AmInvest Research Reports

Strategy - Exporters benefit from USD strength

AmInvest
Publish date: Wed, 25 Oct 2023, 09:45 AM
AmInvest
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Investment Highlights

  • Weaker MYR from higher for longer expectations. The MYR has continued to weaken by 5.9% since 31 July this year, almost reaching the all-time low of RM4.80 level. While the rest of the region has also depreciated, the MYR is the second worst performer after the Japanese yen this year, driven by hawkish “higher for longer” narratives from the US Federal Reserve (Fed) which imply that another interest rate hike could be on the cards.
  • Winners in exports. From our universe of stocks, the net beneficiaries of a stronger USD are naturally exporters such as technology, oil & gas and selected manufacturing companies (Exhibits 1-3).

    For technology companies such as Inari Amertron, Pentamaster, Vitrox, MPI and Globetronics, USD-denominated sales exposure with substantive locally sourced input costs could have an estimated 5%-10% upside to earnings. For oil & gas players such as Yinson, Hibiscus Petroleum and Bumi Armada, US$-denominated revenues, albeit could be negated partially by higher finance costs due to project-related borrowings.

    The weaker ringgit is generally beneficial to manufacturing companies given that most of the revenues are denominated in US$ as compared to their cost structure. However, the positive impact on core earnings varies due to share of exports to revenue, e.g., Ancom Nylex +9-11%, VS Indusry +15-20% and Cape EMS +20-25%. For Lee Swee Kiat, the impact on core profitability is negligible at 1% mainly due to relatively lower export share in total revenue.

    For glove companies, >90% of their revenue is denominated in US$. However, the impact on glove makers varies according to the magnitude of their hedging arrangements. Based on our estimates, for every 10% weakening of MYR against US$, the impact on core earnings will be 0.5%-1.0% for Hartalega, 1.3%-1.5% for Kossan, and 11%-13% for Top Glove, which does not hedge its export sales.
  • Negative for importers such as automobile, transportation, consumer, media and healthcare segments. A weaker ringgit generally disadvantages the automobile sector as it increases the cost of imported content. The non-nationals marques are negatively impacted since they heavily rely on imported CKD kits and CBUs. However, national cars have a high localisation rate of 80%-95%, providing a large cushion against foreign exchange risks. Of the companies of our coverage that stand to lose out from a weaker MYR against the USD are UMW, Tan Chong, MBM Resources, Sime Darby and DRB Hicom.

    For air carriers in transportation, tourist arrivals may be impacted as higher fuel costs are passed through to passengers. For the consumer segment, a stronger USD will be negative for most of staple players as raw material are mostly sourced overseas and USD-denominated, which we believe will affect companies such as Berjaya Food, Spritzer, Power Root, Nestle and Guan Chong. While the impact of a weaker ringgit on Apex Healthcare and IHH Healthcare's core earnings is mildly negative at <2%, this could have a higher -10% to -15% earnings reduction for Duopharma as its sales are mostly domestic while 40% of its cost of goods sold are denominated in US$.

    For media companies with foreign content costs, this could have a mild negative impact while Astro may be further burdened by higher lease liabilities for the dollar-denominated satellites services. For Media Prima, the impact may be partly mitigated by low foreign content costs.
  • Neutral for financial services, plantation, power, property, ports and REITs. The assets of banks and insurance companies are hedged against liabilities. For the power sector, the incentive-based regulatory framework’s cost passthrough mechanism cushions the impact of higher fuel costs. For plantation companies, a weak MYR widens the CPO price discount with soybean oil and supports palm oil demand, which could be offset by higher USD-denominated fertiliser costs. Meanwhile, the revenue of property and REIT companies are mainly derived from Malaysia while most of their assets and borrowings are not USD-denominated.
  • Soft US landing scenario with 2024F year-end MYR target of 4.50. Our in-house economist still holds to an initial baseline “soft-landing” economic scenario in the US, albeit the downside risk is relatively higher now compared to earlier as a rate cut is unlikely to take place any time before the mid of 2024. At the very most, we view another 25 bps hike can still be absorbed while anything beyond that could invite greater downside economic risks. Moreover, the lag effects from pass tightening should continue to surface in the coming months. Hence, we opine that policy tightening thus far is adequate and the Fed should avoid over tightening to engineer a soft-landing scenario for the world’s largest economy.

    Recall that the Fed has pushed the Fed Funds Rate (FFR) to 5.25% - 5.50%, reflecting 525 bps hikes since the monetary policy tightening campaign was initiated early last year. Where the USD/MYR is currently trading at, our economist thinks that the ringgit is undervalued and has recently reinforced our 2024F year-end target of 4.50 as USD weakness is expected to re-surface once US economic indicators soften further, paving the way for a back-loaded rate cut.
  • Maintain our base-case end-2023 FBM KLCI target at 1,515, pegged to an unchanged 2024F P/E of 15x – at its 5-year median albeit at 3 standard deviations below prepandemic 2017-2019 median of 17x. Nevertheless, we still expect some upward traction towards the end of the year on ample local liquidity, below-median P/E valuation of 14x, highly compelling dividend yields and year-end window dressing activities against the backdrop of improving corporate earnings growth for next year, moderating political noises, 16-year foreign shareholding low of 19.5% currently and prospects of a normalising ringgit.

    The worst-case scenario from a global recession, new pandemic-driven lockdowns and worsening geopolitical conflicts translates to an end-2023 FBMKLCI target of 1,294, pegged to 2024F P/E of 12.8x at 1 standard deviation below its 5-year median (SDB5YM). We do not discount global equity volatility from more US rate hike surprises, bank failures and fresh geopolitical/trade tensions.

    A best-case scenario from an abrupt US Federal Reserve policy reversal and better-than-expected global economic growth would underpin an end-2023 FBMKLCI target of 1,635, pegged to 2024F P/E of 16.2x at 0.5 standard deviation (SD) above its 5-year median.
  • OVERWEIGHT on oil & gas, autos, consumer, power, property and REIT sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Dialog Group, Gamuda, Yinson and Pavilion REIT (Exhibit 8). We also like small cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer and niche agrichemical producer Ancom Nylex, as well as grossly undervalued companies such as Deleum (Exhibit 9).

    Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Westports Holdings, Inari Amertron, Sunway Holdings, Sunway REIT and Gamuda (Exhibit 7).

Source: AmInvest Research - 25 Oct 2023

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