Sunday, September 30, 2012

Insider movement: Its significance

One of the fewer things which I seldom mention but is important are the movement of substantial shareholders or to some it is being referred to as insiders. Why is it called insiders? These are either management, owners, directors of the companies themselves who do the trades. Any shareholders who hold more than 5% are supposed to make announcements of their actions to Bursa as well. These personnel are important as they are the ones who know their companies better than anyone.

I have been looking at insiders for years and this is one of the things I learn from the market. Some owners do not really hide their holdings while some (many) of course do not do the trades using their names. They use nominees and these are the ones which we are not able to detect.

Sometimes, these owners would like us to know of their trades so that we follow. Hence, it is important that we are not "screwed" by these trades. Hence, do not be fooled. There are some who are genuine as they feel that their share price could be cheap / expensive, hence their actions show what they perceive.

Of course, sometimes the insiders (especially the weaker companies) shares are being force sold. One of the articles which I have written on where the shares are being sold (perhaps force sold) was MTouche.

One of the major parties who trades on a daily basis and reporting on its trades is our own EPF. Its trades are important as well, due to the size of the fund that EPF controls, We do not want to buy especially when EPF is reducing its holdings on certain counters, vice versa. Of course, just like the insiders, EPF do sometimes disguises on its trades buying and selling the same company on the same day or period. It is important obviously for EPF, from the investment public point of view to not know what its intentions are.

Anyway, due to the significance of the substantial shareholders movement, I feel that it is important for me to highlight them in a separate tab. Updates would be done regularly. I would only update the significant ones. Small trades would not be touched as they are not significant. So are the ones which I think do not bring value to this blog (or for the readers). Hence, I would only pick the important ones. For example, shares being given to their love ones, bonus issues, rights issues would most of the time not be touched.

Purchases / sale can also be done by the holding company, but I may just highlight the important personnel. For example, trades done by Tan Sri Lee Shin Cheng's holding company would also involve his family members, but I would only highlight his name.

Do check out the insider trades occasionally on the separate tab next to "Position". During the course of collecting the data, I may make mistakes - hence, do not blame me - of course, I would hope to be as accurate as possible.

Portfolio position

From now on, I will just put the portfolio position on the attached tab or refer below.

This portfolio is a personal portfolio which is for a longer term purpose. For an earlier update on the portfolio, please see below.

Portfolio - 18 June 2012

Friday, September 28, 2012

How Investing like a "KID" works well for me

Back in school, I read a book titled, "Beating the Street by Peter Lynch". Of course, for those who know, he is probably the person who made Fidelity what it is today. He was one of the top fund managers of all time, but given the stress of the job, he retired early - at 43 (how I wish). During the tenure of the Magellan fund he managed, the fund size grew from a few hundred million to USD12 billion when he left.

In the first chapter of the book, "The Miracle of St. Agnes", he was showing how a bunch of 7th-grader (about 12 years old) school kids managed to beat 99% of mutual funds and outperformed the S&P Composite by a whopping 70% gain to S&P's 26%. Over the 2 years of that study, those kids were obviously buying stocks that they knew - Disney, Wal-Mart, PepsiCo, Gap, Nike, Mobil, LA Gear - among a few of them.

I wish I had followed that principles from the time I read the book. But, I went on a different route, thinking that the financial education that I had would have made me a better stock picker. Hence, I used all kinds of ratios, PE, P/NA. PEG, P/EBITDA, EV etc you name it. I used to compare which company was cheaper in relative PE, NTA terms. Of course, when choosing the cheaper (in relative term) stocks, we would have picked some lesser size-d or less well know companies. This method is not entirely wrong but it is getting as complex as it can be - and it does not guarantee of us being more successful than a simple type of investing - which is only buy things that you like.

Kids style investment

Ever try giving food to a kid. A fussy one - supposed to be better investor -:) - would only be convinced that the food should taste good then only he/she will try. Now, as an investor, we are supposed to be fussy. We should not be afraid to invest but when comes to picking the right stock, it is always better that there should be a tried and tested experience. Kids tend to eat the same thing most of the time. In picking stocks, we should not be having too many stocks in our universe. Too much is not a good thing.

Only buy things you know

How kid-like is this? Kids only eat things that they like or at least they know that they have tasted them before. In the first chapter of "Beating the Street", the 12 year olds were buying companies that they knew. That was the basic rule. Hence, simple brands like Wal-Mart, Nike, LA Gear, Pepsi, Coke etc.

