Lower Growth for Malaysian Companies

BT: Three research firms are set to cut their estimates to reflect expectations of slower economic growth for Malaysia and seven others are sticking to their forecasts for now. AT LEAST three investment research firms, including Citigroup, are predicting a gloomier earnings growth outlook for Malaysian companies this year, a Business Times poll of 10 firms shows. These firms have, or are planning to, cut their forecast numbers further.The rest, however, said they were sticking to their current forecasts, but were keeping a close watch on factors that could derail growth.The casual poll revealed growth expectations that ranged from as low as seven per cent to as high as 18 per cent. (see table below)

Citigroup, whose estimate came in at the lowest end of the range, said in a report on Monday that it had cut its growth projection for the third time since the end of October last year. "Removing exceptional items, we expect market earnings per share (EPS) to grow by 7.1 per cent in 2008," its analyst Choong Wai Kee said, adding that the latest cut reflected an earnings downgrade on Tenaga Nasional Bhd. The heads of two other local research houses, who declined to be named, said they were also preparing to cut their estimates to reflect expectations of slower economic growth this year. The cut would come from the construction and banking sectors, they added. However, seven other research firms, including Credit Suisse, CLSA Asia Pacific and CIMB, said they had no plans to revise their projections for now. Some had already cut their projections early this year or after the March 8 general election. "I'm still happy with Malaysian company earnings relative to other parts of the world, which are much more volatile," said Stephen Hagger, who heads Credit Suisse in Malaysia. He said this was because the earnings of Malaysian companies were very much more domestic-oriented and, thus, relatively shielded from external uncertainties. Those polled agreed that the star performers this year in terms of earnings growth would be companies involved in plantations and oil and gas. The banking sector, too, is expected to see decent growth although slower economic growth and capital market activities may render the industry less robust than in the previous year. According to Choong, the prices of stocks in certain sectors have already started factoring in lower growth rates for 2008. "Since end-October 2007, we have been advocating a defensive strategy by overweighting sectors of a defensive nature with clear earnings visibility. Until we see further earnings downgrades and target price cuts by (others), the market has yet to hit bottom," he said. In his report, Choong said the consensus projection was for EPS growth of 10-12 per cent.

MyTake: The investment houses' estimates are at best estimates only as the size of samples and business sectors selected may be loopsided and biased, egs oil and gas stocks probably have profit margin problem due to higher steel rod prices while steel millers will have to deal with coal and iron ore prices which may eat into their earnings etc. Plantation stocks would probably making a windfall due to the recent rise and rise of crude palm oil prices. I do agree that the earnings forecast needs to be lowered based on the following possibilities. For the record, Malaysia's GDP for 2006 was 5.9%, 6.3% in 2007 and expected to grow about 6% in 2008. Basically, the country's private consumption has been the main engine of growth but it is due to slow down due to slower spending. A sharp recovery in export performance is unlikely; given possible economic downturn in other large economies. There is a possible downside risk due to deeper global economic slowdown, higher inflationary pressure and higher political uncertainty after the recently concluded general election. There is a possibility that private fixed investment which is needed to propel several mega projects in the economic corridors of the 9MP may be downsized or curtailed. We will probably have to let all these events played out or corrected before we can move faster again....it definitely will....