Saturday, March 31, 2012

Latitude Tree: If you continue to believe in US housing comeback

There is nothing fantastic about Latitude Tree except that it is a proven value stock. This furniture maker, with 95% of its market in the United States has a long proven history and yet it's stock price continue to be low. For example, the latest market value at the time of writing is RM62.7 million while its net asset alone is RM196 million - a 68% discount!

10 years Financials of Latitude Tree
In fact, I suspect the actual asset value could be worth more as some of its property assets were bought and valued during 2002. Land prices increased substantially since 2008 for both Vietnam and Malaysia. And Latitude Tree has massive land size in these two countries. I would suspect its properties in Vietnam alone would have been valued much more today as most of them were bought in 2002.

Besides properties, let's look at the the real deal - how sustainable is the business. There are not many small cap companies which I can highlight a 10-year financials, but for this one I feel obligated to do so. Why? Look at the trend.

For most part, it does not have a significant steady trend except Revenue, which has been on the steady rise - since 2002. Another positive trend - 2010 onwards, its operations in Vietnam has brought on much more revenue and profitability (ratio of 2.5:1) than Malaysia. This is mainly due to labour costs. Hence, Vietnam has become more important than Malaysia since.

It is however difficult to predict its profitability trend. One thing you notice is that for all the 10 years, it is profitable no matter how difficult certain years can be. As wood being the main raw material, is a commodity, its profitability can be affected by the fluctuation of raw material prices during the short period.

Its business is also seriously affected by the slow down in US housing market from 2008 until now. On top of that, US currency depreciation has also affected Latitude Tree badly. This is especially so for the last 2 quarters (1st and 2nd quarter 2012) results which are not shown here.


Despite the above, let's look at Latitude Tree as a company in a industry that is competitive.


  1. Where some its competitors has failed, Latitude Tree managed to prove otherwise. It managed to successfully adapt to the costs challenges in the industry by its ability to move to a lower costs country - Vietnam and be successful. It is always challenge when you move your base as quality and many other operational factors may affect business.
  2. The challenges that it faces because of United States as its only market does not too severely affect the company. Yes, profits dropped but it still managed to register profits despite all the setback. 
  3. This is added by the weakening of US Dollar by as much as >15% since end of 2010. Believe me, unless the dollar position are hedged, it will affect any exporters from Malaysia or Vietnam quite substantially. During the period of significant Dollar decline, exporters could be caught in situation where they provided quotations a month or two prior to the order and by then, Dollar already declined by 5% to 10%. These are also seen in the rubber gloves industry.
Now, all the bad news are or should already be in for Latitude Tree...I think. The question is for how long more, they will face challenges like this? US housing market has yet to pick up from its latest statistics although the labour market has shown signs of improvement. Will it pick up back? For sure, the housing market being such a significant contributor to the economy will not slump forever for such a big market like United States.

Another question, will US Dollar fall further? How much more will it drop?

These are questions that Latitude Tree cannot answer. What it manages to do is to pull through the tough times as it has proven in the past.

And the company is trading at a price which is much lower than its book value! This could be attractive enough.

Serious Investing!

Thursday, March 29, 2012

Free Cash Flow for Opensys is still strong

As most business people and investors would agree, Free Cash Flow (FCF) is a very important indicator for any investments. From FCF, is where the company pays out its dividend. Examples of very strong FCF companies are Apple (which is why they started to issue dividend recently), Intel, Microsoft. Locally, there are quite many, the two strong telcos (Maxis, Digi), Nestle, Dutch Lady and another which I have mentioned a lot, Jobstreet. There are many more but some of those companies are actually pretty expensive.

Here however, I would like to highlight one very smallish which I have mentioned before, Opensys where the FCF against its revenue is awesome especially for the last 5 to 6 years. As mentioned before as well, the low profit was because of its high amortisation and depreciation charges in which the amount would probably reduce over the next 1 to 2 years. Anyway, who cares Net Profit. Isn't cashflow more important?

Update of Opensys' important numbers

Today, it is trading at RM29 million market capitalization. Hence if you are doing a ratio of Market Cap against its latest FCF, the ratio is a 3.19x. Just imagine how low is that. Literally, it means in 3.19 years for you get back all your cash (if all are paid out as dividends).

Wednesday, March 28, 2012

Nextnation: From a telco service provider to a developer?

Nextnation seems to be moving places recently, or so it seems? They announced a partnership with PT Inovisi just a month ago, got invested with some additional RM4.5 million raised from the Indonesian company during the same month. Now, they are into development?

Summary of announcements on 28 March 2012
However, I have one question - just how are they going to do that, beats me...Yes, if you look above, they are raising some funds but this is a project with some RM320 to RM400 million Gross Development Value.  
Although they did not say that they are turning themselves into a developer, How do I look at it as a development project rather than a company which is trying to build its own office? Look at the table above for source of fund for development - to be financed by off-takers / tenants. What does that tell you? Also why such a big piece of land?

FYI, from the lack of highlights which I complained about, here I compiled some financial information about the company.



Look at the revenue trend - not much trend aren't they? Cash / borrowings deteriorated further from 2006 to 2012. In fact the latest results as at 31 October 2011, before they raised some RM4.5 million from PT Inovisi, the cash level RM3.05 million) against borrowings was 27%. Receivables are really bad as well with the latest  Days collectible at 326 days!

In today's announcement, they proposed for fund raising of around RM15.5 million from private placements diluting the company by another 30%. I am not sure whether the fund raising can be successful, but this is probably why the company's share price had a run to above RM0.10 as they cannot raise funds from private placement if the price of the shares are below par value - unless they agree to a discount. Whatever it is - here I have 2 questions:

- What is it a company like Nextnation is going to do with a 5.9 acre of industrial land;
- If it is turning or diversifying from a mobile service provider into a developer can they handle a project with a Total GDV of RM400 million? - and why Cyberjaya?

Or are they trying to reverse what Nokia did, from a small timber concern into a mobile company, since Nokia is not doing so well nowadays? It seems the trend nowadays for IT companies is to turn themselves into property owners...

[29 Mar 2012] Note that the receivables increased to RM60.4 million for its 3rd quarter 2012 results announced today. Wonder how come it is so difficult to collect from Telcos.

Tuesday, March 27, 2012

MTouche: The case where they caught up with other people's BullS***? (Updated)

MTouche was never meant to be a very profitable company, or at least one with decent results. Some VC (check the name!) was probably the one doing the behind works for them. Just look at last 7 years performance, you see the wild swing in profits - probably some financial engineering if you look at the receivables trend.








Just recently, there were articles claiming that the 2 largest individual shareholders were set to lose their control of the company. These are young guys (or were) who relied on market players, who understand the ins and outs of the retail market very well. The result, wild swing in share price as well and along the way, there was a rights and warrants issued to raise more funds for the company. Everyone seem to be heroes here, or so it seems!


Problem is that the 2 directors (who are also the largest individual shareholders) had to raise funds to pick up those rights at RM0.80 per piece sometime around November 2007. What happened after the issuance of rights? They increased their personal debts, hence more of their unpledged shares had to be pledged while the share price kept on dropping. Basically they had to pledge almost all of their shares after the rights issuance to pick up the shares. The largest setback is that post-rights issuance, the shares tank! Hence the total financing against the shares was out-of the money.

