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Thursday, 2 March 2017

(The Star) Banks, small caps to lead the way

Corporate earnings seen improving this year

PETALING JAYA: After a challenging 2016 for Malaysia’s corporate earnings due to external and macroeconomic headwinds, this year holds a lot more promise with the expected recovery of several key sectors, say experts.

Banks and construction companies continue to be favoured by research houses after an encouraging 2016. In contrast, the plantation sector is expected to record more moderate earnings, going forward, while the oil and gas (O&G) sector may still face sizeable impairments.

CIMB Research head Ivy Ng said that last year was a mixed bag for the earnings of plantation companies, with the pure upstream companies such as Genting Plantations Bhd and Hap Seng Plantations Holdings Bhd benefiting the most from the strong rally in crude palm oil (CPO) prices during the second half of last year.

“Going forward, we may see more moderate growth for plantation earnings this year, as current CPO prices seem toppish. This year, we are overweight on the banking, glove and construction sectors. Additionally, the ongoing Small Cap Research Scheme will also catalyse more investments into this space,” she said.

The recently concluded fourth-quarter earnings reporting season in February indicated that corporate earnings in Malaysia are showing signs of recovery. However, it seems that this has yet to be reflected in the underperformance of the stock market, with the FBM KLCI reporting a decline of 0.7% last year.

Kenanga Research head and senior vice president Chan Ken Yew said it had been a stronger year overall in terms of earnings for companies that make up the FBM KLCI.

He said they had initially expected a 4% decline in overall earnings for the year, but it had exceeded expectations by registering an 8% growth.

Commenting on the earnings performance during the most recent quarter against the preceding quarter, Chan said the automotive and glove sectors were among those that performed weaker than expected.

“Other sectors than did not perform up to our expectations were construction and plantations. The sectors that performed above expectations were the technology and building material sectors, while the earnings of consumer, property, telecommunications and logistics were mostly within our expectations,” he said.

On the O&G sector, Chan said the earnings were mixed, although most were below expectations.

However, he singled out Petronas Chemicals Group Bhd, SapuraKencana Petroleum Bhd and Yinson Holdings Bhd as the top performers in the sector last year.

“We thought it would be a better quarter for O&G companies, but Bumi Armada Bhd and Dayang Enterprise Holdings Bhd were among those that did not meet expectations.”

However, there are reasons to be bullish for the coming year. Malaysia reported a stronger gross domestic product (GDP) growth of 4.5% during the fourth quarter, which was underpinned by the continued expansion in private sector expenditure, as well as an improvement in consumption.

RAM Ratings estimates that Malaysia’s GDP growth for the whole of 2016 will come to 4.2%, or a commendable performance during a year filled with macroeconomic upheavals.

The finance sector, in particular, being a key driver of the economy as well as a major component of the stock market, showed a marked improvement last year.