KUALA LUMPUR: The market has already priced in the momentum of improving corporate earnings in the third quarter (3Q) of this year as recovery in the domestic economy takes shape, analysts said.

Expecting the current earnings reporting season to have a neutral impact on the market, analysts said emphasis should be placed on management guidance for the last quarter of the year (4Q) as well as for 2010, as their forward-looking statements would have more impact than historical numbers.

The expected better 3Q numbers have led some research houses to revise upwards their estimates, albeit still in negative territory, as they forecast smaller annual contractions in earnings.

Nevertheless, analysts said there were still buying opportunities in some sectors, including financials. One head of research even said financials now presented an investment opportunity that “one will not see again for another 10 to 20 years”.

MIDF Amanah Investment Bank Bhd upgraded its 2009 earnings per share forecast for companies under its coverage after the last result season.

Head of research Zulkifli Hamzah said the research firm was anticipating a smaller annual contraction of 8.1% as opposed to an estimate of 15.3% previously.

“We expect all-round stronger 3Q earnings, both on annual and quarterly basis. 4Q tends to be uneventful as it is the residual quarter for many companies.

“This year’s 4Q will definitely be stronger year-on-year (y-o-y), but on sequential quarter, the numbers could be weaker due to seasonal factors,” Zulkifli wrote in an email reply to The Edge Financial Daily.

During 2Q, MIDF saw 30% of stocks under its coverage exceeding its earnings forecasts. It has revised upwards its earnings estimates for about 20% of these companies since the last reporting season.

In 2Q, the ratio of outperformers to underperformers was two to one.

“In 3Q09, it could be 3:2 (or 1.5:1) as expectations have caught up with fundamentals. That means we expect fewer outperformers (relative to our expectations) in 3Q09.

“On the basis of probability, there is a higher risk of disappointment (in the Malaysian stock market) now as expectations have heightened. However, we are confident that there will not be major surprises on the downside,” Zulkifli said.

As the corporate earnings reporting season in the US, the world’s largest economy, tends to be about a month ahead of that in Malaysia, the performance of US firms so far is believed to be indicative of how Malaysian firms will fare.

A note by OSK Research Sdn Bhd to clients indicates that more than 72% of US firms which have released their quarterly earnings so far, had surpassed expectations, and the rate of outperformers had risen to 13% from 6% in the preceding quarter.

Yet, US companies’ earnings are still down by a yearly rate of some 20%, a sign that it’s still a long road to recovery for the nation’s economy.

“Malaysian companies should fare well, too. The ratio of outperformers to underperformers could decline from that in 2Q as expectations are likely to have been raised in the interim.

“Nonetheless, as long as the ratio remains above one, there will be impetus for the market to continue to rise,” OSK head of research Chris Eng said.

Malaysian companies’ 3Q earnings were expected to register an improvement on a quarterly basis, although on annual terms, the numbers could still see a decline, said OSK, which foresees a 4% y-oy contraction in 2009 earnings among companies in its coverage.

Financial services is a sector to watch by virtue of it being a proxy to the economic recovery story.

In an email reply to The Edge Financial Daily, HwangDBS Investment Management Bhd head of equities Gan Eng Peng said banks’ risk levels were expected to be trimmed against the backdrop of an improving broader landscape as collaterals such as real estate appreciated and borrowers’ financial health improved.

“We foresee an increase in lending rate in local banks soon — all these translate to fatter profit for the financial institutions.

“Besides, since valuations are relatively attractive now, this posts as a window of investment opportunity in the  financial sector, which one will not see again for another 10 to 20 years,” said Gan, who is anticipating “generally better-than-expected y-o-y third quarter 2009 corporate results”.

OSK’s Eng sees banks registering strong results in 4Q as capital markets continue to improve. By virtue of the financial sector’s weightage on the FTSE Bursa Malaysia KLCI, banks are expected to spur the rise of the local bourse.

Among financial stocks, OSK likes CIMB Group Holdings Bhd and AMMB Holdings Bhd, while HwangDBS’ list includes CIMB, Hong Leong Bank Bhd, Alliance Financial Group Bhd and Aeon Credit Service (M) Bhd.

MIDF is overweight on the media, construction, banking, and oil and gas sectors in anticipation that companies in these sectors would unveil strong earnings for 3Q.

MIDF recommends buying Media Prima Bhd, Malaysian Resources Corp Bhd, Public Bank Bhd and Kencana  Petroleum Bhd.

The following are some of the stocks on the radar; their 3Q financials will be keenly watched.


Media Prima Bhd
The multimedia company has got into analysts’ good books as television has gradually captured a bigger share of advertising expenditure (adex) at the expense of newspapers. At the same time, Media Prima is also expected to benefit from its exposure to radio’s fast-growing share of the adex market, said OSK Research Sdn Bhd.

According to Bloomberg data, based on last Friday’s closing price of RM1.70, the stock is trading at a price-to-book (PB) ratio of 2.63 times. The stock has gained 53.15% this year. Eight research houses have buy calls, while four recommend hold, with target prices (TP) of between RM1.60 and RM2.70.


Malaysian Resources Corp Bhd (MRCB)
MRCB announced last Thursday that it planned to undertake a renounceable rights issue to raise gross proceeds of up to RM566 million. The company is allocating RM380 million or 67% of the proceeds to  finance its capital expenditure (capex) needs for future business expansion.

HwangDBS Vickers Research Sdn Bhd said the capex allocation implied the construction firm’s confidence in  clinching new jobs, and increasing its landbank.

Based on last Friday’s closing price of RM1.32, MRCB shares were trading at a PB ratio of 1.89 times.

The stock has gained 87.23% this year. Seven research houses recently had buy calls while three recommended hold, with target prices of between 60 sen and RM1.94.


CIMB Group Holdings Bhd
According to analysts, CIMB stands out among local banks as a well-positioned financial services entity to expand regionally, capitalising on global banks’ move to reduce their resources in Asia.

RHB Research Institute said by virtue of CIMB’s strong presence in Malaysia, Indonesia, Thailand and Singapore, CIMB was ready to further scale up its regional operations by duplicating existing successful platforms and reap higher economies of scale and setting in motion the next phase of earnings growth.

Based on last Friday’s closing price of RM12.78, CIMB shares were trading at PE and PB ratios of 22 times and 2.64 times, respectively. The industry’s average PE ratio is 16.56 times. Shares of CIMB have more than doubled, rising 118.46%, so far this year.

A total of 18 research houses have a buy, six hold while one initiated a sell, with target prices of between RM9.60 and RM15.20.


Kencana Petroleum Bhd
Following the termination of the RM36 million brownfield retrofit project contract between Oilcorp Bhd and Carigali Hess Operating Co Sdn Bhd last month, analysts said they would not be surprised if Kencana decided to submit its bid for the job as the oil and gas support services firm had spare labour and yard capacity.

OSK Research Sdn Bhd said Kencana had a success rate of more than 50% to win the job, partly because of its good delivery track record with Petroliam Nasional Bhd (Petronas) from which 90% of Kencana’s revenue is derived. Carigali Hess is equally owned by US-based oil company Hess Corp and Petronas.

Based on last Friday’s closing price of RM2.21, Kencana shares were trading at PE and PB ratios of 17 times and 4.65 times respectively. The industry’s average PE ratio is 10.88 times. The stock has gained 68.7% this year.

A total of seven research houses have had buy calls recently, with target prices between RM1.48 and RM3.50.


This article appeared in The Edge Financial Daily, November 9, 2009.