Corporate earnings improve marginally; facing headwinds going forward

The top 30 companies in Bursa Malaysia registered strong profit growth, as measured by earnings per share, of 18.2% in the first quarter of 2014. However, looking beyond the bottom line figure reveals profits boosted by one-off gains amid sluggish revenue growth.

The sluggish revenue growth is surprising given that the Malaysian economy chalked up an impressive y-o-y gross domestic product (GDP) growth of 6.2% in 1Q2014. GDP grew 5.1% in the last quarter of 2013. GDP is defined as the sum of all goods and services produced in an economy.

Let us first look at how Malaysian corporates fared in the first quarter. 

Overall, corporates performed slightly better in the first quarter of 2014 even after stripping out the one-off gains. Revenue growth turned positive after being in negative territory since December 2012. Profit and sales growth was also marginally higher.

The FBMKLCI is a market capitalisation-weighted index of the top 30 companies in Bursa Malaysia. As such, it is often seen as a good proxy and bellwether for Corporate Malaysia.

FBMKLCI companies registered strong profit growth of 18.2% y-o-y. Compared to the previous quarter, profits grew by 10.7%. This good set of results seems to be consistent with the impressive GDP growth registered by the economy in Q1.

However, things look less impressive once we strip out exceptional items from the bottom line.

In the case of the first quarter results of FBMKLCI companies, an abnormally large exceptional item was recognised by IOI Corporation Bhd. This in turn skewed the profit figures of the FBMKLCI upwards.

On the revenue side, growth has turned slightly positive with a 0.8% increase, marking the first time since 1Q2014 that revenue has not contracted.

The uptick in revenue and improvement in cost-side management contributed to an increase in profit margins in the first quarter.

At the moment, the operating profit margins of the FBMKLCI are about 19.6%, which is a 2.4% improvement compared to a year earlier.

However, revenue growth is still weak and companies cannot rely on keeping costs down to maintain profit growth. This is because inflationary pressure will eventually result in an increased cost base.

This will likely happen down the road due to the implementation of the goods and services tax (GST) in April 2015 and the possibility of further cuts to fuel subsidies. Bank Negara Malaysia has indicated that inflation will likely be between 3% and 4% in 2014.

So why has revenue and earnings growth been sluggish despite the strong economic performance in the first quarter?

Read more in The Edge this week. 

Bursa Malaysia may see more fund raising activity

Companies with funding needs may increasingly look to the stock market if Malaysia’s low interest rate regime comes to an end. And there are growing expectations that Bank Negara Malaysia (BNM) will raise the Overnight Policy Rate (OPR) by to 3.25% from 3% when its Monetary Policy Committee next meets in July. 

Currently, the main sources of funding for companies are banks and the bond market. With interest rates on an uptrend, these two fund raising venues may become less attractive. The stock market, on the other hand, could see more fund raising exercises.

BNM’s latest statistics show that business loan applications have dropped by 10.6% in April from the previous year. Growth has actually been on a downtrend since January 2014.

While the pace of private debt securities (PDS) issuance has picked up in 2014 compared to the same period in 2013, this trend is unlikely to continue in the coming months. This is because companies issuing PDS would likely have to pay a premium to the current cost of borrowing to reflect the widely-anticipated OPR hike in July.

With bank loans and PDS being adversely affected by interest rates, a shift towards the stock market for capital raising seems natural especially when the FBM KLCI is trading near its all-time high of 1889.47 and investors are generally in a confident mood. 

Read more in The Edge this week.

Long overdue, analysts finally cut sales forecast for property developers

This week, The Edge carries a report on the sales performance of several property developers in Malaysia.

In the reporting period ended March 2014, close to half of the listed property developers under analysts’ coverage reported weaker than expected sales or earnings.  We had expected such moves.   

Meanwhile, property developers have largely maintained their FY2014 new sales target. It is going to be a tall order to meet new sales forecasts for some of these companies.

In the latest quarterly results, we can see slower demand for higher-priced properties and rising cost pressures. However, demand for affordable homes remains resilient.

Most of the larger listed property developers have relatively solid balance sheets (average net gearing of less than 20%) and hence, are able to hold back launches but this might not be the case for smaller property developers.

Companies in net cash position include UOA Development, Matrix Concepts (Matrix) and Daiman Development (Daiman). Matrix Concepts and Daiman focus on affordable and mid-range landed homes (terrace and cluster homes). This segment is clearly more resilient relative to high-rise homes.

Read the full report in The Edge.

Ringgit may rise short term due to positive carry trades

This week, The Edge writes about carry trade in Malaysia and its prospects in the near term.

In a carry trade, investors borrow in countries like the US, where short-term borrowing costs are low. They would then purchase higher yielding assets like Malaysian Government Securities (MGS) to profit from the positive yield difference. 

This strategy relies on the stability of assets’ prices and exchange rates, since excessive movements can easily wipe out the profits of a carry trader.

The Edge analyzed several factors which seems to be working in favour of the carry trade in Malaysia.  

‘Fear’ Index at 2014 low 

To begin with, volatility in global financial markets is expected to be low in the coming months. This can be seen by the S&P 500 Vix index (Vix).

The Vix, which is also known as the ‘fear index’, is a widely-used indicator of the expectations of volatility. The higher the number, the more volatile or unstable investors expect the markets to be.

At the moment, the Vix is trading at about 12%, which is the near the lows of 2014. In contrast, the Vix peaked at 21.4% in February 2014. Despite the ‘sell in May and go away’ adage, the Vix indicates that investors have been relatively calm in May.

This works in favour of the carry trade because volatile markets tend to make investors think twice about being invested in the market. Instead, they are likely to withdraw their funds and hold cash. 

Apart from the Vix index, other factors which are discussed include the trading volatility of USDMYR, the spread of the Credit Default Swap on Malaysian sovereign debt and the potential rise in overnight policy rate by Bank Negara Malaysia.

Read more in The Edge this week.  

Looking beyond top line GDP growth

Malaysia’s Gross Domestic Product (GDP) grew an impressive 6.2% in the first quarter of this year, one of the highest first quarter (1Q) growth in the region. On a quarter-on-quarter basis, though, 1Q2014 growth is slower at 0.8%, compared to 4Q2013’s 1.9%.

The unexpected surge in 1Q GDP sparked off a slew of revisions in growth forecast for 2014, with projections averaging around 5.5%, compared to 5% before.

Is this strong growth sustainable?

In releasing the 1Q performance data, Bank Negara Malaysia guided that GDP performance in 1Q is “exceptional” and unlikely to be repeated in the subsequent three quarters.

Indeed, while the top line numbers are looking good, there are still pockets of weaknesses in the economy, which if not addressed in the coming months, will undermine the growth prospects of the country over the longer term.

Will domestic demand and export performance which are the main growth drivers of the 1Q GDP growth be sustainable moving forward? 

Some economists are concerned of the prospect especially amidst a period of rising inflation, high household debt and the impending interest rate rise by Bank Negara Malaysia which is likely to happen in July. 

With rising government spending and a budget deficit to tackle, the slack in public consumption is likely to be filled by private sector investments.  BUT can private investments deliver the figures? 

Read the full analysis in The Edge this week.