Short Position - Covid-19 impact on business


The rubber glove theme is waning but vaccine-related businesses seem to now draw significant investor interest, irrespective of the fact that creating a vaccine is a long, complex and expensive endeavour.

Covid-19 impact on business

A STANDING joke among listed company officials these days is to say in jest their company is getting involved in some kind of Covid-19 related business. It doesn’t matter how serious, big or small the venture is, what’s important is making that announcement will likely lead to a surge in the said company’s share price.

The play apparently, cannot work with facemask-related businesses any more, considering the glut that is increasingly becoming visible to everyone, and the cheaper prices and stacks of boxes being sold everywhere. The rubber glove theme is similarly waning but vaccine-related businesses seem to now draw significant investor interest, irrespective of the fact that creating a vaccine is a long, complex and expensive endeavour.

To gain some good insights on how Covid-19 is really impacting businesses, some good data points can be gleaned from the forward-looking statements of a few listed companies. In the chemical industry, it is interesting to note what Hezxa Corp Bhd said about the hand sanitiser market.

In the company’s fourth quarter ended June 30 results announced early this week, Hezxa stated in “the ethanol business, demand from sanitiser manufacturers weakened this quarter due primarily to an increase in supply of sanitiser products in the market”.

However, another industry seems to be doing well, which is benefiting from the trend of more people dining at home. Frozen food manufacturer Kawan Food Bhd saw its net profits for the second quarter ended June 30 rise to RM8.84mil from RM2.74mil previously. The company said it is seeing the emergence of new orders and new consumption not previously seen prior to Covid-19. It said its products are able to provide a convenient solution to consumers who are tending to eat at home more often.

The pandemic is impacting industries in varying degrees, providing both opportunities to some and challenges to others. Investors looking to bank on the fortunes of companies claiming to benefit from the pandemic ought to keep a close tab on them so as not to be misled.

Divvying the risks

IT was expected that the earnings of banks in Malaysia reflected what the crunching effects of the weak economy, movement control order and loan moratorium had on their books.

Impairments, modification losses and general cautiousness was reflected in the earnings announced by the major banks.

Profits were hurt, especially by those that have a larger regional exposure, as their Malaysian businesses generally held up well.

That was reflected in the pure Malaysian banks where they managed to grow their profits even during the trying times or experience shallower pullbacks.

But it is the freezing of dividend payments that may raise some eyebrows.

Banks have generally been stalwarts of generous dividends, attracting investor money for the rewards of keeping faith in the financial groups in the country. But the absence of monies to shareholders may be surprising as it was a feature among the larger dividend payers in the past.

Prudence and preservation of capital may be the reason for not paying a return to shareholders but it is also a hallmark of those banks that have done so.

Heeding the mantra of saving for a rainy day was on show as banks decided to keep the capital on their books rather than passing it on upwards.

That way, they will retain some financial muscle to start lending in earnest when conditions allow. By keeping their financial powder dry, they can utilise that money when the risk profiles improve.

But the impact of the lack of dividends may also affect the large funds in the country which are major shareholders of banking stocks.

The likes of Permodalan Nasional Bhd and the Employees Provident Fund do rely on those payments to fund their returns to unitholders and members.

But should conditions permit, there may be grounds for a special dividend before the end of the year but that would entirely depend on what the economic conditions and profits by banks will look like then.

When the going gets tough

WHEN a company with a cash pile of more than RM32bil and a monopolistic business declares a dividend, the share price normally ends higher. This is because Bursa Malaysia is well known for its dividend yielding stocks.

But sadly that is not the case for Genting Bhd, the company that can trace its roots on Malaysia’s only casino located in Genting Highlands. Genting announced a dividend of 6.5 sen per share even though it recorded a massive loss in the second quarter.

However, investors were not taken in by the company’s dividend payout in tough times. Genting’s share price nudged lower even after the dividend was announced.

This is because investors are probably still thinking of how Genting’s president and group chief executive office Tan Sri Lim Kok Thay would resolve his problems in Genting Hong Kong Ltd.

Genting HK, which is 76% owned by Lim, is drowning in debts of US$3.5bil (RM14.6bil) and is currently in negotiations with creditors. Its cruise business is crippled by the Covid-19 pandemic and it has been reported that Lim has pledged his shares in Genting for the stake in Genting HK.

On top of that, Genting has commitments to build a new casino in Las Vegas at a cost of US$3.4bil of which US$2.4bil has already been committed. Genting’s subsidiary in Singapore, which is sitting on a cash pile is also due to embark on an expansion.

Genting Singapore is expanding its facilities in Sentosa in a S$4.5bil expansion under a project called RWS 2.0. The plan has been delayed to next year due to the Covid-19.

Nobody can really predict with some certainty as to when the situation would be back to normal for Genting to start receiving crowds at its operations spanning all over the world.

Hence it’s no surprise even after the company declared a 6.5 sen interim dividend, investors were not impressed.

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Covid-19 , business , rubber glove , vaccine , masks , economy , loans ,

   

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