Tuesday, April 24, 2012

Proton: Is Syed Mokhtar for the land or for the business?

Syed Mokhtar is a very shrewd businessman. Proton is a business which needs rescuing - by a foreign party however - as for 25 years not any local businessman here have proven the ability to make the business of automotive production successful. Moving forward, the business of producing cars will get even more competitive as there are companies such as Volkswagen, Toyota, Honda, GM, Ford, Hyundai and several other smaller brands fighting it out in a very competitive environment. Those who are successful however will benefit as it is a very lucrative business.

This type of competition however is not for Syed Mokhtar. He is already having his hands full with other businesses. Today, the news appeared that Syed Mokhtar is pulling Proton private. Why? Just look at its land...

Major portion of land held Proton - does not include others in UK, US and other states in Malaysia

A quick calculation - 7,142,890 sq ft in Petaling and Glenmarie alone. How much does freehold land in Glenmarie fetch? RM200 per sq ft easily. It will be worth more if the single piece is very large - err say 163 acres where you can use for multi development? What do you think it is worth then? RM1.4 to RM1.6 billion.

What about the 55 million sq ft land in Tanjung Malim? RM10 per sq ft for a industrial freehold land is reasonable for that place. That would come to RM550 million.

Hence, we now know that the total value for Proton's land in Selangor and Tanjung Malim alone could be worth up to RM2 billion. This does not include the others in other states in Malaysia (for Sales and Service), UK (Norwich, Bristol) and US.

What is the value of land in the books? RM215 million - just. Hence it is way under-declared.

Shows land value in the books at RM215 million
By going private, Syed Mokhtar is putting up RM3 billion to buy back all the shares at RM5.50 per piece. The total net asset value in the books alone is RM5.4 billion and we know that the asset especially land is underdeclared.

So what do you think? Syed Mokhtar is for the land or business? - or both? As he probably has more things up his sleeves. What about his relationship with Volkswagen via DRB-Hicom and we know that VW was interested in Proton's manufacturing plant before.

Note: In most cases, where there is an acquisition exercise, usually fixed assets will be revalued so that shareholders can have a view of what they are holding - in this case, those are bypassed.

Monday, April 23, 2012

Masterskill: At RM1.15 do you now think it is cheap?

Not everything is about value. Exactly, a year ago at its price of RM1.70, Masterskill (MEGB) was regarded as a buyable stock. I would not blame anyone who looked at value and if you considered at its promises on paying 50% - 60% of its income as dividend and a year ago's (FY2010) profit of RM102 million - ya, probably quite attractive.


The RM1.70 was already off by more than half its IPO price of RM3.50. And during then, most research houses provided a post valuation of more than RM3.80.
(See this - Masterskill riding on healthcare wave. - article as well.)

Now it is trading at RM1.15, valuing the company at RM471.37 million. Against its book value of RM516 million, the market value is trading at a discount of 8.7%. What failed them further?

As per above table you can look at the trend from its First to Fourth Quarter (I actually reversed it to show latest quarter first from left to right). What do you see? Huge negative trending!

Do you think it can reverse the trend fast? A definite no.

Masterskill's business is dependent on termed fees and most of its programmes are over a period of 3 to 4 years.  Hence, in a quarter of revenue, you will see a combination of its fees collection for students from first to fourth year. The fast and huge drop in revenue and profit within a year is in fact more than surprising.

This potentially could have meant that either a lot of the students have dropped out midway through the courses or they faced a lot of difficulties recruiting new students - or Both.

If you look at the fourth quarter results, we probably can guess that for its business to break even, they will need to achieve a revenue of RM50 to RM55 million a quarter.

From the IPO funds, Masterskill has gone on a spree of buying properties to build campuses and hostels for its students. After the purchases of the campuses, what do you think they need to do? They will need to fill up the campus. There are running costs to this. Hence, Masterskill's business model which is dependent on PTPTN's approval of loans to students will either have to change so that it is no longer dependent on the government loan or PTPTN will have to provide better support to Masterskill by increasing the students loan amount as it has done previously.

It will however be difficult to bet on the first point as the company was never built to address those challenges. The company was built to depend on government's assistance. It has never been built to pull students who depended on "FAMA's" (Father, Mother) funding.

Hence, for an investor of Masterskill and continuing to bet on Masterskill - you better hope that they get these reversal of decisions from PTPTN fast.

Serious Investing!

Wednesday, April 18, 2012

So which bank goes through the harder way to earn your money?

