Published November 18, 2008

Analysts swing axe at profit forecasts

From banks to property and tech stocks, almost no sector in the Singapore market is spared

By TEH HOOI LING

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(SINGAPORE) Analysts have accelerated their downgrades of corporate earnings following disappointing third-quarter results so far.

In the past 30 days, they have slashed 11.4 per cent off their forecasts of Singapore companies' earnings per share, data from StarMine shows. Just a month ago, they were trimming their forecasts by a mere 1.4 per cent.

'More than 90 per cent of the companies we cover have come in below our expectations,' Carmen Lee, head of OCBC Investment Research, said of Q3 results. 'The speed of deterioration took everyone by surprise. We've lowered our earnings forecasts and target prices for almost every stock we cover.'

Kenneth Ng, head of research at CIMB-GK, feels the same. 'Before the Q3 results, we were expecting market earnings to be flat in 2008 and up 10-11 per cent in 2009,' he said. 'Now we think overall earnings for 2008 will be down 6 per cent, and for 2009, a further decline of 14 per cent. Two consecutive years of earnings decline is typically what we expect to see during a recession.'

Fund managers too are slashing their earnings expectations for next year. Christopher Wong of Aberdeen Asset Management Asia said: 'We've been revising our forecast down as we go along. Now it looks like earnings are going to be down at least 20-30 per cent next year.'

Almost no sector is spared. Banks are suffering from higher provisions, weak interest income and bigger trading losses.

Property developers are registering weaker home sales locally and overseas. Technology stocks are suffering from foreign exchange losses and contracting gross margins.

Sales of China stocks have fallen off the cliff. Costs on the other hand, are climbing.

Even the supposedly defensive telecommunications service providers have disappointed.

CIMB's Mr Ng said: 'SingTel and M1 have shown weaker topline growth and higher subscriber acquisition costs.'

Data compiled by BT showed that the aggregate net earnings of the 332 Singapore listed companies, which have reported their third quarter earnings as of last Friday, fell 13 per cent compared with the same quarter last year. Net margins shrank to 7.3 per cent, from 11 per cent a year ago.

But as in any downturn, the smaller companies will have it worse. OCBC's Ms Lee said: 'While we are expecting a slowdown in the next two to three years for blue chips, we are beginning to question whether some of the smaller companies can remain viable.'

These companies are suffering multiple problems, she said. First, orders are not coming in. As a result, inventory is building up. That means more holding and financing costs. And to make matters worse, many can't get finance at the moment.

Aberdeen's Mr Wong said: 'It looks as though the sluggishness of the economy will hit pretty hard next year.' For one thing, banks' provisions will rise. And property companies are not expected to see a pick up in demand. The only respite is that the cost of materials and the cost of doing business has been coming down, said Mr Wong. 'It remains to be seen if that's sufficient to cushion falling demand.'

Despite the severity of forecast downgrades, it appears that StarMine's numbers may not have captured the full extent of bearish expectations. According to its data, Singapore corporations in aggregate are still seen only to suffer a mere 0.3 per cent decline in net earnings in the coming 12 months.

The numbers from StarMine, a company that tracks analysts' forecasts and rates their research performance, show that Singapore has seen the fifth-largest cuts in earnings forecasts among Asia-Pacific bourses.

Taiwan has suffered the biggest downgrades in the past 30 days. Its earnings per share have been slashed by a whopping 24.4 per cent. Accordingly, Taiwan has the worst earnings outlook among all Asian countries - corporate earnings are expected to decline 13 per cent in the next 12 months.

Japan comes next, with its corporate earnings forecasts having been cut 14.6 per cent in the past 30 days. Earnings in Indonesia and Thailand have been downgraded by 13.4 per cent and 12.5 per cent respectively.

So have prices factored in all the poor earnings? Aberdeen's Mr Wong said: 'They have factored in the downside in the next two years. But nobody knows how vicious the economy will turn south. Still, as a long-term investor, we are more excited about the market now than at any time in the past few years.'

Citigroup's head of research Chua Hak Bin expects the Straits Times Index to head towards 1,500 points. At that level, the trailing price-to-book value (PBV) would be about 0.9 times - a level that was breached briefly in October.

'At 1,500 the STI would be pricing in a recession worse than the 2001 tech and 2003 Sars recessions, but still above the valuation troughs of the 1998 Asian financial crisis, when trailing PBV reached 0.7 times,' he said in his latest strategy report.

'We find that bear markets typically do not bottom until the economy is at or past the worst quarter of a recession, which is likely to be some time in the first half of 2009.'