Kossan ... July 09

Its earnings for year ending Dec 31 2009 would be checked by foreign exchange hedging forex losses amounting to as much as RM35 million.

This follows a Rm12 million realized forex loss from hedging activities recorded in 1QFY2009, when management hedged receivables at an estimated exchange rate of US$3.40 to US$3.55 in anticipation of a weaker dollar Instead the dollar had strengthened against the ringgit.

Its management had warned of a further forex losses of between RM8 million and Rm9 million in its upcoming 2QFY2009 results.

It is understood that forex losses could be potentially larger than the realized amount in the next few quarters. The forex losses were realized in 4QFY2008 and 1QFY2009.

In spite of forex losses, Kossan reported a flattish net profit of Rm14.5 million in 1QFY2009 from RM14.02 million recorded a year earlier.
It is understood that the company has not entered into any hedging contracts in 2009 and is not expected to incur hedging lossesd in FY2010.

It is normal in the industry to hedge a certain portion of receivables. As the purchase of raw materials, such as latex, and the sale of the finished rubber products are made in US dollars, there is a natural hedge of around 60% to 70%.

It depends on how the company goes about hedging, and what financial instruments are used. Unfortunately, Kossan seems to have exercised poor judgement on this.

The management had not revealed the forex losses at an earlier stage as the hedging is an off balance sheet item. Now that management has a clearer picture of the losses expected.