Published August 21, 2009

S'pore blue chips show their true colour

Sequential earnings reveal robustness in tough times

By JOYCE HOOI
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(SINGAPORE) For the heavyweights of the Straits Times Index (STI), it may finally be safe to emerge from the bunker, now that the dust from the downturn seems to have settled.

A quarter-on-quarter (q-o-q) earnings comparison of 19 blue-chip companies by BT found these heavyweights have been posting decidedly sturdy earnings in this era of unprecedented panic and losses.

BT also tracked earnings q-o-q to determine whether firms' positions had improved following the recession that started last September.

The q-o-q comparison of the 19 STI companies' results shows the worst may be over - for now at least.

In Q1, their combined net earnings increased 11 per cent q-o-q to $2.8 billion, with 10 posting higher profits than they did in the quarter before.

Despite the pessimism that pervaded the business environment well past March, Q2 brought even better tidings, with a robust 33.3 per cent increase in the combined earnings of the 19 companies to $3.8 billion. In that quarter, 13 reported higher earnings q-o-q, swelling the hoard from Q1.

Making the distinction between blue-chip companies and other companies starker, on a year-on-year basis, the 19 STI companies recorded a 16.8 per cent decline in net profit for Q2, compared with the 34.8 per cent fall recorded by almost 300 companies as at last Friday.

Only two companies - Genting SP and Neptune Orient Lines (NOL) - showed losses for both quarters. While NOL managed to narrow its loss in Q2, Genting SP saw its loss balloon to $50.7 million, from $31.9 million in Q1.

'The worst is most likely over,' said Goh Mou Lih, head of research at Westcomb Securities. 'The issue is whether we will have a strong recovery or face problems in the future.'

While most analysts were loathe to be prematurely upbeat about the prospect of a strong recovery, the variety of analyst responses to the q-o-q rebound reflected the wide-ranging spectrum of crystal balls that industry insiders possess.

Golden Agri-Resources, which topped the q-o-q list of Q2 gains, saw a 511.7 per cent increase in net profit to $79.7 million.

Analyst Carey Wong from OCBC Investment Research framed Golden Agri-Resources' performance against a cheery economic outlook in his report on the company.

'The recovery in the global economies has come slightly faster than expected and this has lent some support to crude oil prices and crude palm oil prices,' he said.

Noble Group was not given such ebullient treatment where its outlook is concerned. It scored a record gain in Q2 - a 162.5 per cent increase q-o-q - and romped towards its highest-ever tonnage in H1.

Despite that, a Lim & Tan Securities report downgraded Noble to a 'sell into strength' rating, saying its earnings outlook would only improve significantly next year.

In contrast, City Developments, which saw a 68.3 per cent increase in q-o-q earnings to $140 million in Q2, was unanimously the darling of analysts on the property circuit for its low gearing and strong cash flow.

In comparison, CapitaMall Trust saw Q2 earnings contract 2.1 per cent q-o-q and CapitaLand slipped into the red, from a $42.9 million net profit in Q1 to a $156.9 million net loss in Q2 - the only company among the 19 to do so.

Despite the varied fortunes of property companies, analysts are convinced that the only way left to go is up. 'With prices here remaining 20 per cent off their Q4 2007 peaks, we expect interest to pick up strongly upon opening of integrated resorts and more improved macro-economic data,' said DMG & Partners Securities' Brandon Lee, who is overweight on the sector.

The trend of optimism continues for stocks that bucked the industry trend, such as ST Engineering. The group's net profit rose 27.5 per cent in Q2 from Q1, prompting UOB-KayHian's K Ajith to upgrade its rating from 'sell' to 'hold' on expectations of a better second half.

While the q-o-q recovery of the banking sector was acknowledged all around, normalisation of earnings is only expected to happen in 2011. 'We expect 2009 earnings to remain sluggish with provisions front-loaded in Q1 2009,' a DBS Group Research report stated.

While the various sectors' outlooks are governed by their individual peculiarities, the sustainability of overall recovery will depend very much on the actions of central banks, according to Westcomb's Mr Goh.

'If central banks do not mind the risk of inflation or a bubble, they will keep up the stimulus effort and we could see some recovery,' he warned. 'If the stimulus is stopped too soon, things may get worse again.'