Tuesday, July 17, 2012

Market headed for soft Q2 earnings season

Business Times: Mon, Jul 16

[SINGAPORE] The market could be heading towards a raft of poor results as companies begin to report their second-quarter earnings, analysts say.

Volatile markets and persistent macroeconomic concerns suggest that cyclicals like commodity plays could be underperformers, while defensive stocks may display resilience. The property sector could see a pick-up after a slow start to 2012.

"Generally, we expect slower revenue growth and some level of cost pressure for Q2 2012 due to the uncertain economic outlook and inflationary pressure," said Ng Kian Teck, lead analyst at Sias Research.

As the mid-year earnings season goes into full swing - Singapore-listed companies have up to 45 days to report quarterly results and up to 60 days to report full-year numbers - analysts say the upcoming crop of results are likely to reflect a weak Q2.

"I'm expecting the results will probably show a decline, quarter-on-quarter and maybe even year-on-year as well," said Phillip Securities research head Lee Kok Joo.

"If you look at the [purchasing managers' index] data that has come out in the past few months, whether in Europe or the US, it shows some kind of contraction. So when you look at it from that perspective, results for the second quarter will not be very strong."

While there could be a number of disappointments, the market has tempered its expectations to a certain degree.

"Generally, we expect the reporting season to deliver earnings broadly in line with market expectations, which are light to start with," said Credit Suisse Private Banking's head of South-east Asia equities, Kum Soek Ching.

"Market earnings revisions have been positive this year with the upgrade momentum only just flattening. Consensus is now expecting 7.9 per cent 2012 earnings-per-share growth, which we expect to be met."

Mr Ng of Sias Research said earnings could actually exceed consensus slightly because "many analysts have been rather conservative in their estimates".

Where disappointments are concerned, analysts unanimously expect the commodities sector to fall short.

"I think to a certain extent there might be disappointments especially in the commodities sector, because commodity prices have been coming down, and I don't think a lot of analysts have made adjustments yet," Phillip Securities' Mr Lee said.

Ms Kum also noted that lower crude palm oil prices will probably hit plantation plays.

"However, we do not expect post-results earnings downgrades since we expect management guidance for the second half of 2012 to be positive in view of stronger CPO pricing prospects going forward," she said.

Banks, too, could struggle with the historically high market volatility that has squeezed trading activity around the world.

"Markets have been volatile, so banks' trading income is not so strong," said Kenneth Ng, head of research at CIMB.

Transportation plays, such as shipping companies and airlines, could also be hurt by the broad economic slowdown, he added.

The property sector, however, could show some quarter-on-quarter strength.

"On a more positive note, property transaction volumes have improved in Q2 in both the Singapore and China market, after the sequential slowdown in Q1, and pricing has held up, so we expect improved earnings performance from the property sector," Ms Kum said.

On that theme, real estate investment trusts are "paying very stable dividends", said Mr Lee.

"The leases for commercial, those leases are maybe one to three years, so those expiring this year were probably signed in 2009, when it was at the bottom, so spot rates now are actually still higher than three years ago ... So for all these Reits they will get positive rental protection."

Mr Lee also noted that while airlines may struggle, airline services companies could actually be interesting defensive plays.

"Disregarding the fact that airlines are not doing so well, they still have to send their aircraft for maintenance, so SIA Engineering and Singapore Technologies Engineering will benefit from this," he said.

"These companies have all along been giving out very good dividends as well, so investors investing in these companies, besides getting the assurance that their companies will not be as affected [by the economy], can also get some dividend as well."

Staying defensive seems to be the message heading into the earnings season.

"Under the current uncertain climate, we favour defensive counters like Cordlife, LippoMalls, First Reit and Aimsamp Reit. Selective China companies still look attractive to us and we are still monitoring some of the interesting gems," said Sias Research's Mr Ng.

Going into the second half, macroeconomic concerns continue to cloud the earnings outlook.

"The outlook is rather uncertain," Mr Ng said. "Much will depend on developments in the three regions, China, US and EU. We will think that most companies will be under topline pressure and local companies such as construction companies will face cost pressures due to higher labour cost, after foreign labour controls from Ministry of Manpower."

Credit Suisse's Ms Kum saw a gap between valuations and expectations in the market, noting that the 12-month forward price-earnings ratio of the Singapore market is below the historical average, but the 12-month forward return on equity for the market has gone back to the historical mean.

"We believe the market is not pricing in a strong earnings outlook for the second half of 2012 ... We see room for valuation mean reversion in the second half of the year, especially against a backdrop of global policy easing," she said.

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