This article first appeared in Capital, The Edge Malaysia Weekly on August 12, 2024 - August 18, 2024

THE strengthening of the ringgit against the US dollar (USD) is expected to show up in better earnings for players across several industries on the back of lower input costs from imported raw materials, analysts say.

Beneficiaries of the ringgit’s strengthening include importers of automobiles as well as players in the transport, consumer, media and healthcare segments.

Choo Swee Kee, chief investment officer of TA Investment Management Bhd, tells The Edge: “Importers like local retailers Padini Holdings Bhd (KL:PADINI), AEON Co (M) Bhd (KL:AEON) and some motor traders such as DRB-Hicom Bhd ­(KL:DRBHCOM) will benefit. However, Japanese car importers will not benefit, as the yen is appreciating faster than the ringgit. Companies that have USD borrowings — Tenaga Nasional Bhd (KL:TENAGA) and Yinson Holdings Bhd (KL:YINSON) — would benefit from translation gains on the USD.”

Last Monday, the ringgit climbed as much as 2.28% to 4.4250 against the greenback, marking its most significant gain against the USD in a single day since October 2015 and setting it as one of the top-performing Asian currencies year to date (YTD).

By Thursday, the ringgit settled at 4.4730, for its strongest level since April 2023, with foreign exchange experts and analysts predicting that the local unit would continue to strengthen in the coming months.

With the ringgit appreciating in July, the FBM KLCI rose 2.2% month on month as foreigners came in as net buyers, bringing in RM1.3 billion versus local institutions’ outflow of RM688 million.

In an Aug 2 note, AmInvestment Bank Research said the stronger ringgit’s positive impact on the automotive sector is due to the lowering of the cost of imported content, highlighting Sime Darby Bhd (KL:SIME) and Tan Chong Motor Holdings Bhd (KL:TCHONG) as beneficiaries since their components are priced in USD. Sime Darby imports luxury brands such as BMW, Jaguar, Land Rover and Porsche; Tan Chong Motor is the franchise holder of Japan’s Nissan vehicles in Malaysia.

“However, these [components] are not priced on the spot market rates, being dated three to six months, and therefore the strong ringgit needs to prevail at these rates for longer for the benefits to be apparent,” the research house pointed out.

Malacca Securities Sdn Bhd head of research Loui Low recommends that investors monitor consumer companies that import their raw materials in foreign currencies.

The analysts concur that for the consumer segment, the weaker USD would be a boon for most staple players that source raw materials overseas that are usually denominated in USD.

“It would be earnings positive for companies such as Berjaya Food Bhd (KL:­BJFOOD), Power Root Bhd (KL:PWROOT), Nestlé (M) Bhd (KL:NESTLE) and Guan Chong Bhd (KL:GCB),” says AmInvestment Research.

For healthcare players, the impact of a stronger ringgit on the core earnings of Apex Healthcare Bhd (KL:AHEALTH) and IHH Healthcare Bhd (KL:IHH) would be mildly positive or less than 2%, the research house added.

To this end, MIDF Research tells The Edge that KPJ Healthcare Bhd (KL:KPJ) (“buy”, target price [TP]: RM2.54) will benefit on the premise that the healthcare group has the advantage of stable revenue from locals while medical tourists may be paying in USD, which will be mitigated by the lower cost on imported drugs and equipment. MIDF Research has a “buy” call on IHH Healthcare with a TP of RM7.35.

It adds that most companies under the research house’s coverage — Hup Seng Industries Bhd (KL:HUPSENG) (“buy”, TP: 99 sen), Spritzer Bhd (KL:SPRITZER) (“neutral”, TP: RM2.55) and Leong Hup International Bhd (KL:LHI) (“buy”, TP: 70 sen) — will benefit from better local sales and cheaper imports of raw materials, packaging and machinery.

Similarly for Nestlé Malaysia, whose tepid earnings results for the first half of the year reflect the “poorer consumer spending”, analysts have pencilled in prospects of improved profit margins from reduced input cost.

“This is especially so since the group imports most of its raw materials in USD but sells in ringgit,” says MIDF Research. According to the research house, about 80% of Nestlé Malaysia’s products are sold in the local market.