A strong banking system is set up to act as a good lubricant to the economy. What are their main functions? By either providing services and loans for you to buy your properties, motor vehicles, business loans etc. On the other hand, if you have excess funds, their will provide avenue for you to put your deposits with them and using those funds, the banks will be the intermediary to re-lend to those who needs them. These are the basic functions of a bank, but of course from those, later on merchant banks, treasuries, remittance services etc are created. If left to these few core things done well, the growth of an economy will be much smoother to manage be it for running of a business or for ownership of a better home or motor vehicles.

However along the way, banks (as always) became very greedy and they think that they can make more money from you through other means - where it is less risky. How? They start to charge you fees for all kinds of things. They charge unnecessary high fees for late repayment. They charge high fees for overseas remittance. They also charge exorbitant fees for some basic banking functions like remittance, confirmation, trade finance etc. All those fees are categorised under the category of non-interest income in the bank's income statement.

As you can see, banks main income comes from interest income and non-interest income (fee income), and you can add on another category to Islamic Banking Income for Malaysian banks. Interest income has largely elements of risks although it can be fully secured as in the lending for your homes, while non-interest income are most of the cases non or less-risky for example they are charging you for doing a Telegraphic Transfer, Treasuries, audit confirmation, changing of signatories etc. And of course Investment Banking fees are categorised under non-interest income.

Over here, we want to see which bank is the one which concentrates on providing more basic functions of a bank (i.e. lending etc) and doing less thinking of how to charge you fees only. Let's look at a comparison of three banks in Malaysia: Public Bank, Maybank and Hong Leong Bank. (I did not include CIMB as over the last 10 years they have acquired Southern and BCB, hence it may not be that accurate)

Comparison of three banks: Public, Maybank and Hong Leong
I took a 10 year view to look at the behavior of these banks to be able to know what kind of actions and perspectives they have taken on. If you look at the comparison, Public Bank is the one which concentrates on more loans and lesser fee income. The ratio of net interest income to fee income was in fact increased from 3.49x in 2001 to 4.45x in 2011. Over the period of 2001 - 2011, net interest income increased 163% which means that they have increased their loans and advances substantially.

If you look at Maybank, the Net Interest Income growth over the 10 years was 79% while non-interest income in fact grew more, by 215%. As a result of that ratio of net interest income to fee income dropped from 3.07x to 1.75x.

Hong Leong Bank was even worse. Their net interest income only grew by 35%, while fee income grew by a much whopping 210%. Hence, I am wondering whether they are more interested to make fee income or loans?

Err...from here, can you guess which bank would assumingly be taking more risk to make your hard-earned money?

Although this is a much simplistic way to explain how a bank functions as it can be much more complex, the writer feels that it is high time that Bank Negara looks at regulating banks charges  especially in this age of exorbitant fee income.

Tuesday, April 17, 2012

Top Glove and Hartalega: Betting between latex vs nitrile gloves maker

As healthcare becomes more important and if you are an investor who is purely looking at the Malaysian market alone and not elsewhere, one industry which you will want to continue to monitor is the medical gloves industry. Why? Malaysia is the top producer of medical gloves globally and the quality of our gloves are competitive if not the best. Additionally, medical gloves is an industry which is growing much faster than the growth of any economies on average. As the industry matures, it is also much easier to identify the winners. The industry will consolidate and over time, there will definitely be lesser players as compared to during the growth stage.

For rubber gloves, one should concentrate on 2 companies - Top Glove and Hartalega. In fact, it used to be Top Glove only being the largest producer by quite a fair bit while the other players like Supermax, Kossan and Latexx Partners are smaller competitors. However, recently another player in fact became larger in the context of market capitalization and started to gain much followings - Hartalega.

Top Glove is the largest natural rubber gloves maker globally while Hartalega is the largest producer of nitrile gloves.

What are the major difference and significance between natural rubber gloves and nitrile gloves? (Obtained from wikipedia)

Medical gloves are disposable gloves used during medical examinations and procedures that help prevent contamination between caregivers and patients. Medical gloves are made of different polymers including latex, nitrile rubber, vinyl and neoprene; they come unpowdered, or powdered with cornstarch to lubricate the gloves, making them easier to put on the hands. Cornstarch replaced tissue-irritating Lycopodium powder and talc, but since even cornstarch can impede healing if it gets into tissues (as during surgery), unpowdered gloves are being used more often during surgery and other sensitive procedures. Special manufacturing processes are used to compensate for the lack of powder.

