Short position - MSM, banks recovery, gloves shares


MSM gets attention

OVER the last two days, the shares of MSM Malaysia Holdings Bhd seem to have awoken from a slumber.

For a stock that hovered around 60 sen a piece for a long time, it shot up on Thursday from 50 sen to 80 sen and then continued to that spectacular run to hit a high of RM1.08 on Friday, before settling down to 98 sen a share.

So what’s happening? MSM seems to be a beneficiary of the commodities super cycle, well at least to those of us who believe there is such a cycle taking place.

What is clear is that there is an on-going rally in commodity prices as the world economy pulls out from the coronavirus-induced slump of 2020.

MSM is the country’s largest refined sugar producer.

On Thursday, it reported a net profit of RM56.24mil for the fourth quarter ended Dec 31,2020, compared to net loss of RM40.28mil a year ago, due to higher overall margin and lower finance cost.

For its prospects, the company says that with the implementation of the vaccination program, it anticipates national sugar consumption to gradually improve.

It also said that it is gearing towards capacity and assets optimisation in FY2021 and expects the business environment to remain optimistic.

This piece of good news comes after a major glitch.

Last October, MSM’s then CEO Datuk Khairil Anuar Aziz was axed after the board found his clarification about an adjustment to write off inventories that amounted to RM36.6mil unacceptable.

Subsequently, a new CEO was appointed in the form of Syed Feizal Syed Mohammad, who says in the company’s recent quarterly report that the group’s capacity rationalisation’s efforts and consolidation of operations have reduced their refining costs and improved capacity utilisation rates.

He says the expansion of business segments for export markets has also broadened their market presence and diversified their revenue stream.

Clearly, MSM is on a new path to profitability and it will continue to be a company to be watched. And it will be left to be seen if FGV Holdings Bhd continues to pursue the sale of a strategic stake in MSM. There are likely to be even more suitors now.

Recovery blues

BANKS have not been doing great for some time now.

This is not suprising as their fortunes are heavily tied to economic conditions, business cycles and of course, interest rates.

When times are good, they are the main beneficiaries, likewise, when people hold on to their purse strings in anticipation of tough days ahead, banks are one of the first to suffer a decline in profits.

Yes, while they are still making money, it is safe to say their hey-days are long gone, no thanks to the ongoing Covid-19 pandemic.

That said, as soon as the virus is behind us and the economy turns for the better, banks will see a reversal in their fortunes.

This is how.Business activity will start to pick up, and demand for loans and financing will increase as people start to get more confident.

This will also push up interest rates, which are closely tied to banks’ profits. The higher the rates, the better for them.

Again, while there have been some green shoots here and there, a firm recovery may still be a while away for Malaysia and globally, as Covid-19 cases remain stubbornly high.

This week, Malaysia’s largest bank Malayan Banking Bhd reported results that were largely within expectations.

The lender’s Q4’20 core profit declined 21% on a year-on-year basis largely because of weak income and more provisions for doubtful debts.

Additionally, its loan growth was generally flat.

To say that banks’ earnings may recover this year as suggested by many analysts, could be a little premature.

The possibility is there - the question is when.

Sharp reversal for gloves

GLOVE stocks had a stellar 2020. There is no question of their historic surge after the Covid-19 pandemic gave those companies the one thing that has eluded the industry for some time and that was pricing power.

With that, the companies in the sector charged increasingly higher prices for the same product as buyers around the world scrambled for PPE equipment, including gloves.

But as the world embarks in 2021, that dynamics are eventually change.

Supply is going to boom with foreign companies, and even domestic ones, venturing into making a substantially large number of gloves that will slowly fill up the demand gap that currently exists.

And with the vaccines being rolled out aggressively and more importantly, as hospital beds get freed up and the number of cases in developed countries start to plunge, then the reverse is going to happen for glove companies in at least the medium term.

But for the near term, from the high price-to-earnings (PE) ratio they commanded last year, glove companies are now trading at single-digit PE ratios.

The question now is what is their earnings going to be?

As they start to see a reversal in their share prices, which has already seen them slip by double-digit percentages so far this year, the question will be will those glove stocks then find even more operating pressures befalling on them then prior to the pandemic.

A glut will spell trouble for a price sensitive industry where money was being made by ever increasing volumes. But with the incoming planned supply being so large, then that simple historical dynamic will get challenged like never before which brings into question just how much more downside do those glove stocks have.

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MSM , sugar , commodities , banks , recovery , gloves , shares ,

   

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