Wednesday, February 13, 2019

MMHE: A quarterly report which is not worth reading

MMHE, a 66.5% owned subsidiary of MISC which in return is a subsidiary of our largest corporate, Petronas just reported a poorer results turning in a net loss of RM25 million for the 4th quarter from profits a year earlier. I do not invest into MMHE and I just would like to know the trend of the business. However to my dismay, it is not worth reading. Just see below from its financial performance announcement.

What do we learn from this reporting? Nothing. I can get this done by a trainee employee, and I would not be satisfied.

MMHE has 9 directors and I am sure professionally hired management but when can we expect professionally provided report?

Sunday, February 10, 2019

Not all Oil and Gas companies are made the same

I have been reading this week's Edge which discusses about Scomi and the challenges that it faces. Under the title "Scomi Group on the Brink", it highlights the predicament that the group is facing as well as giving us an account of its colorful past where it was a vehicle controlled by Datuk Kamaruddin Abdullah, the son of Malaysian 5th Prime Minister, Abdullah Badawi. Of course, the best period experienced by Scomi was when Badawi was PM. After that, it was downhill for the company.

This gives us a lesson and remind us that it is hard to evaluate O&G companies. Why? To me, many O&G companies in Malaysia need a different type of business connection and it is hard to make out their actual strengths and capabilities. That we have seen - the best opportunity for several of the sons of Malaysian PMs to become successful in business is through this sector. It has been proven before.

Whether they are capable business, it is hard to read. This sector however does allow people whom have connections to either our country's oil business, the federal or state government to succeed. O&G is quite a unique business where in many countries, the assets are state owned. This is similar in Malaysia where the asset is owned by Petronas and ultimately the PM's office control.

This was especially so when oil touched $120 per barrel and at that period Petronas was probably more relaxed in developing Malaysian O&G companies. When oil comes down to $60, it will be a different story. I believe Petronas will be more careful. At this period, it will be the time to separate the boys from the men, as someone would say it.

As an investor, it is important to figure out and try to eliminate what is investible and which one is potentially high risk. The retail business is investible and those include PDB and Petron. Then there are the equipment suppliers, companies like Wah Seong, Favelle Favco. Dialog is another one where they have made it successful in the business and they are proven company.

Then there are those that very hard to read, in terms capabilities especially to our Malaysian service providers which largely only supplies towards local projects. Those include Carimin, Perisai, Perdana Petroleum, Dayang, Icon Offshore and few others.

There are several companies that have made it overseas. Those include Yinson, Bumi Armada, Sapura Energy, Wah Seong, MISC. These are the companies that will provide a good basis for us to make our study as this is an international business and the ones that are able to compete internationally shows their competitiveness. The ones that have more than 80% of their business dependent on Malaysian contracts is just too risky.

The recent rise among O&G companies brought back an early exuberant towards the sector but we must be able to separate which are capable to compete and which ones are not. What has not really happened and to my disappointment is the lack of consolidation among the companies. There have been very little M&As within the sector and I feel that there are just too many companies. Although there will be natural attrition, the amount of consolidation is just too few.

I do think that while there seems to be a pick up in the sector, many of these companies will still find it hard to make ends meet. A run through of what the companies say in terms of prospects for 2019 and near term just shows that the good old days are far and between. It is true though that many stocks have touched their all time low. These provides huge opportunities.

To understand the sector, it is not just about how many contracts Petronas can dish out as I believe they are also very careful nowadays. It is about geopolitical. It is also about the politics of Trump and Saudi with Russia in the fray as well. Even the killing of Khashoggi has its impact on the price of oil. Shale from US plays a big role. How will they impact the strategy among the oil majors and OPEC? What about the global initiatives on alternative energy such as solar, electric car etc?

If one is just promoting based on how many rigs Petronas has, I think it is pure shortsightedness and not thorough in their thinking. In this space, one has to be clear on the macro as well as micro economic situation. Is Hengyuan a retailer and refiner? What would the impact of excess supply from US shale brings to their margin?

What about the companies in the exploration space? Are there new activities and are there oversupply among the players. Can I call it the buyers (companies that awards contracts) market?

There are companies that have some debt issues and such are Bumi Armada, Sapura, Perisai Petroleum, Scomi Energy. Can they overcome that? As I have mentioned, some of them are world class competitors. Will they be back stronger if ever they are able to resolve their debt issues?

Then there are some companies which have taken opportunities as they are late entrants in the business when the oil price collapse. When others were struggling with overcapacity and debt, they had just raised new funds and their balance sheet were fresh and unleveraged. Such companies include Hibiscus, DNEX.