Latex allergy
Due to the increasing rate of latex allergy among health professionals, and in the general population, gloves made of non-latex materials such as vinyl, nitrile rubber or neoprene have become widely used. Chemical processes may be employed to reduce the amount of antigenic protein in Hevea latex, resulting in alternative natural-rubber-based materials such Vytex Natural Rubber Latex. However, non-latex gloves have not yet replaced latex gloves in surgical procedures, as gloves made of alternative materials generally do not fully match the fine control or greater sensitivity to touch available with latex surgical gloves. (High-grade Isoprene gloves are the only exception to this rule, as they have the same chemical structure as natural latex rubber. However, fully artificial polyisoprene—rather than 'hypoallergenic' cleaned natural latex rubber  is also the most expensive natural latex substitute available. Other high-grade non-latex gloves, such as nitrile gloves, can cost over twice the price of their latex counterparts, a fact that has often prevented switching to these alternative materials in cost-sensitive environments, such as many hospitals.

Another thing is that due to the substantial rise of the natural latex prices, cost of producing nitrile gloves became lower than natural latex gloves - this significance happened since 2010. As a result of that, many players have started to partially switch from natural rubber to nitrile rubber - Top Glove included.

Will this switch cause Hartalega's margin to be affected? For sure but by how much, it is difficult to foresee. However, since Hartalega continues to lead in the R&D and also being the largest nitrile gloves maker, it is still continuing to enjoy the switch in demand to nitrile gloves from the medical fraternity. These however may not last long as the other players are surely chasing and allowing their production lines to be able to cater for nitrile gloves production especially the newer ones. How much will the effect is still unknown though. One thing for sure is that Hartalega is already in the lead while the other players (Top Glove inclusive) are doing the chasing.

One should look at the below comparison between Top Glove and Hartalega to understand the competitive side of the medical gloves business. As you can see, Top Glove's margin are much smaller despite its revenue being more than 2 times Hartalega. Balance Sheet - Both Top Glove and Hartalega are almost equally strong with minimal debt. Top Glove's capacity on the other hand is probably more than 2 times Hartalega.

Comparison between Top Glove and Hartalega
Over the period (of probably less than 20 years) where many of the gloves maker became very big and successful due to the increased global demand, we have witnessed Top Glove stands out to become the leader in terms of growth in production capacity, revenue and maybe even profit. Its balance sheet is also the healthiest. One should note that it is not as easy as we think to grow to a size as big as Top Glove (even for Hartalega and Supermax) as there must be ready market as well as operational ability to manage these expansion.

On the other hand, Hartalega due to its vision and focus in the nitrile gloves market has become the margin leader. They are enjoying the fruit of the better foresight now. Hence, who are we to bet on if we are asked to pick one only?

This is going to be a hard decision, as from the perspective of Top Glove, although they are moving into nitrile gloves producing, they are also definitely not letting go of latex gloves. Its move of buying land to produce rubber proves that. Hence, in this, we can see that Top Glove is betting that latex gloves will have its own consistent demand. They also feel that the price of rubber is overly speculated at this moment - hence over time, the price of producing latex gloves may still be cheaper than nitrile gloves. Note that Top Glove's rationale for moving upstream by owning its own rubber plantation is that it is the best long term hedge against fluctuations of the global raw latex price.

Hartalega, on the other hand is spending on efficiency and continuous R&D to produce better quality nitrile gloves.

We can know that most of the players do not know which of the type of gloves they will be concentrating on as Top Glove, Supermax, Kossan are now using production lines that are switchable. We configure that if they know, these players would not be relying on switchable lines.

Whatever the results, let's not take our eyes off the players and industry as its significance is going to be important, although I am a little bit bent towards Top Glove due to its capability to expand faster. I still think that due to the players inability to brand - size and efficiency matters more.

Serious Investing!

Saturday, April 14, 2012

Deciphering what ICapital did on ICAP

As in my previous article, I highlighted that ICAP is a closed end stock which is undeservingly trading at much below its NTA. Latest as at 12 April 2012, it is trading at RM2.22 while its NTA was RM2.87, a  22.6% discount to its NTA. Perhaps what some investors do not like is that this stock does not pay dividend. Hence it is not part of a dividend stock portfolio which is now becoming an important thing for longer term investors in Malaysia especially.

Another thing about ICAP is that not much is known about the actions that the closed end stock does except until its Annual Report is out. We do not know the position they probably would have taken on especially when it comes to purchasing new stocks or whether they have sold some of the investments over the 1 year period. Some of their actions can however be deciphered if we do a little bit of work by checking out the companies that they invested in. As at 22 June 2011, ICAP has a portfolio of 10 stocks as below:

With Updates on Suria Group as at 16 Apr 2012

If we check out the companies that they invested in and look at the Top 30 shareholders, we can get some information. From above, we know that as at some of the dates that are presented they have increased their stake in Boustead while selling some of F&N's shares. I think they probably have same opinion on findings with regards to F&N. No change as at those dates mentioned were made for ICapital's favorite Parkson and Padini. So was MSC and Suria Group.

