Q4 numbers fail to lift hopes; muted outlook for local firms

Singapore

EXPECTATIONS are not running high as the earnings season for the fourth quarter kicks in. Analysts note that weaker economic growth and investment sentiment, having taken a hit from escalating trade tensions in the second half of last year, will continue to weigh on bottom lines.

This will be further aggravated by the typical year-end lull. Some bright spots they can identify are banks, benefiting from higher net interest margins, certain blue-chip property developers as they recognise revenue from earlier projects or those completed overseas, and a handful of others that are seeing better operational performances than before because the factors that used to plague them have reversed.

With the Sino-US trade talks still unfolding like a ongoing soap opera, head of OCBC Investment Research Carmen Lee said that economic data and sentiment have taken a real hit; this has been reflected in lower economic growth expectations and declines in Singapore's purchasing managers' index, an indicator of economic health for the manufacturing and service sectors.

Ms Lee expects fourth-quarter earnings to be more muted than for the third quarter, although on par on a year-on-year basis.

Like other analysts, she has already adjusted earnings expectations downwards, and at this point, is not anticipating any major earnings surprises on the upside.

"We believe that earnings expectations for 2019 have been adjusted to reflect the more muted outlook for the coming three to four quarters. This is likely to be the case for well-followed big-capitalisation companies, and to a much lesser extent for small- to mid-capitalisation companies. We thus expect blue-chip companies to report Q4 earnings which are more in line with expectations."

By her count, of the 733 companies listed on the local exchange, only 80 have more than three analysts covering the stock. This effectively means that close to 90 per cent of listed companies are not well-covered and there is a high probability of earnings disappointments.

What she means is, not being closely-watched through the quarter, analysts' earnings estimates for these companies would not have been regularly adjusted in tandem with corporate developments, which would lead to more surprises when numbers on their operational performances are unveiled. Given the current gloom, their results would probably tilt towards surprising on the downside rather than the upside.

Paul Chew, head of research at Phillip Securities Research, is no less disillusioned a quarter on. "The third quarter of 2018 earnings were a disappointment, and we expect this to carry on into Q4," he said.

"Electronics, especially companies with factories in China or smartphone exposure, will likely under-perform," he added, noting that there was a standstill in the supply chain last November because of the uncertainty over US import tariffs.

Maybank analyst Lai Gene Lih largely agreed with this. He downgraded Hi-P International from "hold" to "sell" earlier this month, saying that it is the most vulnerable among tech stocks, given that its largest customer Apple recently cut revenue guidance, and about four-fifths of the electronics end-markets that the company is exposed to are consumer discretionary in nature.

CGS-CIMB analyst Lim Siew Khee said industrials may register a lacklustre fourth-quarter performance.

Sembcorp Industries, for instance, could do worse compared to the last quarter, on seasonal effects and its boiler shutdown in India. There has been an unplanned shutdown for one of the two boilers at Sembcorp Energy India since last October; the unit generally delivers S$12 million to S$14 million of net profit per quarter.

"Sembcorp Marine is expected to make losses due to weak order momentum and as guided, while ST Engineering is expected to maintain a steady quarter-on-quarter performance. Keppel will potentially benefit from revaluation gain and completion of property projects. Tech and manufacturing counters, especially Venture Corp, are expected to see a quarter-on-quarter recovery from new products and customers."

There are others who are less certain about recovery prospects at Venture, like UOB Kay Hian analyst Foo Zhiwei, who said that, whether or not strong shipments to clients in Q4 will continue into 2019 is hard to say, as clients may be rushing orders before the trade tariff ceasefire expires in end February or early March.

"Even if a trade deal emerges from the US-China talks, it is hard to get a strong sense that orders will return strongly to drive earnings improvement. There is a lot of stress in the economy that threatens demand as it is now."

CGS-CIMB's Ms Lim said the trade truce conclusion that both China and the US seem to be working towards would be key to watch for the banking, technology and manufacturing sectors especially.

"A truce would be good for global trade, and improved global sentiment will benefit banks. For the tech and manufacturing sectors, less fear and more clarity would help. To some extent, the industrial real estate investment trusts could also be affected, mainly because of their multinational corporation tenant mix for their logistics and warehouse facilities, which could be affected by overall trade volume."

Bright spots are few and far between, but analysts are unanimous that banks are one - thanks to an expected expansion in net interest margins (NIM).

Ms Lim said NIM expansion would be a lagged effect of repricing from higher interest rates. "All eyes are on the three banks as to whether they can continue with NIM expansion. The market will also watch for their guidance ahead, given that rising rates may soon taper. Wealth management and bank performances in Hong Kong and China in the fourth quarter could also set the tone for indications ahead in FY19."

She also expects property developers, including City Developments and CapitaLand, to do better than last quarter, on the back of recognition from projects launched earlier or completed overseas.

KGI Securities analyst Joel Ng said that banks will lead earnings growth in Q4, but believes that they already hit their peak earnings growth last year. It would thus be challenging for them to maintain their margins and growth levels this year, as the effects of the trade war become more visible.

A mish-mash of several blue-chip counters are also expected to pull in better performances.

Mr Ng said companies such as Thai Beverage, ComfortDelGro, Genting Singapore and Sats are likely to outperform expectations, because "most of the factors that led to their relative share price under-performance in 2018 are starting to reverse".

"For example, ThaiBev should be driven by the recovery in Thai farmers' wages. Meanwhile, we believe that concerns over Go-Jek's entry into the Singapore market were over-hyped and do not see a significant impact to ComfortDelGro's cash flows and strong balance sheet.

"For Sats, we expect weakness at its associates and joint ventures, especially in Indonesia, to stabilise and to recover."

But amid expectations of continued weak trade globally, he does not see a favourable risk-reward return for equities: "I would prefer capital preservation to trying to outsmart the markets."