Higher wages, lower energy subsidies crimpt profits in M'sia

Analysts feel that the rising cost of delivering goods and services was evident as companies saw their profit margins shrink.

 

For instance, Telekom Malaysia Bhd (TM)’s net profit for its second quarter came in flat at 425 million ringgit (US$134.8 million), as operating costs shot up 8.9 per cent, which is faster than the 8 per cent growth in revenue.

 

CIMB Research expects TM’s profit margin to decline further in the coming quarters.

 

“A negative surprise for the market was the significant increase in costs during the quarter,’’ CIMB Research said.

 

Tan Chong Motor Holdings Bhd also disappointed, with RHB Research Institute expecting a “washout” year for the carmaker due to margin compression amid intense competition in the domestic market.

 

Other companies, spanning industries such as oil and gas, banking and manufacturing, are also feeling the pinch, even as sales growth continues to remain strong.

 

The trend, analysts said, would continue into the third quarter.

 

“The slack in earnings seen in most listed companies was not due to a drop in sales, but rather cost pressures as the triple effect of the subsidy rationalisation, minimum wages and higher energy costs, such as electricity, kicked in to profit and loss statements and this saw a pronounced effect for the quarter,” Interpacific head of research Pong Teng Siew said.

 

“Expectations of earnings had not been matched, and there was a premature anticipation of better earnings for the quarter,” he added.

 

The market may have been too bullish at the start of the year in predicting robust earnings growth, largely on expectation that firms will benefit from a fast-expanding economy.

 

For the first time since 2009, Malaysia’s economy grew at faster rate compared with its neighbours.

 

Gross domestic product (GDP) accelerated at a blistering pace of 6.4 per cent in the second quarter after a strong 6.2 per cent expansion in the first three months of the year.

 

“We have seen very good GDP numbers in the first half, but earnings continue to remain weak and this trend could continue into the third quarter,’’ Etiqa Insurance and Takaful head of research Chris Eng. 

 

“Hopefully, this has already been reflected on consensus expectations.’’

 

The flipside of the strong economic growth was the possibility of further hikes in interest rates by the Central Bank which may dampen consumer demand further and raise borrowing costs prematurely, an economist said.

 

The central bank, on July 10, raised the overnight policy rate (OPR) by 25 basis point to 3.25 per cent, the first rate hike since May 2011. The market expects another 25 basis point hike before the end of the year.

 

Investment house Areca Capital Sdn Bhd CEO Danny Wong was more sanguine, saying the slack in earnings had already been anticipated by the market given that factors such as the subsidy rationalisation, that drove costs up in 2014, had been announced in the year before.

 

“The earnings season was not so bad, actually,” Wong said.

 

Wong said he expected the second half to be better than the first, premised on higher contract flows being realised given the economy had continued to grow strongly. 

 

“Some of these may have some lagging spillover effect, which may be seen in the second half of the year,” he said.

 

Despite the sluggish earnings growth in the first half, Etiqa’s Eng expects earnings growth to be at a respectable rate of between 5 per cent and 7 per cent this year.

 

“Given that we are already nearing the consensus KLCI year-end target of 1,950, analysts here would likely have less expectations to be bullish moving forward,” Eng said.

 

“I believe the markets will be susceptible to volatilities from time to time, but the FBM KLCI should be able to breach the 1,900 before the end of the year,” he added.

 

The FTSE Bursa Malaysia KL Composite Index stood at 1,866 points last Friday and was little-changed since the start of the year. At the current level, the market is valued at 17 times earnings.