Published January 12, 2009

The night falls on Q4

Size of provisions may provide downward surprises despite lowered expectations

By JAMIE LEE

	Email this article
	Print article
	Feedback

(SINGAPORE) They say it's the darkest before dawn - so the night starts here. Welcome to the Q4 earnings season.

As Singapore and the rest of the world burrow into recession, poor Q4 2008 results are a foregone conclusion, although analysts say the size of provisions could still shock.

And given the dismal outlook for this year, FY2009 corporate profits would also go into free-fall, with analysts pointing out that in Singapore and Asia, earnings per share (EPS) - the common measure of corporate profitability - have yet to hit Asian financial crisis levels.

Merrill Lynch, for one, has argued that market estimates for the EPS for Asian companies are still 'lofty'.

'Consensus EPS numbers for Asian companies . . . must fall further,' said the US bank in a report, noting that EPS had 'vanished' during the Asian crisis.

Companies with a Dec 31 financial year-end will begin reporting their Q408 and FY08 results this week. All eyes will be on the banks, the property players, and the marine groups - sectors that have been hit hard by the economic crisis. The Keppel group and the real estate investment trusts or Reits will be among the first companies to announce their results.

Citi Investment Research expects EPS to contract 9.3 per cent for FY08 for the Singapore stocks it covers, and sees a further EPS drop of 10.4 per cent for FY09. In its recent Singapore equity strategy report, it also said that Q408 earnings are likely to disappoint.

Lowered expectations may not spare the market from nasty surprises. 'Downside surprises may still emerge, particularly from provisions,' Citi noted, adding that property companies may 'easily go into losses' if provisions are made for lower valuations for land or projects acquired at the peak of the cycle. It has a 'sell' call on the sector.

Others expect to see provisions by property firms in the middle of this year rather than in the Q4 results. 'If you look at how the historical trend has been, provisions usually occur in the year after the crisis year,' said analyst Brandon Lee from DMG & Partners Securities. 'Because there is a lack of transactions for 2008, it could be hard for management and auditors to come up with a consensus on how a piece of land should be valued.'

He added that high-end projects and developments overseas, such as in China, could also be deferred by property firms here.

This has already begun - CapitaCommercial Trust (CCT) said it would abandon its plans to re-develop the Market Street car park into a Grade A office and commercial building.

While CCT's announcement that it had secured a three-year loan of up to $580 million to refinance borrowings due in March has allayed some concerns of a credit crunch, the expected rise in funding costs, the fall in rentals and the lack of acquisitions are likely to drag down the performance of Reits, analysts say.

As for the banks, Citi noted that while the market has factored in slowing loan growth and higher provisions, the impact of low interest rates and flat yield curves on net interest margins has not come into play.

Macquarie Research expects DBS to post a relatively high loan loss provision for Q408 - although this may be lower than Q308's $319 million impairment charge for credit and other losses. It expects DBS to report a Q408 net profit of $233 million, about half the $491 million profit reported a year ago. DBS is expected to chalk up a FY08 net profit of $1.87 billion, compared with $2.28 billion in FY07, said Macquarie, which still rates the bank as 'outperform'.

Sector peer United Overseas Bank (UOB) was downgraded to 'neutral' from 'overweight' by analysts at JP Morgan in a Dec 30 report on fears of dwindling SME credit quality.

'The problem could be particularly acute given negative trends in global trade,' wrote analysts Harsh Wardhan Modi and Sunil Garg. 'We expect Q408 results to give early signs of asset quality trends over 2009.' JP Morgan expects UOB to make loan loss provisions of $198 million for Q408 and $524 million for FY08.

In the marine sector, the news has mostly been of bad debts and cancelled or delayed orders for ship builders and oil-and-gas players.

Cosco Corporation has already warned of a lower net profit in FY08, which CIMB-GK analyst Lim Siew Khee expects to translate to a $16 million loss for Q408, noting that 21 vessel deliveries were postponed in the fourth quarter alone.

Bigwig Keppel Corp could be buffered by earnings from its non-oil and gas businesses, said DMG analyst Serene Lim, who favours Keppel over Sembcorp Marine and expects Keppel's FY08 net profit to hit $927 million, down 9.6 per cent from FY07's $1.03 billion. She has a 'neutral' call on the sector.

As for the technology sector - which has seen some speculative play on takeover hopes - CIMB-GK analyst Jonathan Ng told BT that most tech plays would report earnings decline in Q408, although he is looking for businesses to stabilise in the third quarter of FY09. Inventory levels and working capital would be key, he added.

The telecommunications sector - which is typically more stable when compared with other sectors - is still set to see some margin pressure, said Nomura in a report on MobileOne (M1).

M1 is heading into the latest fiscal year with a new management following the surprise resignation of former CEO Neil Montefiore, which Nomura analysts Sachin Gupta and B Roshan Raj argue could signal M1's shift from a pure mobile play.