You know my kid - when she was a little over 1 year old - she was already pointing to that "Golden Arch" - "M" or the "KFC" sign even in a foreign country - imagine the power of the brand. You know she was not eating the food, or even buying the toys but she wanted to still walk into the restaurant. Frankly, until now I am not sure what was the reason - not the toys.

Stuffs that are bad for you does not mean it is bad for investments

Check these non-syariah compliant stocks - Carlsberg, Guinness, Genting, BAT, JTI etc. Err... of course Playboy used to be a good stock in US as well.

Kids do not care if it is bad or good. As long as it is something that is to their taste and liking - Oreos, Cheezels (Kraft), milk (good stuff - Nestle, Dutch Lady), ToyR'Us, Hasbro.

Most important rule - do not spend more than you earn

Why can't adult do this?

When giving money to a kid, the basic rule to those kids is not to spend more than what you have in your pocket. This goes very well to any company as well. Although I do not have the statistics, this principle proves to be good for me in my investments portfolio. In case of any company is in need of additional funds or borrowings, they are still acceptable, but as long as those borrowings would generate more in future. Any company that has proven or shown little that they have made more from their fund raising, the chances of success from generating more in future would probably be lesser than those that have proven to made it before.

Based on those principles, I definitely made more than looking at complex matters. But of course, our horizon of stocks can be larger - cars, banks, healthcare, education, fashion etc. - better right? Not necessary.

Any more kids like behavior and principles?

Thursday, September 27, 2012

Amway: It's easy

Let me ask a question when comes to analysis is concerned. Is MLM a" low barrier of entry" business or a "high barrier of entry" type of business? Is it easy for anyone to start a business as similar as Amway? Seems easy ya. Plenty of competitions. Then let me show you Amway Malaysia's trend over the last 5 years. Why not start one?

Not convinced? Then look at the dividend payment etc. There is a huge consistencies.

The business itself is not easy. Until now, I can't understand the MLM business. I could not value the value it provides to its members and consumers.

I asked some people - what makes Amway successful? Is it the channel that it has built? Is it the quality of the products? If its the quality of the product - then I am trying to understand - is Mercedes a quality product? If then Mercedes is of quality and synonym to class, then what about Amway. Quality = class? No. Then what? If Mercedes is about high quality, would you buy if the value range is off the chart? I am a person who looks at value - that's why I could not comprehend. (Value is not about low quality though, or I hope so!) Is Amway a status symbol thing? Do you go around and tell people you use Amway - the same way you carry an LV, Iphone or drive a Mercedes around?

For the last 10 years or more, seriously I have not encountered any person selling me an Amway product. (Err...not asking for one now :)) But what makes a company like this earn more than RM100 million a year? Stickiness? Usefulness? Members themselves buy? The believes?

Not convinced of how successful the company is? Look at the Balance Sheet.

Look at how clean and easy the balance sheet is. To tell the truth, I have yet to encounter a balance sheet for a post RM1 billion company that is that easy to the eyes. (perhaps Berjaya Toto is almost as easy) The business itself seems to be straight forward. Inventories are stocked for the members or stockists. Cash and cash equivalents are what they have. No debt - they don't need one. If I am allowed to advice - go get some debts and pay more dividends and debts are cheap nowadays especially for Amway. PPE - perhaps the building and equipment it owns. Trade payables are to be paid to suppliers, distributor's bonuses, seminars costs etc.

Now, if you noticed, Amway paid more dividends per share than its earnings over the last 2 years. No problem. It can afford to do so. In fact, some of the larger successful companies have borrowings and they still pay almost full dividends from profits. (My friend complained about this - hello, not an issue) He should not complain as as he gets as a shareholder and this is how able the company to pay its dividends. Of course, in its near future years, Amway may not pay RM0.66 per share, but if it continues to do as well or more, the dividends will be almost as good or even better.

Its cashflow is just as straight forward. Amway has been paying off all the income it generated over the last few years. If you look at it, the business does not even look at keeping some of the profits for future expansions. The business is a self-rolling business.

Seems easy? I hope so, as I am not yet convinced of the business moving forward as I do not know how to make of the model that it has. But how to fault its past track record moving forward?

I wish I had bought this company years ago. But I lacked the BELIEVE.

Wednesday, September 26, 2012

What's wrong with Benalec

Investors do not understand a marine engineering business? People do not know what it does? You know I feel weird when almost all (in fact all) broking firms that cover the stock, give positive light on the stock.

