT), with an estimated ceiling price of RM2,530 per MT and a floor price of RM2,000 per MT.

As for PublicInvest Research, it projected that CPO prices will likely stay in the range of RM2,200 per MT to RM2,300 per MT towards the end of the year.

This was due to lackluster export demand and excessive palm oil inventories in Malaysia and Indonesia, the research arm explained.

“Year to date (YTD), it averaged at RM2,362 per MT, which is getting closer to our full-year forecast of RM2,350 per MT,” PublicInvest Research said.

Building materials

The building materials sector did not fare well in 2Q18, with Affin Hwang recapping that companies within the sector continued to report losses in the quarter.

This led the research firm to believe that the sector outlook remains challenging given the weak property market and slowdown in construction activities.

“In view of the slowdown in infrastructure and construction jobs resulting from the cancellation or deferment of mega projects post new government, we maintain our negative stance on steel and cement sectors going forward,” Kenanga Research affirmed.

“We maintain our negative outlook on the cement sector given the lackluster outlook on the back of ongoing overcapacity and intense price war in the market.

“Domestic demand for construction steel product is also expected to be dampened by slow down in infrastructure or construction jobs while lingering uncertainty over global trade may pressure steel prices further.”

Oil and gas

In PublicInvest Research’s view, the oil and gas sector ended the 2QCY18 results with mixed performances.

“As expected, not much improvement was seen in the quarter, suggesting that the pick-up in oil and gas activities have yet to translate to better profits,” the research arm said, adding that discrepancies were mostly due to slower jobs progress and weak profit margins.

Meanwhile, MIDF Research noted that the downstream oil and gas companies performed favourably as the supply and demand dynamics for petrochemical and fuel products were within

The research arm further noted that with the relatively stable crude environment in the first half of financial year 2018 (1HFY18), operating margins were well balanced amidst pressure from average selling prices.

“Service providers on average faired reasonably well due increasing offshore activity levels owing to stable crude oil price environment,” it said.

Looking ahead, PublicInvest Research believed that significant contribution to earnings from a slew of new contract awards in these recent times may only be reflected in next year’s number.

“2018 is still a markedly better year nonetheless as compared to years past, and recovery in the sector remaining on the track as oil prices stay at current levels,” the research arm affirmed

“Further supply constraints arising from fresh US sanctions on Iran and a substantial decline in Venezuelan production will provide some support to prices.”

Meanwhile, Kenanga Research kept its cautiously optimistic view on the sector, noting that “the higher oil prices environment has still yet to lead to any meaningful uptick in the number of contract awards”.


It was a hectic 2Q18 for the construction sector following the 14th General Election (GE14), as the new government’s move to review, cancel or postpone ‘high-profile mega projects’ made for uncertain outlooks for affected construction companies.

Results-wise, it was mixed as some companies under analysts’ coverage reportedly delivered while others were observed to have recorded weaker performances compared to the previous quarter.

“Most saw slower sales and progress billings due to general election uncertainties,” Affin Hwang observed.

“Construction earnings for most companies showed positive growth momentum with good progress for major infrastructure projects such as the MRT2.”

That said, Kenanga Research observed that the fate of other projects like High-Speed-Rail (HSR), MRT3, and East Coast Rail Link (ECRL) remains uncertain despite construction works already initiated for some of these projects.

“The ‘100 days’ mark had passed since the installation of a new ruling party as the government and they remain focused on reducing capital and operating expenditure for the country in addressing the RM1 trillion debt owed by the country.

“As a result, the government is forced to take drastic but necessary measures in reviewing the viability of mega infrastructure projects mooted by the previous government.

“These news flow does not bode well for the sector, causing a sector-wide de-rating in valuation,” the research arm said.

PublicInvest Research noted that the two high-profile mega projects ECRL and KL-Singapore HSR that were shelved or deferred, would definitely create a ‘vacuum’ in terms of jobs replenishment as more than RM100 billion worth of jobs are off the table for now.

It further noted that new jobs visibility is also sketchy at this juncture with most contractors already preparing for lower jobs replenishment going forward while waiting for the Budget 2019 announcement in early-November.

“However, not all hope is lost given that the government have given their commitment to continue with projects like MRT2, LRT3 and the infrastructure in TRX but at lower costs that are yet to be finalised,” Kenanga Research opined.


The consumer sector’s performance in 2Q18 garnered mixed views, with some observing that the quarter saw a boost in spending while others said it was mediocre as the tax holiday was only implemented in June.

According to MIDF Research, most consumer companies recorded marginal year-on year during 2QCY18 (April to June).

“This was despite the Ramadhan and Hari Raya festivities celebrated during the quarter which failed to spur spending. We believe that this was attributable to the tax-holiday which only started in the month of June. Hence, this pushed consumer spending to the later part of the month,” the research arm said.

It added that intense competition in the local food and beverage (F&B) and retail market suppressed further sales growth amongst individual operators.

Nonetheless, going forward, MIDF Research expects a strong 3QCY18 (July to September) driven by the strong consumer sentiment post-election as well as tax holiday spending.

