Sunday, February 18, 2018

Shares with stamp duty exemption for 2018

Bursa has provided stamp duty exemption for small and mid cap stocks for the next 3 years starting from 1 March 2018. For each year they have predefined a list of stocks which will qualify for the exemption. Under the definition, small and mid cap stocks are those that are within RM200 million to RM2 billion market cap and for 2018's stocks, the list are for those that are within the market cap as at 31 December 2017.

Here are the list.




I do not know how to make out of the latest move by Bursa but I guess it will slightly enhance the trading activities for the smaller cap stocks.

On investment, it is still advisable to be careful and diligent as trading activities does not make any changes to the fundamentals of the company. Of course some will say it may enhance the business performance of companies like TA, Affin Hwang, Insas etc. but the impact will be minimal considering that the the stockbroking business is rather competitive and the fees that they earn today is a fraction of what they used to earn prior to 2000.

Thursday, February 8, 2018

The curious case of Carlo Rino, Bonia and LEAP

When the LEAP market was created and approved last year in Malaysia, it was supposed to be an alternative platform for Malaysian companies - many of them early stage companies to raise funds. Hence, one of the criteria created was that only those individuals who has RM3 million in assets or earns RM300,000 a year and able to prove them can invest into LEAP market stocks. Companies that has at least RM10 million assets only are allowed to trade LEAP market stocks.

I have written about my apprehension on LEAP here.

However, Bonia's management has done something which I will not even be able to think about. My always thought tells me that most bankers will approach the smaller companies and those that are much riskier as these stocks are not going to be liquid anyway. These are what I hear in the market as well.

What Bonia does is that they have pulled out an old brand - Carlo Rino (CR) - from their portfolio and proposed to list them on LEAP. Firstly, CR is not an early stage company. Secondly, this proposal sounds more like a privatisation effort.

Why?

For LEAP market, usually these companies that want to go for IPO - they are under a smaller group of investors and those investors normally will be the friendly parties as only those who can have better access and information on these companies will dare to invest into LEAP shares as it will not be as easy to sell these companies as compared to the normal Main Board and ACE market as anybody can trade. For LEAP only very selected few can trade.

This CR exercise sounds like one. (I am not saying it is)

As it is Bonia has been traded for a while in a much fluid market. If it wants to expand CR, it could have raise more funds in other manners and it has lots of avenue to do so. When CR is ready for IPO in a bigger board, the usual practise is also about offering to its existing shareholders. Split the two businesses - not unusual.

By going to LEAP it is like preventing the current shareholders to buy CR - as LEAP feels like it is only for a special club of investors. A good management is about offering to its current shareholders - now this exercise is NOT.

Isn't it weird? Think of it, if I am already on Main Board, why would I go to a much lower board and let my stocks be illiquid?

With this case, you know what some companies can do? The management pulls out the most promising companies from their listed company (in the name of allowing the shareholders to share the wealth from the exercise). Pull those that has yet to make much profit but highly promising. List them under LEAP - where they can put them with family and friends as shareholders. When they get bigger, list them in the Main Board. Who is the sucker here.

Much food for thought for SC and Bursa to think further when they created LEAP...Are we now allowing the creation of monsters here?

(The above are entirely my opinion and not necessarily represent the true picture)

Monday, February 5, 2018

High GDP but we do not feel it - why

A person who understands elementary economics will know that it is beyond GDP growth to tell us about how well to do we are. Yes, in most cases GDP tells us about the wealth of a country but it does not inform us how well to do most people are. Is our power of consumption higher or have it gone lower?

Today, Mydin's owner has appeared on BFM and gave his account of how he thinks that despite the strong GDP of last year he does not think that people are feeling it.

One has to understand the calculation for GDP. As below is what we learned from Economics 101 if one can remember:

GDP = C + I + G + (X – M) or GDP = private consumption + gross investment + government investment + government spending + (exports – imports). 

The problem is that as in most news and report, they just report the absolute percentage increase without dwelling into important details just like the headlines - GDP for 2017 was projected at 5.6% for example.

What was not really explained is where did the contributing factor for GDP is from. Is it C (Consumption) or more from I (Investment) or Government expenditure (G) or Exports - Imports (Net Exports)?

To most people on the streets, the C is the most important in the short term but for government, it is potentially the growth of I and Net Exports which can be important in the long run as I and Net Exports is key to the fundamental development of the country.

If one can still feel it, our RM has dramatically dropped from around 1USD : 3.1RM in early 2015 to as bad as 1 USD: 4.4RM last year. That is drastic as our RM experienced a drop of around 40% over 2 years in US Dollar terms.



Our economy as many people would have known is largely a trading economy and that means that the things we sell and consume is very much dependent on our trade and strength of our currency. While a weak RM can be good for Net Exports but it could be very bad for C which is Consumption.

