Short Position - Rising Soybean prices; no respite for TNB


Rising soybean prices

SOYBEAN prices have been rather steady since 2018, something which is unprecedented. The crop was trading closer to US$1,800 levels in 2012-2013 before gradually sliding down to US$850 levels since 2018, indicating a fair level of volatility

In the last few weeks, soybean prices are active again. They surpassed the US$1,000 levels and are now close to a three-year high. The rise has promoted some to comment that soybean, which is the torch-bearer of the oil seed market, is on a bullish run.Whether the crop goes back to its dizzying heights that were seen in 2012 and 2013 will depend on China and its unending thirst for commodities.

It has been reported that production has declined in soybean producing countries while demand has picked up in China. The combination has resulted in higher prices for soybean.

Generally when soybean prices are on the rise, it will benefit the crude palm oil producers. The price for Malaysia’s golden crop tends to increase when soybean prices are on the up-tick.

But there are losers when soybean prices are on the rise. Chief among them are the poultry players because the main ingredient for animal feedstock is soybean and corn. When soybean prices increase, the operating cost for poultry players rise.

In this respect, the integrated poultry players such as Leong Hup International Bhd and Malayan Flour Mills Bhd are said to be able to weather the rise in prices better because these companies also produce animal feed.

Integrated poultry players sometimes tend to command a better valuation compared to pure poultry companies simply because of the upstream operations to produce animal feed.

Whether they deserve a premium will only be tested when the results are out in the next quarter or two. If indeed the integrated poultry players are better equipped to withstand the changes in feedstock prices, it should show in their results.

Embracing digitisationLIKE it or not, the world of transactions are changing. The Covid-19 pandemic has probably accelerated the use of digital transactions to become commonplace and online transactions have boomed and contactless transactions are being encouraged to limit interactions that can be a source of infection.

It also has accelerated the introduction of a digital strategy that will have wide implications for the old and new structure of banking in the country.

Banks have always had a digital side of a business but are still very much brick and mortar. Branches and employees are used to handling transactions of various nature but the digital world has started to exert pressure on their traditional practices.

Fintech companies have seen the entry of competition on a slice of a gamut of transactions and while banks are aware of the risks of a wider proliferation of digital services in the past, the current environment has perked them up to the potential of such usage.

Just yesterday, three of Malaysia’s largest banks showcased their new digital offerings. Malayan Banking Bhd unveiled its 10-minute approval digital financing solution for small and medium sized enterprises. RHB Bank Bhd introduced its digital forex solution for SMEs and Public Bank Bhd launched a service to allow merchants to get faster payments from their customers using a QR code.

All three are different segments of a bank’s business transaction catalogue of services but indicate a blurring between traditional ways things are done and the use of digitisation in the future of their business.

The Malaysian banking system has been prepping for the introduction of digital banks and the giant banks here have in the past said they too have their banking offerings that crosses over into the digital space.

But with the loan moratorium now coming to an end and the need to save on cost and improve efficiency to compete against the smaller digital banks, it does appear that banks in Malaysia are starting to roll out a suite of digital services that will not only allow for a niche in the business segments they are in but to also create new avenues of business transactions that can have a telling result on branch rollout and staff hires in the future.

No respite for TNB

WHEN interest rates are low, utility companies should rightfully be big gainers. It’s because utility companies have big borrowings and provide steady returns which is what long-term yield investors would look for.

For instance Tenaga Nasional Bhd’s (TNB) share price should rightfully be trending higher considering it is a beneficiary of the low interest rate regime and its position as a dominant electricity player.

However, the share prices of TNB is at near its three-year low, despite it giving out steady dividends of more than 50 sen per share per annum. Earlier this year, it gave out an additional 50 sen as a special dividend.

Normalising the dividend payout, TNB at RM10.90 is giving a yield of just below 5%. Yet the share price is languishing at a three-year low.

The reason is because the government, being the major shareholder of TNB through Khazanah Nasional Bhd, dictates the fortunes of companies such as TNB. To ease the burden of the people suffering from the Covid-19 pandemic, TNB has been giving discounts to some segments of the population.

Banks were also giving out incentives to the lenders. However, the blanket moratorium on loans finishes end of this month, meaning borrowers will need to resume the re-payment of loans.

But for TNB, nobody can say with certainty if the discounts will discontinue soon. If the economy is still on recovery mode, the discounts will probably continue at the behest of the government.

Such negative sentiments affect TNB. For the first half of this year, its profit has dropped by almost half to RM1.4bil compared to RM2.7bil it generated last year.

TNB’s top line has also come down but the impact on bottom line is bigger due to the discounts given to consumers as a result of the Covid-19 pandemic

When the going gets tough for the general economy, entities such as TNB are expected to make less money. So can anybody blame investors if they shun TNB even though it is a beneficiary of the low interest rate environment. Not really.

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