Short positions - Hostile takeover? Really?


  • Corporate News
  • Saturday, 04 Jul 2020

Windfall tax poser on glove stocks

Windfall tax poser on glove stocks

WINDFALL taxes have often been considered at a time when a particular industry was making super normal profits. It was mooted for independent power producers that were reaping huge profits at the expense of the national utility company Tenaga Nasional Bhd in 2008.

It was then floated and implemented for the plantation sector in the same year, during the Global Financial Crisis, as a means of balancing subsidy payments through taxing plantation companies that were reaping a bounty from high palm oil prices.

The windfall tax of IPPs were introduced for those companies making a high return on equity and for plantation companies, when the price of crude palm oil (CPO) crosses the RM2,500 threshold.

The windfall tax of 3% on plantation companies in Peninsular Malaysia is still in effect today and it is 1.5% on such companies in Sabah and Sarawak. The threshold for companies to start paying the levy is if the price of crude palm oil (CPO) exceeds RM2,500 in Peninsular Malaysia and RM3,000 in Sabah and Sarawak.

It is not a tax planters welcome but they have accepted paying a levy when prices are good.

Right now, as profits and performance of many companies in Malaysia suffer from the economic shock from Covid-19, the rubber glove companies are the ones that are enjoying bumper financial results.

The expectation is that prices are strong and continue to rise, giving shareholders of those companies a huge return in a very short period of time.

It is about being in the right place at the right time and it is still the same product as before that is only enjoying great price increases and demand. The glove companies, especially the large ones, are projected to make such a huge jump in profit that market analysts have been in a rush to upgrade their target prices to unseen historic levels.

Like the real property gains tax, where a huge profit from the sale of property is taxed on a percentage of profit, maybe it is time for the government to look at how it can tax the super profits glove makers are making to help with the funding needs of certain of its welfare programmes during these trying times.

Hostile takeover? Really?

FEDERAL International Holdings Bhd (FIHB) is one of the older companies on Bursa Malaysia. Anybody going past Petaling Jaya town centre would not miss the headquarters at Menara Choy Fook On that is located next to the city council.

The company, which manufactures furniture and all kinds of kitchen sets, is controlled by the family of Datuk Dr Choy Fook On. Based on the company’s latest annual report, Dr Choy and family are the largest shareholders with close to 30%.

The second largest shareholder is Voon Sze Lin with about 7%. The rest of the names in the top-30 list own less than 2.5% of the company, reflecting how tightly the shares are held.

On June 19, Muar Ban Lee Group Bhd (MBL), a plantation group based in Johor, emerged as a substantial shareholder with 5.09%. According to a news report, Muar Ban Lee Group wants to own a substantial stake in FIHB.

It is rather strange why the Johor based company wants to take up a substantial stake in the low profile furniture company. FIHB manages a turnover of between RM150mil and RM200mil per annum on average and ekes out a gross profit margin of 20%.

Its main corporate client is Starbucks Corp where the group manufactures and installs the furniture and fitting for the coffee chain’s kitchen, countertop, cabinets and display shelves. The Starbucks contract makes up for the bulk of its business as it serves the coffee chain’s Asia-Pacific needs.

Apart from Starbucks, FIHB also serves other retail chain specialists such as Coach, Borders book store, Krispy Kreme, McDonald’s and Target.

So FIHB has a niche in the highly competitive furniture industry. But its profits are not as big as other manufacturers such as the glove players because demand is stable and competition is high.

So why would MBL want to embark on a takeover of FIHB? Also, the Choy family owns most of the convertible instruments in FIHB. It is a defensive tool against any takeover.

Surely, MBL should be aware that having a substantial stake in FIHB can be an expensive exercise. So is this speculation of a takeover really true?

Change in the new normal

WHILE glove stocks are the rage on Bursa Malaysia, the other group of stocks that have made its strong move maybe from the shadows of the thematic play of the market are the tech stocks.

The rally has been strong for the group of stocks to chalk up a strong rise in the technology index of Bursa Malaysia.

The index is up 82.65% from the depths of the Covid-19 crisis and in that upward drive, has lifted the share prices of the tech stocks to impressive levels almost rivalling that of the glove stocks.

As talk of a new normal start to reverberate throughout the business circles and normal lives, the new normal will inadvertently change a number of facets of working and daily lives.

The use of technology has been the centrepiece of how the Covid-19 disease has brought about a change in the way things are done. Just like at the start of the century, which ushered in the dotcom boom, the bust of that group of stocks was precipitated by the high and at that time unrealistic valuations they were fetching.

But the technology revolution continued despite the collapse in those stocks. What was envisioned to take place has turned into reality, it just took a lot longer.

We have online shopping that has turned main streets around the world into a state of despair and now, the use of technology to make purchases and even communication has seen changes in how people have adapted to continue with their lives during the pandemic.

The difference between the glove and tech stocks is that there will be a longer lasting change brought about by technology people use. The adoption of new technologies will see new services brought about by 5G that is starting its rollout and other technologies that will see people get used to the new normal.

But investors too have to be wary of chasing super high valuations of those stocks. The hype and promise is there but the reality is that just like at the turn of the century, there will be a period of gestation before technology once again brings about a evolution to businesses and daily lives.

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