All in all, during times of uncertainty there presents opportunities, but we have to be very careful as not all of them are worthwhile.

Thursday, January 31, 2019

What's dangerous for 2019

The first month for 2019 is almost going to see its close. While very few of Malaysian companies have reported earnings, US companies are midway through their reporting. From my daily watching and reading, I would say it has been a mix bag. Seldom do I really follow through and be tied down to quarterly earnings. This time though, it has a sizeable threat.

CHINA! and semiconductors.

Several of the companies that are largely dependent on business from China is seeing deterioration. Companies like Nvidia, Intel, Apple, Caterpillar - they have reported earnings or guidance that seems to show that China is slowing down. All of them has indicated that their business has slowed in China. Whether this is wide spread i.e. over the entire China's economy or certain particular economy i.e. semiconductor, construction is unknown. One other factor is also because of the trade conflict between China and US, the Chinese are now being patriotic and they are preferring Chinese brands. This is seen from the market share growth of Huawei's phones as against Apple's IPhones.

However, the other two companies being Intel and Nvidia, despite the trade friction, if the demand is still there, the Chinese companies will still be buying as there are very little alternatives. Intel as we know is largely providing CPUs for PCs, servers and modem chips for Iphones. Nvidia is another chip company whose business supplies to the gamers, data centers, autonomous mobility market.

It is still hard to read how bad the Chinese economy is going to affect the world this year. There are already signals as provided by Alibaba's VP, Micheal Evans a month ago, where he indicated that volume growth has slowed. In China, many economists and businessman are already expecting slowing growth - but to how much? Will there be a recession. Official data from the Chinese government still shows growth of 6% to 7%. Is this true?

What is the impact to Malaysia

Malaysia is a huge trading partner to China especially when it comes to exporting semiconductor components to China, for them to assemble them into full product. Among the companies that exports to China via Malaysia are companies like Intel, Broadcom, Infineon. Malaysian listed companies such as Inari Amertron is a supplier to Broadcom especially for the RF filters. As we have seen, Inari has already been affected somewhat, but not massive.

What about the automation companies like Vitrox, Pentamaster? I presume as we see the trend affecting Intel and Nvidia, there is a possibility that China may see under utilisation of its capacity. With that, there are good chance that these Malaysian companies may see slower growth as well. With the threat of the trade war, many companies are also looking for alternative manufacturing sites. Vietnam, Malaysia, Indonesia, Thailand would definitely be explored. I do not see it to be immediate though as China is working on its under utilisation.

Palm Oil is in danger

The trade war also sees China offering to purchase a vast quantity of soy bean oil to make up for the trade imbalance. As it is, the details are still very vague but considering that if some agreements are to be materialised, soybean will be used as a trading commodity. What's good for soybean farmer in US will not be good for palm oil as they are substitutes. I am very wary of palm as China has not many traded goods to show to the American exporters to make up the imbalance besides cars, Boeing planes, beefs.

A slowing down China towards Malaysia

As it is, at the moment it will be hard to figure out the actual impact. I fear though that the initiatives by Malaysia government to reduce debt will not be able to materialise unless we start to sell national assets especially those held through Khazanah. The government is adamant on reducing debt. Hence, medium term i.e. for the next 3 - 5 years, we will see corporate exercise happening where these assets will be privatised.

Saturday, January 26, 2019

First Wing Tai, then MWE this year Suiwah

2017 it was Wing Tai Malaysia.
2018 MWE.
This year 2019, it is Suiwah.

Let me tell you they use the same formula i.e. little trading. Why little trading? It is because they have no intention to expose themselves to the shareholders. These are companies that treat the company as their private company anyway. Remember, where Jho Low comes from. What is the background of his family. Where his father, Larry Low was attached to as a director before? MWE. And coincidentally, all these companies have background from Penang.

They learned from each other.

I can bet you that Suiwah is buying from public very very cheap. High chance, it is going to use Mercury as advisor, or maybe M&A Securities. At the point of writing the Net Asset Value of Suiwah was RM3.30 per share and, it is offering RM2.80. It probably did not do revaluation for a long while.

Be careful on these type of companies. They are not keen to treat the shareholders well at all. At AGMs, they are hoping that the AGMs end fast so that we do not ask questions. They do not think of WIN - Win. The good ones in their business, they pass to their family business. For us investors, we do not mind if our win is smaller but at least they treat us a partners.

