Upcoming results season may not be a pretty sight

Singapore

THE upcoming earnings season will be greatly scrutinised by investors for clues on the extent of damage wrought by the ongoing trade war and the impact of the unrest gripping Hong Kong, though pundits said there are a few bright spots such as S-Reits (Singapore real estate investment trusts).

The tariff war between the world's two economic powerhouses has raged on for a year. When elephants fight it's the grass that suffers.

In the last earnings season, three in five companies listed on the Singapore Exchange (SGX) posted lower profits.

One quarter on, as firms gear up to report their financial results for the July-September period, the export-oriented sector is expected to turn in a lacklustre performance, no thanks to the protracted US-Sino trade fight.

Janice Chua, DBS regional equity research head, said that the August seasonally-adjusted industrial production of minus 7.5 per cent month-on-month was "extremely weak", and the purchasing managers index was in contraction territory throughout the third quarter.

"We would tend towards a lacklustre Q3 earnings season for most companies, given the ongoing US-China trade uncertainty that have continued to negatively affect business sentiment," she added.

Head of OCBC Investment Research Carmen Lee told The Business Times: "For Singapore, and based on the Straits Times Index (STI), earnings growth is likely to ease off by some 2.4 per cent in FY19 before recovering in FY20 with earnings per share growth of about 6 per cent."

Apart from exporters, transport and logistics-related businesses might also report weaker performance. Maybank Kim Eng's head of research for Singapore, Neel Sinha, cited Singapore Airlines (SIA), SIA Engineering and Sats as some of the companies that could be hit.

He said this is in part due to travel disruption in the region as a result of the Hong Kong protests and a general slowdown in Chinese outbound tourism. US-China trade tensions would have contributed to air- and sea-borne cargo shipment weakness as well.

Lim Siew Khee, head of Singapore research at CGS-CIMB, noted that protests that have rocked Hong Kong for almost four months could hit Singapore-listed companies including Dairy Farm, but the impending earnings report might not yet shed much light on the impact.

"The upcoming quarter is an interim one with limited information," Ms Lim added. Early FY2020 results should be able to give a fuller picture.

Singapore yards are not out of the woods, either. DBS' Ms Chua said that losses at Sembcorp Marine are expected to continue in the second half of the year, in anticipation of lower activity level due to low contract wins in the prior quarters. Indeed, SembMarine has flagged the possible red ink.

The telecom sector is not expected to ring in exciting results as well, given that mobile-phone competition is dialled up and video streaming services are eating pay TV's lunch.

DBS' Ms Chua sees a 6 to 7 per cent year-on-year decline in the sector's revenue due to cheaper price plans in anticipation of TPG Telecom's commercial launch in late 2019.

CGS-CIMB's Ms Lim expects a flattish performance from Singtel and slightly weaker results from StarHub.

Amid the gloom, S-Reits are one of the few bright spots, and pundits believe they would continue to deliver in the upcoming earnings season.

"We are upbeat on hospitality Reits. Recent hotel statistics show that this segment has just reversed from a lacklustre H1 performance... Occupancy rate averaged 93.2 per cent in July and August, an impressive upswing from an average 85.3 per cent in H1FY19," DBS' Ms Chua said.

She expects the momentum to continue with the strong Grand Prix Formula One attendance in September, end of the brief spell of haze, China's Golden Week in October and year-end holiday season. "Our top pick is CDL HT (Hospitality Trusts)."

Sticky tenant sales, foot traffic and occupancy costs bode well for retail Reits. DBS is optimistic about Frasers Centrepoint Trust and CapitaLand Mall Trust for retail Reits.

A lack of new competitive supply tips the balance in favour of office Reits. Mapletree Commercial Trust and Keppel Reit are office Reits that DBS thinks would have performed well.

Maybank Kim Eng's Mr Sinha, on the other hand, has faith in industrial Reits, citing Mapletree Industrial Trust and Ascendas Reit for their low earnings volatility and a high degree of cashflow resilience.

As for local banks, which will post their results in November, weaker quarter-on-quarter earnings are expected on the back of muted loans growth, lower trading income and higher credit costs, according to CGS-CIMB's Ms Lim.

Going by the regulatory filings, at least nine Reits and major companies would be releasing their financial results this week.