By Chan Quan Min
Some analysts are finding there is little to entice investors in the plantations and construction industries.
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As Kuala Lumpur falters, Shanghai booms. China’s main stock market index saw a 20% surge in just a matter of two weeks between November and December. Chinese media have dubbed the phenomena “super-bull.”
But the super-bull was more a result of policy change than anything else. China’s central bank has just started a cycle of loose monetary policy and a trading link between the Hong Kong and Shanghai exchanges only began operating from last month.
The trading link allows foreign investors to buy put money in Chinese companies via Hong Kong, the special administrative region with perhaps the world’s freest economy. Foreign funds are locked out of investing directly in China’s stock market and the link via Hong Kong is as close to the China market as they can get for now.
Unlike China, Malaysia will close the year with easily the worst performing stock market in Southeast Asia and one of the worst in the wider Asian region.
The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) started the year above the 1,800-point mark but has now fallen to well below that, most of the losses taking place in the last three to four weeks. Near closing time on Dec 18, 2014, the benchmark index stood at just under 1,700 points.
The mood for 2015, unfortunate for local investors used to six years of a bull market, is solemn. “There are few compelling investment themes or new catalysts to drive the market higher,” lamented a market analyst at a local bank.
“The lacklustre corporate earnings growth, combined with relatively expensive market valuations have resulted in foreign funds being underweight, or at best neutral on Malaysia for much of the past year.”
Expectations being cut
TA Securities, one of the few standalone stockbrokers left, said they had to make downgrades to their 2014 and 2015 earnings forecasts for companies under their coverage four times over. The latest cut came on Dec 2, 2014.
Bank-backed research houses have also made earnings cuts to a large number of the publicly listed companies under their coverage.
The repeated earnings downgrades point to weakening expectations for Malaysian corporations in the coming year. “We now project calendar year 2014 earnings to decline by 1.2% year-on-year before rebounding with 12% growth in calendar year 2015,” said TA Securities research arm in a recent report.
The sectors that saw the biggest downgrades were plantations, oil & gas, media, healthcare and property. Earnings in the plantations sector had the largest cuts, by between 10% and 12%.
No excitement in plantations
Palm oil companies have been reporting weak earnings after crude palm oil prices fell to under RM2,000 per metric tonne in August on fears of an edible oil glut from a bumper soybean harvest in North America.
Crude palm oil is now going for between RM2,100 and RM2,200 per metric tone, still under the two-year average. Current prices are sufficient for palm oil producers to turn a profit but only just scraping past.
The two largest oil palm plantations owners, Sime Darby and Felda Global Ventures (FGV) have seen usually wide profit margins whittled down on persistently low crude oil prices since mid-year.
Inevitably, market valuations have also been hit. FGV shares traded on the local bourse are worth just RM2.30 per share, down 48% from the initial public offering retail price of RM4.45.
To add to plantation companies’ woes, TA Securities has singled out IOI Corp and FGV to underperform because of “lower than expected downstream earnings.”
Hardest hit are the biodiesel producers following a 45% fall in the price of crude oil. Brent crude, one of the most commonly used benchmarks, is now trading at US$60 (RM208) per barrel.
“The weaker crude oil price has wiped out biodiesel margin and could impact non-mandatory usage. Net impact on palm oil demand will probably be muted given the compensatory effect from Indonesia’s significant increase in mandatory biodiesel usage in 2015,” a recent RHB Research report found.
The research house kept a ‘neutral’ call on the sector with limited opportunity for “selective buys.”
It is telling of the sorry state the plantations sector is in when the single key catalyst for palm oil, according to RHB Research, is “weather” since “food demand growth remains muted and non-mandatory biodiesel usage slows.”
“With only a single potential driver going into 2015, being bullish currently on the sector is a risky proposition.”
“Nevertheless, the weather is traditionally the single biggest driver of agricultural prices and by itself is sufficient to result in a sustained upswing in prices,” RHB research said.
Construction sector called ‘underweight’
The boom in big construction projects in the past few years have only been good to listed construction players but analysts fear a slowdown in the industry in 2015.
“While the local construction industry is expected to remain stable, given the high base after the industry has experienced strong growth in recent years, we expect the growth in the construction industry to taper off, especially the civil works,” said TA Securities analysts.
“Furthermore, if the crude oil price remains at current low levels, it may affect government’s spending in infrastructure works, which in turn will affect the jobs flow in the construction industry.”
Shamsul Azhar Abbas
Persistently low crude oil prices could erase up to RM25 billion in lower Petronas dividends, taxes and royalties if Petronas CEO Shamsul Azhar Abbas has his way.
However, the final decision on the dividend payout lies ultimately with Prime Minister Najib Abdul Razak, who has an interest to achieve a 3% budget deficit next year. Government officials have claimed that the final say with the dividend payout rests with the cabinet.
Interestingly, the CEO of the public servants retirement fund Kumpulan Wang Persaraan (KWAP) told Bloomberg in an interview last week of their preference for plantations and construction shares, the same sectors some analysts consider to be dull for next year. Perhaps this suggests that some excitement could be in store instead.
Yesterday: Big isn’t always better: A tale of Bursa’s small caps
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