Tuesday, October 16, 2018

Airasia: The Maybank analyst may have gotten it wrong

The Maybank analyst in putting his opinion after a change in board and management structure in Airasia India may have gotten his analysis wrong. India despite opening up its doors for foreign participation is still a nationalist country. There are already rumors that Tony Fernandes is wielding management power over Airasia India and that does not bode well with the community in India.

The thing that Tony or rather the Malaysian team can do is to take its hands off the management control from within Airasia India. Just look at Airasia Thailand's board, it does not need to have board and management control.

I think the poor opinion over Airasia refocusing into 2 markets is wrong. What Airasia has developed is a franchise, and in a franchise, what is really needed is the development of its business culture and systems. Airasia as a company - believe it or not is the system, some initiatives as a group and then proliferate them towards their business units. Purchasing of planes, booking systems are for example centralised. Ground management are better off left it to the ground managers anyway.

This is what Airasia has done well and many investors do not see that this is highly valuable. One can put in the system and then deploy them to the subsidiaries. Many successful multinational companies have successfully managed their operations overseas these way and that is why several of these US companies are hugely successful as compared to Japanese and Chinese companies i.e. overly dependent on their people rather than local people. Seeing Tony and his team, he is very good at having hands off when things can be run without his local team.

As it is Airasia India is facing criticism over control from Malaysia and that is the best way to fend off that rumor. India being India will find new stories to attack and that is India.

If one tracks Airasia well, the demand on planes will also depend on the performance and need of each country. As it is I do not see there is less planes being allocated to Thailand despite Airasia Group does not have management control over that country. That is the way the franchise is being managed. Another thing which I am amazed is the appointment of a Thai national for its Group CFO position. Very rarely in Malaysian companies, we see that.

Hence, I do not see India is being forgone by Airasia but more of letting the locals manage the show.

As it is, as I have always said, Airasia is a different company. It is not just a Malaysian company but also a regional company. I just wish more Malaysian companies especially the ones that have regional operations to have such structure. The stock market needs more of this than the typical old structure. Without this, our country capital market will not be able to grow.

Thursday, October 11, 2018

Capital Gains Tax may just kill our competitiveness

Please! Do not shoot ourselves on the foot.

When we did away with GST, I thought the government really meant what it promises. It certainly did not promise introducing various new taxes, though - hence long story short, eliminating GST is a mistake. Capital gains tax (CGT) is not a new kind of tax but for Malaysia and this region it certainly is unusual. All our neighbors and sometimes competitors certainly do not have CGT in their playbook. In fact, we have already lose out to both Singapore and Thailand in terms of our corporate tax rate of 24% against Thailand (20%) and Singapore (17%).

Now, we want to introduce something which is really going to be against business - capital gains tax. Malaysia's economy is an open economy and we most of the times will be competing against other neighboring countries. As an example, to enter the capital market some companies can now decide which market they want to get listed. An IT business that operates regionally, can opt for Singapore rather than Malaysia. Airasia for example can go to Singapore or even Hong Kong if it wants to list its group's business. The decision to pick markets to list on depends on how attractive each market is for the issuer.

Introducing CGT will certainly destroy that. In the long run, these kind of decisions which is to address short term problem will just kill our country's competitiveness for existing investors as well as would be entrepreneurs.

In the field that I am in, there is already concern over weak capital flow for both investors and entrepreneurs to tap on. Having a strong capital market means more Malaysians or regional entrepreneurs willing to tap onto as well as invest into our market, and that means more foreign long term money into the market. Do we not want that?

As it is, we have already complained of why did the most successful startup in our history - one that is valued in excess of $10 billion i.e. Grab moved from Malaysia to Singapore despite both the founders started them in Malaysia and being Malaysians. Singapore is just more attractive for them in many aspects and one of them is their ability to raise funds. By my count, Grab has raised more than $5 billion so far. (For one's visualisation, Grab is easily more valuable than Genting today - and capital market plays a very big role in that)

Introducing CGT is an antithesis to that effort of reversing the drain. The government must understand that to reverse brain drain - it is not just about creating job opportunities but it is also about having a conducive business environment. A conducive business environment also means a having and creating a vibrant capital market. Having CGT is hence sheer short sightedness if it is really being introduced.

More often than not, the capital market is pointed as the playground for the rich. It is not that true. It is more of a place for opportunity creation. People or entrepreneurs that would want to tap onto funding, will depend on a strong, consistent and vibrant capital market. As it is, I am seeing a sign of that being reversed by this new government.