In their case, they are using us as like their gambling playground.

Note: I am NOT particularly referring the scenario towards Wing Tai, MWE or Suiwah but these are certainly true for some companies that are listed in Malaysia.

Friday, January 18, 2019

Fear on Bumi Armada is probably overdone

Imagine this! A global company which does business on almost all parts of the world supplying to the large oil and gas companies, top 5 largest FPSO valued for less than RM1 billion or USD250 million that is.

As we see here from a diagram picked from BW Offshore, Armada is one of the largest players in this space

One can say that it  is now largely in debt (about RM11 billion) and huge portion of it is in short term debt hence its liquidity is an issue. With that we can probably put a discount because of the risks but those that fear over it defaulting in its debt probably is worrying too much.

Bumi Armada, as we know is controlled by one of the richest man in South East Asia, Ananda Krishnan and in himself, there is a certain level of ethics which he has shown and practiced towards the investment community in the past few decades from what we know.

We know that he has taken some companies private before and put them back again in the public. (All his major holdings Maxis, Astro, Bumi Armada have gone through that route) Through that route, which I was critical of them, he had actually not let many of his investors down as those holdings were profitably for most of the shareholders. This is unlike some of the companies that have gone private where the party who is privatising the shareholders have taken investors for a ride buying them way below intrinsic value.

This time around Bumi Armada has gone into a little bit of trouble largely due to the poor oil price since 2015.

Bumi Armada has two main core, the first which is OSV or Offshore Service Vessel and the other FPSO which stands for Floating Production Service Offloading. Because of the poor oil price, OSV has largely been impacted and because the OSV's business has less barrier of entry, it is hugely competitive in times where activities on exploration, offshore production is kept low. Many companies in the OSV space are not able to be kept afloat.

FPSO on other hand is a more complex business. It is a partner to the oil companies which is extracting out the commodity from the sea. There are not that many companies which are capable of getting into this business. As mentioned above, Bumi Armada is one of the largest. Yinson from Malaysia is the other. Bumi Armada as we see it is less preferred than Yinson - mainly because of its balance sheet, not its capability. Yinson in fact, is a lesser size player. FPSO is not a dying business and it has much less competitors.

When as outside investors see that the company is in liquidity crunch, the two things that comes in mind is additional injection - which means more capital and the other being liquidation which is the worst of the two. Either one however, during times like this is less preferable. Bumi Armada has come out on record to say that it is not looking at raising funds through additional injection. Coming from them, I would say I trust what they are doing. Instead, it is looking at restructuring its short term debt - which is still a problem - and trying to renegotiate the rates. The CEO of Armada, in its letter to its employees, has written and advice to keep the level of new business development low as they are going to restructure the loans. From this perspective, I take it that it is trying to be careful rather than being in serious condition until it defaults.

Why do I say this? As a start, the level of business operations activities for Armada for the last 1 year is at its highest for the last 5 years. It has just gotten acceptances for 2 of its largest FPSO projects through Armada Kraken and Armada Olombendo. These are the 2 projects which are more complex than its earlier projects - and the key is that it has gotten acceptances, where from here the contractual work should be more smooth flowing. All in all, Armada has over RM20 billion of contracts in hand and another RM10 billion of extension options.

I would also like to highlight that the high gearing over the last few years is also because of mainly the 2 large projects. From 2014 to 2017 as shown below, it has been investing into these business.


What Armada has gotten into trouble is from the OSV business and the termination (Armada Claire) and bankruptcy of one of its client in Nigeria. These largely caused them to be sunk into some liquidity issue.

I do not think these are issues which cannot be solved especially given that it has solved the larger operational issue from Armada Kraken. Looking forward, I would like to think that despite oil price being lower than the best years between 2012 - 2014, many of the oil producing countries have gotten hold of the shock better than what they experienced in 2015. Oil price may not go as high as USD90 or USD100 anymore as it is now having shale as a competitor but they are better prepared.

In analysing Bumi Armada, it is not easy as it is going into chartering and there are different degree of complexities in its business. One of the better explained analysis is coming from CIMB here (page 52 to 57). Its analysis is extensive and I think it looks at it objectively especially on individual projects. Today, we hear that it is keeping its call unchanged. I feel it is right as to me fundamentally it has not changed much.

What the analyst as usual has not taken into account yet is the strength of the brand, relationship, customer exposure, processes that the company has built over the years. With that, it should be worth more.

I do not think the risk of defaulting is high. It may face high interest costs but it should also not be worth just around RM1 billion for a company this level.