Monday, December 31, 2012

Why sell stocks???

A testament of how a poor seller I am, sometimes you cannot follow your heart when you sell.

Just a show of the stocks I sold in the portfolio. This year I sold 4 different stocks as in below.

Stocks I sold:

Genting - well sold it correctly I guess in the early part of the year. Now trading around RM9.20.
AEON - wrong move! Sold at RM9.02 and RM12.12. Now trading above RM14.00
Oldtown - Sold at RM2.20. Now trading above that price.
ICap - well sold at about the same price it is currently trading at, although I would have sold this stock anyway.

Lesson - do not be over eager to sell once you have found a good, well managed company. Stay with them for a longer period. Much more worth it this way.

Sunday, December 30, 2012

Further purchase of NTPM

As part of my plan to increase my exposure in NTPM, I have bought an additional 6,200 units of the tissue and personal care products maker at RM0.435. Felt that there is further opportunity in NTPM's price being depressed by some Malaysian funds selling down.

This has caused my portfolio to be as follows.

A more detailed view of the performance can be viewed as in here 700 days after creating the fund.

As you can see, besides looking at value, the list of portfolio companies that I have chosen are winners in their own space:

  1. DKSH - largest pure products (pharmaceutical, FMCG) distributor and market expansion company in Malaysia.
  2. Wellcall - a rubber hose maker which does not really has competitive comparison in Malaysia. Its business however is mainly export though. It has steady income growth since its listing days. Very good dividends track record.
  3. Time Dotcom - its largest competitor is Telekom Malaysia which is far bigger but I like TdC after the change in management as it is much focused into what it does. I believe in fiber as the medium for expanding communication.
  4. Airasia - I do not need to say much besides I see this company as the leader and innovator in Asia's airline industry. Will face some stiff competition (which is normal) but being the largest and successful low costs carrier, I think it will be able to continue to grow.
  5. Jobstreet - like the management and it is the leader in online job postings market in several South East Asian countries. Fantastic cashflows and amazingly still growing at a decent pace.
  6. Padini - a growth company in the low to medium range fashion. Lots of competition but able to hold its own. With Asia being the place where the number middle class families will continue to grow at a furious pace, fashion will find its place if done correctly. Will have to find ways and means to grow beyond Malaysia though.
  7. NTPM - main competitor - Kimberley-Clark and several others. Has held its own in Malaysian market by being the largest tissue products provider in the market. I like the way the management grow the company.
  8. Airport - Malaysia Airport will see good growth. Competitors are the regional airports. Nevertheless, air travel will continue to grow at pace above average economic growth rates for the region.
Well, these are the basis for the portfolio companies in my investments moving into 2013 or even further as you can see these types of businesses are the ones which does not really depend on whether what happens to 2013, an election year or what if South East Asia has a slower growth next year.

Happy New Year and have a good year ahead!

Saturday, December 29, 2012

SP Setia and its betrayal to its warrants

Warrants is a fantastic derivative which is often very useful to its master holders. Whenever there are rights issuance, the issuer will usually be provided with a so-called sweetener to sweeten the exercise. The calling of rights happens when companies are in need of funds injection and it is often the fear of the issuer that minorities may not take up the offer - hence a sweetener called warrants are usually provided for free. It is like free baby shares (if you are picking up the shares rights) which has some value when it is opened for trading.

As for investors who would like to buy or sell warrants, its volatility is much higher following its mother share especially those that are close to being in-the-money. It is often good for shares that have good potential, undervalued and the warrants are still having some time to expire. The same cannot be said for shares that have near termed expiring warrants though.

SP Setia is a wonderful share despite me not so interested in property stocks. It is probably the best developer in the country for now. The properties that it built probably has gained much premium to its original costs due to the brand and quality that are associated with the company - hence, it is one of those few developers that can actually be traded substantially above its NAV. Hence, with the brand over time, the share is good but in the short term, its shares can be traded at any price as there is less fundamental involved in short term trades.

The weird thing is that shareholders were offered at RM3.95 for each ordinary and warrants at RM0.96 by PNB and Tan Sri Liew together, (CEO of the company) sometime around February 2012. At that point of time, there was much brouhaha calling that the offer was way undervalued etc. etc. There were calls for much higher price. In fact, the independent advisor, call for shareholders not to take up the offer as the so-called RNAV (revised NAV) is actually RM5.00 - so why sell?

At the end, many sold anyway and PNB (the main offeror) and partners were holding more than 79% at that point of time. See below.

On the other hand, the independent advisor asked shareholders to sell the warrants as it was almost 10 months to its expiry. Hence, the offerors ended up holding up to 88% of the warrants which has an exercise price of RM2.99. From there we know that there are less than 25 million warrants shares in holdings of the minorities - important to know the number of shares left for trading (but of course PNB can still sell). I do not know where these group represents - probably they are the believer of SP Setia really worth much more than RM3.95.

Boy, could they be regretting? As SP Setia's shares did not perform to its expectations in terms of price. Financial results on the other hand, was actually good. And if you look at the price below, its share price had a surprising huge drop within say 15 days from around RM3.60 to RM3.00. Why a sudden lost of confidence in the stock? Why and who is behind the selling? It is not one of those who owns more than 5% as no major announcements were made. Tan Sri Liew leaving SP Setia - again the same old news regurgitated?

Trading of SP Setia - ordinary share

It is ok to hold on to a stock which is trading at RM3.10 now as there is no expiry for SP Setia. As long as its performance holds and the company sells more houses, it will be back to RM3.95 in no time, I believe. The one that is running out of time is the warrant which is due to expire in 21 January 2013 and left with few more days to be traded (3 Jan 2013). It suffered a similar huge drop (but much much higher percentage drop obviously) following the mother share. Time is running out, but the mother share is still trading at above the exercise price of RM2.99. Whatever it is, the holders still need to come out with cash and pick up.

Trading of SP Setia warrants

I know that the warrants have been largely traded and as at yesterday, it is still out of the money. In fact, the same warrant share was traded several times on the same day (look at the volume) during the last few weeks as traders like shares that are trading at low price. One thing I know, PNB has exercised some 79 million warrants shares (or even more). There is also a need to increase the public shareholdings to 25%. But you will never know, the share price could be left (if it drops to RM3.00) with the warrant shareholders holding a worthless paper at the end of the day.