If one reads Billion Dollar Whale, i.e. the story on Jho Low, one of the basic message on that story is that rich people do not play by one country's rule. If Malaysia is not friendly to their investment money, their funds can be transferred anytime anyday in an instance. Hence, does our government think that CGT is to tax the rich?

Before we start taxing them, their invested money will no longer be in the country in a flash. That's how fast it is - and does anyone get it. The super rich that we want to gain more taxes do not need to play by Malaysian rules. It will not be long before the not so rich but rich enough to invest in the capital market will be able to do that as well. Fintech companies will enable that and as it is there are already such business startups.

Despite what we may think, one of the success of Trump's administration is to have a swiping change in its tax structure - corporate tax of 35% reducing to as low as 21%. That effort was mainly to bring back businesses that have been locating overseas back to America and it has been hugely successful.

It is time for this government which we have such high hopes to stop being populists.

Tuesday, October 9, 2018

Could it be Gamuda is NOT the problem?

When the government announced the termination of MMC-Gamuda being the contractor for the underground portion of the MRT2, it obviously came as a surprise - as it shows that this government can really terminate contracts. As an investor, it does not appear comfortable for me as where and whom do we trust.

When one invests into Gamuda as an example, it is obvious that their contracts in hand (or book order) is one of the largest determinant towards deciding the investment. I am sure, its largest shareholder such as EPF, KWAP does have the similar information as we are - and we hope it is that way.

The new government, when in power promises us one thing. Go by contract and rule of law. We have yet to see that they are not going by the contract as any contract can be terminated and they have not mentioned anything with regards to compensation. Compensation, however does not console the ones whom they feel they may lose their jobs because of this.

We know for sure that it is not the incapability of the JV between MMC-Gamuda in delivering the project but for it is because of the need to reduce costs. However, I am perplexed over why then they do not negotiate until both parties come to an agreement? Usually, that is the spirit as in any negotiation especially towards company which is dependent on government projects, the one holding the trump card is the awarder.

Or could it be Gamuda has been arrogant as they feel that they are the only one who can do the job in Malaysia as it does seem that way. They have mentioned it as well in a 4-pager explanation as announced in Bursa's webpage that in the event it is opened to international companies, there is none others that have the capabilities to bid from within Malaysia - not IJM, WCT, UEM etc. It is because Gamuda and MMC only have the capabilities of such extensive tunnelling work, it seems.

Ironically, the other 50% partner being MMC announced  the below - lacking the detailed explanation, unlike Gamuda.

Gamuda it seems is the only one which is more vocal and concerned; and it also seems that they are the one that is affected more. If one is to ask around, people are more confident of Gamuda's engineering capabilities when comes to this. Rarely, one would mention MMC.

There is obviously more than that, which one could not help to think of. Hence, cronyism came into mind. In my observation, Gamuda does not seem to be the one that seems to be the crony. It seems that the other company - MMC - is more of the concern here.


If Gamuda is the crony, it would not have been awarded the Penang Transport Masterplan project where it holds a 60% JV stake. That multi billion ringgit project was awarded in 2015 when the current Minister of Finance, Lim Guan Eng was the Chief Minister of Penang. In fact, until the recent change of government, the project faced great difficulties to commence - from getting approval from the federal to getting financing. Now, this announcement of termination came from the MOF although it is mentioned that being the Cabinet's decision.

Najib Razak today, pointed the top 30 shareholders of Gamuda and in the list the largest shareholders are EPF, KWAP, PNB and many other funds that invest into Malaysia. Why not? As in any companies that depend on government contracts, they need to be friendly, but we know that they need to be that. We however do not have complains of their deliveries. In my mind, Gamuda is a quality company, hence the diversified investors. In fact, this is the type of shareholder composition we want among our top listed companies - not the ones which PNB, EPF, Khazanah are the controlling shareholders - where they hold more than 30% to 40%.

MMC - It seems is the other type and Najib may have pointed onto the wrong company. We know who Syed Mokhtar is. Contracts monopolies etc. From Bernas to Pos Malaysia to Proton to port and IPP businesses. He also owns Penang Port and probably caused difficulties to some people from the current government.

Substantial shareholders of MMC Corp

To my concern however is not on Gamuda the stock, but my bigger concern is Gamuda the business and company that it has built itself to be. I have always believe that we need to build our Malaysian companies. Gamuda is one of such. It is capable of delivering what other large companies such as Hyundai, Chinese state companies can deliver - tougher projects - tunnelling. Do it in Malaysia and then overseas - compete there.

I thought the pitch that has always been provided so far is about building our Malaysian capabilities. This is why there is keenness to have our 3rd national car - I thought.

