Corporate earnings dip YoY, up QoQ

Combined earnings of listed companies have marginally declined Year-on-Year (YoY) but improved Quarter on Quarter (QoQ) in September according to two broking firms.

For the 30 September 2012 quarter, 266 companies have released their results by last week, signalling a strong recovery in the market earnings, Softlogic Stockbrokers said.It said market earnings for September 2012 was almost flat or marginally down 2% to Rs. 46.1 billion while on a QoQ basis earnings have grown by 34% to Rs. 34.5 billion.

The September data reflects an improvement in comparison to June performance. The June saw earnings dropping as much as 12% YoY and 37% QoQ on the basis of results of 236 companies.

 “With radical policy measures taken at the start of the year resulted in a slowdown in the economy which we believe to have bottomed out by the June quarter. Following the stability in the exchange rate and interest rate the business outlook and economic conditions improved. As a result the earnings outlook of companies have started to show signs of improvement during the September Quarter with earnings ending to be almost flat on a YoY basis,” Softlogic Stockbrokers said.

“We continue to stand by our forecast that the listed entities are likely to witness a complete recovery of their earnings by the 4QCY12 and 1QCY13 with the Banking, Hotel, and Diversified Sectors leading the growth in earnings,” it added.

Softlogic expects economic conditions and earnings of most companies to stabilise by August and the US Dollar exchange rate remaining stable at Rs. 130 levels. “We expect a better second half for most companies with the recovery of economic conditions and business activity affecting companies towards the 4QCY12 and 1QCY13. We further expect the December 2013E / March 2014E to be a year of strong growth in corporate earnings,” Softlogic said.

Asia Wealth Management on the other hand noted negative third quarter growth was painting the market red.

“The lack of vitality in the performance of Colombo Bourse during the post-Budget phase of trading has persisted along with robust growth in 3QCY2012 net earnings of selected sectors and counters, while the overall net earnings of the market dropped 4% YoY,” Asia said.

“This can be largely attributed to the restrictive market and non market measures adopted by the fiscal and monetary authorities in the form of raising policy interest rates, imposing quantitative limits on credit growth of the banking sector, high import tariffs on selected imports and the depreciation of the currency to stabilise the growth process of the economy,” it added.

Despite overall dip, Asia said a few sectors have so far shown impressive resilience to the challenging economic environment by posting impressive YoY earnings growth in 3QCY2012.

For instance, the Banking Sector net earnings grew 27%, Hotels and Leisure Sector by a whopping 143%, Insurance sector by 103% and Plantations managed to improve from a loss to a significant profit.

“In this light, we are of the view that marginal capital efficiency of few selected sectors is remaining well above that of the market rate of interest and hence, return on equity investments of these particular sectors bear the potential to exceed the rate of return on non-equity financial investments such as time deposits and government securities,” Asia Wealth said.

“Furthermore, four quarter trailing price earnings ratio of the market also improved to 12.6X indicating that prospects of return on equity investments in the Colombo Bourse are attractive relative to the regional peers,” it added.

The broking firm also said the adoption of restrictive non market measures by the fiscal and monetary authorities mentioned earlier are triggered on the grounds that independent interaction of free market forces has not entirely kept the process of economic growth of the Sri Lankan economy within a stable framework.

“In our view this particular aspect should be subjected to further probing by analysts as well as policy makers to uncover the factors that trigger such a condition, and in turn, should formulate more progressive long-term policy frameworks capable of sustaining the stability of the growth process without curtailing its growth momentum,” Asia Wealth opined.