Road to Success
Export-Oriented Company Not Necessarily Benefit From Weakening Of MYR
RicheHo
Publish date: Wed, 02 Sep 2015, 05:25 PM
Most people tend to say that export-oriented company will benefit from weakening of MYR. But, it is not necessarily!
TONG HERR RESOURCES BERHAD is principally involved in
- Manufacture and sale of stainless steel fasteners (75%)
- Manufacture of aluminum extrusions and related products (25%)
Tong Herr is doing well in the past 3 years. Each year its revenue and net profit are better than previous year. However, since last year the global and Malaysia economy started to have some changes. Crude oil price dropped, commodity price dropped, MYR depreciate. How will it impact Tong Herr?
Based on the revenue segment, only 23% of its revenue is from Malaysia and the rest 77% are exported out to other countries. So, it can consider as export-oriented company and will benefit from weakening of MYR against other currency.
Previously, I had read some posts and comments. Some people mentioned that Tong Herr is one of the beneficiaries from weakening of MYR. I want to emphasize that, by just looking at its revenue segment is not enough!
Based on annual report 2014, Tong Herr had loans and borrowings of RM195m where RM190m is USD loan! In other words, strengthen of USDMYR will increase the amount of interest it needs to pay from time to time!
In every annual report, there is a currency sensitivity analysis segment. It can be found at the Financial Risk Management section. Usually, this section is located at the last two points of Notes to Financial Statement. It stated that appreciation of USD against MYR by 10% will decrease the net profit by MYR6.91m!
In year 2015, USD had strengthened against MYR by more than 15% (3.60 to 4.20). Let’s just take into account of decrease in MYR10m, divide into each quarter and each quarter it will have reduction of net profit up to MYR2.5m! That’s a lot!
Let’s have a look at the historical price graph for steel.
Decrease in steel price is good for Tong Herr as the raw material for manufacturing of fastener is stainless steel.
However, we need to take note that its associate, Fuco International is involved in manufacturing of steel billets. Look back to the steel price graph, steel price dropped from UDS400/tonne to around USD100+, a reduction of more than 50%! Even though Tong Herr has only 30+% share interest, it will have an impact as what we can seen from its latest quarter report. Its loss from associate up to MYR3.9m!
As a conclusion, even though Tong Herr is an export-oriented company, but it has few unfavorable factors that might cause huge impact to its earnings. Hence, it is not a good time to consider it.
Before I end this, have a look at the below news.
This is one of the news which extract from Business News. It mentioned that Tong Herr will benefit from strengthening of USD as well. So, I am hereby to urge everyone not to fully believe in either newspaper or analyst research institution’s statement! There are always some misleading parts! This is just one of the examples.
Just for sharing.
http://rhinvest.blogspot.com/2015/09/export-oriented-company-not-necessarily.html
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Discussions
14 people like this. Showing 18 of 18 comments
Strangely the insiders have been buying consistently earlier this year at the price of around RM2.10. What are they up to?
2015-09-02 17:45
Yeah that is good. Check the debt/equity and then current liability such as loans
2015-09-02 20:40
Very good points spotted by you, we need more people and article like this to point out the mis-leading facts reported by media or analyst.
2015-09-02 20:46
I suggest our bro. to recommend some stocks for us to buy . Don't know can or cannot because we always choose the wrong company and did't know how to analyst some company fundamental . We need his recommendation . Thank you .
2015-09-02 20:56
Thanks for the critically written report. Look at Matrade stats http://www.matrade.gov.my/en/malaysia-exporters-section/33-trade-statistics/3812-summary-of-malaysias-monthly-trade-2015 the import/export not directly correlate with Ringgit...
2015-09-02 23:59
just to highlight something, the sensitivity test in the financial risk section is just the currency risk for current balance sheet exposure if I not mistaken, it is true that USD denominated loan is bad for tongher, but we can't denied that exposure of revenue in USD is more than exposure of USD in loan for tongher assuming all 77% of revenue exported to oversea is denominated in USD. (I din read through the financial statement for tongher, so I might be wrong, but this is based on my experience reading other companies/ financial report, please correct me if I am wrong ya, thanks for sharing especially on the investment in associate, some companies have loan in USD to serve as natural hedge to their revenue that is majority denominated in USD.
2015-09-03 03:00
I am not trying to be diplomatic, but RicheHo articles are becoming a Must Read for me
I like the thoughtfulness and the independent thinking, an indication of intellectual capacity
Looking forward to more
2015-09-03 07:42
Thanks for all the compliments and comments! I will take it as a motivation. Appreciate it :)
2015-09-03 08:36
nicholas1184, eventually what is in the income statement must convert to balance sheet items. For example revenue becomes trade receivables and cost of goods translates to payables etc... if the net exposure of Tong Her in USD is -ve means its USD short term liabilities is more than USD short term assets, then strengthening USD will not benefit it.
2015-09-03 09:13
affin hwang.... shame on u, losing to non paid full timer analyst like richeho
2015-09-12 00:08
now u have put a hole to their's(whichever media on the company side in mutual benefit) so called "conspiracy"... which is good for a newbie or small fish like me... thanks for the good article...
2015-09-12 00:22
Thankiu thankiu haha, but I am not full timer analyst. I am also learning :)
2015-09-12 02:17
yes if u export earn US$ but u also service big loan in US$, that's not going to help u
2015-09-12 09:07
Tong Herr & Supermax are example of companies that export in US$ but also have big US$ loans.
2015-09-12 09:08
Nicely done article. One more thing, if you look at the sensitivity analysis, you will see a huge loss also if THB depreciates against USD. To date, I think THB is down about 8.2% to USD, so it is a double hit for Tong Herr.
One thing I'm curious, the quantum of loss for 10% decline in THB is almost as much as for 10% decline in RM vs USD. This is strange given that THB denominated loan amount and external revenues from export to Thailand are both very small.
2015-10-03 06:18
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
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One of the few that read through Annual Report! *thumb up*
2015-09-02 17:30