Underwhelming Q4 earnings a sign of what's to come: analysts

Singapore

CORPORATE earnings season is back in full swing but the upcoming barrage of results could leave investors mostly rather underwhelmed.

Earnings growth for Singapore-listed companies is likely to have slowed in the final three months of 2015 and some sectors such as offshore & marine (O&M) might even see dividend cuts when companies report earnings over the next several weeks, analysts said, warning that 2016 would be weak as well.

Corporate earnings this year could take a similar hit from a tough global environment, soft domestic property market, weak commodity prices and rising interest rates in the United States, they noted.

One small consolation for investors here, though, might be that analysts have not yet started calling it a corporate earnings recession, unlike in the US where S&P 500 companies are expected to show a decline in profits for a third consecutive quarter. That would make Q4 the worst earnings season for the US since Q3 2009, according to Bloomberg.

For Singapore, analysts expect Q4 to have been relatively weak for most sectors of the Singapore stock market, with the softness likely to linger on for the rest of this year, though earnings growth expectations for 2016 are still above zero.

"Don't bank on much positive surprise in Q4 2015 earnings," said Kum Soek Ching, head of South-east Asia research at Credit Suisse Private Banking Asia-Pacific, who noted that the Singapore economy expanded 2.1 per cent in 2015 compared to 2.9 per cent in 2014.

"On a year-on-year comparison, revenue growth momentum will slow, in line with the weaker macro backdrop ... The soft Singapore system loan growth in October and November is also another indicator of weaker economic activity. Meanwhile, higher labour cost will eat into margins."

IG market strategist Bernard Aw also cited China's slowdown and a global trade collapse as factors likely to have led to "underwhelming" Q4 earnings for local corporates.

Ms Kum said that although the consensus estimate for market earnings per share growth was 5.4 per cent for 2016, "earnings visibility is low and there is risk for the numbers to be trimmed further into the year, just as in 2014 and 2015".

OCBC Investment Research head Carmen Lee expects corporate earnings growth here to be "flat to lower single-digit growth" this year, saying that companies might cut dividends if market conditions worsen further.

Sectors that look more vulnerable now include beaten-down O&M stocks, which suffered a sharp selldown last week after Brent crude dipped to fresh lows below US$30 per barrel; telcos; and retail real estate investment trusts (Reits), analysts said.

Though US dollar strength was "typically mildly positive for oil service providers as contracts are usually in USD ... we believe that lower-for-longer oil prices, pricing and asset utilisation pressure will weigh more heavily on the sector, negating any gains from USD strength," brokerage Maybank Kim Eng said in a report last week.

Rigbuilders may have to reverse previously recognised profits, Ms Kum noted. "We do not rule out dividend cuts from the rigbuilders due to rising working capital pressure and the need to conserve cash in a prolonged O&M downcycle."

Telco earnings could underwhelm after a "tepid response to iPhone6/6S and the launch of lower-priced SIM-only products", she added.

Maybank Kim Eng also raised a red flag over retail Reits, saying that the depreciation of regional currencies such as the ringgit and rupiah against the Singapore dollar would discourage tourist arrivals.

As for the three local banks, analysts said a strong greenback ought to boost their earnings but any higher net interest margins could be offset by higher costs of funding and credit costs.

"We estimate that for every 50 bps increase in Sibor (Singapore Interbank Offered Rate), customer margins will rise by 4.6-7.2bps ... Asset quality may deteriorate further as borrowing burden increases," Maybank Kim Eng said.

But analysts said there were still some bright spots. For instance, healthcare and consumer companies such as Sheng Siong should fare well as demand remains healthy, Ms Lee said.

Ms Kum added that she expected plantation companies to post positive results with the recovery in crude palm oil prices and production, while Maybank Kim Eng highlighted manufacturing stocks such as Venture Corp as a beneficiary of greenback strength.

Of the 30 Straits Times Index component stocks, one - Singapore Press Holdings - has already posted results for the October-December period. Four others are scheduled to release results in January: Singapore Exchange, Keppel Corporation, Ascendas Real Estate Investment Trust and CapitaLand Mall Trust. The rest are expected to post results by Feb 29.