Short Position - Valuing a currency, LEAP to ACE, Ringgit poser for planters


THERE is much comparison with the ringgit against the US dollar, and in reality that is really not fair.

Valuing a currency

THERE is much comparison with the ringgit against the US dollar, and in reality that is really not fair.

Going by the size of the US economy, the status of the dollar as the world’s reserve currency and the preference for the dollar in times of uncertainty, there is an easy explanation why the US dollar is strong.

Even with the dollar’s strength, one has to look at the ringgit’s position against a bunch of other currencies that have performed worse against the dollar.

In short, the ringgit has done well against a basket of currencies apart from the dollar and the ringgit on a nominal effective exchange rate basis is undervalued.

But when comparing against the Singapore dollar, well, the same argument can be had where the Singapore economy has a better credit rating and its wealth far surpasses its debt.

But the shame of it all for the ringgit in comparing with the Singapore dollar is that both countries have people who share the same ethnicity and cultures.

We celebrate the same major religious festivals, speak the same languages and share the same type of food, albeit it tastes better here than in the republic.

But to see one Singapore dollar buying RM3.24 today when it started off at 1:1, one cannot help to wonder what went wrong. And that is despite Malaysia having the better luck when it comes to natural resources.

A reversal of the decline can surely start by having a commitment to correct the wrongs in the country, to put in place the universal accepted standards of governance and have the right policies that will steer the country in the proper direction.

LEAP to ACE

THE much awaited proposed framework for companies from the LEAP Market to get transferred to the ACE Market is here. Well, not quite.

This week, Bursa Malaysia said it is seeking public feedback on the amendments it needs to make changes to its listing rules to facilitate this process of accelerating LEAP-listed companies into the ACE Market. This has been something long awaited by market participants.

Bursa said any LEAP Market-listed entity seeking a transfer of listing must meet the suitability assessment by a sponsor under the ACE Market listing rules, has been listed for at least two years on the LEAP Market, and completed its business plan and fully used the proceeds raised from its LEAP listing.

On paper, the ACE Market listing rules do not require applicants to have a profit track record. This would mean that LEAP Market-listed companies should not have much challenges in that aspect.

Bursa MalaysiaBursa Malaysia

However, what is interesting to note is that in reality, it does seem that only profitable companies get approved to list on the ACE Market. And those that typically list, have profits of at least RM5mil.

Hence the question that arises is do the companies coming through the LEAP Market funnel into the ACE Market will also have to display such high profits? If so, it may hamper the number of companies who get through.

That may not be a bad thing, considering that companies that are already profitable have a higher chance of success and hence pose less risk to investors. But if that unwritten rule is applied, then having a LEAP to ACE Market funnel for such listings may prove to be not so useful.

Perhaps some middle-of-the-road approach ought to be taken, considering that the LEAP Market companies have proven some level of their mettle following their two years of being listed on the former market.

Ringgit poser for planters

A potential appreciation of the ringgit against the US dollar by the end of this year will likely have a mixed impact on local planters’ future earnings.

Fundamentally, the ringgit is now seen to be on a stronger footing, supported by firming domestic demand, robust external sector and still elevated global commodity prices.

Despite being traded around RM4.45 to the US dollar over the last two weeks, the weakest in five years, the local currency has appreciated against other major currencies such as the euro (4.1%), British pound (4%) and Japanese yen (8.4%) over the past seven months.

For local plantation companies, the strengthening of the ringgit to the greenback will be most beneficial particularly for those with the bulk of their borrowings and fertiliser costs that are denominated in the US dollar.

For example, fertiliser, which accounts for 30% to 35% of most oil palm planters’ total cost of production, soared over 30% at record prices. This makes it rather challenging for planters to manage their rising costs.

Hence, a ringgit appreciation could help lift upstream planters’ earnings before interest, tax, depreciation and amortisation as well as improve on their net gearing levels.

A local brokerage recently cited that the US dollar appreciation against the ringgit by 1% could result in an impact of RM23mil for Sime Darby Plantation Bhd.

On the flip side, a strong ringgit appreciation, however, will not benefit the top line of many upstream plantation companies. This is because most of these planters’ upstream businesses are adopting the crude palm oil (CPO) selling strategy at an average of 70:30 ratio in the spot and futures contracts.

With only 30% used for forward contracts, a potential ringgit appreciation will not likely provide good returns to upstream players.

The CPO spot price is currently trading at around RM4,350 per tonne while the third benchmark CPO futures contract is trading at about RM4,270 per tonne.

Bearing all these factors, all eyes are now set on the release of the planters’ second-quarter results for 2022, slated by the end of this month.

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ringgit , dollar , planters , bursa , ace market , short position

   

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