JHDP financed 75% of its 1,200MW power plant in Vietnam with bank borrowings in US dollar amounting to USD1.402 billions. The Q1 2023 profit sharing from JHDP dropped RM5 millions from RM33m to RM28m. Management cited increase in interest expense as the reason for the drop in profit. 

What is the potential impact of increase in interest rate on USD based borrowings on the profit of JHDP for 2023 ?

Assuming the interest rate of JHDP loan is wholly on floating basis.

The average interest rate for year 2022 was 5.5%

The average interest rate for year 2023, assuming no further rate increase for 2023, will be approximately 8.28%.

Back of envelope calculation of interest expense for 2023 is as follows;

Average loan balance for 2023           = USD1.402 b x 7.5 years / 10

                                                            =  USD1.0515 b x 4.55 (exc rate)

                                                            = RM 4.78 b

Interest expense                                 =  RM 4.78 b x 8.28% 

                                                            = RM 396 millions

This is an increase of RM131 millions over the RM265 millions interest expenses recorded in Year 2022. 30% sharing will be 39 millions.

Therefore, Jaks' share of JV profit will likely drop by RM39 millions in Year 2023. However, this could be partially mitigated by higher USD/MYR exchange rate which is favorable to Jaks 

Increase in interest expenses reduces both net cash flow as well as financial profit.

Shareholders seek clarification from the Management.

Thank you for your attention.

Gotyou

This article is purely for educational purposes. This is not a buy or sell recommendation ! You should consult your dealers or remisiers before making any decision.