Sectoral performance projections for 4Q18

TheEdge Mon, Feb 18, 2019 09:37am - 5 years View Original


Plantation: Disappointing earnings seen

 
The continued fall in crude palm oil (CPO) price is expected to weigh down on plantation players’ earnings.

The benchmark third month palm oil contract price settled at RM2,279 per tonne last Friday. Over the past one year, the price has come down by 8.95% from RM2,503 per tonne.

“Plantation counters are likely to deliver disappointing earnings for fourth quater of 2018 (4Q18) due to the lower external demand as well as the sharp decline in CPO price. Hence, we are likely to see poor earnings to be delivered by the plantation counters,” said Fundsupermart Research analyst Jerry Lee Chee Yeong.

“However, we believe much of this negatives have been factored in the share price, as the plantation sector as represented by Bursa Malaysia Plantation Index, tumbled by close to 10% in the last quarter of 2018,” Lee added.

 

Technology: Mixed outlook

On Jan 29, Apple reported that the revenue from its iPhone business, which accounts for most of the company’s profits, dropped 15% during its first quarter ended Dec 29, 2018 due to weak sales in China.

According to RHB Research Institute head of Malaysian research Alexander Chia, Apple’s supply chains are badly hit because of the bad news about its performance in China. Hence, he expects companies that are related to the Apple supply chains, such as Inari Amertron Bhd, to continue to face challenging times.

Inari’s earnings results for its first financial quarter ended Sept 30, 2018 (1QFY19) already reflected the softer outlook as its net profit shrank 12% to RM60.16 million, while its revenue was down 12.7% to RM325.72 million.

This weaker performance was due to lower volume loading on a major sensor product and the disposal of assets by a 51%-owned subsidiary, said Inari.

However, not all technology companies will be badly hit. Lee believes the local technology players, especially semi-conductor firms, are likely to deliver better 4Q18 earnings due to the stronger external demand as reflected in Malaysia’s electrical and electronics (E&E) exports for the last quarter of 2018, which saw two months of double-digit growth.

In 2018, E&E products held the biggest share of Malaysia’s exports composition, at 38.2% or RM380.1 billion, rising by 11% or RM 37.74 billion.

On top of that, the weaker ringgit in 4Q18 compared with 3Q18 would also benefit the tech players.

 

Banking: Healthy earnings growth seen

Fundsupermart’s Lee expects the banking industry to report a healthy earnings growth as it continued to benefit from a positive loan growth in 4Q18.

“The higher net interest margin on year-on-year (y-o-y) basis, due to the interest rate hike early this year, will also help to lift banks’ earnings for the last quarter of 2018,” he said.

But the downside risks — higher provisions as well as operational expenses — would weigh on the net earnings, Lee added.

Chia agreed that the banking sector will continue to deliver stable earnings growth in 2019 with loans growing at 4-5%.

“Looking at the KLCI, the growth elsewhere is bad,” he added.

Kenanga Investment Research, in a note dated Feb 4, said loan growth for 2018 ended at 5.6% y-o-y to RM1,665 billion, above its estimate of 5-5.4% y-o-y growth, due to a strong performance in December 2018.

Going forward, the research house expects loan growth to be challenging with the prevailing uncertainties. However, loans should be supported by resilient households on account of accommodative interest rates and stable asset quality.

“We expect 2019 loan growth to be less than 5%. Household demand will be supported by stable employment and wages with inflation looking subdued. The consistently improving asset quality will, in our opinion, see banks having a healthier appetite for household loans and we would not be surprised if competitive lending rates resurface [in order to prop up demand] putting downside pressure on net interest margin,” it added.

 

Rubber glove: Stable earnings growth expected

Two leading rubber glove players reported positive earnings growth in 4Q18. Hartalega Holdings Bhd and Supermax Corp Bhd posted 6% and 6.2% growth in net profit to RM119.76 million and RM38.14 million, respectively.

Chia said rubber glove will continue to report stable y-o-y earnings growth on stronger production growth despite some concerns on margin compression mainly due to price war.

He expects the rubber glove companies to raise their capacity by 14% for 2019, outstripping the expected annual glove demand growth of 8-9%. However, he believes this will not create an overcapacity issue as the demand for gloves remains robust.

Chia said he continues to like Hartalega as the company is a leader in rubber glove innovation and its ability to deliver above-average industry margins.

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