This is also probably why MTouche did quite a lot of share buybacks, to rescue their shares from being clawed by the financier. At last, they clawed anyway!

What is the lesson in this? If you are just a pawn in a chess game, the players will decide when you leave and stay. This is if you believe in other people's BullSh**


I also wonder what is the value in the company besides the RM21 million in the coffers for Kamaruddin Meranun and gang to do a takeover if the rumours are true? Is this another fools theory that we can use as case study?

Hence Serious Investing is much safer than Trading, perhaps!

-------------------------------------------------------------------------------------------------------------
2 April 2012 - Latest news on MTouche - Goh Eugene, the CEO got back all his shares as the transaction was reversed - wonder what actually happened. A big block of his shares was originally sold to a shell company Resolute Force Sdn Bhd.

 If Goh Eugene has control, why would the shares be sold and be reversed.

------------------------------------------------------------------------------------------------------------------------
23 April 2012 - another married deal done - with 30% of MTouche's shares being traded off market with the CEO and ED sold out to an unknown company called Homegrown Media Sdn Bhd. Probably a vehicle used to just trade the counter. The issue here is that even though the 2 largest shareholders sold out, no directors resign. Will not be surprise if this stock has been cornered.

Monday, March 26, 2012

If it takes that to run a successful airline, so be it!

I did mention how hard it is to run a successful airline. One example is Ryanair with its obnoxious, foul-mouthed CEO, Micheal O-Leary. He runs a very successful budget airline so much so that Airasia is probably modeled after Ryanair. Tony probably wanted people to believe its Virgin Airlines but I believe it resembles Ryanair more.

I noticed on the web, Tony Fernandez gets quite a bit of slack from the forummers, but he really can't beat Micheal O-Leary. Here are some of his controversial quotes.

  1. If someone wanted to pay £5 to go to the toilet I would carry them myself. I would wipe their bums for a fiver;
  2. At the moment the ice is free, but if we could find a way of targeting a price on it, we would;
  3. The best thing we can do with environmentalists is shoot them.These headbangers want to make air travel the preserve of the rich. They are Luddites marching us back to the 18th century;
  4. In economy no frills; in business class it'll all be free - including the blowjobs;
  5. The Boeing and Airbus duopoly is ending. (Talking about the emergence of another competitor in Comac from China.);
  6. We don't fall all over ourselves if they... say my granny fell ill. What part of no refund don't you understand?You are not getting a refund so f**k off;
  7. Its absolutely bizarre that the people who can't tell us what the f***** weather is next Tuesday can predict with absolute precision what the f***** global temperatures will be in 100 years' time. Its horses***;
  8. Why does every plane have two pilots? Really, you only need one pilot. Let's take out the second pilot. Let the bloody computer fly it;
  9. On travel agents - Take the f**kers out and shoot them;
  10. On being a father - I'm taking the Ryanair approach - subcontracting everything 

Sunday, March 25, 2012

If you are not an Investor which ONE stock should you pick

Imagine yourself do not have the time to read through stock picks. You have no time to do your own research. You do not trust the unit trust agents or investment managers. Neither do you have believe in any other trade calls as they are mostly short term trades. The return from fixed (time) deposits are just too low. You do not want to keep too much in cash as well. You want to have some investments (besides properties) for your retirement or children's education fund over the next 10 to 20 years.
Which one stock would you pick? We do not want to look at financials at all in this piece. Judgement beyond numbers will be used. It has to be a stock with very strong brand value, stickiness. No PE, EV/EBITDA or any fancy ratios will be used at all as it does not matter for this one stock for your lifetime. (Some stocks may be expensive now but a good stock will give you back your value in a matter of time not too long down the road)

Let's look at the potential lists of individual stocks and where it must meet the above criteria.

Utilities stocks
Tenaga Nasional, Independent Power Plants or any other water utilities stocks - not really as we already know how poorly run Tenaga is. Other IPPs? Some of these concessions are almost to end over the next 10 years. Gone are the lucrative contracts anymore. Hence No. Utilities stocks do not meet any investments criteria for now.

Banks
This sector is more interesting as some of them have given much value to investors over more than 20 years.
CIMB - Well run now but it is very much seen as a one man company right now - Nazir Razak. What happens if there is a change in government - the CEO can be changed as well right? - hence do not buy as it is an unknown.
Maybank - decently managed but not one which you would want to own  as it is not good enough. Anyway, over the last 10 years, it is one of the least performing bank as compared to CIMB or Public.
Public Bank - if we look at banks only, maybe this is the one. Very well run, but the leading man is 80 years of age? It has to prove to me what happens if it changes its management.
Hence for that one stock to choose, banks are not the one.

Telecommunications
Telco sectors, you have 4 stocks - Telekom Malaysia, Maxis, Axiata and Digi.
While they performed well over the last 10 - 15 years - the end game is not known yet and it will never be. First there was TM, then Celcom (now Axiata) and later Maxis. Digi has provided a lot of value to its investors as well. However, as you can see winners of the industry changed few times over less than 20 years. This sector is a bit too volatile and technology caused change in regulatory decisions as well.

Constructions and Property stocks
Some construction stocks have given good value to its owner. But Hell No as they are too volatile. Moreover,most construction stocks depended on largesse from the government for jobs. As for properties, again the land bank thing is a hindrance. Example, what happened to one of the property darling, Sunrise.

Petronas Group of stocks - PDB, PetroChemical, MISC
Uninteresting - and what happens when we run out of oil? I am not able to answer that.

Plantations
Plantations in Malaysia basically refers to palm oil. Maybe this is one of the sectors that will last through time. There are some good stocks there such as IOI, KL Kepong United Plantations. (I would not consider Sime Darby as it is a conglomerate) However, one of the threat is Indonesia, as it seems the prices of oil palm more and more are being dictated by Indonesian planters and government. Anyway, palm oil is more of a commodity stock.

Consumer goods
Tobacco - No. Due to regulatory factors.
Liquor companies - No. Same as above.

Out of all the consumer food companies (Dutch Lady, F&N, Mamee), one stands out - Nestle. It has a very dominant position for two or even three of its brands in Malaysia - Nescafe, Milo and Maggi. Anyone in Malaysia can do without one or the other? (And is Malaysia a growing population? Yes for sure.) Name the competitor brands for Nescafe or Milo? There are, but any one of them are able to shake these brands owned by Nestle? In fact, over time probably Nestle has gained market share from its competitors.

Will it be affected by raw material price inflation? Yes, short term - a definite, No for the longer period. Its brand power provides them pricing power especially for Milo and Nescafe. Its sales volume also provides them purchasing power strength from its suppliers. People can afford not to eat out, but will probably not bother to do without Milo. This one stock, no one cares who its CEO is. Can you name the person? This is one company which the management can make mistakes for that one year and yet be still dominant! There you are this stock is the hedge against inflation.

Is it expensive? Yes, but as I said this stock is for those with really long term outlook.
If you are looking for one pick only, do not even bother to look at its financials. Just take that pick!

For overseas investors, I am referring to Nestle Malaysia and I am also sure Nestle, the one listed in Switzerland is just as fantastic!