“A stronger ringgit is naturally negative for exporters such as those in technology, oil and gas, and selected manufacturing companies. For technology companies with USD-denominated sales exposure and that are partly mitigated by locally sourced input costs, there could be an estimated 5% to 10% downside to earnings,” notes AmInvestment Bank Research.

“Conversely, QL Resources Bhd (KL:QL) (‘buy’, TP: RM7.25) and Fraser & Neave Holdings Bhd (KL:F&N) (‘buy’, TP: RM37) may see exports impacted by the weakened USD. Note that for every 5% [decline in the] USD, profitability for QL and F&N would slip 3% and 1% respectively,” says MIDF Research.

Having said that, while a strong ringgit does not bode well for the technology sector, Malacca Securities’ Low believes the impact could be neutralised, as the sector is supported by the artificial intelligence (AI) theme.

“The tech sector [has the bulk of its business in] exports; so, a stronger ringgit will affect the companies’ earnings. Having said that, in view of the AI theme and overall recovering earnings after a dull 2022 to 2023, we expect overall earnings to go up, at least for the near term,” Low says.

“The year 2021 was good but 2022 to 2023 were dull, owing to declining share price trends. In fact, in 2023, most of the tech earnings were lower than in 2022,” recalls Low, citing semiconductor players Frontken Corp Bhd (KL:FRONTKN) and Inari Amertron Bhd (KL:INARI) as examples.

In addition, AmInvestment Research points out that other exporters such as oil and gas as well as selected manufacturing companies will also not benefit from the ringgit’s appreciation.

“For technology companies such as Inari Amertron, Pentamaster Corp Bhd (KL:PENTA), Vitrox Corp Bhd (KL:VITROX), MPI (Malaysian Pacific Industries [KL:MPI]) and Globetronics Technology Bhd (KL:GTRONIC), USD-denominated sales exposure, partly mitigated by locally sourced input costs, could have an estimated 5% to 10% downside to earnings.

“For oil and gas players such as Yinson Holdings Bhd (KL:YINSON), Hibiscus Petroleum Bhd (KL:HIBISCS) and Bumi Armada Bhd (KL:ARMADA), the ringgit’s appreciation is expected to be negative for such companies with exposure to upstream operations, as sales of Brent crude oil and/or natural gas are in USD,” says AmInvestment Research, adding that the stronger ringgit would also be detrimental to export-oriented glove makers, as more than 90% of their revenue is USD-denominated.

“However, the impact on glove makers varies according to the magnitude of hedging arrangements. Based on our estimates, for every 10% strengthening of the ringgit against the USD, the impact on core earnings will be a decrease of 0.5% to 1% for Hartalega Holdings Bhd (KL:HARTA), 1.3% to 1.5% for Kossan Rubber Industries Bhd (KL:KOSSAN), and 11% to 13% for Top Glove Corp Bhd (KL:TOPGLOV), which does not have much forward foreign currency contracts and instead relies on a natural hedge,” explains AmInvestment Research.

For context, MIDF Research in an Aug 1 report says the ringgit, which erased its losses this year and appreciated a mere 0.1% YTD as at end-July, remains the best-performing regional currency under its coverage.

“This marks a significant rebound from being one of the worst performers in 2023, indicating an encouraging recovery from its oversold position last year.”

MIDF Research points out that in contrast, the rupiah has been among the worst performers this year, plunging 5.3% YTD as at end-July after being the best-performing regional currency last year.

“The YTD movements of the ringgit and other regional currencies suggest corrections from oversold or overbought positions. The broad strength of the USD (because of the delayed rate cut expectations) has led to the depreciation of almost all major currencies of advanced economies against the greenback,” it says.

“Only the pound sterling (+1% YTD) has gained against the USD, while the euro (-1.9% YTD) has reversed last year’s gains. The Taiwan dollar (-6.8% YTD) overtook the yen (-6.0% YTD) as the worst-performing currency we track, following the Bank of Japan’s surprise move to hike its interest rate,” says the research house, which anticipates that the USD will trend lower against the ringgit in the second half with a target range of 4.45 to 4.40.

“Moreover, any intermittent rebound in USD/ringgit should be seen as a selling opportunity.”

MIDF Research anticipates a more aggressive inflow into Malaysia’s equity and bond markets, owing to a rising appetite for riskier assets, once the US Federal Reserve starts easing interest rates, increasing demand for the ringgit.

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