Gloomy forecast for earnings season

Q3 results likely to be dragged down by weak data, slowing growth and interest rate jitters

Among the factors that weigh down corporate earnings is uncertainty over an interest rate hike by the US Federal Reserve (left), analysts say.
Among the factors that weigh down corporate earnings is uncertainty over an interest rate hike by the US Federal Reserve, analysts say.PHOTO: AGENCE FRANCE-PRESSE

The corporate earnings season is coming round again but the overall picture is not expected to be pretty.

Headwinds from a slew of weak Singapore economic data, slowing Chinese and global growth and uncertainty over the US Federal Reserve interest rate hike are expected to weigh heavily on upcoming third-quarter results, analysts say.

Some preliminary clues as to how Singapore Inc has performed may be gleaned from this week's release of the Monetary Authority of Singapore's (MAS) semi-annual monetary policy decision and advance estimates of Singapore's third-quarter economic data.

Pointing to worrying signs for manufacturing companies, Citigroup economist Kit Wei Zheng noted that a manufacturing recession is "likely inevitable, with July- August industrial production levels showing a sequential contraction for the second straight quarter".

"We do not expect a major turnaround in September, given continued signs of distress in recent newsflow on plant closures and receiverships in the petrochemicals and food manufacturing sectors. Construction also likely contracted sequentially as July-August progress payments were 1.5 per cent below the second quarter's. That said, manufacturing and construction alone do not paint the entire growth picture as they are only about 18 per cent and 4.8 per cent of GDP respectively," Mr Kit said.

"A third-quarter technical recession may be avoided on growth in services, and 2015 growth should not be significantly lower than MAS' implicit 2.5 per cent forecast in April. That said, we note that improvement in third-quarter trading activities may not be sustained," he added.

Local banks are expected to post good earnings growth despite the current environment of slower economic growth due to expanding net interest margins, Nomura Global Markets Research analysts Jaj Singh and Manjith Nair said.

"We continue to like Singapore banks because of their strong balance sheets, sustainable dividends, and benefits from rising interest rates position them to withstand current headwinds," they said.

"We expect Singapore banks to enjoy strong operating leverage over the next three years as their assets get repriced faster and in a bigger magnitude, compared to their liabilities. This could, however, come under threat if their cost of funding starts to rise significantly either because of competition from foreign banks, or as their current and savings account deposits start to migrate towards more expensive time deposits."

The telecommunications sector is expected to "possess defensive strength" during recessions, UOB KayHian analyst Jonathan Koh said.

"Telcos recorded positive net additions and post-paid mobile subscribers increased on a year-on- year basis during the global financial crisis. However, post-paid average revenue per user declined 5 per cent to 15 per cent year on year due to lower contributions from roaming as a result of cutbacks on travelling for both business and leisure," he added.

Property developers' earnings will likely continue to be under pressure due to tepid sales and cooling measures. No respite is in sight, with the Government rejecting developers' appeal to extend project completion deadlines, Maybank Kim Eng analyst Derrick Heng said.

"Given a challenging market, development risks could increase as they approach their project deadline of five years... We expect further downward pressure on home prices, with the biggest downside for the mass market.

"We believe that this would set the stage for a lifting of property cooling measures in 2016. While a change in measures may not necessarily arrest home-price declines, we believe it could trigger a rebound in sales volume, removing a key overhang for developers," he said.

Meanwhile, third-quarter earnings of the oil and gas industry are expected to continue to be weak, with the operating environment still a challenge as global oversupply weighs on oil prices. Looking forward, analysts see major oil companies reducing their spending on exploration and development, and shifting their focus to extraction and production-related activities.

Signalling challenges in the sector, some of OCBC's oil and gas exposure, which is mainly to oil supply vessels and oil rigs, are being classified as non-performing loans because its clients are renegotiating to lower charter rates, and asking for the loans to be restructured, said Nomura's Mr Singh.

A version of this article appeared in the print edition of The Straits Times on October 12, 2015, with the headline 'Gloomy forecast for earnings season'. Subscribe