Tuesday, January 9, 2018

Caution - Glove/Semi Mfg, Planters (Earnings Affected By Strong RM) ...

Malaysian exporters have been enjoying the benefits of a weak ringgit since 2015, but high foreign exchange gains may soon be a thing of the past as the ringgit strengthened past 4.00 against the US dollar.


The ringgit, which had not breached the 4.00 mark since August 2016, was trading at 3.9975 against the US dollar on 05 Jan 2018, even as Brent crude oil slipped below its 2015 high to US$67.39 (RM269.56) per barrel.

Exporters like rubber glove manufacturers, semiconductor makers and plantation companies stand to see earnings affected to varying degrees by the strengthening ringgit.

For rubber glove makers, tight supply conditions in the first half of 2018 mean that any increase in costs can be passed on to consumers. But a weaker [US] dollar will have a negative impact on glove makers in the second half of 2018, with Top Glove Corp Bhd being the most sensitive to any foreign exchange changes.

A weak US dollar would mean lower revenue when translated into ringgit terms for glove makers. This would result in a possible dip in topline growth.

However, the recent closure of Chinese glove making factories, greater concerns in healthcare, and aggressive market-seeking by glove makers have helped keep demand strong in the near term.

Meanwhile, the world’s largest condom maker Karex Bhd is more likely to be negatively impacted by a stronger ringgit as it is unable to pass costs through to its customers as easily as glove makers.

Semiconductor manufacturers are also expected to be hit by the stronger ringgit. Almost 100% of revenue of semiconductor players, such as Inari Amertron Bhd and Globetronics Technology Bhd, is recorded in US dollars. But for these chipmakers, half of their costs are also denominated in US dollars, giving these firms a natural hedge against the depreciating greenback.

No doubt [their] earnings will be affected by the weak [US] dollar, but the impact will not be that big. Previous financial results indicated foreign exchange gains were not all that significant when the US dollar was strong.

Plantation companies may also not be spared from the ringgit’s appreciation as crude palm oil (CPO) is traded in US dollars. Any decline in CPO prices may have a more significant effect in ringgit terms, potentially affecting the earnings of plantation companies.

On the plus side, plantation players operating outside of Malaysia that have US dollar denominated borrowings would benefit from the lower cost of these borrowings.

The strong ringgit as a factor in moderating export growth in 2018, in addition to a high base in 2017 and fading rebounds in commodity prices and plantation crops.




No comments:

Post a Comment