This article first appeared in Capital, The Edge Malaysia Weekly on September 4, 2023 - September 10, 2023

BURSA Malaysia-listed companies largely reported a worse set of numbers for the quarter ended June 30 (2Q2023) from a year ago. But on a quarterly basis, more companies registered better results — offering a sliver of hope for the local capital market.

The poorer performance compared with a year ago was mainly due to higher operating costs, including higher financing charges, and slower sales growth, particularly from exports.

The expected improvement in the economy in the second half of the year — barring any major disruptions — should provide a lift to companies’ earnings in the coming quarters, according to analysts.

“For the companies under our coverage, the results are looking more depressed than a year ago, especially for sectors whose earnings are driven by demands of the public,” says Victor Wan, head of research at Inter-Pacific Research, when contacted by The Edge.

“However, things are starting to move upward going into the second half, with some consumer-related sectors reporting better results than a quarter ago. Cash assistance from the government should lead to better results for consumer-related sectors in the second half.”

Vincent Khoo, head of research for Malaysia at UOB KayHian, says it is interesting to note that many companies recorded strong quarter-on-quarter (q-o-q) earnings growth, particularly those which disappointed in the first quarter, providing good capital gains for investors. “We see an improving earnings outlook for the second half as cost inflation has peaked, for example, lower electricity tariff for large companies,” he tells The Edge.

Looking at the top 100 companies by market value on Bursa Malaysia, 47% of the companies performed better in 2Q2023 on a year-on-year (y-o-y) basis. This compares with 50.1% in the previous corresponding quarter.

However, on a quarterly basis, 58% of the companies performed better in 2Q2023 than in 1Q2023. In 2Q2022, 51.5% of the companies registered better earnings on a q-o-q basis.

Among the sectors that performed better than a year ago are consumer products, industrial conglomerates, insurance, oil and gas equipment and services, ports and logistics, and telecommunications.

Meanwhile, companies that are the sole representative of their respective sectors in the top 100 of the local capital market such as Bursa Malaysia Securities Bhd, Capital A Bhd, Malaysia Airports Holdings Bhd and Mr D.I.Y Group (M) Bhd also reported better earnings than a year ago.

Sectors that performed worse than a year ago are plantation, rubber glove, aluminium product manufacturers, gaming, consumer discretionary, electronic manufacturing services and semiconductors.

Automotive, banking, commodity chemicals, digital government services, healthcare, industrial machinery, property development, real estate investment trust (REIT) and utilities are the sectors that registered mixed results during the quarter in review.

The plantation and rubber glove sectors continued to perform worse than a year ago, owing to low crude palm oil (CPO) prices for the former and persistent oversupply issues for the latter.

Among the top 100 companies listed on Bursa Malaysia, the results of the plantation and rubber glove makers in 2Q2023 were all lower than a year ago. FGV Holdings Bhd and Boustead Plantations Bhd slipped into the red during the quarter.

FGV registered a net loss of RM12.9 million during the quarter compared with a net profit of RM374.02 million a year ago, while Boustead Plantations reported a net loss of RM5.52 million compared with a net profit of RM73.22 million a year earlier.

In 2Q2023, average CPO prices, as compiled by the Malaysian Palm Oil Board, trended lower to RM3,846 per tonne from RM3,996.50 per tonne in 1Q2023. In 2Q2022, CPO prices averaged RM6,552 per tonne. The CPO third-month futures contract closed at RM4,010 per tonne last Wednesday on Bursa Malaysia.

The outlook for the plantation sector is mixed as some companies registered better results on a q-o-q basis. Sime Darby Plantation Bhd had the biggest jump in net profit on a quarterly basis, by 450.72% to RM380 million, but was down 53% y-o-y, impacted by sharply lower CPO prices, lower fresh fruit bunch yield, lower oil extraction rate, and higher finance and operating costs. United Plantations Bhd and Genting Plantations Bhd (GenP) also registered better results on a q-o-q basis.

While glove makers are still in the red, their losses narrowed on a q-o-q basis. Hartalega Holdings Bhd’s RM52.57 million net loss during the quarter in review was smaller than the net loss of RM323.42 million in 1Q2023.

The same goes for Top Glove Corp Bhd and Kossan Rubber Industries Bhd, whose net losses narrowed on a q-o-q basis, signalling an improvement in the oversupply situation that had ravaged the once high-flying sector during the Covid-19 pandemic. It should be noted that the improvement in the oversupply situation is largely due to the decommissioning efforts of the rubber glove players themselves, rather than a swift increase in demand for their products.

In an Aug 10 report on Hartalega’s results for the quarter, Kenanga Research says the operating environment of the sector is expected to remain challenging in subsequent quarters, plagued by the massive oversupply. “Nevertheless, we expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants,” it says, adding that the demand-supply equilibrium may only be seen in 2025.

This is in contrast to the projection of the Malaysian Rubber Glove Manufacturers Association (Margma), which expects the supply-demand equilibrium to return in the next six to nine months.

“On the supply side, we are now factoring in a reduction of 24 billion pieces (previous reduction was 21 billion pieces) of gloves in the system by end-FY2023. This will result in an excess capacity of 112 billion pieces (instead of rising by 4% to 116 billion pieces as previously forecast) which is similar to CY2022,” says Kenanga Research.

Meanwhile, the semiconductor sector, another outperformer during the Covid-19 pandemic, also registered lower earnings during the quarter in review compared with a year ago, largely on high inventory levels and lower prices. Inari Amertron Bhd, Malaysian Pacific Industries Bhd (MPI) and Unisem (M) Bhd registered a lower net profit during the quarter compared with a year earlier. 