I am not able to find out what ICapital did for 4 others if its investments. Unless I look through all the Annual Reports, I am also not able to find out whether they have added on to their portfolio.

On how they perform since 31 May 2011, well the NAV of the company improved from RM2.77 to RM2.87 in 12 April 2012. Well, this is not going to be a good year for ICAP, probably (as they have about 50 more days to go).

As for cash holding, they have increased the cash holding as at 30 Nov 2011. This is probably due to they could not find anything exciting to put their money in or it could also be that the market is on the expensive side. They are not wrong.

In any case, due to the discount and looking at the portfolio they are holding, ICAP is not a bad closed end fund to hold, I should say. I would love it better if they pay dividend however.

Note: Updated on 16 Apr 2012.

Serious Investing!

Government guaranteeing Johor Corp? Please don't ridicule us any further!

If you have not read the article, do read the link below published by The Edge Daily yesterday.


This act of inconsistency by the federal government is just sheer disappointment for tax payers like us. Firstly, if you can remember CIMB was the bank which helped JCorp to leverage further by providing them financing to increase their stake in QSR and KFC. Why do they need that? For obvious reasons as they felt that assets such as KFC should go under the hands of the state agencies and certain groups. Do they manage KFC well? Hell No!  Yes, they benefited from the valuation of KFC improving substantially over the last few years but KFC is still the same company which was just a good brand. It can be better!

Secondly, they want to delist KFC by buying up the entire group consisting of Pizza Hut and KFC? This will gear the state fund further. My question is why do they need to do that? Are they trying to push assets such as KFC out of reach of the investment public. If JCorp is not in financial difficulties that needs federal assistance, I am ok with it - but now they are asking for government guarantee, part of the reason is due to they needed more funds to privatize QSR and KFC?

May I know who is doing this deal again. CIMB?

Thirdly as in the article, the guarantee is to allow JCorp "to spearhead development efforts in Johor". Err... you need more KFC and Pizza Hut shares to spearhead development of Johor?

These ridiculous statement is just belittling the intelligence of tax payers! And is the government trying to nationalize (through agencies like Khazanah and JCorp) all the good assets that are in the country? No wonder business people are moving their liquid assets out of the country.

Another thing I am wondering is that JCorp owns some very valuable companies in the form of KFC, QSR, KPJ, Kulim. Can't they pledge some of the shares? Why do they need the federal government to guarantee that?

I reproduce some part of the article below:

JCorp, the strategic investment arm of Johor, announced yesterday that it planned to issue a sukuk wakalah Islamic finance instrument worth RM3 billion to be directed at redeeming the state-owned corporation’s outstanding bonds worth RM3.2 billion maturing at end-July. The guarantee, approved by the Cabinet, represents a major departure from the government’s treatment of loans by state agencies. Typically, the federal government provides its backing for fresh loans taken by state agencies and shuns providing support for fundraising schemes directed at refinancing existing debt.
Bankers and investment analysts said the government’s move to come to JCorp’s rescue sets a potentially negative precedent because it could encourage other financially stressed state agencies to propose similar debt restructuring arrangements.

JCorp president and chief executive Kamaruzzaman Abu Kassim reasoned that the Cabinet’s guarantee of the new Islamic financial instrument is to ensure the state agency continues to spearhead development efforts in Johor. “JCorp has a combined role as a public enterprise, but more important is that JCorp has in the past until now played the developmental role of the Johor state. Over the years, we have gone beyond the state because of the interest of our businesses, especially the hospitals and food chains and so on,” he said.

JCorp has been under pressure to deal with its debt problems and the disposal of key assets, such as Kulim (M) Bhd, QSR Brands Bhd and KFC Holdings (M) Bhd (KFCH), featured prominently in its debt restructuring plans. The group had declared plans to sell parcels of land in Johor Baru and Kota Tinggi to meet its debt obligations. Company executives said the new sukuk refinancing plan will allow it to keep its strong cash generating assets. JCorp is considering the privatisation of its listed entity QSR and KFCH in a joint venture with private equity firm CVC Capital Partners. The privatisation of both companies will require JCorp to fork out about another RM5 billion.


Thursday, April 12, 2012

There are others cheaper than Digi - So?

If you are an investor of Digi and probably may think of switching - Consider this. Ever since Telenor bought over Vincent Tan's ("VT") stake in Digi, investors who stayed with Digi until now has uncountable returns over a period of 10 years. In 2001, Telenor bought (from VT) and increased its stake in Digi to 61%. At that time the price went to as low as below RM4 sometime around 2003. Now less than 10 years after, after two rounds of capital repayment, huge dividends with yields of 4% to 8% every year, it is now priced at RM3.94 - and did I forget to say that this price is after a 10 for 1 split last year. All these things were in a short span of less than 10 good years. Hows that?

