Export-Oriented Company Not Necessarily Benefit From Weakening Of MYR

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 still have some impacts.

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.