Leverage is an important factor for investors
PETALING JAYA: Fund managers and investors are focusing on balance sheets more than before as earnings growth prospects dim and borrowing risks in companies are magnified.
While investors have always considered balance sheet strength, levels of leverage have become the most important factor to watch for many of them.
While leverage among some of the banks in the West had reached levels of fragility - gearing levels of investment banks were as high as 30 times - banks in this country do not have leverage anywhere near those levels.
As Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose put it: “Banks here have been lending to customers who can afford to repay their loans.”
Gerald Ambrose
The concerns over the possibility of a global recession have led investors to place primacy in the balance sheet for assurance the companies would survive tough business conditions.
Companies that had issued bonds for working capital and that have to be renewed every five years, might be vulnerable in the cautious lending environment.
This is especially so for companies with balance sheets that are heavily loaded with debt.
The companies that were particularly susceptible would be those in the middle of their capital expenditure (capex) cycle, where the planting up was not completed, said CIMB-Principal Asset Management’s chief investment officer Raymond Tang.
Such companies would be those that have high capex requirements by the nature of their industry.
Trading companies, even though they do not have much capex, could also face cashflow problems. Difficulties could be encountered if their customers stretched the credit period from 90 days to 180 days, he added.
Companies that trade on cash payment terms will not encounter such problems faced by companies that trade on credit terms.
Sectors that trade on cash terms include gaming. Consumer companies with strong cashflow, such as tobacco and beer producers, would have similar attributes, he said.
In the property sector, Ambrose said, companies with weak balance sheets might not be able to hold on to their land bank.
Aberdeen takes large, concentrated positions in a small number of companies.
In the property sector, the asset management company had invested in SP Setia Bhd which had many sources of cashflow from its projects and served a broad market.
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