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This article first appeared in The Edge Financial Daily, on April 11, 2016.

 

KUALA LUMPUR: As the ringgit reverses its losses to trade higher against the US dollar this year, it has brought mixed fortunes to local companies, raising concerns over lower foreign-exchange (forex) translation gains.

But Classic Scenic Bhd managing director (MD) Lim Chee Beng isn’t the least worried about the local currency’s U-turn even though the group exports 99% of its wooden picture frame mouldings overseas.

Last year, the ringgit had its worst year since 1997, shedding about 20% on the back of plunging oil prices, the prospect of higher US interest rates and the 1Malaysia Development Bhd financial scandal.

However, year to date (YTD), the ringgit has strengthened 8.32% against the US dollar. It closed up 0.37% at 3.9015 last Friday.

In an interview with The Edge Financial Daily, Chee Beng, 53, who is a major shareholder of Classic Scenic with a 49.33% stake, dismissed concerns over the volatile forex rate, saying the group’s strong margin will sufficiently mitigate the risk.

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“Our forex gains may be lesser if the US dollar continues to lose its value, but our overall net profit margin should remain strong at double digits,” he said.

Classic Scenic’s net profit margin ranged from 17% to 21% between 2010 and 2015. For the financial year ended Dec 31, 2015 (FY15), the group’s net profit margin stood at 21%.

Underpinned by the group’s hedging policy, Chee Beng does not expect forex volatility to have a significant impact on the group’s financial performance this year.

“We hedged approximately 50% to 60% of our actual or forecast revenue at an average rate of 4.1 against the US dollar and the other 40% to 50% is opened to [the] spot rate.

“In the scenario [that the ringgit continues to strengthen against the greenback and] the spot rate is 4, the average realised rate would be around 4.05 to 4.06, which is still higher than our average realised rate of 3.6 in FY15,” he explained.

The group saw its net profit jump 18% to RM2.71 million in the first financial quarter ended March 31, 2015 from RM2.31 million a year ago, mainly due to higher sales revenue from exports of wooden picture frame mouldings and the strengthening of the US dollar. Revenue also grew 11% to RM13.91 million from RM12.51 million.

North America remains Classic Scenic’s main and most lucrative market, with 80% of its revenue coming from the region.

According to Chee Beng, the group will continue to focus on this region. Underpinned by US economic recovery, he is expecting performance in FY16 to be better than last year, with the group’s revenue growth to be at 10%.

This may also allow Classic Scenic to declare a higher dividend, he noted.

The group, which had a net cash of RM21.39 million as of end-December 2015, declared a dividend of 10 sen for FY15, up from eight sen last year, giving it an attractive yield of 7.4%.

“Overall, we expect our business to improve in FY16 in view of the recent US Federal Reserve’s (Fed) announcement of positive economic indicators,” Chee Beng said, adding that Classic Scenic’s orders from the United States have started increasing since the beginning of this year compared with a year ago, promising continued strong sales growth from the region.

Classic Scenic saw its revenue for FY15 fall 8% to RM53.96 million from RM58.41 million in FY14, which Chee Beng attributed to a high base effect in FY14 when the group’s major customers increased their orders based on the Fed’s positive projection and economic outlook.

However, the actual US economy recovery was not as good as what the Fed had projected, said Chee Beng, resulting in the group’s major customers being in an overstock position and hence, they had to reduce their orders in 2015.

Last year, the group saw its export sales to North America drop RM9.6 million to RM36.9 million.

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On investors’ concerns over Classic Scenic becoming too dependent on a single market, Chee Beng said: “We know the risk of that. The worst-case scenario we experienced was during the Sept 11, 2001 attacks in the US, which led to our share price diving to 30 sen. In that case, we just earned less. But we have never posted losses in our business.”

In the past 52 weeks, Classic Scenic shares have traded between a low of RM1.09 and a high of RM1.40. It closed one sen or 0.74% higher at RM1.36 last Friday, giving it a market capitalisation of RM163.88 million.

YTD, the counter has risen by 5.4% from RM1.29 on April 8, 2015.

Interestingly, the counter continued to see its major shareholder and co-founder Lim Chee Khoon, 60, who retired as an executive director in 2014, dispose of the group’s shares. As at April 4, his shareholding was reduced to 10.66% from 13.8% as at April 10, 2015. Chee Khoon is the older brother of Chee Beng.

“We have no idea about his personal agenda. However, the reduction in his stake would be beneficial to investors as this would increase share liquidity,” said Chee Beng.

As at Dec 24, 2014, the Lim family-owned Lim Ket Leng Holding Sdn Bhd held a 49.33% stake in Classic Scenic.

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