Friday, July 12, 2013

Riding on the strengthening of the USD impact on companies

As the news of the tapering of the QE begins to roll out, many investors are cautioned that interest rates may somewhat increase sooner than later. One potential result out of this is the strengthening of the US Dollars, which have been declining since the Fed announces the beginning of the QE in 2010. You may think that the impact on the exchange rate on a company's margin is immaterial. But that is often not necessarily the case. Investors need to understand the effect that exchange rates can have on the financial statements, especially if the company you are investing have its earnings or costs denominated in USD.
One company which will benefit from this strengthening of the USD is ST Engineering. Based on report from UOB Kay Hian, every one-cent increase in the USD will lead to about $20 million increase in revenue and $2 million increase in Profit Before Tax (PBT). As ST Engineering has a hedging practice in place as usual, the impact is minimal.
Another beneficiary of the strengthening of the USD is SIA. Based on the report from UOB Kay Hian, a 1% increase in the USD would raise SIA PBT by 8.5%. That is a huge impact on its earnings. I wonder whether SIA has a hedging tools in place at the first place knowing that their earnings would be very much impacted by the foreign exchange movement all over the world. Surely, they must have put this into practice already.
Venture, SIA Engineering, HPH Trust and Ezion are some other companies I can think of which may benefit from the appreciation of the US Dollars. Can you think of any other companies?


  1. The impact is likely to be small as most blue chip companies will hedge.

    Part of corporate treasury function.


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