Remember, at the same time with the drop in price, SP Setia is proposing for several things - private placements of up to 15%, ESOS of up to 15%. All these are based on last 5 days traded price prior to the exercise and with discounts. If I am an employee or someone who is taking up the private placements, obviously the lower the share price the better. Or could it be someone is buying the warrants...

Thursday, December 27, 2012

Tradewinds Plantation may have been cornered

This is the upmost top financial blog in Malaysia - To spend real time and consistently update on a daily basis, it has gained my upmost respect. And to have a respected figure, Mr Koon (one of the pioneers of IJM) to contribute it must be something. If you notice my post before, I have much respect for IJM before and now. In fact, IJM was one of my earlier investments. IJM is an epitome of a great construction company in Malaysia that has worked its way through a tough industry being straight and clean.

In a recent article, Mr Koon Yew Yin caused people who followed him in buying Tradewinds to profit as it is trading close to RM9.00 now.

Today, however - there is a reiteration of Tradewinds Plantation (TWSP) to be way undervalued. Based on underlying asset value, there is no doubt about it. Sometimes though, it may not be in the asset value. We are holding stocks in a company controlled by one of the shrewdest businessman in Malaysia. Currently the group among Tradewinds (the parent) already hold 73.70% of TWSP. Just to highlight some of the most recent numbers which I can find.

92 holders control 95.84% (16.27% + 79.57%) of Tradewinds Plantation. This is almost unprecedented. Another stats below:

Part of First page of Top 30. Top 6 holding almost 90%
How much does the Top 30 hold?

Part of Top 30

The Top 30 hold 93.71% of TWSP. To invoke a compulsory acquisition of RM4.03 per share of TWSP (from mandatory), it needs to achieve 90% threshold which I think is not too difficult. In fact, if you search further EPF has sold to below 5% sometime around July this year. It could mean the insiders were buying up the EPF's portion.

I think this stock is already cornered. Tradewinds the parent is being offered at price probably below its substantial Net Asset Value. TWSP is to be bought at way below its real value and there is not much we can do about it. Another thing in TWSP we noticed, it is very loosely traded now which means probably the more than 90% have already gone to hibernation while waiting for the Tradewinds exercise to be completed - then only a matter of time before the full acquisition of TWSP to be completed. Even if TWSP may have much higher underlying value, it is probably tough for us to get to enjoy that.

The reason I am posting this is to allow some investors be aware - I think this is important enough for some to know. I may be wrong - there's no harm in highlighting.

Wanted to highlight in S Dali's blog but this is too much to highlight in the comment section.

Wednesday, December 26, 2012

Why Free Cashflow for AEON Credit is not that important

Readers of my blog would know that I put a lot of importance on cashflow in my investments. Why? Companies that are not able to generate enough cashflow consistently may run into debt trouble as their businesses would be dependent on cash from other sources for survival. Similarly, as an investor, if you are relying on dividends, capital repayment etc., these cash should come from free cashflow not other forms of cash it generates from unless it is a sale of business or assets. I am really against companies which raised a substantial amount of cash for business expansion but at the same time issuing large dividends as these are inefficient way of managing cash.

Sometimes though, there are some exceptions especially for businesses which rely on one-off large investments into growing their businesses - companies like Genting when it raised funds for expansion in Singapore or Malaysia Airport for the expansion of the KLIA2. Once these projects are completed, the free cashflow should be back to normal or in fact improved.

Another type of business which the cashflow is not that relevant as a benchmark are all the lending organizations - and this include AEON Credit (which is the easiest among the lenders to evaluate on in fact). AEON Credit has two main sources of income - short to medium term lending for hire purchases (such as electronics equipment, motorbikes etc. or even personal lending) and credit card loans. As AEON Credit is not a deposit taking financial institution, it gets its funds from borrowings and its own capital (from profits and fund raising). Unlike the normal businesses, lending organizations make their money from receivables. To illustrate that, let me provide an example from the balance sheet of AEON Credit.

From above, look at the financing receivables - they are basically loans or amount owing from its customers (for credit cards etc). Then I highlighted the equity (which is its own capital which it gained and raised from) and the borrowings which it gotten in order to be able to lend out again. As you can see, from the financing receivables, AEON Credit's receivables grew at a furious pace increasing more than RM600 million over 9 months or grew more than 40% from its total in 20 February 2012. It shows that it is aggressive and doing very well as a lender - if I deem loans growth as doing well. To be able lend, AEON Credit must also be able to borrow as it is not a deposit taking company. Hence, we are seeing its borrowings grew at a similar pace as well.

Turn that scenario into the cashflow report of AEON Credit. What we have learned are different from other types of businesses. The business for Top Glove for example, it borrows mainly for factory expansion, trade financing requirements. Its free cashflow are the net cash amount for its business which is selling gloves as well as the costs for factory expansion. As for AEON Credit on the other hand, its business is dependent on loans. Without loans growth, it is then shrinking. Hence, for the period when AEON Credit was growing at a fast pace, its cashflow statement looks like below. Operating cashflow negative while investing cashflow is almost irrelevant. On the other hand, it is getting more borrowings itself which causes the financing cashflow to have a substantial net increase.

What does that tell of the company? Read the performance review below. While the receivables growth is important, almost another important benchmark is the NPL. Note that its NPL dropped from 1.94% to 1.81%. While this is a good number, usually during a period of high loans growth, this is quite normal as fresh loans are normally healthy. Seldom, you will see bad debts in new loans and quite a substantial percentage (more than 25%) of AEON's receivables are new loans.

Another important benchmark for a lending organization such as AEON Credit is the Capital Adequacy. As in the name, basically the authorities are saying to be able to lend, you cannot depend entirely on borrowings (or deposits for deposit taking banks) alone. You need to put in, raise your own money or build enough reserves, hence the Capital Adequacy Ratio (CAR). However, the CAR for AEON Credit I do not think is as tight as the ones imposed onto banks.

