Effect of Forex Rates Changes on Cash Balance

Sometimes you will see this item at the end of a Cash Flow Statement: “Effect of exchange rate changes on the balance of cash held in foreign currencies” or “Currency Translation Differences” or “Effects of exchange rate fluctuations on cash and cash equivalents” or other similar terms. The following is a snapshot of OLDTOWN’s Cash Flow Statement (AR 2017). For simplicity, I will call this line item as “FX Rate Effects on Cash Balance” in this post.

What exactly does this line item mean?

FX Rate Effects on Cash Balance” doesn’t impact Income Statement, so it won’t show up there. To be more precise, this item is not taxable.

Let’s take OLDTOWN as example. OLDTOWN sells products in other countries (as following). So OLDTOWN is selling products in Renminbi, Indonesian Rupiah, Singapore Dollar, and others. Since OLDTOWN is a Malaysia based company, so OLDTOWN will report all their revenue and expenses in MYR.

OLDTOWN Geographical Segment

In reality, OLDTOWN has actually sold some of their products in other currencies, and OLDTOWN has paid out some of their expenses in other currencies as well. In a very short time period, it doesn’t really matter; you can just convert it to MYR and that’s all there is to it.

The problem is that over the course of a year, the exchange rates on those currencies are going to change in some way. So, maybe the Renminbi becomes more valuable, the Indonesian Rupiah falls in value versus the MYR. When that happens, what ends up happening here is that even though OLDTOWN recorded their revenue in MYR, the actual Cash Flows will not match up because the value of some of those currencies has changed during this time period. (Remember Accrual Accounting?)

This is recorded in the “FX Rate Effects on Cash Balance” line item, normally shown on the Cash Flow Statement at the bottom.

This line item just corresponds to these exchange rate changing over time and the fact that these exchange rates may have changed in between the time when something was sold and then when the company actually even recorded it as revenue or paid out as an expense.

Don’t worry too much about the specifics of how this actually happens. Just remember the following:

  1. Income Statement – No impact because all revenue are reported in the company’s local currency.
  2. Cash Flow Statement – Net Income hasn’t changed, but “FX Rate Effects on Cash Balance” increasing mean that the company has increased its cash flow as a result of how other currencies have changed.
  3. Balance Sheet – Cash balance will be increased accordingly.

If “FX Rate Effects on Cash Balance” is a negative, it works exactly the same way.

How does this line item impact your analysis? Well, just trust the company’s accountants and auditors. Don’t ever forecast this number as this involves “rocket science”…


PADINI Updates – 11 Nov 2017

PADINI Analysis File – https://lcchong.files.wordpress.com/2017/11/padini-fy17-q4.xlsx

For growth drivers and risks, you can refer to MD&A (Management Discussion and Analysis) in their Annual Report 2017. As I agree with their disclosure, so I have no further comment.

My main concern is their increase in cost of sales due to the increase of inventories written off, inventories written down and inventory losses (collectively known as inventories losses) of approximately RM32 million. This is an initiative to embark on a more stringent inventory policy with the use of stricter write off/down estimates. I wonder how this policy impact PADINI’s gross margin in the future. This is a question need to be asked in their coming AGM, but I won’t be able to attend the AGM. Hopefully, someone can ask and share their response with me.

At RM5.10 (9 Nov 2017), in my opinion, PADINI almost fully valued where range of its fair value is from RM4.5 to RM 5.5. I will continue to hold and won’t accumulate PADINI for the time being.

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Correction to PETGAS Updates (18 Oct 2017)

As a follow up to “PETGAS Updates – 18 Oct 2017“, I have uploaded a corrected analysis file. The corrections addressed the following mistakes:

  1. Finance Lease Liabilities – I overlooked footnote of Finance Lease Liabilities (Annual Report 2016, page 73-74). I over-estimated principal and interests of Finance Lease Liabilities for the coming years. After the correction, borrowings and interest expenses is reduced accordingly. This implies a slight increase in fair value estimation: 19.80-23.00.
  2. I have updated the “Key Ratios” worksheet to be “Utilities – Regulated Gas” specific.

