Analysts warn of subdued earnings

Singapore

ANALYSTS warn that the generally weak first-quarter earnings reported by listed companies here do not bode well for the rest of 2015, and many also noted that domestic economic restructuring and wobbly global economic growth could weigh on profits for some time.

Earnings of commodity firms took a drubbing from soft commodity prices while offshore and marine companies were hurt by the ongoing oil slump. Hospitality real estate investment trusts (Reits) also did poorly due to muted visitor arrivals.

One bright spot, however, was the banking sector which is set to benefit from rising interest rates, say analysts who highlighted commodity and oil prices, interest rates and the strength of the Singapore dollar as the main factors investors should keep an eye on for the rest of the year.

Of the 20 Straits Times Index (STI) component stocks that had posted results for the first quarter ended March 31 by the end of the recently concluded reporting season, only seven managed to boost earnings per share. These included plantation giant Wilmar, beer maker Thai Beverage and DBS.

Among the remaining 13 blue chips, EPS fell by as much as 93.2 per cent in the case of commodities trader Olam International.

The STI has 30 component stocks but 10 did not report Q1 results for the January to March period.

The quarterly report card for the broader market paints a similarly gloomy picture, analysts said, noting that only a minority of companies fared better than expected.

"Among the universe of companies we track, 38 per cent met expectations, 52 per cent missed expectations and only 10 per cent beat expectations. These statistics imply that for every one company whose earnings beat expectations, there were five whose earnings missed the mark. Not surprisingly, we have seen earnings downgrades across the Street," UBS Wealth Management equity analyst Lee Wen Ching said last week.

Nomura's South-east Asia equity strategist Mixo Das said that overall, more companies missed earnings estimates this year compared with last year. He added: "It's an overall slow start to the year, but this is not very different from earnings dynamics we are seeing elsewhere in the world. That said, it remains very difficult to predict earnings in Singapore as the economy continues its restructuring process."

The likely cause for the softness in corporate earnings in January through March could be thinner profit margins brought about by stiff competition and elevated operating costs, analysts said.

"Firms with lower earnings had market capitalisation-weighted revenue growth of 3.5 per cent, while net margin declined by one-fifth," said Voyage Research analyst Liu Jinshu.

Mr Liu noted that 76 per cent of the firms he tracked that saw a drop in Q1 EPS also suffered from lower net margins for the three months ended March 31.

The brightest spot in Q1 was the banking sector, analysts said, pointing to solid loan growth, stable asset quality and stronger non-interest income. An upcoming interest rate hike in the United States will probably boost earnings later this year, they added. Both DBS and OCBC beat market estimates while UOB's results were in line with forecasts.

Although transportation companies might also have been expected to fare well, driven by cheaper fuel, analysts were mixed on this segment, with some saying that results were still below expectations.

At the other end of the range, the sectors that suffered the most in the quarter included commodities and offshore, which are both heavily reliant on commodity and fuel prices.

OCBC Investment Research head Carmen Lee said that most of the commodity stocks that the research house covers have been hit by lower commodity prices and weak demand, adding that the outlook for the sector was "quite muted".

Olam, Golden Agri-Resources and Noble were near the bottom of the barrel in terms of Q1 EPS change year on year. Wilmar was the exception, coming in at the top, but that was mainly because it did not suffer huge foreign exchange losses in Q1 2015 unlike in the previous year. Its revenue and gross profit actually fell for Q1 from last year.

However, Phillip Futures investment analyst Daniel Ang said that he expects commodity prices to rally "towards the end of the year" and profit margins for commodities firms "should improve".

In the offshore sector, several companies sustained losses and new orders to date "have been underwhelming and may remain weak", OCBC's Ms Lee said. However, she remains fairly sanguine, saying that despite the weak beginning, an improved outlook in Q2 and the recent recovery in oil prices "should augur well for oil-related stocks" for the rest of 2015.

Hospitality Reits also suffered in Q1 due to reduced demand for hotel rooms. "Muted visitor arrivals dampened demand for hotel rooms, and consequently, room rates," said UBS's Ms Lee.

OCBC's Ms Lee pointed to the "absence of biennial events such as the Singapore Air Show, lacklustre tourist arrivals and still soft corporate demand".

In general, analysts said, the outlook for the rest of 2015 was subdued, with no immediate catalysts. Still, Mr Liu added that higher infrastructure spending in Singapore could spark a turnaround for a few construction counters.

Mr Das said that he expects earnings growth for Singapore corporates to be "mid-single-digit" for 2015.