Look below from It gets 5 star rating. These firms gave a price range from RM1.53 to RM2.48 whereas the company is now trading at RM1.14. That's as much as more than 50% below its real value! Is this why the owners are accumulating?

AMMB gives headline such as "Latent value bottled up waiting to be unearthed. BUY" and "Agreement sealed; now for the big push! Buy". There could be no better headlines that this.

Fundamental wise, Benalec is expected to be trading at below 10x prospective PE with very strong book order and the company is expected to be kept busy until 2016.

Now let me look at the other side of things. Frankly, I try not to be spoiler or be thinking on some of the negatives (believe me, I am also looking at opportunities if possible). However, these are what are I am looking at. Look below at the latest Balance Sheet. Remember, I always put importance on strong cashflow type of companies. Benalec's balance sheet is not weak but it is filled with long term and / or weaker assets. Its receivables are high - I don't know why. Lands and properties held for sale are high as well. So is the PP&E. Its cash and cash equivalent is decent at RM130 million - but if you noticed the increase was mainly due from its fund raising from IPO a year ago.

From what I read, what is its business model which is also to be its competitive advantage as reported?
It is the 2nd largest marine engineering company (largest being Muhibbah, I think) and its expertise is in land reclamation. It has all the tools and machineries to do that. Land reclamation is supposed to be getting bigger in the near future especially along the coast of Peninsular Malaysia, particularly Johor. This is where Benalec is getting its jobs.

Now, what I am of less unsure is that in some of the articles, Benalec is deemed to be of having a better business advantage than its competitors as in some of the projects it bid for, Benalec would accept land as payment rather than cash. That is obviously attractive to the project awarding side. With that, Benalec's margin could be much higher than the rest of its competitors as it is willing to take what the rest are not willing to accept.

My biggest apprehension with this business model is cashflow. Benalec gets land. It has to find a buyer for the land or itself will need to develop the land - which presumingly it does that, then Benalec has now turn itself into becoming a developer? Sounds good, but this model needs even more funding rather than cashing.

If you look at the balance sheet, it is almost certain that the businesscompany is into selling the parcel of property it owns. Isn't that the hard part?

I think that the company is not expensive, with the positiveness that are provided by so many of the research houses. But something is not right somewhere. As the saying "one man's meat another man's poison", could it be that the business model is great for some, while not so positive for others?

I hope that it is the case of mispricing.

Benalec's share price trend

Buying Airasia 26 Sep 2012

You know what, EPF has been accumulating Airasia over the last 20+ days ever since the news about Malindo. I am supporting that call. It has made net addition of almost 1% since then. Now EPF is owning up to almost 10% of Airasia.

I am actually following that move, by buying 2500 units today at RM2.86.

Harrisons' RM92 million problem - what to do about it

Harrisons Holdings is a company which I do follow. It has businesses somewhat similar to DKSH. The reason I do not buy Harrisons is due to I already put myself into DKSH and I deem DKSH to be slightly of my preference than Harrisons. Someone pointed to me that Harrisons in fact has better margin than DKSH. Quite rightly commented. Harrisons Gross Profit (GP) margin is slightly above 10% while DKSH's GP is about 7%. That itself is a good benchmark to tell which company is able to sell the products it distributes at a higher price while having a better negotiation power over its suppliers.

However, one has to know where Harrisons strength is versus DKSH. Harrisons traditional strength is in East Malaysia. I would like to think that Harrisons has much better reach and channels in the East where reaching out, having strong contacts with its base is of much importance. If you notice, Harrisons customers include Nestle, F&N, Asia Pacific Brewery for FMCG products. Why such large multinationals where they probably already have strong distribution channels in Malaysia? Because of the channels that Harrisons has built over the years in East Malaysia. Harrisons has that strength. Obviously, with that bargaining power, margins can be higher.

Why do I pick DKSH over Harrisons

For strategic reasons, I feel that DKSH being a regional player with large operations in Asia would be looking to grow much more than Harrisons. If you notice, Harrisons Tradings's arm was bought over by a group of investors from the original Harrisons and Crosfield, one of the largest plantation company in Malaysia, once upon a time. Harrisons and Crosfield later became Golden Hope and of course all those are history with now Sime Darby being the larger group which holds Harrisons Plantations assets.

