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ANALYSTS fear the local profit reporting season, which kicks off this week, will not be a pretty one.
As the economic gloom deepens, they expect inflationary pressures - such as surging costs for labour, shipping and materials - to take a heavy toll on the results of some Singapore companies.
Higher borrowing costs and sharply higher crude oil prices - which averaged US$123.80 (S$167.30) a barrel in the second quarter, up from US$97.80 in the first quarter - will also hurt profit margins.
Analysts say downgrades of earnings forecasts are likely to be made in the wake of the second- quarter reporting season.
Commodity costs, which have risen 23 times faster than export prices since the start of the year, and sharply slowing sales growth 'should lead to a litany of misses' at the earnings per share level, said Citigroup strategist Markus Rosgen in a recent report.
Brokerages are trimming expectations in anticipation of weaker profit growth this year. Growth forecasts are being slashed from mid-double digits early in the year to single digits.
CIMB-GK has cut its overall average earnings growth forecast for listed companies under its coverage this year from more than 12 per cent to 7 per cent.
Similarly, DBS Vickers has projected 7 per cent growth for Straits Times Index component stocks. It has trimmed predictions for companies that it covers - by 2.2 percentage points to 11.6 per cent - said research head Janice Chua.
Westcomb Securities research head Goh Mou Lih said: 'It's very likely that we will see more downward revisions in earnings. This is not likely to go away in the third quarter if oil prices continue to surge from current levels.'
As they hunt for stocks to buy, analysts will be looking for companies with the ability to pass on the higher costs to customers, thereby preserving their profit margins.
Though profit downgrades are expected, analysts feel they will not be as drastic as those made in the first quarter. CIMB-GK research head Kenneth Ng noted that investors would have grown acclimatised as they moved 'from good to bad weather'.
Sectors likely to see further downgrades include export-related ones such as manufacturing as they are more exposed to the global economic slowdown, said Mr Ng.
Property is also facing a slowdown in sales and assets could be marked down, he added.
Transport companies are being increasingly hobbled by higher fuel costs. Slowing cargo and passenger demand as well as continuing high fuel costs are likely to weigh on Singapore Airlines' earnings later in the year, said Citigroup in a report last week.
So far, smaller firms seem to have suffered the most, judging from the spate of profit warnings issued to date.
Rising steel costs have hurt Catalist-listed AA Group Holdings, which makes high-precision loudspeaker parts. And a slowing United States market has dampened earnings at Manufacturing Integration Technology, which makes equipment for the semiconductor industry.
One of the latest Singapore companies to feel the pinch is furniture-maker Koda. Last week, it warned of weaker full-year profits given lower-than-expected sales to the US, which accounts for 40 per cent of its sales.
Despite turmoil in the global financial sector, Singapore's banks are likely to be spared, say analysts.
'The fundamentals of the Singapore banks remain firm, with their high dividend yields adding a defensive element,' said Kim Eng analyst Pauline Lee, who expects local lenders to post flat earnings compared with a year ago.
In the offshore marine sector, greater project recognition in the second quarter could offset rising steel costs.
yanghw@sph.com.sg
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