Of course, CAR is not as straight forward as that and there are weightings given for different kinds of loans or risks. It is actually quite complex (quite a fair bit of people make a living out of it) and based on the BASEL Accord (google it, the place where Roger Federer was born) continues to come out with new guidelines on this. Nevertheless, the above CAR for AEON Credit seems sufficient even despite the CAR drops to below 20% for this year due to the high receivables growth.

Monday, December 24, 2012

Airport's Dividend Reinvestment Plan: Why bother?

Remember when I mentioned of me buying Malaysia Airport for its future growth as well as potential cashflow in the not too long future. I however am always mindful of companies like this, a monopoly which sometimes can have a wasteful mentality while continuing to be fed off other's hard work. Sometimes, doing fairly well can cause some companies to think of doing unnecessary things.

Well in this case, Malaysia Airport has announced a Dividend Reinvestment Plan a while ago and implementing it for its interim dividend of 6 sen. A Dividend Reinvestment plan is what it is in the name and it provides shareholders the option to choose between receiving the dividend in cash or get them reinvested in new shares of Airport - this time locked in at RM4.73 per share.

While provided with a choice is good as it allows shareholders with options, but to me it is just a waste of time and resources. Time means staffs time, while resources means wasting money on Investment Bank's fees (RHB), mailing fees i.e. stamps to Pos Malaysia etc.

If it needs to keep more cash, it just have to declare lower dividends - I am ok. If Khazanah (the major shareholder) needs more money, it can reduce its holdings by selling more shares. It's that simple.

Sunday, December 23, 2012

Airasia: Competition is not unusual

For a business that has gained momentum, competition is not unusual. Think of the days when PC started - when Apple became a hit, there were tonnes of brands later on. I remember I made a mistake in buying an expensive brand, Amstrad, a brand which you may not have heard of anymore today. Competing against Amstrad, there were thousands of brands, from larger names such as IBM, later Compaq, HP to house brands in Malaysia. Try naming the few surviving PC brands in the world today...

Similarly when the automotive industry was just beginning to be a product for the masses in the 1920s, there were thousands of automotive players in US and Europe. How many are there left today? If you read about the Cola business, it was the same - thousands of them and today left with mainly the 2 big names. Imagine how can a soft drink business selling water and sugar be mainly left with 2 very large companies dominating in this world? There's no technology involved. Neither is it a high barrier of entry business. Other businesses except for the B2B business or where there are protectionism, the trend will remain the same. In fact, in 1984, in a landmark decision, the court splits AT&T into 7 operating Baby Bells. Now there remain to be 2 large (AT&T and Verizon) and 2 smaller players (Sprint and T-Mobile) in the duopoly telecommunication sector in US. Such is the nature of competition.  In the low cost carrier business, let me highlight a paragraph on competition from Wikipedia on Ryanair - the dominant low cost player in Europe.

Ryanair on competition

Ryanair now has a number of low-cost competitors. In 2004, approximately 60 new low-cost airlines were formed. Although traditionally a full-service airline, Aer Lingus moved to a low-fares strategy from 2002, leading to a much more intense competition with Ryanair on Irish routes.
Airlines which attempt to compete directly with Ryanair are treated competitively, with Ryanair being accused by some of reducing fares to significantly undercut their competitors. In response to MyTravelLite, who started to compete with Ryanair on the Birmingham to Dublin route in 2003, Ryanair set up competing flights on some of MyTravelLite's routes until they pulled out. Go was another airline which attempted to offer services from Ryanair's base at Dublin to Glasgow and Edinburgh in Scotland. A fierce battle ensued, which ended with Go withdrawing its service from Dublin.
In September 2004, Ryanair's biggest competitor, EasyJet, announced routes to the Republic of Ireland for the first time, beginning with the Cork to London Gatwick route. Until then, EasyJet had never competed directly with Ryanair on its home ground. EasyJet announced in July 2006, that it was withdrawing its Gatwick-Cork, Gatwick-Shannon and Gatwick-Knock services; within two weeks, Ryanair also announced it would withdraw its own service on the Gatwick-Knock and Luton-Shannon routes.
Ryanair has also responded to the decision of another low-cost carrier, Wizz Air that plans moving its flight operations from Warsaw Chopin Airport in Poland to the new low-cost Warsaw Modlin Airport in Nowy Dwór Mazowiecki. Ryanair had previously operated the route to Dublin from Warsaw but they withdrew claiming that the fees at Warsaw's main airport were too high. When Wizz Air announced they would start operations from Modlin Airport, Ryanair announced several new routes from the same airport, most of which being exactly the same routes as offered by Wizz Air.

From the 60 low cost carriers in Europe, the numbers is much reduced today and in fact, the ones that are really doing well in Europe now remain to be Ryanair and EasyJet. In fact, Ryanair continues to grow in the low-cost airline space and at the expense of other low-cost as well as national airlines. Hence, it is not easy for new low-cost carrier especially when it is a business that relies on high capital expenditure. The stronger the company the more avenue for it to compete against its competitors. Not many companies can obtain financing that easily. Ryanair in fact is the most hated airline in the whole of Europe but it is the most successful today. Amazing on the part of business isn't it?

Many people I know said that Tony Fernandez followed the business footsteps of Richard Branson in the business of airline _Virgin Air. I don't think so (although could not qualify on this) as if you look at the early days of Airasia, one name Conor McCarthy who was the ex-director of operations of Ryanair was a member in the board of Airasia (now still is). Hence, Airasia despite the difficulties may have had begun on the right note with the right people.
Recently, many are wary of the potential competition from Malindo in Malaysia - an airline which LionAir has a 49% stake in. Lion Air is not a small player but it is smaller than Airasia in Malaysia and regionally (except for Indonesia). I do not know what strategy Airasia will initiate in the war against Malindo - if it ever starts to be a real competitor, but my guess is the probably the way Ryanair did to its competitors which attempted to offer services from its base - throwing prices in order to kill competition.
In most businesses, competition is not unusual. In fact, it is embraced as it allows some companies to be stronger. As a commuter, I in fact like it having more options.
However, do not forget that with Airasia planning bigger operations in Indonesia, Lion Air having its base there would like to attack Airasia as well. Like a game of Risk, at the end the right Strategy will win.