Happy Investing!

visit www.fb.com/MalaysianInvest

Saturday, March 24, 2012

Which "Cash call" route will MAS go for this time?

Airline is a very brutal industry. Almost every country has at least an airline for itself, some countries just too many. Hence, competition is fierce especially with some airlines either state-owned or at least subsidized. For example, how do you compete against a state-owned Qatar Airways for a country that can afford to host a (football) World Cup with less than a million population. Another example is UAE - another small country with two large state-owned airlines in Emirates Air in Dubai and Etihad Airways in Abu Dhabi. Airlines in essence sometimes becomes national pride for very rich countries.

Government
Then, the other tough thing is national service. It is almost very common for non-profitable routes created due to country's bilateral arrangement - one example is the Johannesburg's route was in existence due to Malaysia's bilateral relationship with South Africa. In my guess, it is probably a much non-profitable route, otherwise why would MAS terminates it. 

(There are many more national service cases, which I do not want to talk about as can be sickening.)

Supply duopoly and cartel
Against so much tough competition, you would want to look for your ability to squeeze your suppliers. But...in the airline business, how do you squeeze your only 2 major airplane suppliers - Boeing and Airbus. Another high costs component, fuel - and we already know what OPEC as well as speculation can do to fuel prices.

Union and manpower costs
Another major costs for airlines - manpower costs, with most airlines having very strong union (MAS included) and for their top brackets wage earners - the pilots (high costs)! Ever wonder why Micheal O'Leary (CEO for the very profitable Ryanair) suggested for airplanes to be piloted by only one pilot for its planes rather than the current practice of more than one - I don't think its a joke but is more of a message on costs.

Hence, in essence airline companies that are not nimble would be tough to manoeuvre as they are facing headwinds from all angles. These are exactly what MAS encounters, not to include competitions from low costs airlines which are growing in numbers and getting more popular.
In US and many other parts of the world, bankruptcy is quite common for an airline company. This is what is faced by American Airlines (AA) which filed a Chapter 11 late last year (similar to bankruptcy protection in Malaysia).

Recently, MAS reported very bad numbers for FY2011 - for a period even before gas fuel prices goes sky high - to USD133 / barrel (latest numbers by IATA). Hence, from those bad numbers reported by MAS, in a battle among the FEEBLES, I took out latest numbers from AA to compare.

Comparison between MAS and American Airlines numbers
























MAS' liquidity is worse than AA's!

For any company that faces concerned liquidity position, two most important ratios are studied - working capital and acid test. In both comparisons, MAS registered much poorer liquidity ratios than AA. Working Capital and Acid Test ratios for MAS was 38.6% and 33.4% respectively against AA which registered 60% for working capital and 50.3% for Acid Test.

The only thing MAS shows better numbers than AA in its balance sheet is Shareholders Equity. Now, for sure, MAS liquidity is very stretched. This is why in their statement from the 4th Quarter 2011 results, they mentioned that they are in the midst of looking for additional funds to shore up its balance sheet (read below).











The question now is to raise from who and how? Bonds, preference shares, bank loans (err...which bank would loan la - they only want the arrangement fee - CIMB again?)? Who is to participate if the company is to be continuously in the red for a long stretch. There is a mention of rights issue. Will the minority shareholders participate? Together with Tune Air (yet to be approved), the government (through Khazanah and EPF) controls 80% or more of MAS. Will Tune participate if the share swap is approved? And Will the government rescue MAS again?

If all is well with one of the few questions above solved, one question remains - how is it that MAS can be valued at RM4.5 billion (price: RM1.35), FOR A COMPANY THAT DESPERATELY NEEDS CASH INJECTION! (For comparison, AA is now valued at less than USD150 million! - and Quek Leng Chan probably lost quite a bit of money there)

Minorities, this is the time to sell fast as there is probably going to be a cash call and the participation is not going to be worth it. In any case, it is not worth the price now - Or do you still believe that the government is your Santa Claus?

visit www.fb.com/MalaysianInvest

Friday, March 23, 2012

Nextnation: Can you spot what business it is in?

A friend of mine asked me to check out Nextnation Communication Berhad. Hence, as usual I took out the Annual Report, looked through its website, Googled etc. Read this - It claims itself as an end to end mobile service application provider providing connectivity to 500 mobile networks - that's so much I understand. Looked through the management report which can be found as below. I looked through the financials - nothing interesting except for that its receivables pretty high. Not much cash, some debts. From what I can see they have high administrative costs and costs of sales for a software company compared to its income. Capitalised quite a bit of their Development work. Note that capitalised development work totalled RM19 million for a company with around RM1 million profit.

From my count, for a company that has some 20 subsidiaries and 2 associates company, it is weird they have nothing to report. No segmental or business analysis?

Please read the statement from the management as below (bear in mind I have looked through several other Annual Reports - pretty much the same style of reporting, just changed the figures and in fact they used same template for reporting. Can someone spot what they do by reading the statement below? And can they please treat the reporting more seriously.

Sorry, friend, I can't do much for this company's analysis. And anything you can't decipher, don't buy. The company is pretty much going to move to and fro from profit to loss and loss to profit according to their whims and fancy at any given year to their liking.

From Nextnation's Annual Report 2011 (what crap they are reporting):
FINANCIAL PERFORMANCE
For the year under review, the Group recorded revenue of RM72.3 million, representing an increase of approximately 9.4% compared to the previous year. The higher revenue is certainly remarkable given the weak business sentiment caused by the prevailing global economic slowdown. The growth in revenue was mainly attributed to greater consumer demand for the Group’s mobile value-added products and services. Meanwhile, the profit before taxation of RM1.2 million recorded in the financial year under review is a major reduction from the previous year profit of RM3.6 million. This difference was mainly due to the Group obtaining an extraordinary gain of RM4.5 million from the disposal of subsidiary companies that was recorded in the last financial year, and also due to relatively lower amortisation costs incurred. Going forward, the Group is cautiously optimistic about its operations which include the expansion of higher margin businesses both locally and in overseas markets such as Vietnam, Thailand, Indonesia, USA and Europe. Much work and effort have been put in by the management team to expand its’ foreign businesses, which have much bigger revenue stream and profits as compared to the local market. While this is in the pipeline, the management is also mindful of the development of the current weak US economy and data which may have a negative spill-over effect over the global economic sentiment. We are hopeful that this scenario shall not be the case, and the global environment shall continue to provide an impetus for the future growth and profits of the Group.

OVERVIEW OF DEVELOPMENT
Following the successful launch of various products and services in last financial year, the Group continues to improve its products and services to provide more features and higher value of services to users by launching new version of M2CEP and CCAM/CMAM Platforms to cater into different market needs, as well as to localize the platform to meet local regulatory requirement. M2CEP has been developed to utilize cloud computing to cater for increasing traffic as well as to increase the quality of service. Different connectivity module has also been developed to integrate with new mobile operator’s infrastructure. Besides, the Group has implemented IP Location based service on CCAM and CMAM Platforms, which enables the Group to target user based on user’s mobile operator as well as regional location. These new products and services are expected to positively contribute and enhance the Group’s performance and competitiveness.

