KUALA LUMPUR: Corporate earnings for the first quarter ended March, 31, 2011 — which are due by month-end — are likely to be influenced by several factors including the strengthening ringgit, fluctuating commodity and raw material prices, and to a certain extent, geopolitical events.

Sectors that are expected to report better earnings are plantations, nitrile rubber glove makers, oil and gas (O&G), and timber-related products while airlines could see a dip in earnings.

ECM Libra Investment Research head Bernard Ching said despite crude palm oil (CPO) price trending lower of late, plantation companies were still expected to post quarter-on-quarter improvement in 1Q11 earnings as the average CPO price for 1Q11 of RM3,649 per tonne was 12% higher than 4Q10’s average price of RM3,268 per tonne.

As for airlines, Ching said jet fuel had increased from an average US$99 (RM297) per barrel in 4Q10 to average of US$121 per barrel in 1Q11.

“As fuel cost makes up between 40% and 50% of airlines’ operating expenses, we expect Malaysia Airlines and AirAsia to report sequentially lower earnings despite strong passenger traffic growth,” he said.

Meanwhile, banks are expected to continue reporting sequentially stronger numbers, given decent loans growth, although banks with exposure in Indonesia will face net interest margin (NIM) compression due to intensifying competition in the mortgage market, he said.

On the glove sector, Ching said the results were expected to be mixed.

“Producers which focused on latex gloves such as Top Glove and Supermax are expected to be adversely impacted by high latex prices in 1Q11.

“On the other hand, nitrile glove producers such as Hartalega reported strong earnings on the back of relatively stable raw material prices,” he said.

On the impact of the earthquake in Japan on Malaysian companies, Ching said auto players would be adversely impacted by supply chain disruption in Japan following the disaster in mid-March, and this would likely be reflected in 2Q.

“Plywood manufacturers are expected to benefit from higher prices, demand will likely to pick up significantly only toward end of the year when re-construction activities commences,” he said.

Meanwhile, MIDF Research said a strengthening ringgit would provide a degree of natural hedge for plantation companies.

It said while the stronger ringgit may dampen exports to US dollar-denominated purchasers, the offsetting factor was that a stronger ringgit was expected to have a positive impact on cost of production as it would reduce fertiliser costs, which are greenback-denominated.

The fertiliser application accounts for about 30%-40% of production costs, it said.

The research house said rising commodity prices, particularly crude oil, tends to be positive for the O&G service sector as it would encourage more oil exploration activities by the oil majors.

“As such, we can expect more jobs orders for upstream O&G services providers such as Malaysia Marine and Heavy Engineering (MMHE) and Kencana,” it said.

MIDF Research said glove makers that were typically with cost-plus structure were unlikely to be much impacted.

“A strengthening ringgit will not pose a blockade to the industry players as they purchase raw materials (latex)  in US dollar and sell gloves in US dollars, creating a natural  hedge.  

“Glove manufacturers also have the option to adjust their selling prices to accommodate the fluctuation of the ringgit against the US dollar,” it said.

MIDF Research said that to-date, of the corporate earnings announced so far, 29% came in higher than expected while 42% were in line and the balance 29% were lower than expectations.

Meanwhile, commenting on the prospects for 2Q earnings, MIDF Research said timber-related players and automotive companies could be in focus following the earthquake that hit Japan in March.

“During the period of reconstruction, we envisage plywood imports to be more substantial, given that 25% to 30% of Japan’s domestic plywood production capacity is affected by the earthquake.

“Malaysian timber companies will stand to gain as they are the largest plywood exporter, accounting for 48% of Japan’s total plywood,” it said.

The research house said Malaysia may be a beneficiary if Japanese automotive players decide to further diversify their Tier-1 supply chain to a more “tectonically” stable region.

The scale of the March 2011 tragedy may be the catalyst that would force Japanese manufacturers to do so, it said.

“We believe Malaysia can become a favoured nation by having more accommodative guidelines under the National Automotive Policy (NAP) to entice such value-added FDIs.

“At the moment, the preferred nations for automotive FDI are Thailand and Indonesia,” it said.