Wednesday, December 30, 2015

Some questions to ponder for 2016 and beyond

It is easy to think that all companies that sells overseas (exports) their goods or services will do well in 2016. Nobody if I were to ask 12 months ago would think that our Ringgit would have dropped to 4.30 against USD. Nobody would expect the unusual exposure of the supposedly wrongdoings of our government would happen in 2015 - true or not many still think that it is true.

Same things may happen again for 2016 - I don't know. If one is to look at now, companies that mainly depend on local input cost and sells overseas would be an easy pick. They are of course all the companies such as the rubber gloves - Top Glove, Hartalega, Supermax, Kossan - or companies like Wellcall, Chin Well or the furniture companies like Latitude, Homeritz - or those in the electronics exports - Inari, Vitrox or even the new kid on the block, Aemulus etc.

Would they continue to perform. All these companies have already done well and their shares have reflected that - some have increased many folds. Of course, the companies claimed that they are better in costs control, manage the companies better (Hey, nobody would say that they are not good) but in actual fact it is the Ringgit vs Dollar - STUPID! It is the low oil price and price collapse in almost all other commodities - copper, gold, palm oil, iron ore, cotton. That's the story of 2015.

Now, if oil can drop to USD36 from USD100 a year ago, can it go back to USD60 in a year? What if Ringgit improves to 3.70 or 3.80 - let's not be too optimistic that it would go back to the level we see 18 months ago i.e. 3.3. What would happen to all those super performing companies in 2015? Would they look like an Average Joe again? Let's not forget their extra margins for 2015 was the currencies. Nothing else!

Hence a company that usually makes profits of RM100 million back in 2013, 2014 - for 2015 alone they could make RM300 - RM400 million. An example, an exporter that typically makes 10% net margin, just because Ringgit dropped 30% in one financial year suddenly stands to make that extra 30% margin without being extra smart. Hence, if the revenue is RM1 billion and typically the company would make RM100 million profit, they stand the chance to make RM400 million just for 2015 (see the change). There's no strategy involved. That's luck and they were at the right place at the right time. (Nothing wrong with that, but we think that they suddenly will continue to make the same)

But all of a sudden we think these companies are superstars. They are not. They are good but not extraordinary. One if looked further will know that the owners are not stupid and they have been selling. They know that this unusual situation does not come all the time and will not last. But we are that stupid to chase for them to sell.

So when things go back to normal, they will perform normal. But the share price at the moment is not normal. It is expensive if we average out the performance in the last 5 years. Only for 2015, they look cheap.

On commodities

There are so many theories of what would happen to oil price next year and I am not sure which is right. Nobody knows. The main story is that Saudi wants to kill off all the fracking companies in US and Iran since the embargo is to be lifted early next year.

Of course the other story is that China is slowing down - on purpose or due the actions and policies of Xi Jinping. Suddenly, they do not need that many iron ores. China does not think they will consume that much steel, oil as expected. China was overbuilt and they do not want to continue to be the low costs producer for the world. They want their people to start consuming what they produce not helping the world to live a better life while they slog 14 hours a day. They do not want their people to have 2 jobs anymore, unlike Malaysia.

What's for 2016?

No predictions as 2015 was not normal. I am not sure how abnormal 2016 would be. However, what I can say is that let's identify companies that are cheap, fundamentally remain unchanged despite the setback of 2015. The companies that would continue to be managed well. Companies that will consistently pull through and when the times are right they will be back to normal.

But I am not going to buy any companies that are just plain expensive but just because they did extremely well for 2015 we think they will be good for 2016 and beyond.

Happy New Year!


Big Sea said...

Actually I did expect MYR to weaken significantly in 2014 and 2015 after our General Election. My guest however was based upon poor financial discipline from our government and outflow of fund due to FED raising the interest rate. The oil price is a complete surprise to me though.

Export companies have multiple tailwind in 2015.
1). Weak MYR.
2). Low oil price. Low oil price actually stimulated world economy, increasing consumption. Lower oil price also contributes to lower cost for plastic industry.
3). Low commodities price.
4). Rising cost of manufacturing in China

My call in 2016 is that MYR will continue to weaken, but at a much slower pace. Oil will remain low for at least 2016. Commodities price is hard to call. As such, export companies will still be doing well. Export companies with factories in Indo China will do even better.My call will be MAGNI, Prolexus [expansion in Vietnam], PCCS, UMSNGB, HEVEA, LUXCHEM.

Anonymous said...

When MYR depreciation helps improve the profit margin of exporters, as a wise buyer, a strong USD could also be a good excuse for a lower price from a buyer's point of view.

I feel MYR depreciation cannot be the only reason why these companies are performing so well, but mainly yes.

Unknown said...

"They do not want their people to have 2 jobs anymore, unlike Malaysia" lol!!