THE results season thus far has been relatively bumpy in our view with major potholes for some companies (Notion Vtec Bhd), while others have warned of speedbumps ahead (Kossan Rubber Industries Bhd).
Some results have come in within expectations (Faber Group Bhd and Amway (Malaysia) Holdings Bhd) or above (Unisem (M) Bhd).
We expect the remaining results to be relatively mixed, although investors should be wary of more potential earnings disappointments for some sectors, which are not yet reflected in the share price performance over the last month.
Some of the negative issues we should anticipate include the impact of the weaker US dollar versus ringgit for the year to date (-8.1%), and on a year-on-year (y-o-y) (-10.0%) basis.
Likewise, the euro has weakened 15.3% year-to-date (YTD) and 17.4% y-o-y while the sterling pound has weakened 9% YTD and 15.7% y-o-y.
This will likely have an impact on exporters who cannot re-price their sales immediately, such as the rubber glove manufacturers and semiconductor players, although the lag period is likely to be only one-two quarters.
We also highlight companies with major overseas subsidiaries that may be affected by translation from the foreign currency to ringgit.
These include YTL Power International Bhd (for Wessex Water), Axiata Group Bhd (for its foreign operations) and KNM Group Bhd (for Borsig). However, we note also that there will be beneficiaries such as the motor assemblers (whose imported costs would be lower) and Tenaga Nasional Bhd (due to lower imported costs of coal).
Although Sime Darby Bhd was quick to deny news reports of significant losses for FY6/10, we are still wary that the new CEO and revamped senior management may seek to "kitchen sink" the results.
Provisioning may also affect companies that have invested heavily during this period of economic normalisation, including Ann Joo Resources Bhd (for the blast furnace), Notion Vtec (for its 2.5 inch baseplate project) and the glove companies (for their new lines).
Looking ahead, we believe there will be a number of speedbumps or profit warnings if there is a sharper-than-expected global economic slowdown. As it stands, the semiconductor and hard disk drive (HDD) producers have begun to warn of slower demand growth and price competition.
In oil & gas, the offshore support vessels continue to warn of soft charter rates, while for the plantation sector, seasonally higher crude palm oil (CPO) production levels in 2H could result in lower CPO prices. Timber players could also be affected by the slower-than-expected recovery in demand as well as the tight supply of logs.
We remain positive on the longer-term outlook. In the near term, we see the potential for more negative rather than positive news flow, which suggests that the market will continue to be volatile.
This will likely persist until a clearer picture emerges on the strength of the global economic recovery. Nevertheless, beyond the 2Q potholes, and the potential 2H10 speedbumps, we remain positive about the longer-term outlook given our expectation of sustained economic earnings growth.
Sectoral expectations
Banks (overweight)We believe the upcoming quarterly results for the banks would be well supported by the strong loan growth momentum seen thus far, aided by OPR hikes in March and May. Any earnings surprise, we think, would likely come from either lower-than-expected loan provisioning and/or stronger-than-expected non-interest income.
Power (overweight)
Construction (overweight)
There is a risk that the margin recovery that started one-two quarters ago could lose momentum mainly due to rising prices of diesel and other inputs which correlate closely to crude oil prices.
Telecom (overweight)
For Axiata, we believe earnings could come in above consensus (although in line with our expectations) given the strong 2Q performance reported by overseas subsidiaries XL and Dialog, notwithstanding the potential negative effects of the US dollar to ringgit translation. As for Maxis, although voice revenues will remain under pressure, earnings will likely be supported by growth in subscribers in East Malaysia as well as non-voice revenue. This would be in line with our expectations.
Motor (overweight)
The motor sector will likely see another strong quarter as car sales continue to be strong. However, due to the higher base effect, we believe the y-o-y growth will begin to moderate as compared to 1Q. We believe UMW will likely report weaker results for its oil & gas but we note that the division contributes less than 5% to revenue versus the automotive division which accounts for 80% of its revenue.
Rubber gloves (overweight)
For Kossan and Hartalega, we expect slightly weaker q-o-q numbers due to margin contraction on account of the time lag in passing on the higher latex cost (which was at an all-time high in April). We have already assumed the margin contraction in our forecasts.
Plantation (neutral)
We expect the plantation companies to mostly report earnings in line with expectations, given the spot CPO price of RM2,500-RM2,600/tonne during the quarter. We note that Sime Darby and IOI Corp may miss expectations due to weaker-than-expected production numbers.
Oil & gas (neutral)
The oil and gas sector will likely report weaker-than-expected quarterly results due to the decline in offshore greenfield activities and price competition, which has affected the vessel owners (Petra Perdana) and equipment suppliers (KNM, Wah Seong), although sustained brownfield activities and previously secured order books will support the fabrication and engineering earnings for the likes of SapuraCrest and Dialog.
We expect the quarterly results to reaffirm our cautious view on the sector, although longer term, we expect crude oil demand to pick up in line with global economic growth, and this will drive investments and revive the positive outlook for the service providers.
Airlines (neutral)
The recovery in traffic and yields may come in stronger than expected during the quarter. While this may be partially offset by high-than-expected fuel bills, all in there is still a fair chance that the results will come in better than expectations.
Gaming (neutral)
The gaming sector could surprise on the upside, particularly in Singapore, where anecdotal evidence of win per table and market share seem to be stronger than our expectations.
As expected, after the 1QFY10 numbers were released, there was a rash of upgrades to earnings and recommendations, which we expect to continue for Genting Singapore, after this upcoming set of results.
On the Malaysian front, earnings should be in line for both the casino and NFO operators, as the impact of the more intense competition is felt on visitor numbers for the casino and sales per draw for the NFOs.
Media (neutral)
For media players, earnings would likely be in line on the back of strong 1HFY10 adex growth. We expect 2HFY10 adex growth to slow down largely due to the higher base effect.
Steel (neutral)
Most of the steel players will likely report flattish 2Q results on q-o-q basis as both demand and prices were still strong in the first two months of 2Q. We believe the 1H results will thus account for more than 50% of our full-year forecasts, but we anticipate 2H to be significantly weaker due to lower demand and prices.
Timber (neutral)The timber players could be affected by slower-than-expected recovery in sales, while operations could be affected by tight supply of logs (due to poor weather) and shortage of labour.
Written by RHB Research Institute
This article appeared in The Edge Financial Daily, August 10, 2010.
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