Hence, how can you fault a company that gave you such a return. Now, annually Digi is continuing to provide a dividend yield of 4% to 5%. You do not bite the hands that feed. But what if I tell you that there are better value stocks than Digi, and you do not need to look far. What if I tell you that Maxis and Axiata are even more attractive than Digi? Yes, its own competitors. Just look at the below table.

If you look at purely PE Ratio alone, it is fantastic that investors are valuing a third player higher than its peers. Normally, investors are more susceptible to providing a higher value to the leading player than its lower ranked competitors. This shows how much value creation the Telenor group has provided to its shares. Why? This I attribute to the way Digi under Telenor treats its shareholders. Besides providing value and good return, they have been by far the most consistent among the three. Ananda Krishnan is not AK if he does not list and delist and list back companies. This becomes his hobby! That action of inconsistencies, to the shareholders is not good. Although any investors who invested into his group of companies would have made good money from their holdings the action of pulling back a listed company and list them back does not augur well for people like me - pure investors.

Just look at the stats above for Maxis. Why is the NTA negative? Well, these I believe is what he does to his holdings. Prior to the original Maxis being delisted, it used to hold telco businesses in Malaysia, Indonesia and India. The Malaysian one is a cash cow whereas the Indonesian and Indian entities needed more cash injections. Very usual for any businesses. But AK was concerned. As it is not so nice for a listed firm to reveal too much to the public (due to the value deterioration it can appear to create), he delisted the group and list back the Malaysian entity alone. Along the way, CIMB is probably the only one makes good money! - How wasteful. And Maxis Malaysia was geared up to pay for his foreign foray. While it is not a matter of concern, what makes people peeved over the entire exercise is the shuffling of balance sheet in the individual companies.

Having said the above, currently, Maxis Malaysia is still a very investible concern and in fact it is more attractive, valuation wise compared to Digi.

What about Axiata? Well, Axiata's current position is what AK does not want investors to see. If you noticed, Axiata's market capitalization is about the same as Maxis Malaysia. How is that possible? Celcom's (which is in between Maxis and Digi) size is only slightly smaller than Maxis but yet by buying into Axiata, you are getting the Indonesian, Singapore, Thailand, India, Cambodia, Sri Lanka businesses etc. in one stock. I noticed that some analysts used to be concerned over Axiata's debt. Hello? With the telco's nice positive cashflow yearly, they are overly concerned.

Among the three telcos, Digi has the better balance sheet as its debt is lower as compared to Maxis and Axiata. In any case, as the companies are generating healthy cashflow, debts should not be a concern for all three. In fact, judging from the position they are in, I am not worried over the balance sheet position for any of them.

Well, from the above, if you continue to believe the good things that Digi will provide, stay with the stock. But if you venture out, probably Axiata and Maxis will provide better returns over time. In terms of what is going to happen to these three companies business wise, I believe they probably would stay at where they are - as it is! There probably won't be much happening except for all three waiting for LTE to deliver. Over the next 5 years, the biggest challenge for these telcos is growth as their numbers seem to stagnate more recently especially last 1 year.

(Under a non-scientific method) When comes to quality of service, most people would rank the three telcos in the following order - Maxis, Celcom (under Axiata) and Digi although one could not differentiate much between Digi and Celcom. 

Happy Investing!

Wednesday, April 11, 2012

Malaysia Smelting Corporation: This is not a hollow tin company!

A Malay proverb - How does a hollow tin can sounds like? Loud but hollow (no substance). Malaysia Smelting Corporation ("MSC"), the 125 year old tin producing company is not one though as it changed its focus few years ago. Since 2009, it has decided to only concentrate on tin both upstream and downstream. It has decided to let go of its other investments in the form of copper, coal and gold mines. Not a wrong move as tin is what MSC does best.