RESEARCH AND DEVELOPMENT
The Group continues to put its main focus on the research and development (“R&D”) efforts as it believes that R&D is a key factor in ensuring its competitiveness in the evolving telecommunication industry and facilitate future growth. In line with the strategic direction of the Group, the R&D scope is emphasized on strengthening and upgrading its existing platform to support the latest mobile devices and technology, while developing and enhancing new and innovative products and services.

For the year under review, the total R&D expenses incurred was approximately RM5.3 million, representing about 7.3% of the Group’s total revenue. Save for the R&D in new products and services, the Group also continue to invest in training and development skills for the employees in its R&D and technical teams to encourage development of fresh and innovative technology.

Thursday, March 22, 2012

The little things that make Jobstreet preferred over MYEG

Both companies I like for dividends and growth prospects. They are probably 2 of the better dotcom companies that are still up and running, after the dotcom crisis in Malaysia. (MYEG was formed after the crisis)

Having survived, dotcom companies such as Jobstreet and MYEG have very strong cashflows while their operational costs are very manageable. Jobstreet is the No.1 jobs website in Malaysia with commendable operations overseas (Philippines, Singapore), while MYEG is the No 1 e-government site in Malaysia. Both are very profitable with continuous good growth prospects.

MYEG's (Price : RM0.645) current PE based on most recent Audited Report is around 17.5x with PAT at RM22.13 million. Jobstreet (Price : RM2.17) registered a PAT of RM43.7 million for FY2011, hence valuing them at 15.9x PE.

Tax

Currently, MYEG only pays 3.6% tax due to it getting tax exemptions from being a MSC status company. The tax exemption was until 17 July 2011. However as I noticed from its latest management accounts as at 31 Dec 2011, the company is using another subsidiary for it to enjoy continuous tax exemptions. (Wondering how is this possible)

Jobstreet on the other hand paid around 23.8% tax as they no longer qualifies for pioneer status.

Development costs


MYEG's policies with regards to R&D. They capitalised some parts of their development costs.

MYEG's R&D accounting policies

What is the impact? This accounting measure for FY2011 probably improved the company's PAT by around RM1.2 to RM1.3 million. See below.

On the other hand, Jobstreet expensed all its R&D expenses.

Jobstreet's R&D accounting policies

Both practices are perfectly fine within MASB 4 (Malaysian and International Accounting Standards).

However, you can see that MYEG is benefiting still from tax benefits and from its accounting policies, it registers a higher accounting profits. On the other hand, Jobstreet probably is more attractive as a company in terms of current valuation as its pays full taxes and expensed all its R&D costs.
In fact, I am still not happy on how MYEG can transfer its tax benefits to another subsidiary (if its true).

Happy Investing!

www.fb.com/MalaysianInvest
 

Apple is not the biggest R&D spender unlike what many people think

I have to admit, I am an admirer of Apple as a company. Strong cashflow, strong margins and the way they have created the cult effect into electronics is uncalled for. An article which I have read would probably amazed investors as well. They are not the largest spender in R&D and Microsoft, Google, Cisco and Intel outspent Apple.  Look at the article below:

Q: Is it true that Apple spends more on marketing than it spends on research and development?
Ask Matt on USA Today


A: Given Apple's reputation for being so innovative, some investors are surprised to learn that it's not in the top 10 big spenders on research and development. And you're right, Apple does spend more on overhead costs, which includes advertising, than it spends on R&D.

There's no question that Apple has entranced both consumers and investors. Its lineup of mobile devices has become mainstream and practically ubiquitous. Many people who were never tempted to dabble with technology before have bought Apple products. Meanwhile, the company has become an unrivaled corporate power. Apple has dominated the music industry and tablet computing industry, despite  Amazon.com's efforts, and has even marginalized gaming companies such as Sony and Nintendo. The company has become so powerful, it's not only the most valuable company in the world, but thanks to the premium prices it charges for its products, also a profit powerhouse.

The numbers bear this out. Companies in the Standard & Poor's 500 reported 9.4% earnings growth in the fourth quarter of 2011. Without Apple, profit growth would drop to 6.3%.
Some investors like to think Apple has invented many of the things consumers now take for granted in technology by pouring money into R&D. But that's not entirely the case.
The top 10 companies and the amount they spend on R&D (in billions) in the past 12 months were, according to S&P Capital IQ:
• Microsoft : $9.4
• Pfizer : $8.4
• Intel : $8.4
• Merck : $8.3
• Johnson & Johnson : $7.5
• International Business Machines : $6.3
• Cisco Systems : $5.6
• Google : $5.2
• Eli Lilly : $5.0
• Oracle : $4.4
Apple is 18th on the list, spending $2.6 billion, behind other technology giants such as Microsoft, Intel, IBM, Cisco, Oracle, Qualcomm, Hewlett-Packard and Amazon.com. Apple's R&D spending as a percentage of its revenue of $127.8 billion was 2%. What does Apple spend its money on? The company doesn't break out its advertising spending. But, like all public companies, it discloses how much it spends on selling, general and administrative costs, or SG&A. SG&A is essentially a company's overhead, which includes executive salaries and advertising. Apple spent $8.3 billion on SG&A in 2011, which was 6.5% of revenue.

Investors can compare Apple's spending with a competing PC maker: Hewlett-Packard. HP spent $3.2 billion in R&D the past 12 months, which is 2.6% of its $124.5 billion in revenue. Meanwhile, it spent $13.7 billion on SG&A, which is 11% of revenue. The fact that Apple is able to spend less on R&D, while still charging premium prices for its products, is a big reason for its mounting profits and pile of more than $97 billion in cash and investments.

Competition usually erodes such lofty profit margins over time. But so far, that hasn't been the case. Only time will tell if the companies spending more money on R&D are cooking up products that will be able to challenge Apple in the next few years.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies.

Wednesday, March 21, 2012

Jobstreet probably heard me!

After my call for Jobstreet to do more repurchasing, they probably heard me. :)


Whether they read this or not, anyway, it is the right thing to do with the cash that they have and the continuous positive cashflow generation the business possesses. I rather see them do repurchasing than buying marketable securities (or stocks in layman's terms).

Tuesday, March 20, 2012

Oops! MAS needs it again!








As you can read from the statement below, I feel MAS sincerely needs a new management not a share swap. We know of the challenges - all the more needed private managers - not politicians. MAS does not need to do a share swap to promote synergies. I am sure any synergistic exercises that are to be engaged (and put to sturdy executions) would have benefited both parties, MAS and Airasia. - hence whats the point of having share swap? Share swaps in this case are just cheating shareholders.



What MAS need is the sense of competition it gains from competing against Airasia. It is not only competing against Airasia alone. It is competing against any other airlines globally - stop sleeping! Further MAS is not a National Champion. Neither is Airasia, it is already a Regional player. We have enough of National Champions - err! another Proton story? Continue to use the championing national pride as an excuse. 

If you also noticed on the statement, they are sort of again asking for rescue. Enough of that! Rescuing MAS has now become a cyclical thing.




