02/06/2008 (The Star Online) - CONCERNS by economists and analysts that rising costs, coupled with the new political scenario, might severely impact many of the local listed companies’ performance appear unsubstantiated, going by their first quarter results.

Many companies on Bursa Malaysia reported decent earnings, despite operating in a tough environment. But economists believe the worst is not over yet, as rising raw material and fuel costs have not abated and appear to be on the uptrend, at least in the near term.

EONCAP Securities research head Pong Teng Siew said the current economic climate was different compared with that of the 1997/98 Asian financial crisis or when exchange controls were instituted in the late 90s. Those events had caused local stocks to fall out of favour with many foreign investors.

Global phenomenon
Pong said rising raw material and fuel costs were a global phenomenon affecting all companies worldwide. The other two occassions - Asian financial crisis and exchange controls - had generally impacted Malaysia and Asian countries. “(No doubt), our local companies are now more resilient. Many are also more export-oriented and less dependent on markets like the United States to prop up their earnings,” he said, adding that there was also greater trade among Asian countries.

Exports to Asean countries now account for slightly over 20% of total Malaysian exports. Trade between Malaysia and the US has fallen from a high of about 23% of total Malaysian exports in the late 90's to 13% now.

Pong said while the first-quarter results showed Malaysian companies being resilient in maintaining their revenue and bottom lines, there was no guarantee that their performance would continue to be the same, going forward. “We believe there will be tougher times ahead for companies to maintain their performance targets due to escalating raw material costs and possibly higher fuel prices.”

Global crude oil prices hit an all-time high above US$135 per barrel last month and most economists anticipate oil price to hit US$150 or more.

Innovative ways
On the performance of local companies in the second quarter, Pong said they would need to look further at innovative ways to improve efficiency – maybe switch suppliers, tap new markets or look for alternative energy sources to mitigate rising costs.

“If they can't maintain the cost (at the same level), it is likely that they will pass on the cost to customers via higher prices of goods and services,” he said.

Pong said the last option was not very favourable, especially as consumers were already burdened by recent price hikes of basic goods and services.

Aseambankers equity research head Vincent Khoo concurred with Pong that so far, local companies had managed to “ride the tide” of escalating raw material and fuel prices.

Khoo said the first-quarter results were within expectations, with certain industries buoyed by rising commodity and fuel prices while others were impacted by rising costs.

“Palm oil plantation and oil and gas stocks as well as companies servicing these industries generally performed well, while the airline and construction industries were hit by higher operating costs,” he said.

Khoo said moving forward, rising raw material costs and surging fuel prices were likely to have a greater impact on the bottom lines of many local companies. “The impact to companies will vary, depending on the sector they operate in, their energy dependency and how they mitigate the problems,” he noted.

Tougher times ahead
Aseambankers economist Saifuddin Morat said companies should brace themselves for a tougher business environment. “We expect rising costs of raw materials and fuel to remain an issue for many firms.”

He said there were no surprises in the overall performance of local companies in the first quarter. “The construction sector was affected in two ways, rising prices of raw materials like steel and cement and uncertainty that some of the Ninth Malaysia Plan projects in the opposition states might be delayed or shelved.”

He said some local companies in the manufacturing sector that were exposed to the US market, which is facing a severe economic downturn and a weakening currency, were also affected.

“The safer bets are companies in the plantation and oil and gas sectors,” Saifuddin noted.

Foreigners’ opinions
A Singapore-based economist said companies globally, including those operating in Malaysia, would face a tougher time to deliver better results.

The foreign economist said the first-quarter results of Malaysian companies were probably not significantly affected by rising costs, especially the recent fuel hike.

He said fuel prices had increased by over 100% since May 2007 when it was US$66 per barrel and in recent weeks, had shot well above US$130 per barrel. “There is a lag period and the effect of higher oil prices would be seen in the second quarter.”

On sectors impacted, the foreign economist said airline companies and those highly dependent on fuel would be most affected.

Oil price to stay high
Another foreign analyst said the survival and resilience of many companies would be tested in the coming months. “We don't see oil prices falling in the immediate future. In fact, higher oil prices are very likely here to stay for some time,” she said.

The analyst said commodity prices, fuelled by strong demand from the developed world and rising demand from emerging markets, particularly China, would have a significant impact on profit margins of most companies in the long term.

“The double-whammy effect of high commodity prices, coupled with rising fuel costs, makes the business environment very challenging for many companies locally or abroad,” she said.

On Malaysian stocks, the analyst said they were trading at attractive valuations or discounts, but under the current political scenario, many foreign institutional investors preferred to wait and see before investing heavily in the local market.

However, she said, some foreigners, especially from the Middle East, had recently invested sizeable amount of funds in the Malaysian real estate and property stocks. “It goes to show that Malaysia still has a lot to offer to some investors, despite the current political uncertainty.”