A little bit of background on MSC (since we need to know more)

You can get a lot more from its very well info provided Annual Reports
MSC Group is currently one of the world’s leading integrated producers of tin metal and tin based products and a global leader in custom tin smelting since 1887. In 2011, the Group produced approximately 46,599 tonnes of tin metal thus sustaining its global position as the second largest supplier of tin metal. The Group’s turnover in 2011 was RM3.1 billion. MSC is listed both on the Main Market of Bursa Malaysia since 15 December 1994 and the Main Board of Singapore Exchange (SGX-ST) since 27 January 2011, and is a 54.84% subsidiary of The Straits Trading Company Limited of Singapore. The core business sectors of MSC are:
• International Smelting & Marketing
• Exploration, Mining & Mineral Processing

International Smelting
The first smelting facility was established in Singapore in 1887 and the second facility was built in Butterworth in 1902. Both facilities ran concurrently for many years until the closure of the Singapore unit while the Butterworth unit was rebuilt and restarted in 1955 after it was heavily damaged during the Second World War. In 2002 the Company acquired PT Koba Tin in Indonesia and increased its reverberatory furnaces to four with an expanded smelting capacity of 25,000 tonnes per annum. Together with the Butterworth facility, the Division now has an overall smelting capacity of about 60,000 tonnes in two countries. In the mid 90’s the Group started a tin marketing and trading
arm under the Smelting Division. The downstream unit provides the Group with hedging, pricing and marketing linkages to the KLTM/LME markets as well as the end-user markets worldwide.

The division produced a total of 46,599 tonnes refined tin in 2011 representing almost 13% of the world production. The range of refined tin products currently produced is as follows:-
• Grade A with minimum 99.85% Sn
• 99.9% Sn minimum
• 99.9% Sn minimum with 50 ppm and 100 ppm maximum Pb
• Tin anodes
• Electrolytic tin with 99.99% Sn minimum

The Malaysian (MSC Straits Refined Tin) and Indonesian (Koba) tin brands are LME/KLTM registered.

Tin was the metal which made Peninsular Malaysia as a popular destination back in the 19th century for miners. Since then, as applications for tin reduced due to other types of material being preferred for the food packaging business, this metal lost its glitter over time. So, what are the applications for tin in current times? Electronics industry is the main contributor.

Applications for tin

Tin is used in many alloys, most notably tin/lead soft solders (50% of usage for the industry), typically containing 60% or more of tin. Another large application for tin is corrosion-resistant tin plating of steel. Tin-plated metal is also used for food packaging, giving the name to tin cans, which are made mostly of steel.

There is no doubt MSC being a very experienced integrated tin producer would have an advantage with its network of contacts and experience. How would that translate into an advantage for MSC? Production from the largest tin producer, Yunnan Tin in China steadily reduced over the last 4 years while production from the MSC's portfolio of mines continue to be steady. On the other hand, demand for tin as applications for soldering for the electronics industry continue to improve slowly but steadily.

Going forward there will be greater challenges posed on accessibility of economically mineable tin
deposits located in remote locations and at greater depths. It is therefore crucial that MSC as a Group is able to apply the industry’s best practices and technologies for exploration, mining and processing of the tin resources in order to deliver on long term sustainable performance.

Note that the Top 6 producers controls 65% of the tin production.

Hence from the above what do I like about MSC

  • As a tin production unit from upstream to downstream, MSC seems to be a company that knows best what it does;
  • From the above financial highlight, MSC does make enough return for it to be an attractive company (do not look at the exceptional charges). This is however provided that prices for tin in the London Metal Exchange continue to be strong. Currently tin is priced between $22,000 to $25,000 per ton;
  • Applications for tin for the electronics industry does provide that continuity for MSC. The world's reserve for tin is ever depleting and MSC being an expert in the field would probably be the beneficiary from here;
  • Tin is not an industry large enough where they get stiff competition from the largest miners in the world in the form BHP, Rio Tinto, Vale etc;
  • Valuation for MSC is attractive - currently at RM416 million as at 10 Apr 2012;
  • MSC has a very strong reporting unit as well as Board representation and managers. This is very important for an international company so small (only RM416 million) but yet has so much potential in terms of what it does internationally;
For those who have read this, don't stop here. You may find something interesting in this industry and company where for most investors would have already taken a pass long time ago. We may have found a jewel here.

The writer starts to feel that most politicians are just an "empty tin" - lots of promises but just hollow.

Serious Investing!


Tuesday, April 10, 2012

I can now throw VALUE out of the window

Woke up this morning and read Facebook decides to put a billion dollar into a tiny little company of 13 people. Instagram which is yet to make a single dollar was set up just 18 months ago.

For those who probably have to go through the daily rat race (includes me) will rue how come we do not have that luck. Well, stop dreaming and keep working! We are in the 99.9999999% group.

BTW, as I learned, No investor in this region will allow your company to not earn a single sen for 18 months and yet continue to plough money into you. They will be breathing down your neck...

As I see this, I seriously believe that this trend may result in another round of dotcom bust. (Already have a title for it --- The collapse of Dotcom 2.0) The valuation accorded to all these small companies are just ridiculous. Even the valuation of $100 billion for Facebook is just outrageous. And I do not even want to comment on Groupon, LinkedIn, Yelp etc. I do not even know and care what Yelp does, frankly.

