El Nino impact to weigh on corporate earnings

PETALING JAYA: Malaysia’s looming Super El Nino impact could start showing up in corporate earnings next year through higher electricity bills, with retailers, food and beverage (F&B) operators and low-margin manufacturers among the most exposed, says CGS International (CGSI) Research .

In a report, the research house said it was “clear” that higher temperatures associated with a Super El Nino would lead to increased electricity consumption.

It said higher temperatures would drive up electricity use, particularly as businesses increase air-conditioning usage, while machinery and equipment may also become less energy-efficient in hotter conditions.

The brokerage pointed to the last Super El Nino in 2016, when electricity consumption, as measured by the industrial production index (IPI), expanded 8.6%.

“Against this backdrop, we expect most companies to report higher utility expenses, which will drag on quarterly results, especially in the first quarter of 2027 (1Q27), and to a lesser extent in 2Q27,” it said.

“The financial impact of this will be mitigated by the fact that some businesses will be able to pass these costs on to customers, while for others, electricity costs may be insignificant.”

Still, CGSI Research said 1Q27 results are likely to reflect higher utility and input costs due to El Nino.

While the El Nino impact is positive for the plantation sector, with higher crude palm oil (CPO) prices set to outpace production declines, the impact on other sectors is mixed, it added.

The research house said sectoral winners from a Super El Nino include power generators, solar energy plays, healthcare, telecom operators, water bottlers and infrastructure manufacturers/suppliers.

“Conversely, all sectors will face higher utility bills as energy usage rises, while manufactures and consumer companies will also face higher input costs from higher commodity prices,” it added.

CGSI Research found that companies with lower core net profit (CNP) margins are generally more exposed to higher electricity consumption, with a greater number of manufacturers falling into this group.

Technology-related companies, however, are expected to be less affected in 2027 as their profitability improves, it said.

“Retailers, F&B outlets, low-margin manufacturers and others with limited pricing power are likely to see the biggest CNP impacts,” it said.

For real estate investment trusts and data centre operators, CGSI Research said the impact of higher electricity costs should be more limited despite their high power consumption, as these costs are generally passed on to tenants.

On electricity usage, it said refiners, large industrial players, telecommunications companies, manufacturers and firms with extensive networks are among the biggest users of grid electricity under its coverage.

Among the companies covered by the research house, PETRONAS Chemicals Group Bhd (PetChem) and Malayan Cement Bhd are the three largest users of grid electricity, at 3,233GWh, 933GWh and 713 GWh, respectively, based on their annual sustainability reports.

Plantation companies, on the other hand, have significantly reduced their reliance on grid power through the use of biofuels, it said.

CGSI Research also noted that more companies, including convenience store operators and manufacturers, are turning to solar power to reduce their reliance on the grid.

“We expect the upcoming El Nino to further spur solar adoption, benefitting the solar value chain,” it said.

Beyond electricity costs, CGSI Research said the bigger risk from a prolonged period of hot and dry weather would be water shortages and possible activity disrupments caused by haze.

“The biggest risk in the upcoming Super El Nino would be water curtailment, although based on past trends during periods of water stress, the government has done well to keep ‘essential industries’ supplied, to avoid longer-term issues,” it said.

“This, we believe, should allow most companies under our coverage, as well as recently built data centres, to continue operating.”

CGSI Research said food production, including poultry and dairy, as well as construction, tourism, retail and F&B sectors, could be affected by water shortages and haze-related movement restrictions.

It added that dry weather could disrupt logistics in neighbouring Indonesia, potentially affecting the supply of commodities such as crude palm oil and coal, and adding to input cost pressures.

The research house said the key test would be the January to April 2027 period, particularly if rainfall during the November-December monsoon season is lower.

For the equity market, CGSI Research maintained a “constructive” view, with its end-2026 FBM KLCI target unchanged at 1,780 points.

“While El Niño-related news flow is likely to add to valuation volatility, especially into 1Q27, we believe the bigger influence on market valuations will be the tabling of Budget 2027, the underlying strength of the economy and the resultant corporate earnings, as well as the political news flow ahead of the general election (GE16), which we assume will take place in 1H27 (first half of 2027),” it said.

CGSI Research said the recent rise in Malaysian government bond yields, with the 10-year yield up 57 basis points since June 30, was driven by the global macro environment rather than Malaysia-specific factors and should have limited impact on corporate earnings.

The research house also noted that the Malaysian equity market’s risk premium had fallen 49 basis points since end-June 2026 to 3.19%, despite the rise in bond yields.

“We recommend that investors use volatility in the market to accumulate quality names with clear catalysts and undemanding valuations,” it said.

Looking ahead, CGSI Research expects air quality headlines to persist until the northeast monsoon starts in November 2026, before concerns over dryness and haze re-emerge in early 2027.

It said market attention could then shift to the risk of water shortages affecting businesses, although improved rainfall expected by mid-2027 should ease weather-related concerns across most sectors.

For the plantation sector, it said dry weather in 2H26 is expected to start affecting fresh fruit bunch yields and support higher CPO prices into 2H27.