Published April 15, 2009

Q1 earnings: tech sector may put up a poor show

Economy may have bottomed out but not corporate earnings: analysts

By JAMIE LEE

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WHILE the economy could have bottomed out in the last quarter, first-quarter corporate earnings - which will start coming in from about 400 companies this month - may not have hit the floor, analysts say.

Ms Ling: Businesses need to see signs of recovery before they begin investing

The economy took a hard knock, with quarterly trade figures showing a record 11.5 per cent contraction from a year ago.

Ugly bruises will show up in the technology sector for the first quarter - also typically the weakest - as manufacturing output in January and February slumped 26.2 per cent due to drags from the sector.

The industry saw the sharpest fall of about 40 per cent from a year ago.

'I think it's clear that the inventories of electronic components, particularly memory chips, have reached a certain low threshold,' said Barclays economist Leong Wai Ho.

'This is resulting in inventory replenishments in Taiwan and Korea, which will filter down to fabs in Singapore.'

But it doesn't mean that the technology sector has hit bottom as it is still dependent on the level of consumption, said OCBC economist Selena Ling.

'You need consumer spending to turn around,' she told BT, adding that businesses need to see a clear sign of recovery before they begin investing in capital expenditure.

Turning to financial services, loan figures in February represented the fourth consecutive month of decline.

Total loans that month stood at $271 billion - down 0.2 per cent from a month ago - which pointed to continued cautious lending by banks, said DMG & Partners Securities analyst Leng Seng Choon in a note.

And while the government's credit guarantees have stemmed a larger fall in business lending, analysts note that it would take a while before business loan growth recovers.

'It should stop coming off. Let's wait to see that first,' said Mr Leong, noting the leverage ratios among manufacturers in the region are quite low.

'I'm not sure whether they are reaching the point where they need to start borrowing again. The borrowing decision has always lagged, because you expect to see a pick-up in export orders (before) capital raising. That requires a sustained level of pick-up.'

More book value declines are also on the cards for banks here, with JPMorgan analyst Harsh Wardhan Modi saying that UOB could see declines of 7-8 per cent in the first quarter from the earlier quarter. This is highest when compared with DBS and OCBC, which are both expected to see one per cent falls.

For tourism players - such as hotels, airlines and retailers - rising unemployment prospects in neighbouring economies will be one of the key drags on the industry, said Citi economist Kit Wei Zheng in a client note.

CIMB-GK puts Singapore Airlines among its top 'sells' for the country, noting in a recent report that 'unlike Sars, this is not just one quarter of pain'.

Unemployment could also impact the property market later, which is being cushioned now by some buying interest in the mass market segment - from those dubbed as 'HDB upgraders', Mr Kit added.

'Once labour market weakness becomes more prevalent, there is a good chance that the current mass market housing rally could fade,' he said, adding that those in the middle income group could take a bigger hit when job losses in the manufacturing and financial sectors come into play.

DMG analyst Brandon Lee told BT that while players such as City Developments, UOL and F&N should benefit from some of the positive mass-market sales, the sector will need to brace for some provisions that should come into play in the second quarter.

The sector is unlikely to see growth from M&As, he added, with companies such as CapitaLand looking to buy up landbanks for future developments instead.

In the real estate investment trust (Reits) space, OCBC analyst Meenal Kumar is watching how earnings from the first half of the year would be impacted by economic events that are 'slowly (filtering) through'. Besides looking at post-Chinese New Year retail activity and vacancy levels at industrial Reits, she would also be looking at refinancing issues.

As for the rig-building sector, it will still see robust numbers in the first quarter from orders clinched a few years back, Kim Eng analyst Rohan Suppiah said.

But he noted that even with potential new orders coming from Brazilian customers such as Petrobras, these will translate to smaller profit margins for tipped bidders Keppel and Sembcorp Marine as customers will not pay top dollar.