Now, with that - Harrisons with its large and strong distribution operations in East Malaysia is a company which will not be that aggressive anymore - that's what I think. And because of that DKSH is my preference.  Together with DKSH's bigger operations which is based in Malaysia, it is obvious that DKSH will be a larger operations as well as with more competition. I am an investor with less fear over competition if the company has a far larger advantage. That's what I felt on DKSH for its distributions operations in Malaysia.

Anyway, back to the title. Recently, Harrisons price has dropped some 17% from around RM3.50 to more recent RM2.92. But read below:

This is serious and worrying. What do I think about this? It is a company with huge and strong operations in Sabah. If (you know what) is not able to resolve issues with the Customs, operations of Harrisons can be affected. While, Harrisons obviously can absorb this large penalty, it obviously will try not to pay the RM92 million fine if possible. RM92 million for a company with RM200 million market capitalization is huge. This is not Apple or Sime Darby being slapped with a RM92 million fine.

We do not know whether Harrisons is in the wrong or perhaps the Customs had made the wrong judgement. But I would say lets wait this out - and if Harrisons is in the wrong, it may even change the scenario of its East Malaysia's operations which has been its strength all the while.

Monday, September 24, 2012

Market is down, should I buy or should I sell?

Market has been on the quiet side for the last few weeks. I am not going to use KLCI as a benchmark to quote the performance of the Malaysian market as it is probably been much supported by some of the local sovereign funds. The biggest question is as a value investor, should I buy or should I sell?

I am not a momentum trader. I am in fact a very boring (I think so) investor. I do think I have any tips to provide, unless of shorter term opportunities (not really an arbitrage but close) such as the ones with IGB and ECM which I have mentioned about. Well IGB's REIT is already listed - done. ECM's short term trade is still alive.

As for trading tips, my problem with past experiences are that I have made losses from tips more than I have gained. Hence, I have stopped listening to tips long time ago and I have found that this is the way to go. I used to allocate a portion (around 20% to 30%) of my investments portfolio into buying less fundamental stocks (ones that would not have gone through the PN17 drain but these are not great stocks). The problem with this is that, I have not been successful as a trader and more often failed. You cannot fight the market. But you can own fundamentals or be a part owner (however small) of a good, well managed company.

Picking great companies is not as tough as some people might have thought. Ground work is needed though. Now, the problem with the market is that bad stocks outnumber good ones by quite a high margin. You cannot do a random pick or just listen to rumours and hope for the best. Traders have different mentalities and they are probably trained psychologically to trade. The fact of the matter is that though - trading can be a zero sum game. Taking the costs (time and commission paid), it is a negative sum game. Why bother when it is a negative sum game? Do you ever think you can beat the market this way when the odds are stacked against us - they (the larger traders and insiders) have databases of who buys, who sells. They know how many stocks are in the float. How many are short term holders - i.e. considered weak holders as well. Their trading costs are lower than ours. Who do you think will win from here? They are starting from the 10meter line in a 100 meter race.

Back to the current scenario - where market is off its strength i.e. on a little weak side but just for the last 3 weeks or so. This is the best time to look into the stocks which we deem to be great and we would like to keep for a longer period. It may not be time to buy as yet - again I may be wrong - as usually market can weaken for quite a while. Remember, I was saying that the market was at a stage where it was getting overpriced.

I think for me, this is time to reevaluate my portfolio, maybe change some or reposition the portfolio between local holdings vs foreign holdings. Stocks are getting cheaper but not that cheap.

Once it is getting cheap enough, I will be much more active. :)

Sunday, September 23, 2012

Is Instacom worth it OR another mediocre ACE?

I can say that I am happy to see companies (as I had some prior engagement with them) like Instacom and OCK have successfully gone to the ACE market, the second through a direct listing while Instacom had done a reverse takeover of I-Power. To me, I-Power (don't bother analyzing) is already a company which will find it tough to move forward, hence letting go while sharing some bits of another company's success should be the way to go. Otherwise, our ACE market would be a joke with a long list of failed companies.

However, my praise would have stopped here as it is difficult for me to move forward with saying nice things except for that I am happy. Why? If my blog is about value investing with good, strong companies - the industries that Instacom and OCK are in really makes me think. Telecommunication is a great industry - but as I have said before, only for TM, Maxis, Celcom and Digi - fullstop.

Before we really think hard and try to find a gem of a telco based business, see below.

