Short Position - Bank Negara GDP, ratings, pricing a rights

Serba Dinamik logo

Is it that bad?

THERE were very few questions when Bank Negara cut the gross domestic product (GDP) growth forecast for 2021 to between 3% and 4%.

The lockdowns that were seen throughout the country from June and the slow and cautious opening of the economy since has many for tepid optimism over how the year will unfold.

With domestic consumption still handcuffed by apprehension from consumers, and with private consumption a big part of the economy, there is little doubt that growth will be muted this year.

But is it as bad as zero that was forecast by Fitch Solution that had many scratching on how did they come to that estimate?

Expectations are that it will be another lost year economically save for the low-base effect that was seen in the second quarter of 2021.

The 16.1% pop in economic activity from a year ago will not carry on for the next two quarters and will fall drastically from a year on year comparison to come anywhere close to the official figure.

But what the official figure does not reveal is the conservativeness of the projections built it.

For one, expectations for travel is that there will be some in the last month of the year as most states migrate to phase four of the National Recovery Plan.

International travel bubbles is expected to only open up from the second quarter of next year.

The other element of the forecast is that there will be no release of the pent-up demand that has been coiled up for all this months.

With Malaysians having saved billions of ringgit during the lockdowns with no avenue to spend, the projection is that there will be no revenge spending in the last quarter or even the last month.

The subdued spending expectations make for a conservative estimate that may see the the real GDP number for 2021 fall within projections rather than zero like what Fitch Solution has forecast.

Mind your rating

COMPANIES have a few things that they always have to keep an eye out for.

One of the crucial measures of any company is its free cash flow.

As cash is the lifeblood of every company, having ample cash at hand will allow a company to execute its plans for growth in the future.

The next is the ability to borrow. What ever the case may be, working capital needs are important but that will also be linked to the credit worthiness of a company.

The lower a credit worthiness, the higher the interest that will be charged to a company which will make borrowings more costly.

S&P Global Ratings slashed the credit rating of Serba Dinamik Holdings Bhd to CCC, which is a speculative grade that denotes a company that is vulnerable.

Serba Dinamik logoSerba Dinamik logo

It says the rating of Serba Dinamik were lowered to reflect the company’s sizable debt maturities of about RM1.7bil within the next nine months.

Its view is that the persistent challenges surrounding a special independent review and statutory audit will continue to impede Serba Dinamik’s access to external funding.The ability to refinance that impending sizeable debt will be crucial for Serba Dinamik.

The ongoing issues will cause more trouble among its bankers and it is worth watching whether there will be a higher price to pay to secure funding to refinance that debt.

Like S&P says, restoring market confidence in the stock will be crucial in securing funding. It is therefore imparative that the review of the audit issues raised be undertaken in a thorough and expeditious manner in order to resolve the overhang surrounding the group.

Pricing a rights

THE setting of prices for capital market products is serious business.

Various formulae are adopted plus consultations with various stakeholders in the case of new listings. This is to ensure that pricing of such products remain fair to all parties.

When listed companies go to their shareholders for money via rights issues for example, the pricing takes into account the five day volume weighted average market price (vwamp) of the shares, just prior to the price fixing announcement.

The case of Malaysia Steel Works (KL) Bhd (Masteel) piques interest.

Manufactured steel rods being loaded to a lorry at Malaysia Steel Works plant in Bukit Rajah in Klang.Manufactured steel rods being loaded to a lorry at Malaysia Steel Works plant in Bukit Rajah in Klang.

This week it said that it has revised downwards by more than 30% the price for its rights issue which it first priced on May 6.

To recap, back in December 2020, Masteel had proposed the one-for-two rights issue of up to 226.37 million rights shares, together with one free warrant for every rights share subscribed.

It priced this planned exercise on May 6 at 58.6 sen. Masteel’s share price had closed at 86.5 sen on that day.

Now Masteel wants to price the rights at 39.5 sen, after ascribing another discount to the low vwamp as at Aug 18.

What this means is that the company will be raising less money.

Furthermore, should companies be allowed to reduce their rights issue price after pricing it earlier?

The answer is yes, provided the fact that the company has yet to announce the book closure date for its rights entitlement.

In Masteel’s case, the book closure has yet to take place. And shareholders have already approved the rights issue.

Although it is not ideal to change its rights price midway, the company feels that due to the share price slide of the company, it only is right to price the exercise lower in order to make it attractive to shareholders.

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