Short Position – Opcom, La Nina, Taxing

Opcom hype

FIBRE optic cable maker Opcom Holdings Bhd has seen its share price more than double in the last month, climbing 60% in the last five days alone.

At its current price it is trading a price earnings ratio of some 71 times its earnings. So what gives? Apparently, the company is hoping to capitalise on demand for fibre optic cables which it says will rise given the government’s plans to expand fibre network infrastructures in the country.

The point is valid, as countries like Malaysia race to strengthen their connectivity, including building out 5G infrastructure.

However, competition in supply fibre optic cable is rife.

There are large telecom companies in Malaysia that do not purchase fibre optic cable from local players like Opcom because importing the products has proven to be more viable.

It is after all a commoditised product, in the sense that many manufacturers around the world are making and selling fibre optic cables.

To be fair to Opcom, they themselves admit to the steep competition, noting in their recent financial report that foreign competition continues to be a significant challenge to its business.

Another notable change in Opcom is a change in shareholding.

Businessman Datuk Eddie Ong Choo Meng, who has been investing in several public-listed companies, had emerged as a major shareholder in the fibre-optic manufacturer with a 15.276% stake in February this year.

Other companies where he has surfaced include Hextar Global Bhd, Rubberex Corp (M) Bhd, Complete Logistic Services Bhd, SWS Capital Bhd and more recently in KIP Real Estate Investment Trust.

Perhaps the interest in Opcom is driven more by the presence of Ong, who has been making waves in the corporate world. But the question is, will Opcom be able to see its earnings rise sufficiently high in order to justify its lofty valuations?

La Nina returns

THE current supply tightness in crude palm oil (CPO) is expected to worsen should a strong La Nina weather phenomenon return by this December and prolongs till February next year.

La Nina, which brings heavier-than-usual rainfall, could affect the output of fresh fruit bunches in the estates that have been disrupted by severe shortage of harvesters and poor fertiliser application amid the Covid-19 pandemic outbreak.

The recruitment process for foreign labour may not be easy, especially with the United States Customs and Border Protection issues on forced labour against several local plantation companies.

<a href=Sime Darby Plantation” src=”” onerror=”this.src=’'” style=”width: 620px; height: 413px;” />Sime Darby Plantation

Planters are also experiencing a 30% hike year-to-date in the price of fertiliser – which represents 35% of their total production cost – due to lower supplies and lack of vessels and containers space to ship the fertiliser.

Back in 2018 and 2019, some plantation companies had reduced the fertiliser applications when CPO prices were very low and the application did not catch up in 2020 and early-2021 due to heavy rainfall.

Given the Covid-19 environment, poor estate maintenance has also given rise to pests and other infections in many estate holdings nationwide. All these factors combined together will result in a further drop in Malaysia’s palm oil production going into 2022.

However, one big consolation for planters is that the CPO price is expected to remain strong, trading above RM3,000 per tonne at least till the first quarter of next year.

The price of CPO has surged by more than 50% in the past one year due to the tight supply situation.

Another important development being monitored is the expiry of Indonesia’s three-year moratorium on new plantations last Sunday with no indication of an extension.

Industry observers say a potential extension of the moratorium may suggest CPO prices could remain elevated in the future given the slow replanting activities in the last four years given the volatile CPO prices.

On the other hand, should an extension be granted, Indonesia, which is the world’s largest palm oil producer, will stand to become the target for environmentalists and draw mounting criticisms ahead of the United Nations Climate Change Conference scheduled in November.

Prior to the signing of the moratorium, the Indonesian government is believed to have issued out a number of licences for new plantations, of which some still have yet to commence.

Taxing burden

THE one consequence of the pandemic has been the dearth of income taxes. Tax collection has been slow with actual direct tax collection as of July 2021 coming in at 56.2% and indirect at 59% of target.

The slowdown in economic activity and subpar performance of companies are the reason for the drop in taxes. The repeal of the goods and services tax has meant that capturing a portion of lost taxes through an economic recovery will take time as there will be a lag effect between performance of companies and taxes paid, apart from a less efficient sales and service tax.

Talk has been that to plug the gap, other taxes will have to be considered and one suggestion has been a capital gains tax.

Such a tax was looked at during the Pakatan Harapan government reign but it was not introduced, likely because the damage to the stock market would have been more than the taxes collected.

But the recent pandemic-fuelled rally where transactions hit new highs would have swayed calculations in a different direction.

The problem is that boom in activity did not last and most would say that imposing a capital gains tax on transactions would just make Malaysia less attractive to foreign investors, given the markets in the region Bursa Malaysia is in competition with do not have such taxes.

Factoring the overall poor performance of the local stock market over the past few years and the drop in the ringgit’s valuation against the dollar would have stocks on Bursa Malaysia less attractive than peers in regional markets.Maybe the tax authorities should look at trading activity on Bursa Malaysia for taxes. After all, those engaged in short-term trading and that being their profession, are liable for taxes of profit made. Getting people to pay up for trading profit could be the first step instead of a broader tax on capital gains.