Look at the ones which I have boxed up in Red. To me, these companies are finding it hard to do business as they are being squeezed in terms of margin by the Telcos, while continuing to finance them - indirectly.

What does Instacom do for a living? It is an engineering cum construction company - doing things that successful telcos do not want to do - i.e. the dirty jobs - you may say doing dirty jobs should be profitable - hardly until now especially your clients are telcos.

So if you ask me, should I-Power allows itself to be RTO-d by Instacom? Yes. Should we invest into Instacom? Wait a second, and think. See if the below companies are successful and used as a benchmark for your investments? If not, take a pass and just be happy that there's life after I-Power.

Saturday, September 22, 2012

Answer from RCE Capital for RM18 cash purchase of a one-month old IT firm

I remember a reader asked on RCE Capital's purchase of a company for RM18 million cash. Well, here is the answer that the CEO of RCE Capital has provided. If it is something that will provide competitive advantage, I am all for it. The biggest question however is "how come the company, Urusan Ihsan was just incorporated on July 2012." This one is the biggest question mark, don't you think? Usually, software development work will take more than a month or two to build on. The CEO focused his answer on the code mechanism.

My understanding on companies such as Urusan Ihsan is that for it to build on something, there must be an economic reason to do that. When they have built some code mechanisms which to RCE is so valuable for it to pay RM18 million, then Urusan Ihsan must have thought of selling its system to more than one company, usually RCE and its competitors. Is RCE into reducing competition due to the "code mechanism"? As I see it RCE only has 2 competitors - BSN and Bank Rakyat.

Is RM18 million worthwhile? The one thing I know is that the owners of Urusan Ihsan stand to make 10x within 1 month from incorporation. Wow!

Friday, September 21, 2012

Plantation: A tale of two companies

Company-P has been one of the pioneer in palm oil cultivation operating in Country-M for more than 40 years. It started as a family business, later went listed in the M-stock exchange and continued to have successful expansion. Due to the attractive crude and refined palm oil prices, it is now a very profitable company. Since 1991, due to the lack of land for expansion in Country-M, it started to buy land in Country-I and uses its palm cultivation and refining expertise to improve palm oil processing efficiencies in the new country it invested in.

The Chairman of Company-P has a very strong relationship with the President of Country-I as well as all the district heads in the areas where he cultivates palm in. Whenever, he faces problems with the locals of the country especially the villages head, he will use his many problem solving tools that he has. Some of them may not be legal as he would have gotten one of his entrusted managers to carry large amount of cash to pay off some of the villages heads so that operations can go smoothly. Of course, these method of paying off the villages heads were not reported in the autobiography that he had gotten one very popular writer to pen on. His success in Country-I had made the investors of his company and himself (who owns 45% of the company) very rich.

The expansion in Country-I is so successful that he has been honored by the President of the country. Currently, Company-P owns 300,000 hectares of land in Country-M while the expansion in Country-I made the total acreage ownership of land in Country-I higher than Country-M, at 500,000 hectares. Company-P now is one of the largest land owner for palm oil cultivation totalling 800,000 hectares. The company's palm production efficiency is also one of the highest in the world.


Started its palm oil operations during almost the same period, Company-S commenced to replant palm to replace rubber trees in 1971. Total hectares of land in Country-M for the cultivation of palm is now 700,000 hectares, making the company the largest palm oil exporter in the world. Originally, it was a privately owned company with the shareholdings largely held by Europeans whose ancestors went over to Country-M since the early 1900s. However, due to the policies of the new PM of Company-M in 1980, he started to nationalize these assets owned by foreigners by buying the shares from the majority holders of Company-S. As such, Company-S has now become a majority owned national assets largely held by the investment arm of the government and its provident fund.

Due to it being a national owned assets, expansion was not a problem. The government of Country-M helped the growth of Company-S by contributing part of the infra development budget erecting roads next to the plantation land that Company-S has. Over time, as part of the land has become closer to new urban developed area of Country-M, some of those land that were originally agriculture land has now become commercial and residential properties. As a result, Company-S became a very big and rich conglomerate - very successful as well.

As a result, the CEO is paid more than USD10 million a year inclusive of bonuses. However, similar to Company-P, new land for cultivation of palm oil is getting much more difficult to acquire and they are becoming much more expensive as well. Hence, it is also almost a no brainer for the CEO of Company-S to plan his company's expansion to Country-I, a place which has enjoyed palm oil success to a certain extent partly due to the work of Company-P a decade earlier.

