PETALING JAYA: Corporate earnings of Malaysian stocks in the fourth quarter of 2018 (4Q18) were among the worst seen in recent years with large-cap companies turning into a drag.
“On the surface, the 4Q18 reporting season looked better; 26% of companies in our universe (121 companies under coverage) reported earnings that were ahead of our expectations, a marked increase of 16% in 3Q18,” said Affin Hwang Capital in a report today.
It noted that companies whose earnings that disappointed shrank to 31% from 48% in 3Q18, implying that a higher number of companies delivered a better set of earnings after the successive disappointments in the previous quarters.
However, a review of the larger-cap companies (27 of 30 under its coverage) showed a higher number of companies reporting poorer performances with 33% of the companies registering earnings below expectations while a smaller proportion registered earnings above expectations.
“Being heavyweights, the impact of this disappointment was significant. Cumulative 4Q18 core earnings fell a sharp 23% year on year (yoy) or 14% quarter on quarter (qoq), one of the largest ever quarterly earnings contractions in recent years,” said Affin Hwang Capital.
In 4Q18, only 40% of the 20 sectors under coverage managed to deliver yoy earnings growth with telcos, transport and utilities being the key heavyweight sectors that were a drag, contributing a combined RM3.1 billion qoq decline in 4Q18 earnings.
Post 4Q18 results season, the earnings per share (EPS) growth rate for stocks under Affin Hwang Capital’s coverage has shrunk to -4.5% and for the FBM KLCI companies -0.6%. This makes 2018 the fourth year of frail corporate earnings over a five-year period from 2014 till 2018.
Its current market earnings growth forecast is 6.7% and 4.2% for 2019 and 2020. For the FBM KLCI companies, this growth is at a lower 3.8% and 2.9% for 2019 and 2020, implying weaker earnings growth for the larger-cap companies.
“Nevertheless, we are of the view that the larger-cap company earnings will better hold up in 2019 considering that their 2018 earnings were distorted by a lot of bulky items that may not recur,” it added.
Due to the lack of major catalysts, it expects the FBM KLCI to continue to trend sideways over the near term, maintaining its neutral rating on the FBM KLCI and year-end 2019 target of 1,810 points.
“We would, however, recommend investors position themselves in the large-cap stocks and favour sectors that are still delivering growth on a yoy basis,” it added.
Meanwhile, CGS-CIMB has lowered its FBM KLCI earnings growth forecast to 5% for 2019 from 6%, but maintained its growth projection of 6% for 2020. Its 2019 FBM KLCI earnings growth projection of 5% is below Bloomberg consensus, which forecasts a 6% growth.
“This is lower than the 6% core net profit growth rate we estimated before the 4Q18 results season, as we adjust for the downgrades in earnings forecasts for several big-cap names like Axiata, Tenaga, Petronas Gas and Maxis,” it said in its report.
In 4Q18, only 18% of the 127 companies actively covered by CGS-CIMB reported results that were above expectations while the percentage of companies with results below expectations rose to 39% from 38% in 3Q18.
“The high ratio of earnings disappointment suggests that Malaysian corporates are facing a challenging operating environment due to local and external (US-China trade war, rising rates) factors,” it said.
Although its revision ratio improved to 0.46 times during the quarter versus 0.29 times in the previous quarter, the 4Q18 revision rate stood out for being among the lowest historical revision ratios for 4Q, matching 4Q12’s revision ratio.
Market earnings for stocks under its coverage fell in 4Q18 at a higher rate of 7.5% yoy due to lower earnings from the agribusiness, aviation, construction, oil and gas and telco sectors. Corporate earnings under its coverage fell 2.1% in FY18 due to lower sales, provisions for receivables and weaker profit margins.
CGS-CIMB maintained its end-2019 FBM KLCI target of 1,638 points with no change to its top three picks namelym Dialog, Astro and MPI.
Source: The Sun Daily