STATEMENT BY TAN SRI MD NOR YUSOF, CHAIRMAN MALAYSIA AIRLINES (MAS), FOR AND ON BEHALF OF THE BOARD OF DIRECTORS
- Recovery of Malaysia Airlines is top priority

On behalf of my colleagues on the Board of Directors of Malaysia Airlines, I wish to place on record our commitment and support for the Management Team of Malaysia Airlines, led by Group Chief Executive Officer Ahmad Jauhari Yahya.
Malaysia Airlines recorded a significant net loss of RM2.5 billion in 2011, at a crucial juncture in time when airlines globally are challenged by intense competition, high fuel costs and spreading economic instabilities.
These negative factors for the global airline industry have been building up over several years. In the last decade, numerous national carriers have failed because of this changing environment and finding a viable and sustainable business model has been a challenge. Certainly, the market is punitive for those airlines on a weak footing.
The Board identified structural weaknesses in Malaysia Airlines in early 2011 and initiated a series of proactive measures to contain losses and strengthen the company for recovery and sustained future performance. A key foundation stone of this plan was the August 2011 Comprehensive Collaboration Framework (CCF) involving a share swap between Khazanah Nasional Berhad and Tune Air,  a collaboration agreement between Malaysia Airlines, AirAsia and AirAsia X, and a restructure of the Malaysia Airlines Board and Management Team.
Subsequent to these changes, the Board and Management Team has endorsed a Business Plan for the recovery and sustained future performance of Malaysia Airlines. This is our top priority.
The Board is confident that the CCF will benefit both Malaysia Airlines and AirAsia by promoting synergies in many areas. Already, we are in the process of setting up joint-venture companies for procurement and training and a potential maintenance service provided by Malaysia Airlines Engineering for the AirAsia fleet.
I would like to be very clear in stating that the share swap is not part of the acute financial problems at Malaysia Airlines, it is part of the solution. Likewise, the collaboration agreement between Malaysia Airlines and AirAsia is not part of the acute financial problems at Malaysia Airlines. It is part of the solution.
Malaysia is a small nation on the world stage, but we have the benefit of two national champions in aviation. Our ultimate belief is that we have the opportunity to promote two national champions and build economies of scale that will benefit Malaysia Airlines and AirAsia and Malaysian consumers. By strengthening Malaysia Airlines, we put the company back on its feet and give it a secure future.
I am writing in such a forthright manner because I have noted that our Business Plan has not been accepted by all of our stakeholders and has in fact met with turbulence in some sectors. This turbulence has the potential to distract the attention of Malaysia Airlines' Management Team and its 20,000 staff from the very crucial task at hand. That task is our top priority. It is the economic recovery and sustained future performance of Malaysia Airlines.
I know that Malaysia Airlines has a long history, and a special place in the hearts of many Malaysians. However, I ask you to take a long, hard look at the position of Malaysia Airlines in the intensely competitive global aviation business.
Malaysia Airlines must be allowed to focus on pulling itself out of its current financial crisis. Key initiatives in the Business Plan that will be undertaken within the next six months include strengthening revenue management, the launch of a new regional short-haul premium airline and the introduction of the new flagship Airbus A380 to our fleet. The company also needs to strengthen its balance sheet urgently and various options are being considered. At the same time, we will continue to work closely with the Malaysian Government to balance our commercial instincts and financial pressures with the Government's wider interests.
Do judge us on the results we deliver with our Business Plan, but please give the Management Team sufficient time to implement the Business Plan effectively. Similarly, to pass judgment on the CCF in general or the share swap in particular is premature at this juncture.
Malaysia Airlines is a very sick patient, and its condition is quite critical. Indeed, there are a full range of prescriptions available. Judge us by the result, not by the choice of prescription.
This announcement is dated 19 March 2012.

Sunday, March 18, 2012

F&N: Why Coke is derailing its growth

F&N Malaysia has for many years provided happiness to its shareholders. It is a much professionally well run company, executed the property plan perfectly, continue to build its brand value well and along the way gave good dividends to its shareholders as well as capital appreciation  - all the things you couldn't have asked for better for a shareholder. The results as below:



Note that there are 2 F&Ns. 1 is listed in Singapore, the other in Malaysia. The one I am talking about is F&N Malaysia which has its operations mainly in Malaysia and dairy products in Thailand. F&N Singapore, the holding is much bigger and both are just as well run.

All the good things will not come to an end but one very significant factor will derail F&N's competitive advantage for quite a while. What is that?

The Coca-cola company factor

Once a good partner, now a major nemesis in Malaysia. Why is that? F&N used to be the bottler for Coke - for more than 50 years remained that way. When Coca-cola was just happy with building its Cola range and maybe Sprite's market share in every country that it goes to, F&N of course was just as happy being the bottler. Along the way, F&N used the partnership and distribution strength it has built in Malaysia to introduce several drinks of its own brand. Hence, we in Malaysia are introduced with 100Plus, F&N carbonated drinks, Seasons and several other brands - all owned by F&N. Problem is that Coca-cola has the same flavoured drinks. But F&N doing the bottling and distribution so well and Coke, the marketing master was still growing at a nice pace that both were happy with this arrangement for a while. Until both Coca-cola and Pepsi realized that they cannot just rely on carbonated drinks for growth as they are not growing as much anymore as before.

Hence the multi-drink strategy. To have a multi-drink strategy, you will need a multi-marketing strategy and to be able to test out the market for acceptance of any new drinks that they introduce. F&N with its own brands are just not going to do that. Imagine they are bottling for Fanta, Minute Maid while F&N is also selling its own brand of similar range. Surely, Coca-cola being the tai koh (big brother) is not going to allow that as well. Malaysians who do not know, Coca-cola actually has over 100 types of drinks, just that they are not here - yet.

All good things came to an end in 1 September 2011. In fact, the termination was announced much earlier - sometime in 2009 but it took Coca-cola more than 2 years to build its plant in Nilai and together it has to build a distribution channel as well. Remember, Coca-cola did not need to worry about that when F&N was doing the hard work for them.

Good marketing however, is much tougher than good distribution. Coca-cola, is not what it is today (and made Warren Buffett very rich) if not for it being the best marketing company in the world. Apple took over that realm for last 10 years I should say.

Just look at all the strategic shelf space it took over the last year. It has the might. And some time around last year, Fanta (owned by Coca-cola) was brought back. I foresee Coca-cola is not going to stop there having built a 30 acre plant. It will be fighting for market share in the sports drink market and everything else it can make from selling water.

From that, the Malaysian soft drink market is to have 3 major players - Coca-cola, PepsiCo and over time I foresee F&N will drop to be that 3rd player.

So what is the effect to F&N? Tremendous if you look at the contributions the soft drink business brought to them.

Blue Color shows the contribution from soft drink to F&N in FY2011 (30 Sep)
From the chart above, can see the 62% contribution the soft drink business brought to F&N's Operating Profit from just 47% of revenue - hence it is a very profitable one. For an immediate picture of the effect - below, just look at 1 quarter of results (latest) without Coca-cola.





















Operating Profit from soft drinks dropped more than one fold (RM88.36 million to RM41.17 million) . Note that the drop in dairy business in Thailand may be short term though due to massive flood last October - November around Bangkok.

I believe this one quarter impact is not a short term thing. It is going to be a long fight for F&N - one that may turn out to be a big headache for F&N.

