Megachem Limited Annual Report 2015 63 Risk Management Recognising the importance of risk management in providing sustainability to our business and in preserving our shareholders’ value, Megachem is committed to incorporate effective risk management practices into our organizational processes to mitigate and manage each of these risks. Megachem has identified 4 main risk components within the framework of its risk management. Assess Evaluate Measure Manage Risk Management Enterprise Risk Management Financial Risk Strategic Risk Operational Risk Legal Risk > STRATEGIC RISK > Financial Risk The Executive Committee and Board members collectively formulates the strategy and charts the directions for the Group. The progress of implementation of the strategy is monitored and reviewed annually. In the process of strategy formulation and review, we evaluate the external environmental factors such as the risk profile of the industry, competitive forces within the industry, opportunities and threats, as well as the internal factors such as our key competitive strengths and weaknesses, our market position and growth strategy. The Company views the current strategy of building our growth around our distribution and contract manufacturing activities as the 2 pillars of growth and the business model of diversification in terms of markets, customers, products and suppliers as being robust and sustainable. Megachem’s activities expose it to a variety of risks and unpredictability of the financial markets such as changes in foreign currency exchange rates and interest rates. The following sections outline the practices with respect to our financial risk management. • Foreign Currency Risk We operate internationally and is exposed to foreign currency risks arising from various currency exposures primarily with respect to United States Dollar, Euro Dollar, Sterling Pound, Japanese Yen and Malaysian Ringgit. Forward currency contracts are entered into to hedge certain of its exposures to foreign currency risk. General guidelines are set with regard to the level of hedging and the type of hedging instruments that Megachem undertakes. Authority matrix is also in place that sets the authorized personnel and his/her authorization limits for hedging. The Executive Committee monitors the foreign currency exposure on a monthly basis through monthly executive committee reports. • Interest Rate Risk Interest rate risk arises mainly from our borrowings which are mainly at floating interest rates. Megachem manages its interest rate risk by keeping borrowings to the minimum required to sustain our operations. • Credit Risk We sell our products globally which thus increases the risk of payment default by our customers. We manage our credit risk by diversifying credit risk exposure and dealing with high credit quality counterparties. As such, Megachem has no significant concentration of credit risk. Policies are in place to ensure that the sale of products and services are made to customers with an appropriate credit history and obtaining sufficient security and/ or credit insurance where appropriate to mitigate credit risk. • Liquidity Risk We manage liquidity risk by maintaining sufficient cash balances and availability of funding through an adequate amount of credit facilities at all times. • Capital Risk Our objectives when managing capital are to safeguard Megachem’s ability to continue its business operations as a going concern and to maintain an optimal capital structure so as to maximise shareholders’ value. In order to maintain or achieve an optimal capital structure, we seek to strike a balance between debt and equity and capping our financial gearing at a comfortable level.
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