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Consumer staples, banks did well in Q3 amid broad slowdown

Analysts call for caution, saying further earnings downgrades are likely

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Automated Teller Machines (ATM) outside Tangs basement, along the Orchard Road underpass.

Singapore

SINGAPORE companies recorded a mixed set of results so far for the July to September quarter, a period marked by turbulent global financial markets and further signs of a depressed global economy.

Consumer staples companies and banks did well or surpassed expectations, while industrials such as shippers and rigbuilders, and discretionary consumer companies were hit particularly hard.

Analysts urged their clients to keep their expectations low, noting that further earnings downgrades are likely.

"The third-quarter season alludes to a broad slowdown across sectors," said Kenneth Ng, CIMB head of equity research for Singapore.

"The banks have seen topline growth slow due to weak investment markets. Banks are also seeing the beginning of an increase in bad debt," he said.

"Within Singapore, the slower sales environment is showing up in all industries; the difference is just the degree of deterioration," he said.

Statistics compiled by The Business Times as at 6pm on Monday show that third-quarter profits reported by 145 Singapore Exchange-listed companies were down a sixth from a year ago, to a combined S$5.3 billion.

While 56 profit-making companies reported higher profits, 50 profit-making companies reported lower numbers.

This picture was broadly similar for nine-month numbers.

Generally, management is guiding towards a more conservative outlook, said OCBC Investment Research head Carmen Lee.

"We expect earnings to be trimmed for the coming one to two quarters," she said.

Companies that disappointed her team's expectations included national carrier Singapore Airlines, logistics and commodity broking firm CWT, and water solutions firm Hyflux.

Downgrading Hyflux to "sell" from "hold", OCBC analysts Carey Wong and Andy Wong said the company faced another disappointing quarter, with falling margins and estimated core operating losses of S$14.7 million.

In its results, Hyflux had said that it was cautious about the near-term business outlook as depressed oil prices caused many countries to scale back on infrastructure projects.

OCBC's Ms Lee said, however, that many defensive sectors like telcos and real estate investment trusts (Reits) reported steady or in-line results.

A Bank of America Merrill Lynch (Bofaml) equity strategy report on Nov 9 guided clients to keep earnings expectations low as much of the developed world and China are "old, indebted and unequal and so growth and inflation, repeatedly, keep disappointing".

Bofaml said further earnings downgrades could be expected given that a leading indicator, global trade volume, has contracted 2 per cent year-to-date. Since 1991, this only happened during recessionary periods in 2001 and 2008, it said.

In Singapore's largest companies, which Bofaml tracks, sales have contracted year-on-year for the three quarters this year.

Bofaml noted that 12-month forward earnings growth is an average of 6 per cent, with analysts predicting higher growth of 13 per cent for consumer staples and lower growth rates of 3 per cent for industrials and 2 per cent for consumer discretionary.

Yet even a slowdown can be seen in a the supermarkets space, said CIMB's Mr Ng, noting low same store sales growth there.

At local supermarket chain Sheng Siong, higher operating margins boosted third-quarter net profit by 19 per cent to S$14.5 million. Revenue increased 7.3 per cent, or around S$14 million, to S$200 million.

However, five new outlets contributed around S$12 million more, while the 33 existing outlets added about S$2 million. This means revenue growth at existing Sheng Siong outlets was essentially flat.

"Retail sales in Singapore have been unexciting, and not surprisingly sales at supermarkets remained tepid," Sheng Siong said.

Meanwhile, consumer discretionary companies such as lifestyle products group OSIM International saw a drastic drop in earnings, Mr Ng noted.

Due to currency turmoil in Malaysia and soft consumer demand in key North Asian markets and Singapore, OSIM's third-quarter net profit plunged 62 per cent to S$6.2 million.

Weak domestic demand can also be seen in a drop in advertising revenues for Singapore Press Holdings, retail malls guiding down their ability to increase rentals, and potential declines in office rents, said Mr Ng.

"Outside of the domestic focused industries, the worse-than-expected results have been in industrials," he said.

"Sembcorp Marine has seen a big hit on earnings as work done on existing rigs potentially face collection problems. Neptune Orient Lines is seeing margins squeezed by a persistent weak freight rate environment."