Market watch: Corporate Revenue picks up marginally, earnings under pressure

Of the 104 listed companies that have announced their 9M 2017 results, 46 per cent reported a decline in revenue, 61 per cent reported a drop in net profit and 18 per cent recorded a net loss 

Aggregate corporate net earnings continue to record double digit decline for the third consecutive quarter (9M2017: 21.9 per cent YoY) as companies struggle to control expenses in order to offset the slowdown in revenue growth. The drop in net earnings was witnessed across the main sectors (Industry, Financial, Service), albeit to a lesser extent than the previous quarter. Corporates continue to still face pressure on their margins resulting from higher expenses and subdued revenue growth on the back of weak economic activity and slower demand.

Out of the total 104 listed companies that have announced their 9M 2017 results, 46 per cent reported a decline in revenue, 61 per cent reported a drop in net profit and 18 per cent recorded a net loss. In the Q1 2017 the number of companies that recorded a loss was the highest at 24 per cent when compared to the remaining quarters in 2017 and 2016.

Revenue shows signs of improvement in the third quarter. The aggregate market revenue edged up only slightly (9M2017: 0.2 per cent YoY) due to the significant revenue decline in the industrial sector.   At the main sectorial level, the industrial sector recorded the steepest decline in revenue (9M2017: -14.9 per cent YoY). Nevertheless, moderate growth was achieved in the financial sector (9M2017: 1.8 per cent YoY) while the service sector maintained a steady revenue growth at the same level as the previous quarters (9M2017: 7.3 per cent YoY). In comparison to the previous quarters, the number of companies that have reported a decline in revenue has dropped noticeably (6M2017: 55 per cent), suggesting that certain sub sectors have seen their revenue marginally pick up and stabilise in the third quarter.

To shed further light on the improvement in revenue growth we look at the growth in the Q320171 YoY compared to the growth in 2Q2017 YoY. We find that revenue growth improved across the main sectors, especially in the financial sector (Q32017: 5.3 per cent YoY, 2Q2017: -0.3 per cent YoY), possibly indicating that we may have reached the bottom of the business cycle and going forward we can expect demand to gradually recover or at least remain steady.

In the financial sector, the sub sectors that recorded reasonable revenue growth were; banking (Q32017: 4.5 per cent YoY), investment (Q3 2017: 15.1 per cent YoY) and the leasing sector (Q3 2017: 4.5 per cent YoY). In the service sector, the most noticeable subsector that achieved better than anticipated topline growth was the telecom sector (Q3 2017: 7.5 per cent YoY). Most of the industrial subsectors continue to witness a decline in their revenues as companies face a shortfall on the demand side.

Net Margins continue to fall in the Q3 for the third consecutive quarter across the main sectors with the exception of the service sector. The majority of the companies continue to bear the impact of the government austerity measures such as higher royalties and taxes; reduced electricity, petrol and gas subsidies, and higher import levies. The service sector net margins saw improvement in the third quarter (9M 2017: 6.4 per cent), after net margins dropped sharply to 1.5 per cent in the Q1 2017 due to the one-off Deferred Tax Liability adjustment resulting from the corporate tax rate increase from 12 per cent to 15 per cent, that was effective as of January 2017.

Net earnings across subsectors fell with 16 subsectors out of a total 19 recording a decline in bottom-lines. Nevertheless, we observe that the magnitude of the decline is less than the previous quarter where all the main sub sectors recorded double digit decline.

Overall the financial performance in the Q3 2017 has been reasonable if not very promising. The companies have focused on improving operational efficiencies to counter the impact of weak revenue growth and higher expenses on profitability in these challenging market conditions.

Lower corporate revenues and earnings are reflected in the drop in share prices and consequently the market already. However, recent stability in the market indicates that the fear relating to continuous fall in earnings that existed at the beginning of the year, may have subsided. Moving forward into the next couple of quarters, a gradual recovery in corporate earnings could be expected as oil prices continue to stabilise. Having said that, investor expectations on growth in corporate earnings in the coming year would be tempered to more realistic levels. 

Market watch: Corporate Revenue picks up marginally, earnings under pressure
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