Tuesday 7 December 2010

The emergence of the underperformers

The emergence of the underperformers

by Ghaz Ghazali ghazghazali@theborneopost.com.
Posted on December 6, 2010, Monday

Earning numbers in 3Q10 not favouring outperformers – Analysts



SHIFT IN TREND: Photo shows the Bursa Malaysia building at Bukit Kewangan, Kuala Lumpur – the nation’s bourse and index centre. Companies pegged under ‘downgrade’ call have exceeded the ‘upgrades’ by 33 per cent as corporate earnings in the country have been slipping against expectations since last year’s fourth quarter.

KUCHING: The year’s third quarter results signals the rise of underperformers, which outnumbered outperformers by two to one – indicating continued pressure faced by certain key sectors, say analysts.

On a percentage basis, companies pegged under ‘downgrade’ calls exceeded the ‘upgrade’ ones by 33 per cent as corporate earnings in the country had been slipping against expectations since last year’s fourth quarter, observed OSK Research Sdn Bhd’s (OSK Research) head of research Chris Eng.

“Third quarter earnings were uninspiring particularly the small caps, with 45 per cent of companies reporting results that were below expectations compared with the big caps, of which 60 per cent were within expectations.

Sector-wise, only the media sector outperformed. On the flipside; the smaller steel, technology and O&G (oil and gas) companies reported weak results owing to lower margins, a stronger ringgit and delays in contract awards,” he outlined.

On the other hand, ECM Libra Capital Sdn Bhd’s (ECM Libra) head analyst Bernard Ching noted that while the trend appeared to favour underperformers in the reviewed quarter, positive earnings surprises were somewhat more than those in the negative.

“Even as positive ear-nings surprises for the third quarter – which comprised 18 per cent of stocks under our coverage – were lower than the 29 per cent reported in the preceding second quarter, there were fewer negative earnings surprises as well,” he pointed out, adding that 12 per cent of stocks under coverage had failed to meet estimates against 20 per cent in the preceding quarter.

Notable players that recorded such positive earnings surprises included telco giant Axiata Group Bhd, national airline Malaysian Airline System Bhd (MAS), O&G-related services provider Dayang Enterprises Holdings Bhd and construction conglomerate Sunway Holdings Bhd.

On the negative end, the research house weighted off building materials provider Lafarge Malayan Cement Bhd; consumer goods distributor Pelikan International Corp Bhd; O&G groups Petra Perdana Bhd and Wah Seong Corporation Bhd; plantation player Boustead Holdings Bhd; and construction company Sunway City Bhd.

Adding in a more optimistic take on the underperformers-versus-outperformers scenario, HwangDBS Vickers Research Sdn Bhd’s head of research Wong Ming Tek maintained that the restructuring of the KLCI in July last year should provide an added boost with higher weightings on bigger caps.

“The absolute 2010 net profit for our universe is set to surpass pre-financial crisis levels, supporting the KLCI (Kuala Lumpur Composite Index) to new highs in 2011. Coupled with impending Sarawak state elections, the government’s ongoing reforms and potentially strong CPO (crude palm oil) prices; we believe that the resilient economic growth, interest rate differential and weak US dollar could also see higher levels of foreign ownership.”

Similarly, ECM Libra’s Ching was also positive on the foreign ownership matter, highlighting that foreign net equity inflows would remain strong in the near term.

“We are still positive in the near term. Although the local index has retraced by about three per cent since hitting a high of 1,528.01 three weeks ago, we are unfazed by it.

“Rather, we believe the market will continue its uptrend in a more meaningful manner in next year’s first quarter, led by resilient domestic consumption, strong foreign net equity inflows, M&A (mergers and acquisitions) activities and also the Sarawak state election.”

On behalf of OSK Research, Eng believed that upgrades might again beat downgrades by the end of the fourth quarter, assuming that “things to turn for the better in the coming last quarter of this year.”

“For now, we maintain our 2011 fair value of 1,648 points, with our KLCI earnings growth to remain intact at 16 per cent. We maintain our ‘overweight’ call on the Malaysian market,” he added.

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