On the other hand, Kenanga Research said that “most of the retailers posted stronger local operational sales buoyed by the combination of zero-rated tax holiday and Hari Raya festive season, as expected”.

Additionally, as anticipated by the research arm, F&B stocks also performed well as cost factors were more favourable.

It noted that for the most part, 2017 was previously undermined by high commodity prices and rates which affected importers.

“We see the implementation of the SST overall to be a neutral-to-negative event for F&B, retail and sin stocks,” Kenanga Research projected.

“With consumer sentiment now registering at a 21-year high, the subsequent raise in prices to pass on the tax, may undermine the presumably looser spending habits of consumers currently.

“That said, certain exempted goods (i.e. dairy products) should not experience a major disruption.”

On the downside, the research arm noted that the damaging impact of higher prices in the sin sub-sector may encourage an expansion of illicit trade.


While the sector continued to generally perform well, in the research arm of MIDF Amanah Investment Bank Bhd’s (MIDF Research) view, it noted that the quarter saw net interest income coming under pressure as net interest margin compressed.

MIDF Research further noted that deposit competition is heating up in the sector as banks scramble for deposits to meet the Net Stable Funding Ratio requirement next year.

“This had resulted in cost of funds increasing. Nevertheless, non-interest income and Islamic

Banking income had moderated this impact and provide support to income growth,” it said.

“Asset quality remains stable with only stress coming from individual accounts rather than any sector wide issues.

“Meanwhile, loans growth continued to be supported by the consumer segment with mortgages remaining a major contributor.”

On that note, PublicInvest Research continued to be encouraged that the recent pick-up in loans growth is managing to maintain its momentum, with banks now seemingly more assertive post-MFRS9 clarity.

“As most financial institutions are also in compliance with capital and net stable funding requirements, we see no reason for prolonged conservatism though we acknowledge potential margin compressions on heightened competitive pressures.

“With provisioning levels on the downtrend, financial institutions should see decent earnings growth in the coming year,” the research arm said.

Outlook for the second half of 2018

The Malaysian economy has been projected to grow steadily for 2H18, as economists and analysts alike continue to have a generally favourable outlook for overall 2018.

In its press release on the economic and financial developments in Malaysia in 2Q18, Bank Negara Malaysia () highlighted that the Malaysian economy is expected to remain on a steady growth path going forward.

“Growth is expected to be sustained, supported mainly by private sector activity. Positive labour market conditions and capacity expansion will continue to support robust private consumption and investment respectively,” it further read.

According to governor Datuk Nor Shamsiah Mohd Yunus, by their latest estimate, growth for 2018 is likely to be around five per cent, lower than their earlier projection.

“At this new range, growth remains firm and Malaysia continues to be one of the fastest growing economies in the region,” Shamsiah said.

“Going forward, the growth momentum will be supported by the following factors: first, sustained and trade momentum will support trade activities; second, private sector spending is expected to benefit from continued positive spillovers from external demand, recent indicators also point towards an improvement in business and consumer sentiments and thirdly, household spending will be supported by favourable labour market conditions and additional spending from the tax

Looking further ahead, RHB Institute Sdn Bhd Bhd (RHB Research) projected Malaysia’s real GDP to grow at five per cent for 2019, sustaining the same pace estimated for 2018 but slowing from 5.9 per cent in 2017.

“We, however, see increasing downside risk to our GDP forecast for 2019, due to the trade war effect and review of policies by the Government,” RHB Research said.

The research firm thus kept its forecast for 2019 unchanged at this juncture while waiting for a clearer picture on the trade war.

Meanwhile, in Affin Hwang’s view, earnings delivery remains a sore point for the KLCI. However, it noted that there could be some upside in 3Q18 with the GST tax-free holiday.

“Longer term, we remain positive on corporate Malaysia with the new government in place, which we believe is gradually institutionalising structural reforms that will be long-term positive – stimulating domestic demand (consumption spending) to ensure long-term economic growth,” the research firm said.

“Near term, foreign equity outflows appear to have reduced significantly and stabilised (US$1.4 billion in May 18 to US$23 million in August 2018).

“Foreign equity holdings have tapered to 23.5 per cent in July 18 from its recent high of 24.2 per cent in March 2018, although this is still off the low of 22.3 per cent in February 2017.”

Affin Hwang further noted that in stark contrast to prior years, Malaysia has also better weathered the capital outflows from the region (US$2.1 billion versus US$21.3 billion year to date (YTD) for the Asia-6 markets), potentially based on renewed faith in the new government.

The research firm thus maintained its ‘overweight’ stance on the KLCI with a 2018 year-end target of 1,845, based on 18.4-fold 2018E earnings.

As for Kenanga Research, based on its FBMKLCI Earnings Universe, FY18E-FY19E earnings growth estimates have now been lowered to 4.3 per cent-3.5 per cent, in contrast to 5.1 per cent-5.4 per cent previously.

“As such, our end-2018 index target is lowered to 1,870 from 1,900 previously.”

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Source: Borneo Post Online

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