Looks like a tough second quarter for listed firms

KUALA LUMPUR: Corporate Malaysia is not expected to show a good earnings report card for the second quarter despite Bursa Malaysia Bhd kicking off the earnings season with a good start by meeting market expectations.

Analysts said the continuing trend of declining earnings over the last few quarters and a much weaker economy projected for the second quarter would work against listed companies bucking the trend.

“It looks like a tough quarter. The performance of most companies hinges on economic activity,” said Kenanga Investment Bank Bhd head of research Chan Ken Yew.

Global economic growth has slowed over the last few months from the shock from the earthquake in Japan and the continued sluggishness of the advanced economies of the United States and Europe.

Economic growth in Malaysia is expected to slow in the second quarter from a growth rate of 4.6% registered in the first quarter. Weaker industrial production and exports, which will affect exporters listed on the stock exchange, are expected to be a drag that even robust domestic demand cannot overcome for the period.

Chan expects stocks under Kenanga's coverage to register an earnings growth of 16% in 2011 and 10.4% in 2012. Kenanga cut earnings estimates by 1% after the reporting period for the first quarter.

OSK Research head Chris Eng expects disappointments in the earnings scorecard to be more pronounced among the smaller companies than the large blue-chip counters, a repeat of what transpired in the first quarter.

“The upgrade to downgrade ratio continues to deteriorate because of the smaller stocks,” he said.

In his wrap-up of the first quarter, Eng had earlier said first-quarter results were better than those seen in the fourth quarter of last year, with some 75% of the stocks under its coverage either meeting or exceeding expectations versus 68% in the previous quarter.

Small caps continued to disappoint although they had a better quarter than in the fourth quarter of last year, with 66% versus 62% either outperforming or meeting expectations.

Despite the better results in the first quarter from the fourth quarter of last year, OSK's upgrade to downgrade ratio worsened in the first quarter.

Eng feels the auto sector, technology stocks and the small oil and gas and construction stocks will disappoint the market when they report their second-quarter earnings.

He said the nature of big cap stocks, like large construction companies, would carry such stocks through during the current reporting season because of their diversified earnings.

Eng is expecting earnings growth of 18% in 2011 and 12% in 2012.

CIMB Investment Bank Bhd research head Terence Wong expressed hopes that the second quarter would not be as bad as in the first quarter, when earnings estimates were cut 3% after the conclusion of the first reporting season this year.

“I expect it to be mixed but hope the economic transformation programme (ETP) will gain traction and that will translate to better earnings in the third and fourth quarter,” he said.

Despite successive quarters of disappointment, the market rose in June and touched a record high earlier this month.

Wong attributed the surge to other factors and not to the earnings of companies.

He said Malaysia was seen as a low beta market and was favoured for its defensive nature.

“News flow on the ETP had piqued investor interest in Malaysian equities,” he added.

Wong has forecast earnings to grow by 9% in 2011 and 14% in 2012.