Business

Monday March 2, 2009

Firms in for tougher reporting season

Maybank-IB Watch - By Maybank Investment Bank's Vincent Khoo


But many are on strong footing to weather slowdown

WHILE the global economic downturn undoubtedly brings major uncertainties, Malaysian companies in general are on a much stronger footing to face it and the many quarters of weakening earning prospects now, compared with the 1997-98 Asian financial crisis.

This is in stark contrast to US corporations, where we estimate that almost 60% of the outstanding bonds issued by the top 500 US-listed companies (by revenue) were rated below investment grade.

Using a range of financial liquidity tests such as interest cover, cash conversion cycle, and z-score, we conclude that the balance sheets of most Malaysian companies will remain financially steady through 2009.

Similarly, our stress tests indicate that the banking system would not require recapitalisation unless non-performing loans quadruple from today’s level, which is highly unlikely.

As the fourth-quarter 2008 reporting season closes, investors have clearly focused on three key concerns which could dampen sentiment: the quantum of downward revisions to earnings forecasts for 2009, potential cuts in dividends, and sizeable rights issues such as TM International Bhd’s RM5.25bil cash call, joining the regional bandwagon for similar exercises.

In Singapore, cash calls have dampened sentiment – most prominently, DBS Bank’s share price has fallen well below the theoretical ex- price of S$8.05 (referenced on last closing price before the rights issue was announced).

Corporate earnings have been disappointing, based on the results announcements through the tail-end of the reporting season, with 32% of companies under coverage falling short of our expectations. Only 21% of the companies under our coverage beat expectations.

We reckon that corporate earnings contracted by low single-digits in 2008, against our earlier estimated single-digit growth.

More importantly, 2009 earnings could further contract by over 10%, more than our original forecast for an 8% contraction.

The poor results were accentuated by various one-off provisions such as hefty inventory mark-downs by steel companies.

Besides the steel sector, other key industries with disappointing results in the fourth quarter were plantations (for example, inventory losses, low fresh fruit bunches production in Indonesia) and semiconductor (as demand from the US and Europen Union for electronic and communication products melted).

Looking ahead, notable sectors which are expected to record significant earnings contractions are banking (on potentially higher credit charge on loan defaults), plantations (in anticipation of a lower average crude palm oil selling price of RM1,600 per tonne versus RM2,800 per tonne in 2008), motor vehicle (significant sales drop) and technology.

A handful of companies have started to cut cash dividends to preserve their cash flows and capital. The list includes, most prominently, Public Bank Bhd which made up for the shortfall by declaring a share dividend, but surprisingly, also consumer companies Amway (M) Holdings Bhd and Carlsberg Brewery Malaysia Bhd that belong to one of the most recession-resilient sectors.

Many steel companies have chosen not to declare final dividends. Looking ahead, some plantation companies could also join the fray.

Nevertheless, the fourth-quarter reporting season has also brought some cheers to investors, most notably Telekom Malaysia Bhd’s surprise proposal for a 98 sen per share capital repayment, and the heftier final dividends declared by UMW Holdings Bhd and JT International Bhd.

What is in store for corporate Malaysia in the coming quarters? The next reporting season will definitely be even tougher, judging from the further deterioration of general business conditions from an already dismal December month.

Recall that global business conditions hit an air pocket in December as global financial markets crashed following Lehman Brothers’ bankruptcy and the bailout of AIG Group in September.

The resultant fallout of global demand has severely curtailed Malaysian exporters’ revenue and cashflows since December, signifying the start of a sharp domestic economic slowdown.

Thus far into the year, January new car sales have fallen 5% year-on-year, the nation’s electricity demand has eased by 6%, and consumers have noticeably tightened their belts post-Chinese New Year, as evidenced by the shrinking retail sales and fast-food consumption which we selectively track.

Positively, despite the dour economic outlook, most Malaysian companies are in good stead financially to survive a protracted downturn.

Our assessment factors in the proactive efforts by the central bank’s aggressive interest rate cuts and the upcoming second fiscal stimulus package, which should facilitate a soft landing for the economy.

We expect the stock market to trough in the coming quarters, providing patient investors with a great bottom fishing opportunity. Any storm, no matter how vicious, will eventually pass.

·Vincent Khoo is Maybank Investment Bank Bhd head of research.


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