Hence, at the current price of RM18.18 valuing F&N Malaysia at more than RM6.56 billion and over 20x FY2011's profit - I think is going to be tough for F&N to maintain in near future. No major property project or any immediate diversification is going to change the immediate loss from Coke's business so soon.

Note: The theme for F&N's Annual Report last year was "Sustainability through Diversity" - hence, you can already guess what they are thinking!

Happy Investing! 

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Saturday, March 17, 2012

ICAP: An overperforming fund with underperforming price

Perhaps the one "i" brand recently that underperformed. Look at Apple's price...Now valued at $550 billion and moving towards $600 a stock...Wooohoo!

Anyway, let's talk about iCap. I have to admit I have not been following iCap until lately. Latest NAV (best barometer to measure the funds performance) as at 15 March 2012 was RM2.88 but its share price was at RM2.24, a 22% discount to the NAV. To be fair, it is the only listed closed end fund in Malaysia and a very successful one.

While I like the concept closed end fund better than open ended fund, there are just none to compare. The only way to compare is the performance against KLCI which they do very well indeed.

Why then is it trading at 22% below NAV? In fact when the fund was introduced, it was at premium over its NAV. Starting from around October 2008, investors started to discount it from its NAV and lately the price pulled further and further away from its NAV. Look below:

 Why? Usually, a fund trading at a discount from its NAV would be due to two main reasons.

  1. Investors no longer believe in the fund managers - in this case, I do not think so as they continue to perform well and it you do a straight line measurement of performance, it achieves a staggering 29% over a period of the 6-1/2 years since its inception in 19 Oct 2005. There is no reason to fault this amazing performance;
  2. Investors expect the performance of the funds to be below par -  for iCap, I have to admit it is difficult to measure this as the latest portfolio they revealed was 22 June 2011 as below
Since then, they probably would have moved in and out for some of the stocks but I have the feeling that they would keep to some of the larger holdings such as Parkson, Padini, Boustead, Petronas Dagangan still. F&N? I would like to discount F&N now as I would like wait and see the performance of F&N after its lost of the Coke's franchise. Don't know about iCap though.

Those who follow iCapital's newsletter would probably know better what they like - I don't. In any case, I am a little perplexed over why a strong performance fund is trading at such a discount.

Serious and Happy Investing!

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Friday, March 16, 2012

EPF's RM1.5b loan scheme: When the crux of the matter is not addressed

A government has the duty to address matters of public housing to those who cannot afford private properties while doing their best to maintain the prices of properties in check.

What we have seen over the last many years are sheer lack of interests to address matters with regards to housing by the Malaysian government. There are just too many cases of property developers abandoning projects and eloping with the deposits and any other progress payments that cheated buyers have made. After many disappointments and through lack of initiatives to keep prices of properties in check especially in Klang Valley, Penang and Johor, they have come out with this scheme that can be considered to be a joke.

What can EPF (who is supposed to be protecting the savings of the Malaysian employees) do to help public housing? Provide financing at high interest rates to high risk clients? That is not the solution. The poorer group cannot afford to pay high interest rates on top of the principals especially with matters concerning the biggest portion of payment out of their monthly household income. At 6.5% to be charged, it is way higher than the current market rate of 4.0% to 5.0%. Housing firstly should be made affordable to all. Then you will not see situations of a huge "baby boomers" group being left out of doldrums without a roof under their head due to price.

There are 9 local banks in Malaysia (largest 3 out of 4 are owned by government), because of pure greed did not do anything to keep the spiraling property prices in check over the last 5 years. If I may, I would go to the extent to call that it is the financial institutions that have greedily speculated the property market together with the developers at the expense of the consumers. Yes, they are the ones that provide financing for 2nd and 3rd home (etc) with almost zero upfront payment terms and up to 40 years. Beyond 30 years financing, this is basically asking for the children of the borrowers to bear some of the burden as very few can have the liberty to maintain their jobs past 60. If you are encouraging a wealthier group to own more than 1 property with ridiculously low barrier of entry, this is what happens. It becomes a massive speculation.

Then you want to charge the poor (who already cannot afford) a higher interest rate. This is pure capitalism at play! Cheaper or subsidized financing for the ones who deserve it should be from the government's coffers. A government has many sources of income. Chief among them from taxes. And for this government, they should look at education, health, affordable properties and security as their main concern.

EPF's role has for so many years been providing loans to the government by subscribing to the Malaysian Government Bonds. Yes! with the funds continue to grow at a very fast pace, EPF is finding it tougher to allocate funds and provide the returns its depositors are expecting of them. But lets not reinvent the wheel with a creative scheme where EPF will lend the money to a special purpose vehicle, with guarantees from DBKL. In financial terms, this is an "off balance sheet" item for the government which they will bear anyway. Surely one could remember the biggest "off balance sheet" trick which went wayward awry was the House of Cards created in the housing collapse in US.

While the first RM1.5 billion is a small start as opposed to the size of the housing collapse in US, I am sure if not in check the government of the day (knowing them) would create a bigger hole.

Tackle the bulls by the horn. Housing should be the problem (no matter how difficult) for the government to address, not by some creative schemes.

Wednesday, March 14, 2012

DKSH: Europe put a high price on the stock, why aren't Malaysians?

After a long period staying private, DKSH (the holding company) is now going public in the Swiss market. Book builders are projecting a total value of Swiss Franc (CHF) 2.8 billion (equivalent to RM9.24 billion) effectively valuing DKSH around 18.4x.

DKSH which has a large presence in Asia is predominantly successful in China, Thailand and Malaysia. Malaysia, in my calculation provides around 12% to DKSH Group's revenue.

In Malaysia, DKSH owns 75% of the listed company. In fact, there was a rumour that DKSH was planning to delist from the Malaysian exchange, which it denied. It is currently trading at RM300 million market capitalization (price RM1.90) hence valued at below 7x PE. Besides the low free float, it beats me why DKSH Malaysia is trading at such a low PE as compared to the valuation it gets from Europe. This is a company which has potential still.

Isn't Europe supposed to be struggling? Perhaps DKSH is one of the few companies that has such large presence in Asia where investors in Europe are excited to. Another thing is that, Europe investors are excited over China rather than Malaysia, but why the vast difference in valuations?

Do check out my other blog on DKSH, here.

