Fertiliser woes

       OF late, the record high fertiliser prices seems to offset upstream planters’ solace in the current strong crude palm oil (CPO) prices and news of a gradual return of some 32,000 foreign workers into the plantation sector.

       To put into perspective, fertiliser application represents 30% to 35% of cost, which is the highest in most planters’ total CPO cost of production (COP).

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

       This saw the prices of raw materials that constitute the fertiliser market such as ammonia, nitrogen, nitrates, phosphates, potash and sulphate soaring to dizzying record prices, mostly trading over 30% higher since the turn of the year.

       For upstream planters here, the 30% hike in fertiliser prices does not bode well for their entire CPO production chain, given their other rising COP upkeep including harvesting, transportation, other estate charges and the new minimum wage costs.

       Back in 2018 and 2019, some plantation companies reduced their fertiliser applications when CPO prices were very low at around RM2,000 per tonne and the application did not catch up in 2020 and early 2021 due to the La Nina-induced heavy rainfall.

       However, the situation is different now with CPO trading at record high, with the average selling prices at about RM6,000 per tonne in the first quarter of this year.

       A higher fertiliser application is needed to boost the fresh fruit bunch output in the estates. This will enable oil palm planters, who are price takers, to reap the benefit of the current high CPO prices.

       However, according to palm oil expert Dorab Mistry, the increasing global fertiliser prices have led smallholders to slash their fertiliser applications by about 50%, while some big companies have cut about 10% in their estates.

       By severely reducing the fertiliser applications, this could further aggravate the current shortage of edible oils including palm oil in the global market in the long run.

       While this could translate into the current CPO prices staying at lofty prices in the long run, sometimes such high prices does not necessarily meant to be good.

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

       Another factor is the looming global recession, should it happen given a prolonged Russia-Ukraine war among others, more demand destruction will also occurs.

       IPO performance

       THE share price performance of the few recent public listings on Bursa Malaysia piques interest.

       It is true, we are in tough times, with the US markets nearing a bear market. So it shouldn’t be surprising that the share prices of these newly listed companies don’t do well.

       However, the trend noticed among most of these listings is that they tend to spike soon after their flotations only for those gains to fizzle out in the days to come.

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

       Ten days later, Engineering firm MN Holdings Bhd listed at 21 sen, touched a high of 28 sen and is now settled at 22 sen a piece.

       Yew Lee Pacific Group Bhd came to the market earlier this week at an initial public offer price of 28 sen, spiked to 34 sen and is now settled at 30 sen a piece.

       Bursa IPO

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

       It is still early days yet for LGMS and it’s left to be seen if its momentum can be kept up or will it fizzle down closer to its offer price in the days to come.

       What investors should take note of is the valuations these companies are listing at. In LGMS’ case, it was listed at a demanding price-earnings (PE) multiple of 22.12 times historical earnings.

       That PE is now even higher at its current price. The question is, can the company live up to such expectations.

       All the listings mentioned above are on the ACE Market. As we know, there are many ACE Market companies that get listed on high expectations only to later fall short of those promises.

       This is why there are often new owners emerging in these companies bringing in new businesses.

       Of course, there are exceptions to the rule. But it would always be safer for investors to pick companies, especially younger companies which have yet to prove themselves, that come to the market with less demanding valuations.

       Such companies are likely to perform better post their listings in the longer run or their share price slide, in the event things don’t pan out as planned, will be less severe.

       Material problem

       FOR the longest time, the price of cement has been in the doldrums. So much so that some of the listed companies some years back were taken private, given the unexciting prospects for the basic material makers.

       Leaving just Malayan Cement Bhd on the stock market, the immediate barometer of cement in the country can be gleaned through the financial reports by that company.

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

       Malayan Cement’s performance was bolstered by the acquisition of YTL Cement but apart from making more money because the sum of parts are larger than before, cement prices are also up 12.2% in May. The price of steel bars was up 20% that month from a year earlier.

       In short, building material prices are on the uptrend and that is going to have a telling impact on the construction and real estate industries.

       Contractors normally will have clauses that will allow them to pass on cost increases if it is a government project. The end result is that if purchases of building materials were not contracted out earlier, it is going to cost the government and taxpayers more.

       The higher price of building materials will make projects more costlier and that inflationary impact will also limit the bang for the buck the government can hope to achieve from the high multiplier effects of the construction industry.

       Then there are the property developers. They have been bringing up rising construction costs as a real problem and that can well squeeze margins, as selling prices will be sticky on the way up given the huge overhang that is seen throughout the different aspects of the property market.

       What impact that will have on the margins of property and construction players will also bear watching in the quarters ahead as the price of building materials are on the uptrend.