BTW, if you hate Airasia, I suggest you watch this youtube on a speech made by Ryanair's CEO.

Saturday, December 22, 2012

R.I.P Dr Lim Keng Yaik

One of the few more respected and less selfish Malaysian statesman, his hard work in protecting the palm oil industry against the onslaught of the much more media powerful soy and rapeseed oil's lobbyist has achieved a lot for the industry itself.

Read below in the article by TheEdge which highlighted the challenges facing by the palm oil industry and it did mention Dr Lim's role during the time when we was the Primary Industries Minister.

Rest In Peace Tun Dr Lim.

Is there any value in XOX?

I am watching XOX with a weird feeling. It is a MVNO with its price pushed to a market capitalisation of RM65 million as at yesterday (RM0.215). Last year, it raised RM42.6 million before 30 June 2011.

Balance Sheet as at 30 June 2011
Today, it has burned off almost all the cash and left with slightly more thaabout RM8 million in cash after 15 months. In fact if you look at its working capital ratio, it is in trouble already with the ratio much below 1x. It does not build momentum from the cash spent. I do not know where is the bullishness coming from...

If it is about Syed Mokhtar buying the company, I doubt it. Let us ask ourselves, would anyone buy a company that has yet to build a brand, a MVNO (which means hardly any valuable physical assets) for more than RM65 million. If this is the case, Green Packet would seem to be more attractive, don't you think?

Friday, December 21, 2012

ECM: Efficiently Constructed Market?

Today's trading in ECM can actually tell that market is ignorant. I believe the market should read more and trade less which to me is not happening now. Lots of information are readily available. A reader highlighted to me that ECM's stock symbol is to be traded in "red" from today onwards as it is now a PN17 company and he is worried. I never suspected a company that is to be admitted into the PN17 category will immediately trigger selling no matter what reason as it's symbol will be highlighted with red color font. Its the fundamental, not the color that determines the stock.

PN17 triggering the stock marked red
In fact, I mentioned that its buying opportunity if the share price drops as the fundamental remains the same while the stock now becomes cheaper. One should already know this as ECM has already pre-empted shareholders way before during the announcement on the merger.

What is the PN17 for? Note: Not all PN17s are all that bad

From the exercise, as below, shareholders will be getting a total RM0.676 worth of cash, ICULs of Kenanga and some small shares of Kenanga. The main attraction is the cash of RM0.534 per share. ECM is traded at RM0.85 now. The distribution of RM0.676 will be completed by next month - 31 Jan 2013, which is what is mentioned by ECM, and I trust that it will happen as the Kenanga deal is already completed.

Upon the distribution, ECM will be having a RM0.38 of Net Tangible Asset (NTA) per share with RM0.32 in liquid assets (cash and ICULS).

Hence, if we are doing the math - with the RM0.676 distribution, at RM0.85, the stock will be quite in the money (RM0.85 - RM0.676 = RM0.174). Assuming it is trading at a discount of 30%, it is still in the money. I am not holding this stock for long though as I think the company is going the Private Equity route judging from the purchase of Pelikan's shares. Its directors were formerly investment bankers and PE people anyway - that's what they do best.

Hey, within a few months we should be getting back almost all our money with some small profits possibly. This is almost a "cigar butt theory" as what Graham says - the cigar butt that's thrown on the ground can still last few more good puffs - if only you are willing to pick it up.

What is left at ECM
It is easy to find out what's left of ECM as after the distribution of RM0.676 per share, the company will still keep RM265 million worth of cash and ICULs from Kenanga. From the below balance sheet, ECM has already highlighted what they are to dispose off from the sale. Just take out the one in red box and intangibles as well (not sure what it is). What's left in the cash and ICULs add back to the assets - liabilities, that's what you get from ECM. But beware, it is a company with no real business.

Thursday, December 20, 2012

No Property Bubble?

I remember I was reading the below article quite a while ago.

Property Bubble: Fact of fantasy? by Dr Ernest Cheong

Interestingly, he uses an Average Malaysian's take home income as the gauge on affordability. His points I feel are really relevant. Simple, but yet effective. But of course what he did not say is that loans can stretch up to 60 years of age i.e. sometimes allowing 2 generations to pay off for one single property or even eyeing the EPF's savings for part of the repayment. This is how hard for the average man on the street moving forward, with what's left for the savings from EPF.

The points of rebuttal are to counter the article by Dr Jeffrey Cheah (Sunway). If you notice, the more recent houses or apartments built are mainly higher priced units. The argument by Jeffrey Cheah is not going to help to stabilize the housing market in terms of pricing but of course helping the developers.

Another way of looking at is the household loans-deposits ratio. As of recent, the household debts have sort of stabilized while it is still a cause of concern, although some are saying that they are in check. Again, these comparisons are against some of the regional countries. Many a times, comparison against other regional countries are flawed assumptions. Many countries - Hong Kong, Singapore, China inclusive are trying hard to cool down their properties with different types of medicines. Any one affected, it could bring contagion effect to regional countries. The "tomyam effect" did not just limit itself to Thailand in 1997, despite the country being first to get hit. Similarly, with Europe recently.

If you notice housing and consumer loans as a gauge of how well the banks have been doing as well as moving forward, this is the reason why I have stayed away from banks (despite liking bank stocks as a business). I would not call it as a signs of stress but the banks have been continuing to stress test the system far too much as of recent. Yes, Malaysian banks today are much more diversified than before (as in geographical as well as products) but the stress on obtaining deposits due to high loan - deposits ratio, continued low NPLs for while now, high consumption loan (which is bad if too much) worries me. Perceived strong asset quality can suddenly turn to bad at an instant if not kept in check.

At all cost, property and financial sectors have to remain strong and stable as if they are not, the impact to other sectors are just too great.