Reproduced from Marketwatch:

DKSH offering may revive Europe's IPO market

-- DKSH seeks to list shares on Swiss stock market in March
-- Market capitalization could reach up to CHF3 billion
-- Listing could inspire more IPOs across Europe
ZURICH -(MarketWatch)- Zurich-based trade and services firm DKSH on Thursday said it plans to float its shares on the Swiss stock exchange this month, potentially helping to revive the European market for initial public offerings that has been slowed by the region's debt crisis.
DKSH, which helps other companies expand and organize operations in countries such as China, said it will offer around 30% of its shares at a price of 42 francs ($45) to 48 francs a share. A successful listing could translate into a market capitalization of up to CHF3 billion, making the IPO one of the largest in recent years in Switzerland.
"The objectives of the IPO are to allow its majority shareholder, Diethelm Keller Holding, to diversify its investment portfolio...and to help DKSH enhance brand recognition," the company said. Diethelm Keller, which will keep a significant stake in the firm, currently holds more than 60% in DKSH.
The float will be of existing shares and won't raise new capital.
The decision to list the shares in Switzerland, the company said, is partly due to the company's Swiss roots and DKSH's already-strong local investor base--which includes Swiss entrepreneurs and financiers such as billionaire philanthropist Stephan Schmidheiny, investor Rainer-Marc Frey and private banker Pierre Mirabaud.
Analysts and traders said the IPO price range was roughly in line with expectations and reflects the solid growth prospects of the company, which is predominantly active in Asia. DKSH, which has grown at an annual rate of more than 10% in the past, posted sales in excess of CHF7 billion in 2011, with the bulk coming from markets such as Thailand, China and Malaysia.
"Given the company's 2011 net profit of CHF152 million on sales of CHF7.34 billion, a fair price-earnings ratio of around 18.4 times could result in a market capitalization of CHF2.8 billion, or around CHF45 per share," a Zurich-based trader said. Given the company's target to provide dividend payout ratio of 25%-35% of net profit, the listing price could even be higher, the trader said.
Bookbuilding for investors will run March 8-20, with the first trading day set for March 21. UBS AG  and Deutsche Bank AG are acting as joint global coordinators, and together with Berenberg Bank and Credit Suisse Group as joint bookrunners. Several market participants said that the demand for the IPO looks solid at this point.
Analysts expect that the planned listing of DKSH and the scheduled IPO of Dutch cable firm Ziggo could rekindle interest for public listings in Europe, which have come to a near standstill in 2011. According to PricewaterhouseCoopers, 430 IPOs were registered in 2011 in Europe, with momentum falling markedly in the fourth quarter, when 78 IPOs raised just EUR866 million, an 81% drop compared with the third quarter and a 83% fall compared with the year-ago period.
But 2012 could see an improvement, albeit traders say that the recovery will only be a mild one given the euro zone's protracted prospects and limited upward momentum for stock prices.
"Companies considering an IPO in 2012 should prepare and position themselves to be ready to go when the [IPO] windows open," said Martin Scholz of PwC. "Exactly when markets will pick up again is uncertain. The Olympics may be well under way by the time the markets get out of the starting blocks. In order to access the key IPO windows in 2012, companies will have to ensure that the groundwork is completed well in advance."
Among potential IPO candidates analysts point to firms such as Germany's specialty chemicals firm Evonik Industries and Siemens AG's [SI] lighting unit Osram. But they say a recovery in stock prices and an improvement of the euro zone's debt crisis is needed before these firms may go public later this year.

Serious Investing! 

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Tuesday, March 13, 2012

EPF: By far the Biggest market mover

I know most people are happy when EPF announced 6% dividend for 2011 (I am). However, here are some facts to make you feel wow (or jittery) whether you are a local or foreign investor in Bursa.

  • EPF - Fund size of RM460.05 billion (as at 31 Dec 2011) with 35.6% invested into equity.
  • Total investments into equity RM167 billion.
  • Total market capitalization for Bursa = RM1.24 trillion. Hence, EPF probably holds 13.4% of total Bursa market value.

Note that EPF increased its investments into equity from 33.68% in 30 Sep 2010 to 35.6% in Dec 2011. How much more can they go? EPF will probably run out of ideas to put their money (or should I say our money?). They went into buying London properties recently...now Malaysians (you and I) own London properties as well. May not be a bad thing as there are such thing call diversification...as having 35% of our monies into Malaysian stocks may be a risky endeavour. You will never know, Malaysia may have a bad year or two, then what happens?

Imagine a few guys (in EPF) can make such a difference to the Malaysian market. So few can do so much! I am having the  jittery feeling now.

EPF says ‘selling spree’ was nothing unusual

KUALA LUMPUR, March 13 — The Employees Provident Fund (EPF) has denied any unusual activity in its recent surge in share disposals that dragged the share market down last week. This comes after The Star reported that the EPF along with its portfolio managers "dumped" a total 83.68 million shares on the open market on March 7, or about half the total daily trading volume which pulled down the benchmark FBM KLCI.

The move by EPF also sparked market rumours that the share disposals was timed with the next general election in mind as some analysts say that profit taking usually occurs just before the polls. Some brokers say that the reports of EPF's selldown had dampened market sentiment with many now taking a wait and see attitude on the sidelines.

When contacted EPF said that the pension fund had sold the shares in order to lock in profit so that it can pay higher dividends. Figures provided by EPF show that about 48 per cent of its gross investment income last year came from equities. It also holds 35.6 per cent of its investment portfolio in equities, or about RM167 billion, as at December 2011. Another 26.5 per cent of its portfolio is in government securities and 34.2 per cent in bonds and the two fixed income assets tend to offer lower dividends in line with the current low interest rate regime. EPF said that in order for the pension fund to pay higher dividends, it had to look to making money on equities.

It added that it sells shares based on timing and this period with the market at a high, was the right timing and noted that the disposals worth RM441 million on March 7 was only a very small portion of its giant RM167 billion equity portfolio. One broker said that EPF's move appeared to be right based on hindsight given that the market has now fallen off its near all time high since March 7. "The market is now spooked," he said.

EPF CEO Tan Sri Azlan Zainol was also reported to have said that the EPF did not intentionally distort the market but could not help making an impact due to the sheer size of the fund. “It is all unintentional. We transact over three million shares at any one time; of course the market would be distorted,” he was reported to have said. EPF paid a six per cent dividend last year, its highest in ten years.

The fund's gross investment income in 2011 was RM27.24 billion, up 13.18 per cent from 2010. The distortions, whether intentional or not, caused by EPF's size also strengthens perception that Bursa Malaysia is overly dominated by government and government linked investment institutions which analysts say hampers market liquidity.

The FBM KLCI had hit 1589 on March 6, which was close to its all time high of 1597 reached in July last year. It fell more than 15 points on March 7 however, the most since the start of the year.

My other articles on EPF:

What EPF did last quarter?

EPF significance in dictating Bursa

Serious Investing!

Monday, March 12, 2012

Dijaya and Berjaya: Same shit different Tan

I guess the Tan brothers are pretty good at asset injections. Remember Vincent Tan trying to inject a less than performing property, Berjaya Times Square into Berjaya Group for something like RM1 billion? Then the same guy tried to inject another, Bukit Tinggi for RM1 billion into same vehicle, Berjaya Group. Another underperforming property being injected. When you are in trouble who do you call? SHAREHOLDERS!

How about injecting a performing McDonald? You don't hear that do you?

Now younger Brother, Danny Tan tried to do the same. Injecting properties worth RM1.1 billion again, this time into his vehicle, Dijaya Corp. Ever wonder anyone really bother to analyze the exercise which involves gearing up the listed company as well as raising funds via rights issue - asking investors for money again.

My little question is if the properties are worth RM1.1 billion, why bother to inject as it is probably worth more than Dijaya now? Too many questions unanswered.

In the process, he nets RM250 million from this exercise as he is selling the property. Yes, he commits RM250 million of the rights himself, meaning that he is not taking any cash out from his property injection. Hey! OTHER SHAREHOLDERS HAVE TO INJECT MONEY ler!
I am smelling something fishy from the Tan brothers again.