Saturday, April 7, 2012

Nestle: Great companies are expensive

If you are 40 - 50 years of age (or more) and in Malaysia, do you remember Ovaltine? What about Indocafe? Were you the ones who preferred Cintan over Maggi? What happened to them now - these brands are still around BUT just that they are now way overwhelmed by Milo, Nescafe and Maggi.

Think of it this way, as a business owner would you rather own a Milo or an Ovaltine brand (assuming they are sold to you at the same valuation, not price)? Unless, you have the confidence and ability to turnaround the Ovaltine business, the effort to push for its success almost end up in futility. It is almost always much harder to turnaround a failed (or struggling) brand than to manage a successful one for consistent growth. Of course any self-confident investor would prefer to stumble upon great and fast-growth companies such as Facebook, Google, Microsoft, Apple at an early stage - but seriously we are looking at investment as a part time job. Most professional firms which invest into early start-ups are seldom successful anyway.

So how do you as a busy working adult with some savings tend to look at your investment opportunities? You look for great companies. The biggest issue is that great companies tend to be expensive. Look at the below statistics specifically on the Price Earnings line for Nestle.

Except for 2008, the year where most investors grapple for safe haven investments such as gold, government bonds, Nestle's PE was never below 20. The lowest it went was 18.5x, and highest most recent year, 2012 - almost 29x. In fact, I have looked further up to as early as 2001, the PE was never below 20x. Just look at the trend below.

Three other lines which you will want to notice are the Profit After Tax (PAT), Cash Flow and dividend yield. Nestle has superb PAT and Cashflow growth for a mature company while dividend yield which tracks its dividend payment against price is above Fixed Deposit yield in Malaysia.

Hence what does that tell you? Even at its most expensive period like now, you are almost assured of buying into a company that is to have a continuous growth in future while it continues to pay a good dividend to you as an investor. Yes, for the more aggressive investors, Nestle is a boring stock but for the person who do not have much time doing research, Nestle is one company which you do not have to do research. You can almost be assured that this is one stock which provides the natural hedge against inflation, recession and any other calamities.

And yes, it is expensive - so are diamond and gold (for those who is buying gold as a natural hedge against inflation and currencies depreciation)! As Warren Buffett says, would you buy something which you can only fondle but does not do much beyond that?

I wonder fondling a piece of gold bullion ever becomes a hobby...

I recently bought a bottle of IndoCafe (cause for whatever reason Nescafe was not available) - did not like the taste anymore - I am now starting to believe that taste is most of time acquired.

Serious Investing! 

Wednesday, April 4, 2012

How deep is Green Packet's problem? Quite!

Green Packet is a company that is bleeding cash. Just like some of the telecommunication companies (telcos), it is being thrown into the deep sea without much life savers. Once a while they get some life savers in the form of SK Telecom (the big one), IntelCap and Malaysia Debt Ventures. They just have to continue to swim. Why is it that the company and all the shareholders, continue to be able to battle through? Telco business has some uniqueness where there are some interests from foreign parties. In Malaysia, any foreign party is not allowed to own more than 49% of a telco. This is why Telenor is still required to reduce its stake in Digi from 61% to 49% despite several approved appeal.

This is also why SK Telekom did the absurd by injecting in close to RM400 million into Packet One and yet to see the light of the day. They probably feel that RM400 million for 26% of a telco is worth it. Why? That uniqueness in telcos, as most countries see telco assets as a sovereign right. Companies like SK Telecom, Singtel, Telenor have not much room to grow anymore in their own respective countries. Imagine SK Telecom having a net free cashflow of some USD1 billion a year and they do not know how to grow the business any further. Besides issuing dividends, companies like SK Telecom will always look for opportunities overseas. These opportunities however are few and far between. That is probably why the Green Packet deal was stumbled upon. What they probably are short in the right decision making is that Malaysia is already a matured market in terms of telco business growth. Yes, South Korea is much more matured but the competitors in Malaysia are ruthless and cash rich already as well. In fact, Malaysian telcos are also already looking for opportunities overseas. Look at Axiata, Maxis.

Now look at the table above. By converting all the preference shares Packet One will have some of the debts converted into equity. Good stuff for Green Packet who is the holding company. But now what - will SK Telekom be injecting more money into Packet One? They already own 26.07% (via preference) of the company which is valued at some RM350 million. Will SK Telecom be the grand daddy again and value Packet One much higher than the market as what they did in the past? These are questions that only SK Telecom can answer.