Wednesday, December 19, 2012

The curious case of Malayan Flour

It is no easy feat to have a name "Malayan" Flour and still flourish and survive until today. To be able to be in business for 40 years, with its ups and downs, doing very well at times is a good story. Malayan Flour (MFlour) is today the second largest flour milling operations in Malaysia with about 25% market share or more. If you read further, it is looking at the Vietnam market (as well as Indonesia) for expansion. Besides flour milling, it has other businesses as in live stocks poultry and feed milling - however the main bread and butter remains to be flour milling- wheat that is.

Now, the Malaysian wheat flour business has one large challenge - which also allows MFlour to survive and kills off competition - price control. (At the moment it is priced at RM1.35 for general flour)
When the price of wheat is low, all millers will survive - with of course quality of the flour and distribution taken into consideration. When the price of wheat is high, the weak ones which have weaker balance sheet, quality, sourcing strength etc. will be eliminated. Hence, it is no surprise that the performance of MFlour as well as the rest are very dependent on the price of wheat.

Prices of Wheat over 10 years
If based on the chart above, the flour millers were facing their hardship in 2008 and again today in 2012. These results are pretty much the same for MFlour and Federal Flour (own by PPB). And to top off, with price control, the years 2008 and 2012 are period before election. No government will be brave to allow increase in price for a staple (almost) - as flour is used for bread, noodle, roti canai etc. What the government would normally do is to provide subsidies. That kind of subsidies will of course be dependent on the sentiment of the government itself and the trend nowadays are to reduce subsidies for all kinds of stuffs. This scenario is like between the rock and a hard place for these millers.

5 year track record for Malayan Flour - not too bad but its 2012 performance is going to be challenging

If you noticed the performance of MFlour, it's profits is pretty much cushioned due to subsidies while over the last 5 years it has not failed to improve its revenue to the extent that it is currently running on almost full capacities on all its mills in Malaysia. This year 2012 is very tough though as revenue for 9 months increased to RM1.5 billion while Net profit reduces to only RM15 million, hence I am actually seeing the worst results for MFlour for the last 6 years despite record revenue. Why such when 2008 was a worse year in terms of prices for wheat?

Besides probably reduced subsidies, now comes my speculation. What is surprising is that there are certain trends which we see is not going according to what the trend should be. If you notice on the revenue for MFlour, its revenue growth does not follow industry average which is around 4% - 7%. Its revenue exceeded that by far (almost doubled in 5 years) probably due to price increases and its other segments of its business (feeds and poultry as well as overseas) but I doubt it is entirely from there. It shows that MFlour is gaining market share in wheat flour. With price control, by right the more you sell, the higher the profit margin as economies of scale kicks in. For MFlour, it is not really that. It is hence dealing in price competition.

The bad news. MFluor's biggest competitor in this business is Federal Flour, a subsidiary of PPB - ultimately Robert Kuok. As already all know, Robert Kuok is the largest by far in these area of business - flour, edible oil, sugar etc. FFM has a market share of more than 40% in Malaysia. Being the largest by far in edible commodities comes together with the power of negotiation and sourcing - as well as ability to throw prices. Why do I say that?

Prices of wheat flour is controlled but not for those used for industrial purposes - which means the ones sold to bakeries and noodles maker are not controlled. Hence prices of bread by right should have increased when wheat prices increases. (White bread which uses wheat flour as well is sometimes subsidised though). This has always been the saving grace for the flour millers as through non-price control in their sales to other industrial buyers, pricing is more inelastic. The higher the price of wheat, products that directly rely on wheat will increase price naturally. Another thing, with so few players and the top two (FFM and MFluor) in Malaysia already in control of almost 70% of the supplies, it could have led to a cartel situation - but it is not recently. Additionally, MFlour based on its quarterly report is claiming squeezed margin including lower selling price as the reason for lower profits. Why?

Poorer margins due to lower selling price is being used as the reason for lower profits in 3 quarters 2012 by MFlour. It cannot be lower selling price if it is price controlled item

Could be- Very recently, PPB has gone downstream i.e. into bread making - Massimo. Some say it is due to Gardenia not relying on its FFM flour anymore and has moved on to MFlour, hence PPB is doing this, or could be due to PPB started bread making and Gardenia moved on to another supplier, I am not sure. But never mess with one as big as Robert Kuok especially when comes to food commodities.

I am sure I do not know what actually happened, but prices of bread remains unexpectedly this time around. the Massimo bread I sometimes eat - its price definitely remains and I am sure Gardenia's price (which I eat as well) stays the same or probably it even lowered its pricing for some of its range to compete against Massimo, which is priced more attractively. If you notice as well this time around, Gardenia stopped lobbying for price increase as it is fighting a different war.

With the artificial lowering of retail bread prices, we probably see MFlour's pricing being the supplier being squeezed as well. Both FFM and MFlour suffer in terms of profits in the wheat flour business - that's for sure. But MFlour is a single entity when comes to the business of flour milling as its profits from poultry and feed are paltry. PPB, Wilmar are not. Its flour business in Malaysia is just one of the few places it supplies this product. Hence, FFM can afford to make less in Malaysia while not suffering as much elsewhere. MFlour has less of that luxury.

So, sometimes being second may not mean good enough especially when times are a bit more challenging.

I think this is going to be a temporary setback though as MFlour remains to be resilient and a well managed company. I am not able to speculate on the volatility prices of wheat though. Once prices of wheat returns to normalcy, MFlour will be attractive once more, and I think another reason why it diversifies to other regional countries is due to flour is not a price controlled item in these countries.

Another thing which I do not understand on MFlour is that, this year it raised RM200 million from rights issue while at the same time issued a massive taxable (25%) dividends totalling RM100 million. Both of them happened first half of this year. As a company, rights issue are normally used for business expansion or paying down debt. However, a huge sum of dividends paid about the same time I think is a little bit careless on the part of planning of the company. See below.

Tuesday, December 18, 2012

Jobstreet: Share buyback is the name of the game

What do you do when you have funds that you do not know what to do with. Either dividend or buyback. I like buyback especially when the shares are cheap presumably.

Well, this is what Jobstreet did. 2 major buybacks in less than a month. 3 million shares was bought in late November. I much like this than when they bought Innity.

