PETALING JAYA (Sept 4, 2011): Following disappointing financial results for the second quarter of 2011 (Q2), analysts are cutting their earnings forecast for Malaysian companies by up to 5% for 2011/12.

HwangDBS Vickers Research Sdn Bhd said the proportion of companies which reported disappointing earnings in Q2 was quite similar to the Q1 results season, while the percentage of those that beat expectations remained low.

Notable disappointments were largely the result of stock-specific issues such as sizeable losses from Tenaga Nasional Bhd and Malaysia Airlines.

"With the slowdown in economic growth, there could be risk to our earnings projections. In the 2008-09 financial crisis, our 2009 earnings were cut by 18%. At that time, the impact on earnings was compounded by a collapse in crude palm oil (CPO) and oil prices," the research firm said in a report.

"Without these factors, the extent of earnings risk should be less than in 2008," it said, adding that it is cutting its net profit forecast by 2-5% for 2011/12 largely for stock-specific issues.

"With the earnings cut for our stock universe, our year-end FBM KLCI target is lowered to 1,520 points from 1,730 previously," said HwangDBS Vickers.

"Q2 earnings season was the second in succession which we deem to have disappointed as negative earnings surprises exceeded positive earnings surprises," said ECM Libra Investment Research, adding that the earnings growth momentum is also waning as it cut 2011 and 2012 aggregate earnings of stocks under its coverage by 2.3% and 2.1% respectively.

It has also downgraded its year-end FBM KLCI target to 1,450 points from 1,650.

ECM Libra's top stock picks are Axis REIT, Berjaya Sports Toto, CapitaMalls Malaysia Trust, Axiata, AirAsia, Parkson, QL Resources, Alam Maritim and Wah Seong.

"We are selective on growth stocks, preferring those which depend on domestic or regional demand which is more resilient as compared with export to advanced economies," it added.

OSK Research Sdn Bhd said despite the 6.5% drop in the FBM KLCI last month in line with the global sell-off in equities, it believes that the outlook on the global economy and the European sovereign debt crisis remains hazy and does not recommend aggressive bottom fishing as yet.

"Instead, we advise investors to stick to defensive stocks, with some rebound capacity, especially with Q2 earnings looking decidedly weak," it said.

"We foresee a 1-2% cut in our 17.1% earnings growth forecast for 2011 and 12.8% estimate for 2012. This will likely lead to a cut in our year-end 1,557-point KLCI target although we will likely leave our 2012 KLCI fair value of 1,466 points intact."

Pong Teng Siew, head of research at Jupiter Securities, said plantation stocks such as Sime Darby Bhd and Kuala Lumpur Kepong Bhd have delivered positive Q2 earnings on the back of higher CPO prices and strong demand for cooking oil.

He said there is potential for another strong year for the plantation sector on strong demand for the commodity, especially for palm kernel oil, and the outlook for the sector remains bullish as CPO prices are expected to sustain at the current level.

Meanwhile, HwangDBS Vickers favours more resilient sectors like telecommunications, gaming and plantation.

"In view of the slowdown, we would expect the government to push ahead with infrastructure project awards. As such, we remain keen on the construction sector with IJM Corp, Gamuda, WCT and MRCB as our stock picks, although high foreign shareholdings could result in high share price volatility," it said.

"We continue to like names with good domestic drivers and reasonable valuations such as Boustead Holdings, DRB-Hicom and Alliance Financial Group, which is the cheapest banking stock in our coverage."