If SK ever decides to pump in more money for whatever it is, trying to help to keep Green Packet afloat for the LTE and fibre broadband initiatives, how much more can they do to add to that 26.07%? Another 20% for RM150 million. That I foresee is still not enough for Packet One.

Green Packet has looked overseas and the overseas solution is going to be maxed out. They have to look inward as a solution. Any local takers? You see, SK Telecom's injection has to be met by locals so that the % shareholdings are even out. Again probably tough, as all the other cash-rich players are already fully happy with what they have. LTE (4G) is coming and from that WIMAX is no advantage anymore. Why then would they want Packet One? No angels would want either as Green Packet's business is beyond angels appetite already.

Will the current shareholders of Green Packet be able to pump in more money. Let's look at the below table and you will see they themselves are maxed as well.

The CEO's, Puan Chan Cheong and gang shares in Green Packet are already pledged (same as MTouche case). You bet they can raise anymore funds themselves for their own injections? These pledged shares are due to a rights issue done sometime in 2009. They are just not able to raise from within themselves anymore.

Having said all the above, I am still amazed at the ability of Green Packet to raise funds externally. Will they be able to keep that up? As they will need that extraordinary ability again.

Tuesday, April 3, 2012

Revisiting Green Packet's cash position

After my previous post more than a year ago, let's revisit Green Packet's liquidity position.

For the entire year of 2011, Green Packet had a negative free cash flow of RM108 million. As you can see above, its current working capital ratio is 68%. Besides that, Green Packet via its subsidiary Packet One has more than RM270 million of convertible preference shares. These convertible preference shares are supposed to be convertible into shares when Green Packet lists its Packet One subsidiary. How viable is the listing? I am far from convinced. Will SK Telekom, be the saviour again by pumping additional funds into the company by picking up convertible preference shares again?

Again I reiterate, Green Packet is taking the wrong fight - especially so when LTE comes into play. (They do not have the diferentiator advantage anymore, as all are the real 4G) I wonder how long more it can last.

Related article:

How deep is Green Packet's problem?

Sunday, April 1, 2012

Penang Island: A place for mass low costs housing?

How do you plan an island densely populated, only 293 sq kilometres with more than three quarters of the area unbuildable? The question is do you want to plan it like Hong Kong Island, Singapore and Gold Coast Australia or do you want to turn it into a Port Dickson, a place with much potential but due to poor planning has turned itself into a property nightmare for investors.

The opponents of the Bayan Mutiara project have many ideas.

Some groups call for this sea-front prime land situated north of Queensbay and east of Pulau Jerejak be allocated enough portion for low costs housing. What do you expect, when a piece of prime land with a right minded government doing the right thing (by selling to the highest bidder) - and, only later announced that the piece of land which you have to partly reclaim can only be used largely for low costs housing? Would any developers be interested for any bid in future - anymore? They have been taken for a ride, before remember!
Some other feels that Penang Development Corporation (PDC), the state owned developer should have taken up the project itself rather than selling the tract of land valued at RM1.1 billion. Between PDC and a private developer, who do you trust to build a private property better? Who has more clout, ideas and brand presence to make full use of the land value better? Compare between Tropicana and PDC? Would you buy a high or medium end property from PDC or Tropicana?

Penang Island is 293 sq km while the mainland in 753 sq km. Much part of the island is hilly.

Thanks to Francis Light, Penang has enough land in the mainland area of the state. Probably the best thing to do is to develop mass housing projects over in mainland Penang where land size is 2 and half times larger than the island - and more buildable. Turn the island into a tourist hotspot and the sea front premium land into holiday homes for the rich. Aren't we trying to attract high income society? Then tell me what is it that the current federal government promoting Malaysia My Second Home project for? Why are they creating Talent Corp? Are we luring these people by showing your best piece of property - Bayan Mutiara - you can now buy a nice apartment (RM1100/sq ft) surrounded by 50% low costs apartments within a 103 acre development?

Not all things are a duel between the rich and the poor. The rich will only buy properties which are attractive to them when there are investment values. The poor, for the first thing in their mind is to have a shelter above their head. You do not turn a premium sea front property into a place for low costs housing.

An economy needs and will have a mixed type of development. And for Penang, the entire state is a mixed development. Beyond the 2nd bridge, create more links between the mainland and the island.
103 acres is not large but large enough for it to be turned into a nice piece of premium tourist spot.

The current state government is doing the right thing. You do not see the Malaysian government turning surrounding KLCC with low cost housing either. If there are any, I want!

The writer is a born and bred Penangite and would love to go back there to work one day. The writer also feels that Penang island, surrounded by sea and with large part of the island covered by hills - it is a really nice place for tourists.