Earnings Exposure To Weakening Ringgit Vs. US$
♦ Weakening ringgit. Following on from RHBRI’s Economic Highlights (4 Mar 2009) and Technical Highlights (7 Mar 2009), in which we raised the concern that the ringgit may weaken further, we now look at the impact on corporate earnings. Note that we had also published a Market Update (Regional Exposure) on 3 Mar highlighting companies with overseas exposure.♦ Sensitivity analysis – forex at RM3.80/US$. RHBRI’s current view is that the ringgit will appreciate to RM3.30-3.40/US$ by the end of 2009 once global economic conditions stabilise and investors begin to shift their focus back on the US’ ballooning budget deficit. For this sensitivity analysis, we have assumed that the ringgit would remain weak at RM3.80 for 2009-2010. This would be some 12-15% lower than RHBRI’s official year-end
assumptions. We have also assumed that all other currencies weaken in tandem vs. the US$.
♦ Exporters – the reality. While a weak ringgit may theoretically be good for export earnings, the reality is that overseas trade especially to US and EU has dropped significantly due to contraction in demand. And if all currencies similarly weaken against the US$, Malaysia’s manufacturers may not necessarily become more competitive.
♦ Neutral for the planters. Plantation companies also do not directly benefit from RM/US$ movements as CPO sales contracts are priced in ringgit, and currency-hedged. The only impact from a weaker ringgit would be in the downstream manufacturing operations. In this regard, we estimate only less than 4% p.a. impact to FY09-10 earnings.
♦ Bad for …
o Airlines. The impact is clear for airlines, ranging from -35% for AirAsia to -103% for MAS in terms of FY09 EPS estimates. Although revenue is predominantly in ringgit, costs (including fuel and maintenance of engines etc.) are in US$.
o Media. US$ newsprint costs would rise, and erode FY09-10 EPS by 7-200% p.a.. We believe NSTP would be worst off among the newspaper companies due to its low earnings base, and the impact would also flow up to Media Prima albeit diluted to -5% p.a.. Similarly FY09-10 forecasts for Astro fall by 74-95% due to low earnings base.
o Motor. Both UMW and Tan Chong have US$ costs (less so for UMW compared to Tan Chong) and would respectively suffer a 10-13% and 29-34% p.a. drop in FY09-10 EPS forecasts. Proton and MBM costs are primarily denominated in Yen.
o Consumer. Higher effective cost of imported raw materials would erode our FY09-10 earnings estimates for the consumer companies including Amway, Hai-O, KFC and BAT, by around 5-23% p.a..
o TNB. TNB’s exposure to higher coal costs which are priced in US$, would reduce our FY09-10 EPS estimates by 8-10%. We note that our forecasts currently assume an average exchange rate of RM3.60 and RM3.50 vs. US$ for FY09-10 respectively.
o Kinsteel. As imported iron ore accounts for 26-28% of production cost, our FY09-10 EPS forecasts wouldfall by 21-36% p.a..
♦ Good for …
o Oil and gas. We estimate 4-15% p.a. uplift to our FY09-10 EPS forecasts for the oil and gas companies including KNM, Petra Perdana, Wah Seong and Dialog, given their overseas earnings.
o IPPs. Tanjong would benefit from a weaker ringgit given its overseas power earnings account for around 50% of operating profits. However, the impact is diluted at the net level due to US$-related interest costs. As a result, we estimate only 3% p.a. boost to our FY01/10-11 EPS forecasts. For YTL Power, the positive impact is marginal at only +2-3% p.a. coming from its Indonesia associate, 35%-owned PT Jawa Power.
o Rubber gloves. The earnings impact to rubber companies is artificially high at more than 150% p.a. for FY09-10 as the sensitivity analysis is applied to only on one variable i.e. US$ exchange rate. We highlight that the actual benefit is normally only for 1-2 months before selling prices are adjusted.
o Timber. We estimate 92-296% p.a. uplift to our FY09-10 EPS forecasts. However, like the rubber gloves sector, plywood selling prices are normally adjusted to preserve long-term relationships with Japanese customers.
o Semiconductor. Assuming demand forecasts remain intact, we estimate 9-10% p.a. boost to FY09-10 EPSfor Unisem and MPI.
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