In the data that is presented, while it may show that Consumption is on the rise in percentage, but in terms of total real consumption value, it may not have improved. Today, many things we consume are impacted by dollar terms - i.e. milk, sugar, fruits, and other commodities such as metal, fuel etc. If RM has dropped by 40% over 2+ years, the actual situation could be that real inflation could be higher than the inflation for standard goods as presented in our inflation index.

Then, the actual case of goods substitution effect has also caused our locally produced food to increase as well. For example, if price of mackerel from Thailand has increased because of drop in our RM by 30%, ikan kembung caught by fishermen in Kuala Muda would have increased in price as well. Higher prices of oranges that are imported from Egypt (because of weak RM) would cause almost similar price increase in banana sourced locally.

Question: I still could not figure out the good GDP numbers?

Remember the good performance in many of our exports sector. Well, the weak RM has brought joy to many business people especially the semiconductor, rubber gloves, furniture, textiles as has been shown by their financial numbers over the last 24 months. This will be shown in the Net Export numbers i.e. a component of the GDP calculation.

However, while these good numbers are translated for the industrialists but it may not be trickled down to the general people. While the minimum wage is introduced, the middle class especially for those families which earns less than RM5000 would be hit the hardest.

Will this be a long term phenomenon? I think so. One of the main reason which is a more longer term fundamental is because of this - More upcoming middle class from our neighboring competing countries

Then of course, as more middle class families are coming on stream in our competing economies - like China, India, Vietnam, Indonesia, the fight for basic necessities is getting even greater while at the same time, the amount of "arable land" continues to reduce due to urbanisation. This would be a long term effect which will continue to affect Malaysia unless we really improve our real wages.

Even the I which is for Investment is getting precarious. The "Industry 4.0" term which we continue to hear of recently will not be really appreciated as automation means more investments and when our currency is weak, business people are much reluctant to invest for the long term but rather be more willing to be dependent on low cost labor. Low costs labor on the other hand means more foreign workers and they may not be that keen with a poor RM.

When our RM has improved to US Dollar (and a basket of currencies) i.e. to 1USD to 3.9RM as in recently, it will take some months for us to feel that positive impact in terms of "C" value - rather than nominal number.

And even then, it is still a drop of 25% from 1USD to 3.1RM...which we used to experience.

How do our economists feel about this? Of course, they know the real truth!, I think. But if we continue to kid ourselves by looking at just the GDP number, it is a matter of time before the people on the street will not trust that anymore.


Thursday, January 25, 2018

Market expensive? I agree partially BUT...

Where else should one put their money? Cash (which literally means return of about 3% to 4% from deposits), properties which is not cheap now (rental return less than 3% in most cases), bitcoin (are you sure), gold, other commodities, JJPTR equivalent (even more are you sure) etc?

The market has been inundated with headlines - first from the head of EPF - who is a very powerful person due purely to the size of the fund he oversees and second from a fund manager from Affin-Hwang. Think of it this way, the head of Affin-Hwang can be a respected figure but his fund would not cause ripple (not the digital currency) but the action from EPF can cause aftershock to the market. EPF oversees some RM600+ billion or could be as high as RM700 billion of funds. That is some 36% of the capitalisation of Bursa Malaysia.

Of course, EPF has investments all over the place i.e. MGS, private investments, private bonds, but equity forms more than 40% of its holdings (local and foreign). To my calculation of where majority of its equity investments is still in Malaysia - the exposure of EPF in the local equity market is about RM200 billion. That is more than 10% of our market. Considering that many of our companies are either GLCs or family controlled, the 10% really play the king maker role - ala PAS, the political party - i.e, third force.

Hence in this respect, with EPF moving overseas and hunting for deals - I agree but once EPF goes overseas it is now a big fish in a big ocean or five oceans, no more a big fish in Selat Malacca where it does not have much room to manuever. A big fish in a big ocean though will have bigger fishes - even bigger sharks. Then in that respect (with all due respect) it is now a equivalent of Affin Hwang Asset Management in Malaysia. Not easy. That's why EPF is - to some certain extent - still back to Malaysian-related deals such as the Battersea. It is better to do what you know, than to invest in areas which you are not so sure.

Now back to the first topic in this blog. Is our market expensive? If one is to look at KLCI and the type of companies that represent it, I would say very - just like what the Value Partner guy, Cheah Cheng Hye said. In fact, back in late 2016, I have put up a blog (on our KLCI counters) where if I were given a choice to pick from the Bursa KLCI Composite 30, I do not know which companies to pick.

Investments is not just about the PE of today or next year, but how we foresee (with good hindsight) on where these companies will lead themselves into. Based on that same article above, I just do not have good positive view of these companies moving forward. These companies which forms the 30 Composite - AMMB, Axiata, Maxis, Digi, YTL, PDB, Tenaga Nasional - they are not exciting.

(Note: the last 1-1/2 year, there has been movement in the KLCI 30 where Press Metal, Nestle has joined taking over from IJM, Sapura Kenanga, BAT but the two new counters have since became expensive.)

So, is out market expensive? Based on that 30 stocks (which forms about half our our market capitalisation) - yes. Not just on current PE valuation but future valuations of these companies.

