PETALING JAYA: Corporate Malaysia’s third-quarter (3Q) earnings season is expected to be mostly in line with the previous quarters, with limited surprises.
Analysts and fund managers anticipate sectors like real estate investment trusts (REITs), banking, construction, property and poultry to record better profits. In contrast, weaker earnings are expected in sectors like petrochemicals, technology and gloves.
Their projections are largely due to the ringgit’s appreciation.
In early July, the dollar-to-ringgit pair was trading at 4.70 before the local unit strengthened to a four-year high at 4.13 by the end of September.
This appreciation was driven by an unexpected 50-basis-point cut in the Federal Reserve (Fed) funds rate by the US Fed, along with the repatriation of foreign earnings by local government-linked companies and government-linked investment companies into the ringgit.
On the whole, Tradeview Capital Sdn Bhd chief executive officer Ng Zhu Hann told StarBiz that importers with raw material costs in dollars and companies with large amounts of dollar-denominated debt are likely to report strong earnings for 3Q.
“For instance, poultry players may see some margin expansion because they import animal feed in dollars. Hence, the weaker dollar will benefit these firms. Moreover, the healthcare sector such as hospitals which have dollar-denominated debt will benefit from reduced financing costs.
“However, tech stocks are expected to post a weaker performance as a majority of their exports are denominated in dollars. This can be seen in Vitrox Corp Bhd
’s earnings where the impact of foreign exchange losses was quite severe due to the ringgit’s sudden strengthening,” he said.
Ng added earnings of the petrochemical industry are expected to be affected as well due to the ringgit’s strong showing in 3Q, as well as the slow recovery of the Chinese industry.
Meanwhile, defensive counters like REITs and banking, in particular the latter, are expected to continue to be the bright spots in profit delivery for 3Q.
Kevin Khaw Khai Sheng, research analyst at iFAST Capital said REITs will serve as a good buffer for investors to position ahead, while banking has always been quite resilient with the industry’s current accounts and savings accounts ratio remaining quite healthy at about 20% to 30%.
“The asset quality of banks is also nearing pre-Covid-19 pandemic levels. These indicators suggest that banks could serve as a strong proxy to reflect on a positively growing economy in Malaysia.
“Furthermore, recent activities in the construction sector show that construction companies have a higher order book. All this could translate into a growing loan portfolio for banks as well,” he said.
On the other hand, there is more of a mixed view on how the consumer and commodities sector will fare in the upcoming earnings season.
Khaw, for one, holds a neutral view for both.
“The plantation sector is influenced not only by domestic factors but also by developments abroad, including in Indonesia and larger demand markets like China and India.
“Crude palm oil prices have rallied recently, hence investors can consider upstream players such as Hap Seng Consolidated Bhd and Ta Ann Holdings Bhd, both of which have large exposure in Malaysia,” he said.
As for the consumer space, Khaw said factors like the uncertainty in whether tourists arrivals will see a substantial rebound, government measures like sugar taxes and negative measures for the poultry industry, continue to impact the sector.
Looking ahead, iFAST’s Khaw noted that investors will be closely watching global macro developments – particularly whether China will positively impact Malaysia’s economy and the direction of the Fed’s future moves – rather than focusing on domestic developments.
“Domestically, for the first half of the year, sectors linked to infrastructure, data centres and artificial intelligence have seen strong rallies in share prices. It was more of a thematic play for investors.
“However, coming to the second half of 2024, especially as we are approaching the end of the year, we think that investors might be more prudent by shifting from broad themes to closely monitoring the execution phase of government policies,” he said.
Khaw expects the ringgit to strengthen to 3.75 in 2025 against the dollar, underpinned by the fundamental value of the local unit supported by the recovery in electrical and electronic exports of the country. He noted the ringgit has actually been oversold for many months.
“Secondly, Bank Negara’s reserves are still quite elevated. Thirdly, although Budget 2025 did not provide excitement to the equity market, we can see that the government has the intention to broaden its revenue base, which is good for our bond market.
“Subsequently, this could turn into a positive catalyst for the ringgit as well.
“These positive catalysts have yet to translate into a stronger ringgit, which is why we believe the ringgit has more potential to strengthen in the coming year,” he said.
While the strengthening of the ringgit is bad news for exporters, Khaw said exporters are fine with a strengthening ringgit as long as it appreciates gradually, rather than the sharp spike seen a few months ago.
“As exporters, they can also hedge their ringgit position. What they want is the gradual strengthening of the ringgit. For the third quarter, earnings may be affected due to the rapid appreciation in the ringgit.
“However, looking ahead to 4Q and next year, I do not expect the ringgit’s strength to be a major factor for corporate performance.
“We anticipate the ringgit’s movement to be more gradual, which would limit any negative impact,” he said.
