Fertilizer woes

Recently, record fertilizer prices appear to be offsetting comfort to upstream planters from current high crude palm oil (CPO) prices and news of a gradual return of some 32,000 foreign workers to the plantation sector. .

To put it into perspective, fertilizer application is 30% to 35% of the cost, which is the higher of the total cost of production (COP) CPO of most growers.

However, with Russia – the world’s largest fertilizer exporter – currently at war with Ukraine, most of the former’s fertilizer operations have been halted.

This has seen the prices of commodities that make up the fertilizer market such as ammonia, nitrogen, nitrates, phosphates, potash and sulphate soar to dizzying record highs, mostly trading higher 30% higher since the start of the year.

For the upstream growers here, the 30% increase in fertilizer prices does not bode well for their entire CPO supply chain, given their other upholding COP, including harvesting, transportation, other property charges and new minimum wage costs.

In 2018 and 2019, some plantation companies reduced their fertilizer applications when CPO prices were very low at around RM2,000 per ton and the application did not catch up in 2020 and early 2021 in due to heavy rains induced by La Nina.

However, the situation is different now with CPO trading at an all-time high, with selling prices averaging around RM6,000 per ton in the first quarter of this year.

More fertilizer application is needed to increase the production of fresh fruit bunches in the fields. This will allow oil palm growers, who are price takers, to take advantage of the currently high palm oil prices.

However, according to palm oil expert Dorab Mistry, the rise in global fertilizer prices has led smallholders to reduce their fertilizer applications by around 50%, while some large companies have reduced by around 10%. their plantations.

By drastically reducing fertilizer applications, this could further exacerbate the current shortage of edible oils, including palm oil, in the global market in the long term.

While this may translate to current CPO prices remaining at high prices over the long term, sometimes such high prices do not necessarily mean good.

This could lead to demand destruction by major price-sensitive palm oil importing countries such as India, China and Pakistan.

Another factor is the impending global recession, should this occur given a protracted war between Russia and Ukraine, among others, greater demand destruction will also occur.

IPO performance

There is interest in the share price performance of the few recent public listings on Bursa Malaysia.

It’s true, we are going through a tough time, with US markets approaching a bear market. It is therefore not surprising that the share prices of these newly listed companies are not doing well.

However, the pattern seen among most of these quotes is that they tend to rise soon after their IPO only for those gains to plummet in the coming days.

Private hospital operator Cengild Medical Bhd floated on April 18 at a price of 33 sen and enjoyed a dizzying flight to 52 sen a few days later. It has since settled at 40 sen apiece

Ten days later, engineering firm MN Holdings Bhd listed at 21 sen, hit a high of 28 sen and is now settled at 22 sen coin.

Yew Lee Pacific Group Bhd hit the market earlier this week at an initial public offering price of 28 sen, climbed to 34 sen and is now settled at 30 sen apiece.

Bursa IPO

Cybersecurity expert firm LGMS Bhd entered the market on June 8 at an offer price of 50 sen and reached a high of 85 sen. It closed yesterday at 77 sen, still at a significant premium of 54% to its listing price.

It is still early days for LGMS and it remains to be seen if its momentum can be sustained or if it will crash closer to its offer price in the coming days.

What investors need to consider are the valuations at which these companies are listed. In the case of LGMS, it was listed at a demanding price-earnings (PE) multiple of 22.12 times historical earnings.

This EP is now even higher at its current price. The question is whether the company can meet such expectations.

All listings mentioned above are on the ACE market. As we know, many companies in the ACE market are quoted on high expectations and then fail to deliver on those promises.

This is why new owners often emerge in these businesses, bringing in new business.

Of course, there are exceptions to the rule. But it would always be safer for investors to pick companies, especially younger, unproven ones that come to market at less demanding valuations.

These companies are likely to perform better after their longer-term listings or the decline in their stock prices, if things don’t go as expected, will be less severe.

Hardware problem

FOR a very long time, the price of cement was in the doldrums. So much so that some of the companies listed on the stock exchange a few years ago were privatized, given the lackluster prospects for commodity makers.

Just leaving Malayan Cement Bhd in the stock market, the immediate barometer of cement in the country can be gleaned through the financial reports of this company.

Its latest financial results show quarterly profit from a year ago increased 400% and revenue increased 112%.

Malayan Cement’s performance was supported by the acquisition of YTL Cement, but in addition to making more money as the sum of the parts is larger than before, cement prices also increased by 12.2% in May. The price of steel bars increased by 20% that month compared to the previous year.

In short, building material prices are on the rise and this will have a significant impact on the construction and real estate industries.

Contractors will normally have clauses that allow them to pass on cost increases if it is a government project. The end result is that if building material purchases were not outsourced sooner, it will cost the government and taxpayers more.

The higher price of building materials will make projects more expensive and this inflationary impact will also limit the value for money the government can hope to get from the high multiplier effects of the construction industry.

Then there are the real estate developers. They cited rising construction costs as a real issue and this may well squeeze margins as sales prices will be sticky on the upside given the huge overhang seen in various aspects of the real estate market.

The impact this will have on the margins of real estate and construction players will also be one to watch in the coming quarters, as the prices of building materials are on the uptrend.