Short Position - Money Lending in vogue?

For this year analysts foresee Brent oil pricing to trade in the range of US$30-US$35 per barrel and to remain flattish at US$35 per barrel going into 2021.

Money lending in vogue?

The money-lending business seems to have latched on among listed companies on Bursa Malaysia.

DWL Resources Bhd is the latest listed company to join the bandwagon of companies that have gone into money lending as among their core businesses. The other newcomer to the block is MAA Group Bhd, which also offers factoring and leasing facilities.

DWL, which is into production of ceramic materials, property investment and construction activities, announced that money lending will potentially contribute 25% or more of the company’s net profit.

The company envisaged that the money lending business would require working capital of RM20mil in the future.

MAA, which is also into education business, has so far set aside RM13mil and RM31.2ml respectively for the money lending and factoring and leasing businesses. In the latest announcement, it is seeking more money as working capital for all three segments of business.

MAA is cash rich from the disposal of MAA Takaful Insurance to Zurich, a deal that was completed in 2018. It received a net sum of RM364mil from the sale. At one point, the major shareholders of MAA wanted to take the company private but failed.

As for DWL, it really does not really have a solid core business. The major shareholder is in the business of supplying foreign labour. However, the foreign labour business is not part of DWL.

The rationale for companies to go into the money lending business is simple – the returns are good. But so is the risk. Collection can be a major problem, especially if the amount is high.

Hence the money lending business needs a good clientele and experienced people with the knowledge on how to collateralised the loans.

There is always demand for credit as the banks and formal financial institutions do not serve all and sundry.

And people turn to money lending companies because they are not such a good credit to the banks.

Both DWL and MAA are new entrants to the business that is already competitive.

There are many companies that fail to recover the loans and folded up. A good example is Magnum, which closed its money lending operations some 20 years ago, after incurring huge losses.

The oil demand factor

After imposing stay-at-home orders to flatten the spread of Covid-19, many countries are now re-opening their economies, turning the attention to oil demand recovery.

Sentiment on the oil and gas sector has turned slightly more favourable going by the interest on such shares in our stock market.

Many agree that the worst is possibly over considering the way the price of crude oil is trending.

That in turn is related to the gradual lifting of lockdowns around the world, coupled with sustained production cuts from Opec+ and its allies.

For this year analysts foresee Brent oil pricing to trade in the range of US$30-US$35 per barrel and to remain flattish at US$35 per barrel going into 2021.

However, the path to economic recovery is still fragile – meaning that oil demand may not return to its pre-pandemic peak levels in the near future.

Consumer behaviour is changing and currently many economies are undergoing structural changes in daily life to cope with Covid-19. One of the major oil buyers is the aviation industry.

While airline demand is slowly coming back, the pick-up is seen to be gradual as there is still a fear of flying due to the virus.

Air travel is unlikely to be as robust as before. The shift towards remote working in the near term could likely impact on consumption for oil too.

For upstream O&G service providers, the path to recovery is seen as tricky given that oil majors, including Malaysia’s national oil company Petronas have undertaken capex cuts.

Then there is the risk of non-adherence to production cuts by Opec+ and allies member countries or divergence in the intentions of Russia and Saudi Arabia.

Against this backdrop, investors are advised to treat the oil and gas recovery play with caution considering that some stocks have run ahead of their valuations during the recent rally.

Companies with strong balance sheets or sustainable cash flows would be able to ride the current downcycle.

This is because near-term earnings outlook for upstream service providers remain bleak given potential margin squeeze due to greater competition now with fewer jobs out there.

Covid euphoria continues

The rush by public-listed companies to get involved in making products tailored to the against the pandemic is not ceasing.

ACO Group Bhd is one of the latest jumping on the bandwagon. This week the company said it has entered into a collaboration to distribute Covid-19 rapid test kits.

Also this week, Seacera Group Bhds said it secured rights from Xidelang Holdings Ltd to resell and distribute protective clothing products in Malaysia.

Both company stocks prices climbed up this week.

But what investors ought to know is that with increasing number of players securing distribution rights to Covid-19 test kits and increasing number of people producing personal protective equipment (PPE), the margins from such ventures are bound to be minimal.

There are even non profit organisations helping disenfranchised people produce PPEs at low cost and selling them at reasonable prices, especially to front line staff. As far as rapid test kits are concerned, there are an increasing number of people distributing them in the market.

Margins must be getting squeezed.

Furthermore, despite some of these kits being said to be endorsed by the health authorities, it should be noted that the Health Ministry has said that said it does not recommend the usage of the antibody rapid test kits (RTK) for the screening of Covid-19, as a negative test result does not guarantee the individual is free of the virus.

The Director-General has said that the tests that are recommended for screening purposes are the antigen RTK test and the reverse-transcription polymerase chain reaction (RT PCR) test, both of which require the usage of a nasopharyngeal swab by a trained personnel.

He said that the antibody RTK test, which uses a finger-prick method, cannot be used to detect active infections.

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Money Lending , DWL , MAA , oil , Brent , Covid , ACO Group ,


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