Analysts paint bleak earnings outlook

Earnings per share growth of S'pore listed companies may not even make 6% this year

By TEH HOOI LING

(SINGAPORE) Faced with a small domestic market and a very open economy, Singapore companies are highly susceptible to any global slowdown and are therefore expected to chalk up one of the slowest corporate earnings growths in Asia in 2008. This is the conclusion drawn from an aggregate of all analysts' forecasts by StarMine Professional.

Overall, companies in Singapore may see earnings per share (EPS) improve by a mere 5.9 per cent in 2008, making it the market with the third worst outlook in Asia. Hong Kong fares even worse, with its companies expected to register a 2.5 per cent decline in EPS this year. Malaysia, too, has a negative 0.9 per cent earnings outlook.

StarMine, which compiles analysts' estimates and provides equity research performance ratings, aggregated analysts' forecasts of listed companies' earnings in the coming 12 months and compared them to the trailing 12 months' estimates.

It gives greater weight to forecasts by analysts which have proved to be the most accurate in the past, and to more recent estimates.

According to this data - called Smart Estimates - Thailand is poised to have the region's highest growth in EPS - 50.9 per cent in the coming 12 months.

Second is China with an expected growth of 33.6 per cent. Listed companies in India, Indonesia and Korea are expected to boost their EPS by about 17 to 18 per cent each.

Some broking firms' reports seem to conform with the big picture view presented by StarMine.

In a recent report, Merrill Lynch said that it had done a bottom-up stress test to assess the earnings risks and valuation contraction for the top 30 stocks in the Hang Seng Index (HSI).

'In aggregate, we see potential 9 per cent downside to 2008E earnings. In this case, we would not see any earnings growth in the HSI this year,' Merrill Lynch said.

The US investment bank, however, added that it believed the market outlook was unlikely to do worse than its assumptions. 'The result shows that airlines, consumers, Chinese banks and insurance companies are most sensitive to either macro slowdown or poor A-share market sentiment. HK banks, utilities, oil and telecoms are the most defensive with respectable dividend yield,' it said.

Citigroup, however, thinks that analysts and investors may still be a little over-optimistic.

'Region-wide, a 41.5 per cent decline in earnings should not come as a surprise given that it has happened before (when the United States fell into recession),' said its regional equity strategist Markus Rosgen. 'A 41.5 per cent decline in 2008 earnings would leave the region on a P/E of 26.2 times, well above most investors' comfort zone.'

And on the basis of price-to-book ratio, assuming that any upcoming recession is no better or worse than the last two, stock prices in Asia excluding Japan as a region could fall by 47 per cent from current levels, he warned.

Indeed, in the last 30 days or so, StarMine's data showed that there have been continuous downward revisions of earnings for the region by analysts.

Sri Lanka has had the largest downgrades of earnings, by 5.3 per cent. Corporate Taiwan's EPS estimates were also cut by 3.5 per cent compared with a month ago, while Japan's and Singapore's were trimmed by 2.9 and 2.5 per cent respectively.

The markets whose earnings estimates were upgraded in the last 30 days were Indonesia and India. In aggregate, analysts bumped up their estimates of Indonesian companies by 1.7 per cent, and Indian companies by a marginal 0.4 per cent.

Generally, market prices are pegged to the growth outlook for the various markets. For example, China - with an expected earnings growth of 34 per cent - is trading at 24.7 times forward earnings and six times the book value of the companies' assets.

In contrast, Singapore is trading at just 10.9 times its forward earnings and 2.5 times its book value.

Given that certain markets are valued richly based on the very high earnings expectations, any disappointments will have severe consequences on stock prices.

Meanwhile, there are also markets with high growth expectations but low valuation. Thailand and Korea are trading at just over 11 times their forward earnings, despite their pretty robust earnings growth expectations.

Timothy Wong, head of regional equity research with DBS Vickers Securities, explained that Thailand companies' earnings are coming off from a low base. This accounts for the high EPS growth rates. But the market's overall valuation is low because it is perceived as a higher-risk emerging market.

'On the political front, there remain a number of uncertainties, although things are moving in the right direction. And corporate earnings will come through only if the country progresses on the right course,' he said.

As for Korea, the market has historically traded at a discount to other markets. This is due to the structure of the market where there are a lot of chaebols or conglomerates. Also, there are questions on corporate governance, said Mr Wong.

Calculations by Citigroup's Mr Rosgen also showed investors to have very low expectations of Korea, Taiwan and Thailand, making them the three cheapest markets in Asia. 'Given the risks in the global economy at the moment, we'd rather buy low expectations than high expectations,' he said.

Source: The Business Times