One should know, funds (local and foreign) form 2/3 of the movement of stocks almost daily. Many of them are exposed to the KLCI 30 and the mid-cap 70 stocks i.e. the larger capitalised companies. These funds when they make a mention of the market they look at the PE of the market as a whole. (I look at this as well but I like to look much much more micro - which means the individual companies - then only macro)

Our market, on the large part is a bit stale as there have not been much new exciting listings over the past few years. If there are new potential ones, it is more of a repackaging i.e. Sime split into 3 companies, KFC wanting to come back, eDotco - the tower arm of Axiata coming onstream.

As I see it, on the micro level, there are still a portion of attractive companies - which I am not going to discuss here. Because of the general perception that the Malaysian market is not cheap and some of them are avoided or missed out by the funds, they are surprisingly still very good in my eyes. As mentioned above, the global market is now running on low interest rates still and to find investments that secure more than 5% is not easy. It is hard to find companies that are consistently growing and yet traded at less than 10x PE. If you have one and quite confidently see that they will be having that good growth 10 years down the road - you and I have found gems.

Why?

At 8x PE for example and if the company is growing at 10% growth yearly in terms of earnings, one could get easily 15% return yearly over a long term period from its investments based on value - not price. Isn't that better than keeping cash? Of course, there are risks but in today's world keeping cash is risky - if you know what I meant.

HENCE. Do continue to keep looking because there are those types of opportunities still in Bursa. And sometimes being a small fish is perhaps better as I do not really need to eat a lot to satisfy myself.

Friday, January 19, 2018

MRCB is into something really BIG?

Seldom I see exercise done in this manner. And seldom an organization can do it at this scale. After raising about RM400 million a year ago in three tranches of private placement - expanding its share base by 20%, it does a rights issue in less than a year.

Back in November / December last year, MRCB raised additional funds at 1 for 1 rights at 79 sen per share. My question is why?

Although felt like not much, MRCB had a major fund raising exercise over a period of 18 months - as mentioned above first a 20% private placement, then rights issue which raised RM2.26 billion, followed by sale of land to EPF for RM1.144 billion and probably another big one in the sale of EDL i.e. Eastern Dispersal Link for another RM1 billion or more. Confused?

I am. But this potentially signifies something really big may come on stream.

I am not one of those who think speculatively, but with a total add-ons of funds of potentially more than RM4 billion, it definitely does makes me turn around and look further.

Cash add-ons of RM3.9 billion (excluding EDL deal with the government)
To understand their exercises, perhaps let me list down one by one:


  1. private placements of 20% raising RM408 million - which includes the MD's additional subscription, Bank Rakyat, Tabung Haji.
  2. sale of 80% of the land which MRCB gotten for refurbishing the Bukit Jalil stadium to EPF. This amounts to RM1.144 billion. Yet to compete, but potentially will be done in near future.
  3. the biggest one which is rights issue raising RM2.257 billion at 1 for 1. Obviously the MD and EPF took up the shares.
  4. Sale of Setapak land for RM100 million to Tabung Haji.
  5. negotiation with government to settle the EDL project in which case the toll collection has been stopped since 1 Jan 2018. One has to note that this is one of the toll highway which is loss making, hence the sale could be a goo thing for MRCB.
What are other major projects which the company has managed to secure or in the process of finalising?

  1. MRT2 projects at Cyberjaya City valued at RM148 million
  2. Cyberjaya City project which it will invest RM229 million for a controlling stake. See the link with the MRT2 project.
  3. Big one - Kwasa Damansara which it will subscribe for probably the most premium land (commercial center) there for 70% stake - project called MX1 - costing RM737.88 million.
  4. project delivery partner for LRT3 with George Kent - the project is a RM9 billion project.
  5. partnership with Gamuda to bid for High Speed Rail project - which I think the partnership has a fairly good chance of winning considering that Gamuda has experience in the MRT1 and MRT2 while as mentioned MRCB is working on the LRT3 with another partner.


Although it is still a big question, unless with the reason of improving the gearing of MRCB, I like the fact that the above exercises focuses on what the group clearly wants to own and what it wants to dispose. Of course, only a few companies can do the way they want it to. For example, not many would be able to have the chance to negotiate and dispose the Bukit Jalil land to EPF and have a fairly good deal out of it.

The group in the last 18 months exercise has managed to focus on three things.

  1. Get the large scale projects like PDP for HSR, LRT3, MRT3, DASH Highway;
  2. push for development into larger mixed development like Kwasa and Cyberjaya;
  3. sale of less strategic land while still be able to keep the construction work. The sale of land at Bukit Jalil and Setapak does not mean they are out of the projects but yet they are construction partner for these projects. I think this is sweet. 
In looking at the past, of course MRCB is not very attractive. Its margin was low and gearing was quite high - that gearing problem is almost being solved. Still, because of that I am not able to figure out how good is the group able to bring financial benefits to its shareholders.

But I like the exercises so far.