Kossan- a good long-term BUY

Kossan came under fierce selling pressure over the past one week, with the share price dropping from RM4.00 to a low of RM3.50 yesterday. Kossan nearly tested its medium-term uptrend line support at RM3.46. Today, we can see some buying support for the stock and this has lifted the share price to RM3.62 presently. At the current level, I believe that Kossan is a good buy.


Chart 1: Kossan's daily chart as at July 27, 2009_11.30am (Source: Quickchart)

Kossan's recent selldown was attributable to analysts’ reports that it may incur an estimated forex loss of RM8-9 million in 2Q2009 ended June 30, 2009, after having written off RM12 million in similar losses in 1QFY09. According to a report in the Edge, the forex losses "spilled over from last year when Kossan hedged its receivables at an average contract of RM3.37 to the US dollar in anticipation of further weaknesses in the US currency. Instead, the dollar strengthened against the ringgit."

I think investors over-reacted when they heard about forex losses & associated them with losses from derivative or structured instruments which brought about the recent Global Financial Crisis. The decision by Kossan to hedge its USD receivable against further slide in the USD may not be a bad business decision. Unfortunately, the USD rebounded instead of going lower. However, if you look at the chart of USD-RM below, you can see that USD is expected to weaken against the Ringgit as the 100-day SMA has cut below the 200-day SMA and the MACD indicator has also hooked down. The critical support is at the neckline of the Head-&-Shoulders formation of 3.48. A break below the neckline may send USD to RM3.30 or even RM3.20. Burdened by ballooning budget deficit & external debts, the USD is expected to hobble, not rally like it did in 4th quarter 2008 or 1st quarter 2009. So, I think the worst is behind Kossan as far as the USD hedge is concerned.


Chart 2: USD-RM's daily chart as at 27/7/2009 (Source: Yahoo Finance)

Based on the above, I believe Kossan could be a good long-term BUY at the present level.