Hence, as a Malaysian, I feel that the government has to revisit the termination. Renegotiate again but try not to give this kind of projects to another Chinese or Japanese company - otherwise we are just another buyer of capabilities. I know they perhaps can be capable or even cheaper but this is not what we have been voting for.

Monday, September 3, 2018

Before providing Government with fuel cards, Petron was already attractive. Now?

Last year, I gave my opinion on Petron over Hengyuan as well as the potential for the stock from a defensive investment perspective or even if we are to look at mid-growth stock. When I was about to collect the stock, there was a craze over an almost similar stock - Hengyuan. Hengyuan had a run until a huge (enough) stock investment community became well-verse about crack spread even though we have never visited any kind of refinery before.

As in all spikes up or down, it will always come to normalcy, this is what happens to a refining business - and it was pretty shortlived. This is also the usual trend of any economic concern especially for the more traditional business. Petrol is now a traditional business with a threat towards its existence - electric vehicle - but not in the next short decade.

In a normal situation, a B2C business is more often a better bet and provide better stability. Petron and Petronas Dagangan (PDB) are the only 2 traded stocks that has that exposure for investors in Malaysian stocks. PDB is trading at around 23x PE while Petron is trading at less than 7x PE.

What causes the difference in valuation? My theory for that is the wealth of our government controlled funds - Khazanah, EPF, KWAP, PNB and few more. They have less options to invest with the continuing strength in their deposit taking. PDB moreover is a Composite stock whereas Petron is not hence making it more reason for government related funds to buy more.

As a value investor, these are what I try to take opportunity of. To me Petron has built its business to be just as good as PDB albeit the size. In fact, I like it more as a private company as opposed to PDB being a government owned business.

The approval for Petron to be a provider to government fuel provider for its fleet of vehicles has also probably allow us to see the change in attitudes towards private businesses as we have been exposed to preference for GLICs and GLCs in the past decades.

As it is Petron has been growing at around 5% to 7% over the last few years, above its peers and from this new business opportunity, I see a spike in its business in the short term.

Last quarter (April to June 2018), we see Petron making around RM92 million net profits and I see this is a number where it is pretty much an average for the company with continuous growth of around 7% to 8%. This is a period where fuel price was fixed at RM2.20 (RON95) for most period of the quarter. This action taken by the new government will also allow petrol station operators to lose less than when they allowed it to float. This is positive for company such as Petron.

Crack margins was also weak for the period in review, hence the allowance for upside is also there.

At its normalcy, Petron should have been a strong defensive stock but in its price as I reiterated, has not shown anything of that. Hopefully yet!

Sunday, September 2, 2018

How should we see Ekovest?

The change in government is going to see changes in Ekovest from a company perspective which is from largely construction based (from government related contracts) to more of its dependence on its long term assets - toll and land. I know many would be concerned on the toll assets as the new government is looking at ways to eliminate toll but lets face it, this is going to be difficult as the country juggles with our finances and continuous development. Toll over the period like it or not it is still an asset which is generating very good cashflow.

For the next 3 years the consistent revenue that is to be generated is going to come are mainly from construction (SPE highway) and toll (DUKE 1 and 2).

Property business as one know is going to be sporadic until it manages to obtain consistent revenue from its property investment - which potentially will come from EkoCheras mall.

The below is a pick from its latest 4Q18 quarter results, and as we see there is new revenue from DUKE 2 (which increases the contribution from toll) since December 2017. However, in accounting for concession assets, this is also the start where it is starting to recognise the interest expense from the toll assets (see Figure 2).
Figure 1
Hence, profitability from toll concession will not be good, but that is a different story when concerning cashflow. Its cashflow will be good and when the third highway is completed - i.e. the SPE it is all full throttle for the company. Again, I am not worried when it comes to abolition of tolls, it is very hard for the government to do that. Otherwise, they would have contacted the concessionaires and discuss. So far, the only concession that they have contacted is their own - PLUS which is owned Khazanah and EPF. The way I see it is that the current government is trying to avoid the topic until when they are ready to discuss about this.

Figure 2
The concern over the losses for 4Q18. As mentioned in Figure 3 below, part of the losses is due to costs of the failed acquisition of IWCITY - turns out to be a blessing in disguise and its provisioning for LAD - Ekocheras and highwe interest expense as mentioned earlier.
Figure 3

How I see Ekovest

As in many of my investments, I see Ekovest as a good long term investment with solid assets. It is moving into a territory where it will be less dependent on new projects while focusing on what they have built in the last one decade.

Seems to me, after this few years, it hopefully can become a good dividend stock if the controlling shareholder is fair.