Short position – MSM, bank takeover, equity gloves

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MSM attracts attention

DURING THE LAST TWO DAYS, shares of MSM Malaysia Holdings Bhd seem to have woken up from a sleep.

For a title that has long hovered around 60 sen per coin, it rose from 50 sen to 80 sen on Thursday, then continued its spectacular run to peak at RM 1.08 on Friday, before settling at 98 sen . sharing.

So what is going on? MSM appears to be a beneficiary of the commodities super cycle, at least for those of us who believe such a cycle is happening.

What is clear is that there is an ongoing recovery in commodity prices as the global economy pulls out of the coronavirus-induced crisis of 2020.

MSM is the largest producer of refined sugar in the country.

On Thursday, it reported net profit of RM 56.24 million for the fourth quarter ended December 31, 2020, compared to a net loss of RM 40.28 million a year ago, due to an overall margin over high and lower financial costs.

For its outlook, the company indicates that with the implementation of the vaccination program, it anticipates a gradual improvement in national sugar consumption.

He also said he is heading towards capacity and asset optimization in fiscal 2021 and expects the business environment to remain optimistic.

This good news comes after a major glitch.

In October, then MSM CEO Datuk Khairil Anuar Aziz was fired after the board found his clarifications on an adjustment to write off stocks that stood at 36.6 million unacceptable. RM.

Subsequently, a new CEO was appointed in the form of Syed Feizal Syed Mohammad, who said in the company’s recent quarterly report that efforts to streamline the group’s capacity and consolidate operations have reduced their refining costs. and improved capacity utilization rates.

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

Clearly, MSM is on a new path to profitability and will continue to be a business to watch. And it will remain to be seen whether FGV Holdings Bhd continues the sale of a strategic stake in MSM. There will probably be even more suitors now.

Recovery blues

BANKS haven’t been doing well for some time now.

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

When times are good they are the biggest beneficiaries, so when people hold on to their purse strings in anticipation of difficult days ahead, banks are among the first to experience a drop in profits.

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

That said, as soon as the virus is behind us and the economy improves, banks will see a turnaround.

This is how. Business activity will begin to pick up and the demand for loans and financing will increase as people begin to become more confident.

It will also lead to higher interest rates, which are closely linked to bank profits. The higher the rates, the better for them.

Again, although there have been a few green shoots here and there, a firm recovery may still take some time for Malaysia and around the world as Covid-19 cases remain stubbornly high.

This week Malaysia’s largest bank Malayan Banking Bhd reported results largely in line with expectations.

The lender’s basic profit in Q4’20 fell 21% year-over-year, largely due to weak revenue and more bad debt provisions.

In addition, the growth of its loans has been generally stable.

To say that bank profits could recover this year, as many analysts suggest, might be a bit premature.

The possibility is there – the question is when.

Net reversal for gloves

GLOVE stocks have had a great 2020. There is no question of their historic surge after the Covid-19 pandemic gave these companies the one thing that the industry has missed for a while and c was the pricing power.

With this, companies in the industry were charging increasingly higher prices for the same product as buyers around the world rushed for PPE equipment, including gloves.

But as the world embarks on 2021, that dynamic ends up changing.

Supply will explode with foreign, and even domestic, companies venturing into manufacturing a massive number of gloves that will slowly fill the demand gap that currently exists.

And with vaccines aggressively rolled out and more importantly, as hospital beds become available and the number of cases in developed countries begins to plunge, the reverse is going to happen for glove makers at least. medium term.

But in the short term, given the high price-to-earnings (PE) ratio they achieved last year, glove makers are now trading at single-digit PE ratios.

The question now is, what will their income be?

As they begin to see a reversal in their stock prices, which has already seen them drop double-digit percentages so far this year, the question will be whether these glove stocks will then come under even more operational pressure. than before the pandemic. .

A glut will cause problems for a price sensitive industry where money was made by ever increasing volumes. But with the expected incoming supply being so large, then this simple historical dynamic will be called into question like never before, calling into question how even more downside these glove stocks have.

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