By the way, have you read Vincent Tan is donating RM600 million into his foundation? How noble...

Serious Investing!

N2N: Buyback? What for???

Many companies in Bursa are probably doing share buybacks for all the wrong reasons. (I should not be checking on buyback, but it still is reflective of the behavior of the management - can't help it) I thought the one I found out on Pelikan is bad enough. At least Pelikan has a decent business. Just that economic condition in Europe affected them badly. This one (N2N) as I noticed, the company has RM3.5 million cash, just bought a RM36 million property with debt.

Net Tangible Asset Value of RM29.6 million against market capitalization of RM148 million (at the price they bought back some of shares). Latest FY2011, registered losses of RM1.35 million. They are buying back shares? Bought back some 2 million stocks. What the @#$%. Must be dreaming share price is undervalued!

Serious Investing!

RCE Capital: Low PE may not mean good value

If you are looking for a really low PE stock, RCE Capital stands out. At its current price of RM0.50, it is trading at PE of below 3.5x! Low enough? I am not too sure of another company in Bursa with such low PE except for some companies with one-year wonder performance.


RCE Capital is not a one-year wonder. It in fact has fantastic growth. Just look at its performance below:



Despite having those growth and such low PE, why is RCE still languishing at 50 cents. Here is a company which 5 years ago Kenanga, Aseambankers (Maybank IB) put a price tag of RM1.20 to RM1.30.

RCE Cap's price never touch RM1.20. Look below.
























Why is it languishing? We probably have to trace back to what RCE does and where is its competitive advantage as a business.

RCE is a moneylender which provides hire purchase and personal financing loan to government employees. It is quite unique in the sense that it is the only listed non-financial institutions that provide financial assistance to government servant such as teachers and police. It ties up with with three co-operatives: Koperasi Wawasan Pekerja-pekerja Bhd, Koperasi Sejati Bhd and Koperasi Belia Nasional Bhd.

In minimizing non-performing loans, monthly collections are done via deductions from salaries of these workers. So who are its main competitors? Bank Rakyat, Bank Simpanan Nasional. In fact RCE is so small compared to these two that it only manages to capture less than 2% of the market. In most reports provided by analysts, they mentioned potential upsides which are the low NPL and market share which is a huge potential to RCE.

Here, I would like to highlight 2 main areas which RCE is struggling with.
  
Cost of funds
  • While RCE is a moneylender, it is also a borrower. Unlike BSN, RCE's Cost of Funds is not low as it is a non-deposit taking company. The funds that it uses to lend to the government comes from its own equity raised and bond. Against its other main competitor, such as BSN and Bank Rakyat, it loses out here. When your costs are higher than your competitors (and in this case it has no choice due to law and circumstances), overtime it will lose out.
High Rate of financing
  • Financing rate RCE charges to its borrowers are around 11 - 12%. What is the market rate charges by the banks to the public? 8%, 9% or even at most 12%. (I would like to think that) Government servants are not stupid. They will find out and look for other means of financing over time although in the short run they may find the ease of getting financing from RCE, Bank Rakyat attractive.

In any case, as in the announcement below, it already shows that KOWAJA is not happy with the terms of financing from RCE. 

RCE wishes to inform that Koperasi Wawasan Perkerja-Pekerja Berhad (“KOWAJA”) had on 8 June 2011 advised that KOWAJA has received approval from Suruhanjaya Koperasi Malaysia (“SKM”) to obtain funding from RCE Marketing Sdn Bhd (“RCEM”), a wholly-owned subsidiary of RCE, subject to a limit of RM200 million (the “Approval”).  KOWAJA is currently the largest borrower of RCEM. KOWAJA provides personal loans to its members who are primarily in the civil service.   
The Approval is subject to stringent operational, funding and other conditions. The funding conditions comprise pricing cap, security/collateral restrictions and structuring limitations. KOWAJA is confident of meeting the operational requirements of SKM and will work towards continuously complying with them going forward.  
RCE does not expect the Approval to have any material financial impact to the Group for the financial year ending 31 March 2012 and on its ability to meet interest and principal payments in respect of its debt obligations.  
However, the impact on the prospects of RCE is dependent on market conditions as well as industry and regulatory developments.   


Despite having written the above, RCE will not lose out immediately in the short run as it will still continue to enjoy the profits it has already lent out some of the funds to its borrowers and government servants may still continue to borrow from them. RCE is still attractive from the perspective of its earnings in future vs the share price. Price to Book Value (Below 1) is attractive as well. Despite the setback from the KOWAJA issues, the effect will only be felt few years down the road. However, as long as it continues to charge higher than the market rate and its costs remain higher than its competitors, this is not a long term stock.

Market anyway probably know this well already, as in the share price.

Serious Investing! 

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Sunday, March 11, 2012

Pelikan: A case of wrong buyback decision?

I have in the past written on preferring Jobstreet to do more buyback with the cash it has.

However, I am a sceptic over Pelikan's buyback. Just look at the overview of some of its recent financial numbers.








Pelikan has repurchased not less than 10.43 million of its own stocks and in the process spent more than RM10 million. Part of the shares it bought back will be distributed to shareholders in the form of share dividend from its latest proposal of 1 for 50 stocks owned.

Excess cash?
Buyback should normally be good for investors especially if the management feels that its stock is undervalued. However, what I would like to see is that buyback should only be done when the company has excess cash. Based on table above, does Pelikan has excess cash? I do not think so. Cash against borrowings ratio is 1:4.6. This is hardly a situation of spare cash to be used for buyback.

Is the controlling shareholder trying to support the share price?
One of the things I hate the most is that the controlling shareholder in trying to control the floor of its shares uses the company's cash to do so. Why some shareholders do this?

In this case, Loo Hooi Keat being the President / CEO (also owns shares through PBS Office Supplies) and substantial shareholder may be using the company's cash to do buyback for the support of his own shares.




If you look at the record of depositors above, you will notice a substantial amount of the controlling Director's (Loo Hooi Keat) shares are pledged. I have a suspicion that the director has to support the share price so that his shares are not forced sold. (Note that financiers normally have the right to force sell shares once it goes above certain gearing ratio)

When the shares pledged is under tremendous pressure because of price drop, I commonly see the substantial shareholder whose shares are pledged do not act right as they see to protecting themselves first than their shareholders. Look at the chart below, this is the case where potentially Loo Hooi Keat's pledged shares are under pressure.


Rights issue in 2010, why buyback now?
Another question I have is that Pelikan just raised around RM185 million via rights issue in February 2010. A company normally issues rights to raise more funds for its operations. That's what Pelikan did! I do not like to see the company using the money it raised to do buyback especially it just raised them not too long ago.

(Shareholders should look at the process of rights issue as management's request to shareholders to participate in raising more funds for the company's growth.)

Actions like this, if what I observe is true although sometimes may not be against the law is what you question whether management is into protecting the shareholders. This is because I hate to see once a potentially good company being used as a tool for personal gain / self-protection. It is against minority shareholders who in this case may not have a strong self defence. I also feel for Lembaga Tabung Haji as they are the largest shareholder but one who is purely an investor.

Serious Investing!