And another 2.6 million stocks today, making a total 1.75% of Jobstreet's shares being bought back in these 2 transactions.

All in all Jobstreet has spent RM12.8 million on this. The thing is that, I believe in the two transactions, the selling are just done by 2 shareholders who hold large blocks. Otherwise, it would not be done in such manner.

The difference between dividend and share buyback is that while dividends provides returns to the shareholders immediately, a share buyback done right would provide the impetus for creation of better value per share in the long term.

Coincidentally, on a larger scale, Berkshire Hathaway did the same by buying back USD1.2 billion worth of stocks in a single transaction just last week.

EPF: The way it announces numbers has to change

No wonder MTUC asks for higher dividend because he is reading the headlines. See the report below. The guy is probably being mis-informed

KUALA LUMPUR: The Malaysian Trades Union Congress (MTUC) has called on the Employees Provident Fund (EPF) to declare a higher dividend this year because of its increased investment income.

The EPF recently announced that its investment income soared to RM7.02bil in the third quarter of this year ending Sept 30.
MTUC vice-president A. Balasubramaniam told Bernama on Tuesday that in view of this, it was only appropriate for the fund to declare a higher dividend.
EPF declared a six percent dividend for 2011.
Balasubramaniam said the majority of the 10 milllion private sector workers were looking forward to a better dividend from the fund as it was the only source of savings for them. - Bernama
The thing is if we use absolute numbers to announce the performance of the fund, chances are it will increase. This is because the fund size increased as well. Over time, EPF's fund size would probably increase (by quite a lot) rather than decrease. This is because total number of contributors increase as well as its amount each contributor gives increase as well. What EPF actually needs to report is Return on Investments or Return on Assets - not the absolute number in terms of performance. EPF's fund size is having net increase of RM1 to RM1.5 billion a month! Its absolute return should increase as well...What's more important is the performance per ringgit of fund contributed.

See the announcement below (can you track what's wrong):

EPF earns RM7.02bil in investment income in third quarter ending Sept 30

KUALA LUMPUR: The Employees Provident Fund (EPF) Thursday announced a 66% year-on-year income growth for its loans and bonds portfolio to RM3.06bil for the third quarter ended Sept 30, 2012 vis-a-vis RM1.85bil in the same period in 2011.
EPF said it earned RM7.02bil in investment income for the quarter under review, up 3.24% over RM6.8bil last year.
Chief Executive Officer Tan Sri Azlan Zainol said loans and bonds generated exceptional one-off returns due to a number of tactical capital market transactions, thus outperforming other portfolios in the same period. - Bernama
Not asking much. EPF is representing almost everyone in the labor force (except for public servants and self-employed) - I think we deserve a bit more in terms of reporting.

Friday, December 14, 2012

My problem with property stocks

What is fundamental stocks investments? To identify a company which can continue to provide value either in the manner of capital appreciation or in the form of dividend or BOTH.

With that objectives, it is much easier for us to choose and pick the type of stocks we would like to own and hopefully for the foreseeable future, be it medium to long term so that we are able to get ABOVE AVERAGE return with manageable and controllable risk management.

Assuming we invest in a company that is not traded publicly. If we are depending on dividend alone and assuming that stock consistently provides 7.14% dividend yield, we will get back our invested money in 14 years if there are no capital appreciation in the stock and we do not sell the stock.

On the other hand, another stock that is publicly traded and assuming it appreciates 7% every year (and does not pay dividend), we will be getting 100% return from that investment in 10 years.

Take that methodology into our investment, we have to either find that investment which provides consistent return of 7.14% over 14 years or hope for another company which is able to provide capital appreciation of 7% every year so that our return will double in 10 years. It is above average return, but that is a long period of time to hope for that consistency but still we must lookout for that.

So, taking that into consideration, we have to look for companies that can provide that consistency (be it the market condition is bad or good). Trust me, there are times when market can be really undervalued as well as way overvalued for a long period of time. It is always very hard to time market. There are times when we feel that the market is already very cheap and it continues to drop even further for a period.

Now, back to the topic - what are property stocks? Where do they belong in our investment mindframe. A property stock is one which owns tracts of land or landbanks which it can use and will use to build commercial, residential or industrial properties for sale or rent. Usually its assets are long term assets, which it uses to build houses, offices, factories etc. Minus the landbanks, it will no longer be attractive as a property company. Names such as Sunrise, SP Setia, Mah Sing, Sime Properties obviously have other forms of intangible assets in its expertise, quality, landscaping, concepts, brand names etc. But still the core asset is land. A great property company such as SP Setia can turn a piece of land in Klang (tens of kilometres away from prime area) to be worth as much as those much nearer to KL. After that piece of land be it to be built over a short period or longer if it is a big piece is fully built, the developer will need to find a new piece.

Big names will continue to build premium housing with premium pricing. But for how long? Land is finite. Plantation companies, consumer food or rather FMCG, fashion, manufacturing, retailers, money managers as in banks, insurance companies, utilities, rubber gloves etc. can continue to generate and regenerate the same thing / product over and over again. Property companies will face it much harder to consistently do that - which is why SP Setia, Sunrise are already being bought over and there are rumours that Mah Sing is becoming an attractive target.

Why? Reproduction is a problem but they are good developers with strong brand names. They themselves are up (or feel like wanting to be up) for sale after certain very successful projects are over and these players may find it hard to regurgitate the same formula. Look at Sunrise! After Sri Hartamas and Mont Kiara, where? Look at See Hoy Chan. Yes, the See Hoy Chan owner which has kept the company private all these while is very rich but the one which probably continues to print and reprint money for them is One Utama. I do not see them having large projects anymore after Damansara. Remember, we shareholders (most) are minorities. We are not the owners generally speaking.

Seldom a property company can continue to consistently and sustainably be able to produce strong results after strong results. I have yet to come across a strong property company in the 70s or even 80s and they still have very strong sets of results today. The only one I can think of is Sime Property. Sime is still there because of its parent which has unlimited supply of agricultural land (and also help from government). That by itself, defeats the term "continue" in the first paragraph of this article. Most of these property companies like to morph to a IGB (Mid Valley) or See Hoy Chan (One Utama) where income can be more consistent.

