THE listed companies' financial performance in the first three months of the year were unspectacular, but there are enough reasons to look forward to the corporate results for the coming months. Earnings for the first quarter of the year largely came within expectations of research houses, although analysts noted a few disappointments in the numbers posted by building materials, industrial and oil and gas (O&G) companies.

OSK Research head Chris Eng says the first-quarter results disappointed on poor earnings from construction and steel stocks towards the end. “We should see better second-quarter results as the first quarter is typically weak for sectors such as steel, construction and oil and gas. Our 1,680 points year-end target for the FBM KLCI remains and we see merger and acquisition excitement among banks as one of the catalysts to achieve it,” he says in a report.

“While we had expected first-quarter earnings to finally recover after slipping for the past 12 months, companies reported disappointing earnings again towards the tailend of the reporting season, particularly among small caps in the construction and steel sectors, combined with poor results from the O&G and technology sectors,” he said.

Eng adds that the first-quarter results were better than those seen in the fourth quarter of last year, with some 75% (of the stocks under its coverage) either meeting or exceeding expectations versus 68% in the previous quarter. While the small caps continued to disappoint, they had a better quarter than in fourth quarter of last year, with 66% versus 62% either outperforming or meeting expectations.

“Surprisingly, the upgrade to downgrade ratio fell further to 0.58 times but its effect on the FBM KLCI was muted as a large number of downgrades were seen in the steel, construction, transport and technology sectors, which had less of an impact compared to the upgrades, which were seen in the plantation sector,” Eng says.

Analysts agree that the consumer sector for the first quarter was strong due to the festivities.

TA Securities points out that out of the 87 companies under its coverage, 54 companies or 62% reported earnings that were within expectations.

“This is a marked improvement from the 58% recorded in the preceding quarter and considerably higher compared with the long-term average of 54%. All in, 21 companies reported earnings that were below our expectations, mainly coming from O&G, transportation, industrial and building material sectors. Meanwhile, 12 companies beat our expectations, mainly comprising consumer, O&G and property sectors,” says the stockbroking firm.

TA Securities adds that industrial (mostly glove manufacturers) and technology companies were clearly the biggest losers from the strengthening of the ringgit against the US dollar.

“Based on our discussions with the management of some of these companies, we understand that demand had actually improved in tandem with growth in global economy but the impact was offset by lower revenue translation to the ringgit. The industrial sector, on the other hand, particularly glove manufacturers, were doubly impacted as margins were negatively impacted by rising commodity prices,” it explains.

Meanwhile, CIMB Research says the first-quarter results did produce some negative surprises, with its earnings revision ratio (upgrades/downgrades) deteriorating from 0.8 times to 0.6 times and calendar year 2011 earnings per share (EPS) being cut by 3%.

“The earnings downgrades came mainly from larger-cap stocks in the telco, airlines and shipping sectors. We are especially disappointed that 2011 EPS growth is down to high single digits, which would partly explain why the KLCI has been lethargic year-to-date (YTD),” CIMB Research head of research Terence Wong says in his results wrap-up report.

Wong adds that the disappointing results season and year's three black swan events explain why the KLCI is relatively unchanged YTD.

“We continue to be overweight' on Malaysia as we believe that the index will perform better in the second half as it rides on positive newsflow from the Economic Transformation Programme, and potentially better earnings seasons once the execution of Entry Point Projects spills over to corporate earnings,” he says. The research outfit's year-end KLCI target remains at 1,700 points, based on an unchanged price to earnings target of 14.5 times.

ECM Libra Investment Research says positive earnings surprises made up 18% of stocks under its coverage, while negative earnings surprises have increased this quarter, with 24% of stocks under coverage failing to meet estimates as compared to 18% in the preceding quarter.

“There were 12 stocks under our coverage with negative earnings surprises. Both airlines (AirAsia Bhd and MAS) posted lower numbers due to higher fuel prices. Also, UMW Holdings Bhd'd numbers were affected by a production shortfall and Lafarge Malayan Cement Bhd saw a higher effective tax rate coupled with seasonally lower demand for cement,” it adds.

Other companies with negative earnings surprises are Sunway Holdings Bhd, which experienced some project deferments, and the loss-making Pelikan International Corp Bhd. In the O&G sector, Alam Maritim Resources Bhd and KNM Group Bhd reported poor numbers, with the latter affected by a case of low-margin older backlog orders. Alam Maritim was hampered by lower fleet utilisation and maintenance downtime

“Despite higher crude palm oil prices, IJM Plantations Bhd and Sime Darby Bhd still underperformed in the plantation sector due to large drops in fresh fruit bunch production,” says ECM Libra.