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Categories
| Kossan feels the bite of forex hedging losses |
| Features | |||
| Written by Ellina Badri | |||
| Monday, 27 July 2009 00:00 | |||
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This follows a RM12 million realised forex loss from hedging activities recorded in 1QFY2009, when management hedged receivables at an estimated exchange rate of US$3.40 to US$3.55 in anticipation of a weaker US dollar. Instead, the dollar had strengthened against the ringgit, and according to OSK Research, Kossan’s management has warned of a further forex loss of between RM8 million and RM9 million in its upcoming 2QFY2009 results. An analyst tells The Edge that the glove and industrial rubber products maker had entered into a hedging contract in 4QFY2008, which will expire in 4QFY2009. The company estimates it will incur up to RM35 million of hedging losses in FY2009 in a worst-case scenario, if the dollar were to stay at the current level of around RM3.50 to the dollar, and at an average contract rate of RM3.37 to the dollar. In a recent report, AmResearch says, “We understand forex losses could be potentially larger than the realised amount in the next few quarters. The forex losses were realised in 4QFY2008 and 1QFY2009.” Analysts are, however, unclear on the exact extent of Kossan’s exposure to the forex contracts, as management was not entirely forthcoming on the amount. Analysts also speculate that the company could have hedged for a longer period than the usual two to three months by the industry in general. In spite of forex losses, Kossan reported a flattish net profit of RM14.15 million in 1QFY2009, from RM14.02 million recorded a year earlier. Revenue grew to RM202.37 million from RM199.94 million in 1QFY2008, although its industrial rubber products division, which contributes around 20% to revenue, reported a loss due to the slowdown in the auto industry. According to OSK Research, consensus net profit for Kossan for FY2009 is expected to be RM69 million, which would still be higher than the RM59 million earned in FY2008. The Edge also understands that the company has not entered into any hedging contracts this year, and is not expected to incur hedging losses in FY2010. AmResearch says it is normal in the industry to hedge a certain portion of receivables. As the purchase of raw materials, such as latex, and the sale of the finished rubber products are made in US dollars, there is a “natural hedge” of around 60% to 70%, the research house adds. “It depends on how the company goes about hedging, and what financial instruments are used. Unfortunately, Kossan seems to have exercised poor judgement on this,” says AmResearch. The research house also reckons that management had not revealed the forex losses at an earlier stage as the hedging is an off-balance- sheet item. Now that management has a clearer picture of the losses expected, it has been indicated to analysts, says AmResearch. But Kossan has yet to make an official announcement on Bursa Malaysia on the matter. Meanwhile, Kossan’s warning of its forex losses has raised concern that other glove makers may share the same fate. “We believe all rubber glove manufacturers would be hit by the unfavourable turn in forex, but the impact on every one of them would differ in terms of quantum,” says OSK Research. Apart from Kossan, it appears that Adventa Bhd has had the most significant exposure to forex losses, incurring a RM4.3 million loss in 1Q2009 ended Jan 31, and 2QFY2009. OSK Research says the losses wiped out more than 50% of its quarterly net profits. Adventa reported a net profit of RM3.23 million in 1QFY2009 and RM3.79 million in 2QFY2009. OSK Research says, however, that despite Kossan and Adventa’s losses, it could be seen that management at both companies had been prudent in their approach, as their hedging could spare them forex losses should the US dollar weaken, compared with leaving their receivables unhedged. It adds that while Top Glove Corp Bhd, Supermax Corp Bhd and Hartalega Holdings do, or will, have forex losses, their hedging exposure is not significant. According to Hartalega’s 4Q2009 ended March 31 financial report, as at May 12, 2009, it had entered into foreign currency forward contracts on its receivables at a notional amount of US$6.5 million, maturing within three months and at a contract rate of between RM3.6364 and RM3.6390. Top Glove said in its 3Q2009 ended May 31 financial report, that as at May 31, it had entered into open foreign exchange forward contracts at a notional amount of RM138.17 million, maturing within three months. While Supermax did not report in its financial statements the amount it hedged, it said that in its 2Q2009 ended June 30 financial statement, its revenue, which was lower by 2% to RM188.49 million compared to the preceding quarter, was affected by forex movements when the US dollar fell by 2.5% to RM3.55 against the ringgit. Given that hedging is an off-balance-sheet item, losses on the companies’ forex forward contracts have not been reported. Analysts remain fairly upbeat about Kossan’s prospects despite the setback, although its stock is expected to come under some selling pressure in the near term. HwangDBS Vickers Research has downgraded the counter to a “hold” with a revised target price of RM4.40, believing that its forex losses will result in discounted valuations relative to its peers until its earnings recover. The stock ended at RM3.64, shedding two sen, at last Thursday’s close. The company plans to start commissioning 18 double-former production lines in FY2010 and another 18 lines from 4QFY2010 onwards, which will boost installed capacity by seven billion pieces of gloves annually. Additionally, it is carrying out upgrading works to lengthen 10 existing production lines to more than 120m at its Kapar plant. AmResearch says its installed capacity is expected to rise 62% from an estimated 11.1 billion pieces this year to 18 billion by end-FY2011. OSK Research sees the stock as a “good buy” for 2010 rather than 2009 due to catalysts, including the optimum output of its production lines, and the recovery in the auto sector as well as the global economy, which would also boost demand for its products. Kossan will feel the pain of its forex contracts this year, but with its manufacturing operations still stable, the company’s long-term earnings prospects remain intact. This article appeared in Corporate page of The Edge Malaysia, Issue 765, July 27- Aug 2, 2009
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