I know that there are several readers who asked my opinions on companies such as Hua Yang, MKH (Metro Kajang), Asas Dunia, Hunza, Ivory etc. To be frank, they look attractive to me but I just could not foresee where their directions are in the middle term future - in case either the stock or property market turns to the worse. I however can pretty much foresee where Nestle, DKSH, Amway or Malaysia Airport are sort of heading. Bear in mind, property prices have had an extended run for a period.

NTPM's 2Q2013 results: A short review

Over the last one month, NTPM has spent around RM3.7 million to buyback its own shares. Their purchase price was around RM0.425 - RM0.445 and if I am not wrong close to 8.6 million shares was bought back.

These shares I believe are mainly from Tabung Haji's ("TH") portion which has reduced its portion to below 5% (see below) since 7 November and I think it is still selling.

Sometimes, I wanted to know as a shareholder, what makes these fund selling? Are they selling to have opportunity to buy something else or could they just be losing interest in these stocks. Or could it be just year-end effect. Note that NTPM's shares have not been rising much over the years, hence the selling may not allow TH to gain much from their interests. I have noted of the same scenario happened to Bonia where PNB was selling. However, I think Bonia in this case did it better by getting the block off market.

Now, back to NTPM - is it a bad stock? It just announced an improved  performance in its most recent quarter. Its balance sheet in fact improved as well with better cash position against debt (gearing). There's nothing to fault the company here.

So, where are the contributions coming from? I am actually quite surprise actually as I thought the paper products division would continue to do better while the personal care products are the one facing competitive pressure. It is the other way, the paper products have actually sort of tapered in terms of growth while the personal care registered improved performance. See below.

Now, as I am living in cities, I would not have noticed these things. I have always thought that it has stiff competition as well as (to me), its going to be tough for the personal care (especially diapers) division with so many brands in the market.

I noticed NTPM does not promote (via adverts) its Diapex (baby diaper) brand in the bigger cities, but if you drive around, it does promotes its products via billboards (and other manners) along the smaller towns / cities. Hence, I could be seeing that NTPM either has better distributions itself or because of the pricing (cheaper) of its Diapex brand, it does have tractions in the smaller cities.

As I see it while its tissue brands are probably as strong as Kleenex (owned by Kimberley-Clark) in Malaysia, it may have a different strategy for the personal care segment.

Let's see how Vietnam goes as it seems that NTPM is investing quite substantially there with recent announcements.

And, lastly I do not see the selling by TH to be due to performance. Note that NTPM is not in the fashion industry like Padini, Bonia. Fashion changes (and these companies have to keep up with he fashion). Tissue papers on the other hand remain the same for a long period of time. More people means more tissue papers being used. More modern babies means more diapers as well. It is more of a strategy, marketing, distribution, quality, manufacturing differentiators.

Oldtown: How do you turn away from this kind of rumour?

On a lighter side, since today is a Friday (and my blog has been on more serious stuffs all this while), I received email for the below topic on apparently, our PM's wife - Datin Seri Rosmah is now the owner of Oldtown.

Well, I think this is a rumour. There are nothing to substantiate this and as far as I can see Oldtown is still a public company. Notice, the word "Bought over" and it basically means in control. I think sometimes rumour can be way overdone.

Understand the "nominee" thing, but there are no facts to proof on this. No announcements - nothing. No shares changed hands in large quantities. Anyway, the way these things have been circulating around is a bit too much. Not protecting anyone here...

Yes, you heard it right. This is no rumour !!
Rosmah, ............, has bought over the ubiquitous "Ipoh Old Town White Coffee Kopitiam". 
Isn't it amazing? First, the big diamond ring, then the posh and unaffordable handbags and now this?
Where does she get all the $$$$? Do your maths, guys. Even if her parents started savings when Rosmah was still in her mother's womb and she carried on since a toddler, it will take, like the song says- as long as the 12th of never...
Now you get why we have to continue paying North-South Highway tolls even after they have made three folds profit of its capital outlay..
Now you understand why Penang Port was awarded to Syed Mokhtar? Why AES was privatized and we have to pay full summon of RM300??
Why they coveted but failed to implement the National Medical Insurance scheme ?
Why they turned to brain-washing mechanisms such as BTN (Biro Tata Negara) to champion the cause of --------------------
Enough said and what are we going to do about it ?? 
Yeah..I heard you loud and clear....START SPREADING THE WORDS....

Tuesday, December 11, 2012

Malaysia Airport has a strong case

Generally, I do not really favor a business that largely depends on rent for revenue. This is especially so for Malaysia Airport ("MAB"). I always felt that it is a monopoly and that position itself is no good for business. MAB is a monopoly allright but when comes to competing against other airports around the region it is not. Within Malaysia, it is probably the only player in town (except for Senai, I think).

Over the years, I have to admit that MAB has done very well - depending largely on the rise of low cost carrier business in Asia especially. I looked at MAB more than a year ago - and at that time it was trading close to RM7.00. Felt that it was overpriced although I already liked the business during then.

On the business of airport, the success of MAB is very dependent on Airasia's hardwork. There are expected new competition from Malindo although I am yet to be convinced of it doing well in a market where Airasia is becoming very dominant. If you go to LCCT (low cost carrier terminal) in Sepang, one could not help to be mistaken that the airport is owned by Airasia itself. Such is that amount of traffic Airasia has brought to the LCCT, but the main beneficiary sitting down and collecting toll is MAB. MAB is doing so well to the extent that for the last 8 years, it has not failed to grow - not one year. See below.

5 years performance for Airport from 2007 - 2011
Rewind a few years back, although it may sound easy, the business of managing airports may not seem that simple. Let me bring you back to year 2003. A mediocre management will not be able to grow the revenue as seen in the stagnation of revenue below. Yes, it is probably due to the rise of low cost airlines after 2003 but a good manager will only allow a star player to shine. A poor manager will not be able to spot the talent or allow the talent to be groomed.

