Published July 16, 2009

Q2 earnings may spring a happy surprise

Analysts bet on tech and property; still wary of S-chips

By CHEW XIANG

	Email this article
	Print article
	Feedback

(SINGAPORE) Companies are likely to post better- than-expected earnings as the second-quarter results season gets under way, analysts say.

'We think there could be upside surprises for earnings, largely coming from banks,' said Chua Hak Bin, Citigroup's head of Singapore research.

CIMB analyst Donald Chua said property counters are also likely to perform strongly. 'Interest in residential properties has been more organic than speculative, led by upgraders and local buyers,' he said in a report last week. 'Meaningful price cuts have also attracted some foreign demand.'

The tech sector could also throw up some surprises after three quarters of poor results, said analyst Jonathan Ng of CIMB. 'For sure, Q2 will be better than Q1 but most of the companies will still see year-on-year declines,' Mr Ng said. 'We think some of them will return to year-on-year gains only from Q4 onward.'

He is bullish about companies with 'strong free cash flow and strong balance sheets' such as Venture Corp, Meiban and Armstrong Industrial Corp.

Bullish quarterly growth estimates this week from the government show a recovery in manufacturing, albeit led by the highly volatile pharmaceuticals segment. Yet inventory restocking since mid-March has contributed to strong orders for local tech companies, Mr Ng said. 'A lot depends on the sell-through in the third quarter, if the economy stabilises and job losses aren't too heavy.'

Creative Tech and Chartered Semiconductor are still sell-calls, he said, but 'Chartered has left off a bit since, so we may be upgrading to a 'neutral',' he said.

For Citi's Mr Chua, the consensus forecasts for the three local banks are 'too gloomy' as they do not see much change from the first quarter. 'Loan growth is holding up far better compared to past recessions, while local banks are benefiting from repricing of loans and the pullback of foreign banks from corporate lending,' he said. 'The seizure in bond markets has shifted business towards direct bank lending, while the NPL (non-performing loan) cycle is turning out to be relatively benign.'

Sectors such as the oil- and-gas support industry 'could come on really strong' this quarter on the back of good orders, said Roger Tan of Sias Research. However, S-chips - China companies listed here - could disappoint as corporate governance issues are still present. Four S-chips issued profit warnings this week. 'I would be very cautious over their performance,' Mr Tan said. On the other hand, mass-market property counters should do well on the back of strong interest from HDB upgraders, he said.

Analysts say the wider economic picture supports stronger equity performance in the present quarter. A DBS report this week noted that the benchmark Straits Times Index 'has been in limbo for the past two weeks while awaiting H2 corporate guidance to come through'. Yet, it has 'shown resilience despite recent weaknesses in US indices and the volatility in property stocks'.

'We believe that this is because valuations have dipped closer to levels that mid- to long-term investors will consider buying in again, which is at 2,100,' DBS said. 'We believe that investors have not turned bearish but are just hoping to buy cheaper.'

A BCA report this week said equity prices face a critical test this quarter but could emerge stronger. 'Currently, there is an intense standoff between reflationary forces and debt-deflation pressures, creating corrective pressures on global stocks and risky assets. However, our bet is that reflationary policies will ultimately win out, allowing global equity prices to break higher in the coming months,' BCA said.