This article first appeared in Capital, The Edge Malaysia Weekly on November 18, 2024 - November 24, 2024

THE corporate earnings reporting season for the quarter ended Sept 30 has started, with more companies releasing their financial results in the next two weeks. The general expectation is that domestic-centric firms will continue to see profit growth, in tandem with the robust economic expansion.

However, a strong ringgit has been a key challenge for exporters in sectors such as technology and manufacturing, especially the glove players. The local currency strengthened 12.5% against the greenback during the quarter under review but it recently pared gains, depreciating past the 4.4 level following Donald Trump’s victory in the Nov 5 US election.

The ringgit strength has taken a toll on glovemaker Hartalega Holdings Bhd (KL:HARTA), with its net profit tumbling nearly 70% — also partly due to lower export revenue and higher raw material costs.

“Things seem to have slowed down in the third quarter (3Q). Looking at the PMI (Purchasing Managers’ Index) numbers and exports, I suspect it may be weaker on a quarterly basis,” Inter-Pacific Securities Sdn Bhd head of research Victor Wan tells The Edge.

During the July-September period, Malaysia’s PMI readings came in at 49.7, 49.7 and 49.5 respectively, according to S&P Global. A reading above 50 points indicates activity expansion while that below 50 signals contraction in the sector.

Soft manufacturing sector conditions continued to be seen in the beginning of 4Q, with the PMI coming in at 49.5 in October as firms scaled back production amid muted demand.

Wan notes that local firms have also been bearing some of the impact from the slowdown in China. The world’s second-largest economy’s gross domestic product (GDP) grew 4.6% in 3Q — the slowest pace since early 2023. This was slightly lower than the 4.7% in 2Q.

A research firm head who declined to be named concurs, saying export-reliant sectors will face challenges due to the stronger ringgit, while those with US dollar-denominated costs, such as the aviation sector, may benefit. Besides the currency factor, the aviation sector is set to reap the benefits from the drop in global oil prices as well as strong air travel demand.

Meanwhile, he says there is uncertainty about the tech sector’s earnings recovery, as the currency effect is expected to affect tech firms’ earnings.

Pentamaster Corp Bhd (KL:PENTA), which was among the earliest to announce its results, saw its net profit halve to RM11.77 million in 3Q, from RM23.49 million a year ago, due to lower automated test equipment sales and foreign exchange losses.

Similarly, electronic manufacturing services provider PIE Industrial Bhd (KL:PIE) reported a 56.7% drop in 3Q net profit to RM8.84 million from RM20.39 million in the same period a year ago. Its performance was dragged down by lower revenue, foreign exchange losses, and higher administrative and distribution expenses.

Loui Low, head of research at Malacca Securities Sdn Bhd, says domestic-driven sectors such as banking, construction, property, building materials, utilities and consumer are set to sustain their earnings growth.

CGS International foresees that Malaysia’s banks will report year-on-year net profit growth of 8%-9% in 3Q, slightly below the 9.5% y-o-y growth in 2Q. This is on the back of a more than 20% y-o-y decline in loan loss provisioning (LLP), as well as top line expansion during the quarter under review.

The securities firm expects banks’ net interest income to increase 3% y-o-y in 3Q, driven by net interest margin (NIM) expansion. CGS notes that it is not overly concerned about the slowdown in banks’ loan growth from 6.4% y-o-y as at end-June to 5.6% y-o-y at end-September, as it was within its expectation.

It is worth noting that there could be surprises from the plantation stocks as crude palm oil (CPO) prices surpassed the RM5,000 level last week — the highest in more than two years. For the period from July to September, CPO futures were flat, trading at around RM4,000.

Hong Leong Investment Bank Research (HLIB Research) estimates that all planters under its coverage will deliver quarter-on-quarter earnings growth in 3Q, driven by seasonally stronger output and improved performance in the oleochemical sub-segment.

“Based on our estimates, every RM100 per tonne rise in our CPO price assumption will lift earnings forecast for plantation stocks under our coverage by 3.5%-15.0%,” the research house says in a Nov 6 note, adding that it has raised the CPO price assumptions by RM150 per tonne to RM4,150 per tonne in 2024 and by RM200 per tonne to RM4,000 per tonne in 2025 to reflect the recent upward trend in CPO prices.

HLIB Research believes that CPO prices will remain at elevated levels (possibly until 1Q2025), supported by weak palm output and robust near term demand.

However, on a y-o-y basis, planters are expected to post mixed performance. “Planters with higher exposure in Malaysia — FGV Holdings Bhd (KL:FGV), Hap Seng Plantations Holdings Bhd (KL:HSPLANT), IOI Corp Bhd (KL:IOICORP) and Johor Plantations Group Bhd (KL:JPG) — will likely register better upstream earnings than those with higher exposure in Indonesia. This is due to better palm productivity in Malaysia (arising from improved labour availability), while palm productivity in Indonesia likely weakened, mainly on the back of the carry-over effect from El Niño at end-2023,” the research house adds.

For the consumer sector, Wan is of the view that expansion may not be too strong judging by the wholesale and retail sales performance, with an expected growth rate of below 10%. “Besides that, the wage growth is not so strong and the cost of living is likely to pick up slightly.”

Both brewers Carlsberg Brewery Malaysia Bhd (KL:CARLSBG) and Heineken Malaysia Bhd (KL:HEIM) reported strong earnings growth in their 3Q results. Carlsberg said its performance was buoyed by better-than-expected margins, while Heineken attributed the decent results to higher revenue and effective cost management.

Wan is positive on the construction sector, which has been progressing well, while expecting decent sales for the property sector in view of more new launches.

On how Trump’s second term could impact Malaysian corporates, Low says while it may affect companies that have business exposure to China, more trade diversion opportunities could be expected, especially with the China+1 strategy, which saw multinational corporations seeking to diversify their sources of supply and production from over-dependence on China.

The research head notes that it is still too early to gauge the impact of Trump’s return to power, and it remains to be seen if there will be tariffs slapped by the US on countries beyond China.

Wan sees a volatile period for the FBM KLCI for the coming months, following the outflow of foreign funds in response to Trump’s win. The benchmark index had gained 10% year to date to close at 1,600.68 points last Thursday.

“Judging by Trump’s previous presidency, it is going to be another choppy one as far as emerging markets are concerned,” he says.

Looking back at the quarter ended June or 2Q, total earnings of the FBM KLCI constituents stood at RM18.7 billion, representing a 22.3% growth from the same quarter a year ago. Quarter on quarter, total net earnings were up 7.2% against RM17.5 billion in 1Q2024.

Meanwhile, for 1Q, total earnings were RM17.8 billion, up 7.4% from RM16.5 billion a year ago.

Will the FBM KLCI constituents perform better in 3Q, outperforming the 22.3% jump in the previous quarter? Watch this space. 

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