Q3 corporate earnings outlook: what to expect

By Omodele Adigun

The strong recovery and growth momentum that has been driving corporate earnings this year is expected to maintain the steam in the third quarter.

However, industry-specific factors may keep earnings constrained in some companies, while those that added huge foreign exchange windfalls to bottom lines last year will continue their descent.

This is a year of correcting the distortion of corporate exchange rate earnings: companies that grew fat by foreign exchange and asset value gains with naira depreciation have shifted position to the other side of exchange and asset value losses.

Some recovery in the naira exchange rate, with reasonable improvement in liquidity, will make the impact of relative exchange rate stability on corporate earnings more pronounced in the third quarter.

Generally, financial services organisations are the main beneficiaries of foreign exchange and asset value gains over the past two years; this year is lean, as those gains turn to losses or huge drops. Profit plunge can be expected to mark the earnings stories of this category of operators in the third quarter.

On the other hand, industries whose huge exchange losses ripped through bottom lines and broke equity cushions over the preceding two years will recover, and further progress in rebuilding profits and capital stock can be expected to be sustained in the third quarter.

Banking stocks remain the key drivers of the equities market, and the phenomenal growth of the industry over the past two years appears good enough to keep investors confident in a year of correction. Banks are categorised into two: the large, industry-leading names with substantial cross-border operations and the national banks with less exposure to external markets.

The former are expected to continue the year-on-year drop in profit in the third quarter, as exchange and asset value gains that powered all-time peaks in profits and balance sheets continue turning into losses this year. Gradual recovery of the naira exchange rate is aiding the correction. Expect a sustained profit drop, therefore, from this group of banks in the third quarter.

The other group of banks with domestic market focus missed out on the massive exchange gains reaped by the multinational players and are equally shielded from the volatility in earnings the external exposure entails this year. They are therefore expected to maintain stability and, for some of them, even outstanding profit growth in the third quarter.

Generally, the banking industry is experiencing strong growth spurred by recapitalisation that enables multinationals to mitigate earnings volatility and others to speed up growth. A general buildup of earning assets in a high-interest-rate situation is lifting interest earnings to new peaks, compensating for drops or slowdowns in non-interest earnings.

Investor confidence can therefore be expected to stay firm with banks even in the face of profit drops by the industry majors. The reason is that dividend payout may not be affected, as the industry is a sure source of regular and timely cash dividends with robust resources sufficient to raise dividend payouts even in the event of profit drops.

Like banks, insurance companies are similarly divided between a few that profited from exchange gains and others that didn’t. The former are headed for a steep drop in profits this year, but others, particularly some that have restructured their operations, are set for major recoveries and turnarounds this year.

The third-quarter financial reports will most likely reflect this earnings pattern, where some insurance companies will be on a rapid recovery, some on a sharp drop and others without a clear direction. The inconsistency of earnings, dividends and returns will continue to keep insurance stocks in the high-risk investment zone.

Breweries are expected to step up recovery and growth momentum in the third quarter, as improving economic growth with improving consumer spending power rekindle consumer appetite for brewed products.  The race back to profitability for brewers is expected to gain momentum in the third quarter, as operating challenges continue to ease and cost and income structures adjust further to rebuild profit capacities.

Pharmaceutical companies have successfully negotiated a turning point into a new chapter of recovery and growth, and they are expected to solidify their grounds in the third quarter. The expectation of the best earnings season in years for healthcare providers this year is likely to be on course in the third quarter.

Their strength lies in growing sales with improved ability to convert an increasing proportion into profit. The strength in sales is boosted by improving consumer spending power and favourable market conditions, to push sales, and significant tariff restrictions on imports.

A favourable combination of rising sales and slowing costs is in the making for healthcare companies this year, and this is expected to mark the earnings stories of the operators here in the third quarter.

Food and beverage producers are expected to step up the recovery momentum, reflecting the absence of exchange losses that resulted in huge losses in the preceding two years. This will be reinforced by gains in consumer spending capacity, which is enabled by slowing price increases and gains in incomes. The rising cost of production will continue to be a challenge to profit growth.

Agricultural companies, particularly oil palm producers, are expected to maintain their operating comforts and rapid growth with volume expansions of rapidly moving products. The improvement to new peaks in revenue and profit is expected to mark their third-quarter financial reports. Their advantage is low production cost and rising export earnings.

Declining sales and loss of profit are expected to continue in the petroleum market in the third quarter, as the reality of the sharp drop in product consumption continues to hurt the industry. The loss of the cross-border market, which hitherto flourished through smuggling into neighbouring countries, has shrunk product demand and shifted the domestic market from inadequate product to overcapacity almost overnight.

The sudden change in the industry narratives is the driving force of the slowing sales, dropping profits and piling losses of oil marketers, which can be expected to be sustained in the third quarter.

Cement producers are expected to retain their high growth momentum in the third quarter with growing sales and cost savings. Turnover is upbeat on firm demand, and gains in output volumes and costs are lowered by the absence of huge exchange losses of the preceding year.