In a sectoral overview report dated Aug 16, CGS-CIMB Research says a meaningful industry recovery may happen only in 2024 as the current inventory glut could take some time to reverse. The research outfit has an “underweight” call on the sector. Nevertheless, it forecast aggregate sector earnings to grow by 29% in 2024, anchored on a recovery in demand-supply conditions following a relatively weak 2023.

“That said, we find that the risk of further cuts to earnings expectations is still being overlooked, even with 1QCY2023 results largely falling short of Bloomberg consensus expectations and unlikely to catch up given the weak macro environment,” says the research firm.

The financial sector had a mixed performance during the quarter in review. The top three banks by market capitalisation — Malayan Banking Bhd, Public Bank Bhd and CIMB Group Holdings Bhd — all registered better results on a y-o-y basis. The better performance was due to the absence of an additional tax charge arising from the one-off prosperity tax.

However, Public Bank’s net profit of RM1.62 billion in 2Q2023 was 5.57% lower on a q-o-q basis, bogged down by the weak performance of its treasury and capital market operations as well as investment banking. The pretax profit of Public Bank’s treasury and capital market operations and investment banking business decreased 79.9% and 66.1% q-o-q to RM19.7 million and RM5.4 million respectively during the quarter.

Nevertheless, analysts are still sanguine over the prospects of the banking sector in the second half of the year. CGS-CIMB Research is projecting an 8.2% growth in net profit for Public Bank in the second half, compared with the first half, supported by higher net interest income on the back of stable (or slightly better) 2H2023 net interest margin and an increase of more than 2% in loans.

“We do not expect any significant increase in its loan loss provisioning in 2H2023, given Public Bank’s tight control of its asset quality and the buffer of RM1.8 billion in management overlay,” it says in an Aug 29 report.

Meanwhile, mid-liners Hong Leong Financial Group Bhd and AMMB Holdings Bhd reported weaker earnings both on a y-o-y and q-o-q basis, as did Affin Bank Bhd, the smallest bank by market capitalisation.

Alliance Bank Malaysia Bhd and Malaysia Building Society Bhd registered improved earnings on a q-o-q basis, but lower on a y-o-y basis. RHB Bank Bhd and Bank Islam Malaysia Bhd reported better results during the quarter compared with 1Q2023 and 2Q2022.

Property development is a sector of interest to the investing fraternity as some players see it as a leading economic and market indicator. In 2Q2023, the sector registered largely better earnings on a quarterly basis.

All the property developers in the top 100 companies on Bursa Malaysia — except for S P Setia Bhd — registered better earnings on a q-o-q basis. However, on a yearly basis, only UOA Development Bhd, UEM Sunrise Bhd and Eco World Development Group Bhd registered better results. Juggernauts IOI Properties Group Bhd and Sime Darby Property Bhd registered lower earnings on a y-o-y basis.

RHB Research is overweight on the property sector, with “buy” calls on nine of the 11 stocks that it covers. Maybank Investment Bank Bhd is still neutral on the prospects of the property sector despite recent announcements by the government that could provide an impetus for the growth of the sector.

The first major announcement by the government was on the funding of the Penang Light Rail Transit project. Talks for this key infrastructure project had been going on for quite some time, but the federal government recently agreed in principle to fund the project.

“The Penang LRT will improve accessibility and alleviate worsening congestion on Penang island. It will also stimulate economic activities and demand for properties near its station stops while making previously less accessible areas more attractive for property development purposes,” says Maybank IB in an Aug 23 report.

“More importantly, the reclamation of land (2,300 acres) for a new Silicon Island in the southern part of Penang could redefine the future dynamics of Penang’s property sector, offering multiple development opportunities. We anticipate a potential shift in property demand patterns (for example, for commercial properties) from the northern to the southern parts of Penang island.”

The second major announcement was by Prime Minister Datuk Seri Anwar Ibrahim in designating the Forest City development as a “special financial zone” (SFZ). This could boost the development potential of southwest Johor, according to Maybank IB in an Aug 27 note.

“We are positive on this latest initiative as the SFZ has the potential to attract a growing number of Chinese family funds seeking more affordable alternatives in this region, besides Singapore. Additionally, the SFZ could also benefit from the spillover effects of Singapore’s initiative to develop Jurong Lake District as its second CBD,” says the investment bank.

“More importantly, establishing an SFZ in Forest City will help to balance the economic growth in southwestern Johor. Currently, business activities are concentrated in Johor’s CBD, which will be further boosted by the upcoming JB-SG RTS while the southeastern region is driven by oil and gas activities.”

However, it noted that efficient transport networks and infrastructure offered by Forest City are crucial to attract investors.

The interest rate environment will be another crucial factor for the property sector, says Inter-Pacific Research’s Wan.

The Malaysian economy registered a much softer growth of 2.9% y-o-y in 2Q2023, compared with 5.6% in 1Q2023, largely due to weakening export growth during the quarter.

Economists see weaker growth ahead. TA Research expects growth to moderate in the third and fourth quarters of this year, due to the high base effect in the previous year. In 3Q and 4Q2022, the economy grew 14.1% and 7.1% y-o-y respectively.

“The presence of this high base effect is expected to contribute to a moderation in growth, particularly evident in the third quarter of 2023. Currently, we are maintaining our forecast of 3.5% and 4.6% y-o-y growth for the third and fourth quarters respectively, with an overall growth target for the year set at 4.2%,” the research firm says in an Aug 21 report.

Malaysia registered a GDP growth of 8.7% in 2022 and 3.1% in 2021. As the stock market is a forward looking discounting mechanism, the moderation may have been priced in. With inflation peaking in February, things should improve for businesses, barring any unexpected events. 

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