Extracted from Annual Report 2024
Recognizing 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 6 main risk components within its risk management framework.
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.
Economic Risk
Economic growth in FY 2024 had been resilient but the geopolitical conflicts in Ukraine and the Middle East region remain unresolved.
Any major shift in US economic policies after President Donald Trump took office could significantly alter outlook of global trade flows and economic growth.
China’s economic recovery has also been sluggish. The trade tariffs imposed by US on China may hinder its recovery.
These factors are casting a gloom over the global economy. As the chemical industry is inextricably intertwined with the global economy, the impact will be felt in our business and performance.
Supply Chain Risk
Although a ceasefire to the Israel-Hamas conflict has been agreed, it remains to be seen if a complete end to the Israel-Hamas war can be achieved. If the situation persists, it may hamper further growth in our business.
Energy Prices
Any escalation in oil prices will push freight rates higher which may in turn dampen demand for chemicals. Specialty chemicals, though not immune, are less susceptible to oil price fluctuations, in comparison to bulk commodity chemicals due to the fact that they are more downstream product whose usage in the finished product is smaller.
Supply Risk
One of Megachem’s strength is the ability to secure supply of quality products. Even though our sources of supply are fairly diversified, any supply disruption orloss of product distributorship of our core products may have an impact on business.
Currency Risk
We operate internationally and therefore are exposed to foreign currency risks arising from various currency exposures. The currency market remains volatile and difficult to predict.
Furthermore, some countries impose foreign exchange controls. These pose a challenge to our foreign exchange risk management. While we will continue to hedge our exposure, we recognize that there is no perfect hedge. In addition, currencies of certain countries have limited liquidity and carry high hedging cost. Thus, any adverse changes in foreign currency may have an impact on our profitability.
Interest Rate Risk
Our interest rate risk arises from bank borrowings at floating rates. Even though interest rates are trending downwards following interest rates cuts by central banks, they remain fairly elevated. Hence our borrowing cost will remain high.
Credit Risk
Our products are sold to more than 2,000 customers across many countries. Although there is no significant concentration of credit risk, the credit risks in some countries are more difficult to assess. Some customers may also face financial stress as a result of high interest rates and business cost. Any significant payment default will negatively impact our financial performance.
Country Risk
Our products are sourced and sold globally. Our business may be affected if any of our markets suffers significant escalation in country risk.
Inventory Risk
Our business involves keeping inventory of chemicals to meet customers’ requirements. In the event of an unexpected fall in customers’ demand levels, we may end up with excess inventory.This will have a negative impact on our profitability.
IT Security
Megachem adopts the following 3 key principles in its IT security management:
Confidentiality - information should not be disclosed to unauthorized individuals or systems.
Integrity - important data should not be modified by unauthorized individuals or systems.
Availability - information should be readily available when needed even at times of any disruption.
With this in mind, we have in place the following measures :
Process Execution
Failure in operational and business processes can jeopardize our Company ’s competitiveness. In order to minimize process risk, we seek to standardize our processes throughout its entire organization by adopting international Quality Management standards within the framework of ISO9001. Guided by this Quality Management System, we are able to consistently deliver quality in our products and services with an impeccable level of service.
Business Continuity
For the same reason as explained above, Megachem has implemented a Business Continuity Management (“BCM”) program which aims to ensure continuity of our key functions and processes, in part and/or in whole in the event of any unforeseen disruptions, in order to fulfill our obligations and to protect our reputation and branding.
The BCM program involves the integration of management, people, system and facilities. The framework covers :
Megachem is proud to achieve ISO22301 certification for our BCM program.
Business Ethics
Compliance with rules and regulations is set as a fundamental principle with which we conduct our business. Through staff induction program and continuous education, this principle is being reinforced to ensure that we continue to comply with all relevant rules and regulations.
Anti-graft laws are increasingly being enacted globally such as the US Foreign Corrupt Practices Act and UK Anti-Bribery Act. Recognizing the adverse impact of non-compliance on our Company’s reputation and the potential loss of business, Megachem puts integrity at the core of our corporate value system. The business conducts of all employees of the Group are guided by a Business Ethics Guide which provides guidance on areas such as anti-bribery, corruption, conflict of interest, intellectual property protection, insider trading and fraud. These Codes of Ethics are strictly binding for all employees in the respective countries in which we operate. Trainings are provided during staff induction program and refresher trainings are also provided. This Code demonstrates our commitment to integrity in the workplace and in the way we conduct our business.
Industry Specific Regulations
Various government agencies also imposed industry-specific regulations. In this area we collaborate closely with these agencies on educational programs and exercises to keep ourselves up to speed with changes in their rules and regulations.
Stock Exchange Listing Rules
Guided by our Catalist Sponsor, listing rules are constantly being observed and followed. All announcements are perused by our Catalist Sponsor before they are released. Our Catalist Sponsor is also frequently being engaged in board discussion on matters relating to listing rules compliance.
Failing to address climate risks can have financial, operational, and reputational consequences for businesses. Megachem is committed to putting in place an effective climate risk management to ensure business continuity and mitigate financial losses.
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