PETGAS Updates – 18 Oct 2017

PETGAS Analysis File – https://lcchong.files.wordpress.com/2017/10/petgas-fy17-q21.xlsx

In the foreseeable future, I think PETGAS is expected to remain stable. You won’t find any WOW factor in short term though.

However, with existing Gas Processing Agreement, Gas Transportation Agreements and Regasification Service Agreement signed with PETRONAS, I believe that PETGAS income is sustainable. Besides, PETGAS will allocate around RM4.5 billion capex to cater for the growth projects, such as the LNG Regasification Terminal (RGT) and the Air Separation Unit (ASU) project, both of which are located in Pengerang.

The RGT project is now at 25% progress on ground and the first storage tank should be commissioned before the end of 2017 while the second tank, which will complete the whole project, will be commissioned by the first quarter of 2018. Its Pengerang Gas Pipeline Project is also on track and expected to be completed this year, which will enable the initial supply of gas from the existing Peninsular Gas Utilisation (PGU) pipeline network to Pengerang and vice versa.

Thus, with the above catalysts, I believe PETGAS will continue to grow in long term.

In my opinion, its fair value is range 19.5-22.31 (base scenario), and 17.98-20.68 (bad scenario). At 18.50, PETGAS is undervalued. Because my average price of PETGAS was 8.9, I have accumulated some PETGAS shares recently.

KAREX Preliminary Study – 26 Sep 2017

Analysis file – https://lcchong.files.wordpress.com/2017/09/karex-fy17-q4.xlsx

In short, despite Karex prices dropped from 2.60 to 1.48 (taking bonus shares into consideration), in my opinion, Karex is still overvalued. DCF is not really suitable for KAREX.

  1. EBITDA Multiple – Referring to the following EBITDA multiple, if compare to manufacturing companies in Malaysia and US, KAREX’s EBITDA multiple is very high. This is an indication of overvalue.
    1. My estimation – 32x
    2. WSJ’s estimation – 30x
  2. If you can’t comprehend EBITDA Multiple, then you check out KAREX’s P/E which is 53x. If we convert this to Earning Yield, 53x is equivalent to 1.9%.

I have been toying some high growth rates, but I just couldn’t “make Karex undervalued”. Therefore, I will pass KAREX for the time being, but I will keep it in my watch list.

I want to thank my relative who shares EquitiesTracker’s study on Karex with me. This saves my time a lot.

If you ever open my analysis file, you will see quick and dirty assumptions for many items, such as:

  1. Segregation of debts for FY2017
  2. Interest rates for cash balances
  3. Interest rates for debts
  4. And others….

Anyway, all of these quick and dirty assumptions won’t impact the valuation a lot (thus won’t change my view) unless their 2017 Annual Report releases something extremely off from my assumptions.

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BURSA Updates – 26 Aug 2017

BURSA Analysis File – FY17 Q2http://wp.me/a17Hxk-2IN

In the foreseeable future, I think BURSA won’t have significant catalysts to boost up its growth. This year may have higher market activities due to the coming general election.

Having said that, BURSA will still be able to achieve steady performance. Also, BURSA dividend payout is more than 90%. At 10.12, valuation of BURSA is not really attractive where I believe its fair value is around 11.20 (±0.50). The uncertainty risk of buying at the current level is more towards medium.

Besides, if you buy BURSA now, dividend yield is less than 4%.

I will continue to accumulate BURSA if there is any significant correction.

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PADINI Updates – 21 Aug 2017

PADINI Analysis File – http://wp.me/a17Hxk-2IK

I have updated analysis file of PADINI based on FY17 Q3 results.

In this release, I have made some further fine tuning to the modelling.

At 4.23, in my opinion, PADINI almost fully valued where its fair value around 4.45. I will continue to hold and won’t accumulate PADINI for the time being.

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