4 years performance of MAB from 2000 - 2003
One may point to the quarrel between Airasia and MAB to the extent that at one point of time, there was a threat by Airasia to build its own airport in Nilai but this I think could be a thing of the past.

If you noticed, year 2003 was also a year of change in MAB. There was much changed in focus i.e. on running the airport operations well as it in later years sold off its F1 circuit and the management (as well as government) objectives became much clearer.

The write-up on the left is picked from the Chairman's statement in the Annual Report of MAB, and one could notice that MAB changed its management team mid 2003. Coincidentally, from 2004 onward, MAB's performance started to get better. To me, it is no coincident. There must be something in it.

In a business, it is much harder to convince people that the business or the managers have managed to turnaround or made them a lot better than convince on continuing the steady performances of some companies. This is why, it is much easier to convince that Nestle or Carlsberg will continue to do well than telling investors that there's already a change in performance (to the better) of MAB or a company like Time Dotcom where they have had bad past.

The biggest story in the near or medium term future for MAB though is not all of the above, but KLIA2. Despite all the hoo-hah about the costs overrun (or maybe overly expensive to build), is the potential it may bring. If one google on KLIA2, you would have noticed, the proposed initial retail space itself is more than 4 times the size of the current LCCT. It will be able to accommodate 3 times the traffic of the current LCCT. From there, looking at the growth prospect of Airasia, and bringing in several of its potential competitors, the revenue from KLIA2 is to grow exponential again - pretty much when LCCT opened in 2007 (despite the rush). This time, it is a serious one and KLIA2 will be able to accommodate for more space for the future as long as low cost carrier business continues to grow well. I think it will, as flying be it for business or holiday travel will continue to grow. MAB's business of renting out retail space I foresee will be doing very well too, if one notice the lack of space for retailers in the current LCCT. I am convinced.

On bringing more traffic, one need not be smart to know that Airasia will be planning for more planes as this is where its profits are mainly from. The rush for low costs will naturally allow it to grow - both MAB and Airasia (in fact MAB more due to its monopolistic nature). Look at SIA's sudden focus on regional flights as well as low costs focus in initiating Scoot. More people will fly, no doubt about it.

I am positive on MAB's future as long as it does not do anything stupid - and with that, I have bought some 2,100 units between RM5.29 and RM5.32.

Monday, December 10, 2012

Time Engineering is not related to Time Dotcom anymore

Just wanted investors or traders to know. Today, Time Dotcom (TdC) is having a good run due to its announcement of distributing (proposal) 6 shares of Digi's shares for every 25 shares of TdC held. While this is good in terms of untangling its Digi shares held hence allowing shareholders to directly hold Digi now, for shareholders of Time Engineering, one should note that it is no longer related to TdC. See below. I see that Time Engineering rose 8% as well today. Should not happen.

I would say Time Engineering now has not much of a business, but its balance sheet is clean with some RM60 million cash. Don't think its worth RM244 million of market cap as at now though. Look below, it is struggling to find good businesses from its liquid assets it holds.

On another note, TdC by distributing Digi's shares, it's performance in future will be more reflective of its own performance as investment income (dividends contribution from Digi) may be reduced by half. Also, assuming Digi's price is RM4.84, the value of Digi's shares that is to be distributed by TdC per share is at 0.24 x RM4.84 = RM1.16.

Friday, December 7, 2012

Selling Genting for other opportunities

Genting has always been a stock which I was not going to hold for long. It went to as low as RM8.50 for the last few months, but I bought the stock at RM8.92. It is a good stock with very good cashflow over the coming next few years, but its business has sort being challenged recently. The Singapore together with the Malaysian business somehow or rather are tapering down both from the perspective of volume (revenue) as well as margin.

I guess the strong Singapore effect is slowing down. The government of Singapore if you notice is very comfortable with the current situation and at the same time trying to discourage its own citizens to frequent the casinos. This does not augur well for Genting relying much more from its casino business rather than hospitality and theme park business for profits. Genting's gaming and convention businesses in UK and US seem to have slow pick-up rate - probably due to the management's over confidence on its success hence going in big into this area of business. It seems to be getting tougher due to the increasing competition and with many countries now planning to have casinos in their own countries.

At the same time, Genting's other businesses in plantation and power plant are facing some sort of slowdown recently - the first due to the poor palm oil prices while it is selling its power plant business in Malaysia. Power plants are businesses which provide consistent much calculated revenue but it is not exciting if you want strong growth.

With this, I feel that there could be better opportunities from elsewhere. I have hence decided to sell Genting at RM9.17, making a small gain.

Over the last few months, it is getting tougher to pick stocks due to the market getting expensive. From the list of stocks which I have picked, some are doing well while others are facing selling pressure from very large funds.

Position as at 7 Dec 2012
2 of the stocks I hold - Airasia and NTPM are facing selling pressure from large local funds if you notice - Airasia from EPF with this largest fund in Malaysia selling few million shares a day. I have noticed that Tony Fernandez and his partner have been buying but their buying would not be able to provide support to the large volume selling by EPF.

NTPM similarly is being sold by Tabung Haji to the extent that now the fund is holding less than 5% of its stock. I believe that TH is still selling despite it not needing to report the transactions. If large funds are selling, there is no point supporting the stock. Let them sell as fundamentals remain the same while share price is the only one that changes. The lower the share price, the more opportunities it presents for future buying.

Anyway, the small fund that I present here continues to hold on with my latest purchase Padini springing a surprise in a short period from my purchase on 29 Nov 2012. If you notice, the shares that I hold in this portfolio have very good dividend payment track record except for maybe Airasia and TimeDotcom. I like companies with good cashflow and confidently provide good dividends from its cashflow. However, do not buy overly expensive companies though despite the high dividends. There are some which are providing high dividends but are expensive.

On another note, if you notice today's evening announcement, Time Dotcom is proposing for dividend in specie of Digi's shares it holds. It is proposing to distribute 6 shares of Digi for every 25 shares in TimeDotcom held. By doing this, TdC is freeing up and untangling the Digi shares it held for its shareholders, a commendable move. I expect upside for the share on Monday.