The recent spate of results shows that profitability at most companies recovered in the last three months of 2009. On a full-year basis however, pre-tax profit came in slightly lower than 2008.

The recovery in the global economy in 2Q2009 — thanks largely to coordinated government rescue and stimulus packages in many countries — saved businesses from the worst of the crisis.

Earnings at most Malaysian companies were in line with market consensus, with some even exceeding  expectations.

For industries such as glove manufacturing and banking, the better 4Q2009 earnings were a continuation of a recovery that began as early as 2Q.

However, for some sectors such as oil and gas (O&G), recovery only began in 4Q2009.

Maybank Investment Bank notes that finance and construction stocks exceeded their 1Q2008 profit peaks in 2Q2009, while telecommunications, property and consumer stocks exceeded their 1Q2008 peaks only in 4Q2009.

It also believes that the O&G sector has seen the worst of the crisis, with crude oil steadily trading above US$70 per barrel, rising capital expenditure and improved earnings of almost all the sector’s service providers.

Maybank estimates that  4Q2009 earnings of the universe of companies under its coverage was up 30.4% y-o-y.

On a full calendar year basis, more than half of the FBM KLCI companies saw lower pre-tax profit in 2009, based on Bloomberg data (see Table 1).

Total earnings of the 30 companies fell by 12.6% for the whole of last year versus  2008, while revenue rose a marginal 4% from a year ago.

Analysts say for the calendar year, the overall earnings contraction registered by their stock universe and the FBM KLCI stocks was much smaller than expected.

OSK Research says core earnings of the FBM KLCI stocks  contracted by 2%, lower than the initially projected 3%.

“We can clearly see that there was a [earnings] contraction in the first half of the year, but it later picked up towards the second half,” says OSK Research’s head of research Chris Eng. “The calendar earnings of companies in 2009 were better than expected.”

Separately, CIMB Research says in a note: “2009 was not that bad. Compared to the 9% core earnings per share (EPS) contraction we forecast during the August 2009 results season, the final tally is a much smaller drop of 0.8%.”

However, RHB Research head Lim Chee Sing says the better overall performance of companies in 2009 did not come as a big surprise since the recovery cycle across industries had started early in the year.

He adds that the strong reporting season was also consistent with the recovery in the economy. Malaysia registered a y-o-y  GDP contraction in 1Q (-6.2%), 2Q (-3.9%) and 3Q (-1.2%) before seeing an expansion of 4.5% in 4Q.

Lim says during the year, more sectors saw better margins from improving demand, better product mix and lower operating expenses on the back of cost-cutting measures.

He adds while some sectors posted better 2009 profits than in 2008, not all outperformed the market during the year.

The FBM KLCI gained 396 points or 45% in 2009.

All builders (see Table 2) except for Gamuda Bhd and IJM Corporation Bhd, saw higher operating profit margins in 2009 as construction activity picked up while building costs decreased towards the second half of the year.

All consumer products (see Table 2) saw better pre-tax profit margins last year, partly due to better cost-control measures, except for Carlsberg, whose figures were rather flattish.

The pre-tax margin growth was rather mixed for  property developers while plantation companies, except for United Plantation Bhd, saw a drop in pre-tax margins.

It is perhaps fair to view the Year of the Ox as a glass that’s half full rather than half empty for Corporate Malaysia.

The leaders and laggards
The number of outperformers and strength of upgrades during the last three months of 2009 came as a pleasant surprise to analysts.

CIMB says some 52% of company earnings of its stock universe met expectations, while 25% did better. OSK, meanwhile, says for its portfolio of companies, 51%  performed within expectations while 28% exceeded forecasts.

In 4Q2009, banking, rubber gloves, and technology companies outperformed.

In the banking sector, CIMB Group Holdings Bhd, AMMB Holdings Bhd and Malayan Banking Bhd beat expectations, largely because of lower provisions and stronger non-interest income.

Underperformers in 4Q2009 were the consumer and retail sectors, which saw margin erosions, and the O&G sector, which faced a drought of new contracts.

On a calendar year basis, the construction, glove-making and property sectors did better in 2009 than the previous year (see Table 2).

Glove makers and the construction sector registered better profits last year thanks to improving global demand and a pick-up in building activities in Malaysia.

