Malaysian firms to see moderate 3Q earnings amid unabated economic headwinds
18/11/2022 (The Edge Markets), Kuala Lumpur - With the 3Q corporate earnings reporting season kicking off, investors are wondering which sector will wrap the year big.
Analysts The Edge spoke to said a slew of major global events are still weighing on these companies’ performance for the rest of the year. These include high inflation and interest rates, moderating commodity prices, global energy crisis, Covid-19-induced supply chain disruptions and strong US dollar.
Let’s take a look at what investors could anticipate for companies from these five key sectors.
Mixed outlook for O&G service providers, as more upstream players pivot to alternate energy
Despite high crude oil prices remaining at above US$90 per barrel, not all local oil and gas (O&G) companies will make significant jumps in their core earnings, said Areca Capital Sdn Bhd’s CEO Danny Wong.
This is because of the long-term risk of bigger upstream players pivoting away from fossil fuels to alternative energy to limit carbon emissions, likely resulting in fewer long-term contracts for service providers.
“As there is more scrutiny of ESG standards on oil production, O&G service providers may face challenges if producers do not increase production or capital expenditure (capex) in new exploration activities. They may spend more capex on cleaner energy. For this reason, I do not see service providers growing for the upcoming quarter,” said Wong.
However, TA Securities’ analyst Kylie Chan Sze Zan remains positive on the prospects of upstream service providers being leveraged towards steady O&G capex momentum.
“We expect a recovery in daily charter rates, fleet utilisation and new contract awards. The catalyst is higher capex spend from Petronas and other oil companies in these areas: expansion projects, well drilling, production enhancement, and platform and facilities maintenance,” she said in an Oct 17 research note.
For perspective, Petronas’ 1H22 capex spending surged 49% year-on-year (y-o-y) to RM18.9 billion, which reflects a recovery back to pre-Covid spending levels. The oil major expects domestic activities to heighten in the upcoming quarters.
Plantation headed for a weak quarter on low CPO prices and high costs
The plantation sector was the darling among investors when crude palm oil (CPO) prices touched the RM7,000 range earlier this year. But not all good times are meant to last, as prices have tapered off since. Analysts are now less positive on this sector.
Hong Leong Investment Bank Research’s Chye Wen Fe said plantation earnings will be affected by lower CPO prices and fresh fruit bunch (FFB), as well as higher costs of production.
“Most planters will likely post a y-o-y decline in their upstream plantation earnings, on the back of higher production costs arising mainly from the full impact of minimum wage hike in Malaysia and higher fertiliser prices,” said Chye in a research note on Nov 16.
Malaysia imposed a minimum wage of RM1,500 per month effective May 1 this year.
Chye added that planters with high exposure to upstream operations in Indonesia will likely fare better than those that have high exposure in Malaysia, given the change in export levy structure and possibly higher FFB output.
“As for the integrated players, volatile feedstock prices, coupled with elevated freight cost, will likely hinder profitability at the downstream segment.”
Indonesia’s palm oil export tax of US$33/tonne (RM151/tonne) for Oct 1-15 2022 was lower than Malaysia’s RM322/tonne. This has made Indonesian palm oil more competitive till at least end-October, putting Malaysian planters at an unfavourable position, said CGS-CIMB Securities’ Ivy Ng Lee Fang and Nagulan Ravi.
“We project palm oil stocks to rise 8.2% month-on-month to 2.5 million tonnes by the end of October, as higher output trump higher exports,” the analysts said in a note.
4-5% y-o-y core net profit growth for banking sector on NIM and loan expansion
CGS-CIMB’s analyst Winson Ng foresees three major positive trends for banks in the 3Q22 results announcement. Banks are expected to expand net interest margin (NIM) by 6-8 basis points, post robust loan growth of above 6% at end-September 2022, and register a decline of 40% y-o-y in loan loss provisioning.
On the flip side, he expects lethargic 3Q22 non-interest income, which likely to be flattish or even lower y-o-y and quarter-on-quarter (q-o-q) (excluding the one-off gain of RM1.022 billion by Affin Bank for the divestment of its stake in Affin Hwang Asset Management).
