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Nikkei Markets

Weak corporate earnings weigh on Malaysian stock market

Analysts trim year-end KLCI target as more companies miss street expectation

KUALA LUMPUR (Nikkei Markets) -- Malaysian corporates risk earnings contraction for the second consecutive year after underperformers swelled following tepid June quarter results, prompting analysts to cut year-end forecasts and targets of the main market gauge.

Following the recent reporting season for earnings for the June quarter, a median forecast of 13 analysts polled by Nikkei Markets for the year-end target of the benchmark FTSE Bursa Malaysia KLCI is for 1660, lower than 1695 a quarter ago. The estimated level will reflect a gain of about 3.7% from Friday's close of 1601.25 but a loss of 1.8% from end of 2018.

Analysts expect little-to-no growth in aggregate earnings at Malaysian benchmark corporates this year with some now forecasting a contraction following weaknesses in sectors sensitive to business cycles such as banking, and those vulnerable to global trade shocks such as electronics.

"Pessimism seems to rule in the current economic climate," said Leong Hoe Kit, chief executive at Pheim Asset Management that manages about one billion ringgit of Malaysian assets. "Investors should nevertheless be ready and not under-invested in the event that the U.S.-China trade tensions suddenly get resolved quickly."

Malaysian equities, largely known for their defensive nature and sticky valuations at around 17 times forward earnings, have struggled to hold ground on the back of a foreign sell-down even as other emerging markets edged higher.

In August alone, foreign investors have net sold Malaysian shares worth more than 2.6 billion ringgit ($622.38 million). Bursa Malaysia has recorded a cumulative net foreign outflow of 7.34 billion ringgit since the beginning of the year, according to exchange data.

The heavy foreign outflow has in part dragged FBM KLCI more than 5% lower so far this year, while most of its Asian peers racked up gains. Year-to-date, Singapore's Straits Times Index gained 2.8%, while the Taiwan Stock Exchange Weighted Index climbed nearly 11%. Hong Kong's Hang Seng gained 2.8% despite violence-marred civil unrest that has stretched for months.

Risks to Malaysian assets are rapidly mounting on lingering trade tensions between the U.S. and China, both major trading partners of the Southeast Asian country, though there has been a thaw of late, with high-level talks between the world's two largest economies expected in October. Apart from external threats, domestic uncertainties, partly due to a potential transition of power by Prime Minister Mahathir Mohamad, have also weighed on investor sentiment.

Malaysian corporates, anticipating the headwinds, have responded mostly by moderating financial targets, cutting operating costs, squeezing capital expenditure, or seeking to broaden revenue sources.

"Forward guidance from respective managements remained cautious," said RHB Research Institute Analyst Alexander Chia, who cut his year-end target for KLCI by 20 points to 1620. "Corporate Malaysia appears to be bracing for business conditions to worsen going forward."

Malaysia's top banks--Malayan Banking, CIMB Group and Public Bank-suffered a decline in second-quarter net profit partly due to policy rate cut. Malayan Banking trimmed its return-on-equity target, while Hong Leong Financial Group's commercial banking arm lowered loan growth aim.

In May, Bank Negara Malaysia cut the benchmark overnight policy rate by 0.25 percentage-point to 3.00% for the first time in nearly three years to perk up growth in a slowing economy. Banks are also bracing for a further dent in profit margins if the central bank cuts the benchmark interest rate again in November.

A decline in palm oil prices amid mounting supply and sluggish demand meanwhile resulted in at least 10 companies missing market expectations for the June-end period. Sime Darby Plantation, the world's largest palm oil producer by acreage, reported a 10% decline in net profit.

In other sectors, technology firms reported weak sales as trade tension simmered. Construction companies reported lower billings due to slower contract flow and home sales, while airlines carried fewer-than-expected passengers. Net profit of AirAsia Group, the largest regional budget airliner, plunged some 95% on year.

Corporate earnings performance is trailing behind its regional peers, said CIMB Investment Bank's Analyst Ivy Ng, who slashed her KLCI target to 1,583 to price in a 5% contraction in KLCI earnings for 2019.

About 40% of 131 companies covered by CIMB reported below-expectations results in the June quarter, compared with 38% in the past three months while the percentage of companies with better-than-expected results fell to 10% from 12% in the previous quarter.

"We feel that the market has priced in some, but not all, the potential policy risks and may not have fully appreciated the margin pressures affecting some industries due to the slower global growth, weaker consumer sentiment and recent escalation in the U.S.-China trade war," she said.

--Jason Ng

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