However, RHB’s Lim notes that although contractors saw better profits in 2009, the sector still underperformed the market as a whole.

He adds that the property sector performed much in line with expectations due to the low interest rate, and high liquidity in the market.

Although tech companies (except for Malaysian Pacific Industries Bhd) managed to stay profitable in 2009 and outperformed market expectations in 4Q2009, overall, the sector still posted lower profits than in 2008.

The laggards in 2009, meanwhile, include the steel, and plantation players.

Most steel companies were in the red last year due to the lacklustre selling prices of their products and major inventory writedowns in the first half of the year.

Planters’ earnings were also hit as crude palm oil (CPO) prices fell from an average of RM2,864 per tonne in 2008 to RM2,261 per tone in 2009, according to Bloomberg data.

Given the robust 4Q reporting season there were more upgrades to earnings estimates and fair values than downgrades relative to the preceding quarters.

More interestingly, OSK Research noted the upgrade to downgrade ratio rose to 2.35 times — the highest since 2004.

OSK’s Eng says sectors that saw major upgrades after or during the 4Q reporting season include technology and automotive sectors.

In January, at least three research houses upgraded the auto sector to “overweight” from “neutral” as it expects demand for passenger and commercial vehicles to further improve this year.

In the same month, CIMB upgraded the tech sector from “trading buy” to “overweight” as it believes the segment has seen its worst. It had also upgraded Unisem (M) Bhd and Malaysian Pacific Industries to “outperform”.

The house also upgraded the property sector to “overweight” from “trading buy” on the back of better sale prospects.

CIMB also notes the upgrades in overall profit forecasts in the media, and rubber glove sectors. It upgraded Star Publications to “neutral” from “underperform” due its good 2009 results.

As for the banking sector, HwangDBS Vickers Research notes that post-4Q 2009, earnings upgrades were not fantastic compared to the post-2Q2009 and 3Q2009 results season.

But the research house says there could be further room for earnings upgrades for selected banks such as Hong Leong Bank Bhd and RHB Capital Bhd after the overnight policy rates (OPR) move up, due to their higher proportion of variable rate loans.

Last Wednesday, Bank Negara Malaysia raised the OPR interest rate by 25 basis points to 2.25% after keeping it at 2% since April 2009. The hike follows the significant improvement in the domestic economy, moderate rise in inflation and improving global landscape.

For Maybank, HwangDBS says there could be upside from stronger Bank Internasional Indonesia earnings and non-interest income.

Notable upgrades of specific stocks include CIMB’s upgrade on Pelikan International Bhd (neutral to trading buy) due to its Herlitz acquisition, and Petra Perdana Bhd (neutral to overweight) following the revamp of its board.

Also noteworthy is that over the past three months, CIMB had downgraded three stocks — Ann Joo Resources Bhd (trading buy to neutral) due to limited upside to target price, Genting Malaysia Bhd (overweight to neutral) due to possibly worse-than-expected cannibalisation from Singapore’s integrated resorts and Kurnia Asia (trading buy to neutral) due to disappointing FY2009 earnings.

Better upside in earnings
With better prospects, and as raw material prices recover and  liquidity gradually tightens, some analysts say they may upgrade earnings of companies after 1Q2010, albeit at a slower pace.

Sectors likely to continue doing well include banks and rubber glove makers, while automotive and steel companies are expected to see an upside in earnings.

OSK says the recovery sectors for 2010 are steel, after experiencing losses in 1H2009,and transportation, which may see more than 100% growth this year.

Economists’ upward revision of the gross domestic product (GDP) growth for 2010 should also provide guidance to a better year ahead for companies in an export-dependent country.
The official forecast for 2010 GDP growth was 4%.

Maybank Investment Bank, however, warns that while earnings will accelerate, policies may cause equities to pause a while, and withdrawal of subsidies may impact consumption.

Some economists are expecting the central bank to raise the OPR by another 100 basis points this year.

RHB in a note says although the rising interest rate trend will be seen as negative for highly-geared companies, it believes the market has priced in such adjustments.

This article appeared in Capital page of The Edge Malaysia, Issue 796, Mar 8 - 14, 2009.