“A wider increase of around 5% y-o-y in 3Q22 overheads versus a rise of 3.2% y-o-y in 2Q22, and a q-o-q increase in gross impaired loan ratio. Most of the above trends are reflected in our assumptions, barring potentially weaker-than-expected non-interest income,” he added.
However, Ng said this could be partly offset by stronger net interest income growth from robust loan momentum.
The research outfit estimates a total core net profit of RM7.1 billion to RM7.2 billion for the banking sector in 3Q22 (excluding Affin Bank’s one-off divestment gain), versus RM6.84 billion in 3Q21 and RM7 billion in 2Q22.
“This represents core net profit growth of 4-5% y-o-y (1-3% quarter-on-quarter/q-o-q) in 3Q22. We reiterate our ‘overweight’ call on banks, predicated on the potential re-rating catalysts of expansion in NIM amidst the OPR (overnight policy rate) upcycle, and robust loan growth. Our picks for the sector are RHB Bank Bhd, Hong Leong Bank Bhd and Public Bank Bhd,” he added.
Semiconductor to remain flat on cost pressure and low demand
Technology and semiconductor-related companies are expected to slow down in 3Q22 in terms of financial performance, as the sector is undergoing inventory adjustment and responding to higher inflation situation, said Ronnie Tan of Mercury Securities Sdn Bhd.
“After the surge in demand for outsourced semiconductor assembly and test (OSAT) services and semiconductor equipment in the last two years, I think the industry is slowing down due to rising interest rates and high inflation, which impacts consumer purchasing power,” he told The Edge.
Global smartphone shipments fell 9.7% y-o-y to 302 million units in 3Q this year, according to International Data Corporation (IDC) data.
“Bear in mind that interest rate hikes in some countries such as the US may compress the valuation of the semiconductor industry. As a matter of fact, Malaysia’s semiconductor and tech valuation is very high compared to some of the other peers in other countries,” said Tan.
Having said that, he is of the view that there is still light at the end of the tunnel for semiconductor segments that continue to benefit from the mass adoption of electric vehicles (EVs).
Meanwhile, PublicInvest Research in a note on Oct 25 said the semiconductor industry is grappling with export restrictions from the US government, which is ratcheting up pressure on its allies to prevent shipment of cutting-edge chips to a growing list of Chinese companies.
However, Malaysia is likely to capture the spillover effects in terms of the relocation of industries from China and the US to this region, in order to minimise future risks arising from increased US-China tensions.
“Malaysia is among the leading countries in terms of investments [in] the semiconductor, telecommunications and technology industries, as it has a favourable ecosystem, including talent, infrastructure and a business-friendly environment,” the research outfit added.
Property earnings still impacted by weak buyer sentiment
The property overhang issue, coupled with interest rate upcycle and rising inflation, have dented buyer sentiment, said Areca’s Wong, adding that such weak sentiment could impinge on core profit growth for property players.
“Outlook for this sector looks challenging on the back of rising interest rates, which is not positive news for property loan applications. Although the last OPR (overnight policy rate) hike may not have been reflected in 3Q earnings, the previous interest rate increases have hindered buyers,” he added.
Real Estate Investment Trusts (M-REITs) growth also looks moderate on the back of oversupply of office spaces, as the pandemic diminished demand for such spaces.
According to research by real estate agency Knight Frank, the cumulative supply of retail space in Klang Valley is expected to increase from 68.4m sq ft in 2022 to 71.9m sq ft in 2023, and 73.7m in 2024. Some of the notable new malls that are expected to open in 2023 are The Exchange TRX (1.3m sq ft) and 118 Mall (850k sq ft).
“With the risk of an economic slowdown, this will further compound the downward pressure on rental reversion and occupancy rates,” said analyst Loong Kok Wen from RHB Investment Bank Bhd in a note on Nov 7.
She added that despite the negative outlook, retail REITs have shown to be resilient in surviving the pandemic.
“While growth may be limited, good management by REITs and the strength of key malls should ensure stability,” she said.