To fast forward the expansion into Country-I, the CEO asked the new PM of Country-M to arrange a working visit to Country-I. In that working visit, Company-S signed a MOU with a local partner (in front of both PM of Country-M and President of Country-I) announcing that it would invests USD5 billion into buying agricultural land for the cultivation of palm trees over the next 5 years. 2 years after that MOU has been signed, Company-S has now bought over 300,000 hectares of land. However, the local partner after making some quick profits decided to sell back his shares to Company-S.

Another 3 years has passed since. However, the clearing of land in the area that Company-S had bought was going very slowly. Every time Company-S wanted to clear the land for planting, it faced many obstacles - part of reasons the locals in the province it owns its land were against the move. Of course, them learning from their nearby villages head whom were given some rewards by Company-P were asking for something of the same. However, the professional managers that Company-P hires were unwilling to do so as they were unwilling to risk their career, especially if they are caught by the government of Country-I, they may lose their jobs or may even be jailed. Nobody wants to go through that, especially with the relationship of Country-M and Country-I which was turning sour, even more so recently.

Things got worse and after 10 years, about 80% of the land was still yet to be fully cleared. The planting of new young trees were also moving very slowly. Due to that, and with the pressure from his shareholders, the CEO resigned. He was in fact charged together with his CFO by the anti-corruption agency of Country-M for laundering company's money. The newly appointed CEO, in the end after studying the case and did not want to be encountering the same scenario as his predecessor, announced a cut-loss sale of the land in Country-I at USD2.5 billion.

Of course, by now you should know that this story is fictional. Any similarities to any of companies, countries are just a coincidence.

Thursday, September 20, 2012

Astro's IPO: Get the picture?

It seems Astro's IPO is on. And it seems that the valuation is going to be around RM15.6 billion - plus minus. Assuming this year's net profit is to be about RM600 million, that's a valuation of about 26x. Read this - Astro's IPO is to be a dividend stock as it has mentioned of awarding up to 75% of profits as dividends.

I have written of my concerns on Astro moving forward. To sum it up, let's look at what's in store for Astro to defend on which are not going to be just local. Discard ABN, Media Prima, Hypp TV - check out what's entertainment about, present and future.

You may ask, why Time Dotcom and Maxis. Well, these are the parties which Astro has tied up with. In fact the Maxis tie-up is mutually exclusive as I have read.

Wednesday, September 19, 2012

Oldtown: Dividends and placements should not mix

I am an investor who is trying to look at things rationally - sometimes perhaps overly rational.

What are the purposes of equity? Fund raising when you need them. Share them when you have excess cash. The sharing can be dividends, capital repayment (one of the popular one nowadays due to tax reasons) and even share buyback as by repurchasing, companies which have excess cash and deem their stocks to be undervalued will be reducing stock holders from the market - a positive.

Oldtown (a business which I like) just got listed a year ago. It promised 50% of dividends to be paid from its profits. Malaysian companies now tend to declare generous dividends which is a good thing - but sometimes has its limitations. It is no wonder that consultants advice for these directors and controlling shareholders to issue generous dividends if possible. Hence, 50% from profits is generous with Oldtown's decent profits.

Today, it announced of potentially issuing up to 10% private placement of shares. That will raise up to another RM60 million for the company and will increase the paid up share capital of the company. See below. The exercise will definitely dilute the EPS of the company further.

Now, what I boggles me is that it still has cash as seen below.

Debt is very minimal (about RM12 million) for the company especially after the fund raising from IPO done last year. It however puts the reason for this private placement as reducing interests costs?! My question is, isn't interests costs low nowadays, especially for companies that have good cashflows and balance sheet?

If it needs more funds, why not pay less dividends? It does not need to be gung ho and pays 50%. These kind of exercise is not right - of course sometimes you know the placements may not be as simple as it seems.

What kind of headline is this?

I like The Edge as it provides better neutral business news than the others. However, I liked them better previously, than now.

Just see the headline below on Icap. Do you note anything irrelevant here? If you read the entire article, you will know why.

Tuesday, September 18, 2012

Why not EPF just take over KFC?

I am thinking a little bit controversial here. After all, EPF has already had stakes in so many of Malaysian companies, why not another good franchise? As in my earlier article, I have mentioned of my liking for the local KFC franchise. I like EPF's takeover of PLUS. You see, whenever PLUS gives discount, it is our Malaysian employee's money anyway. I have no qualms over paying EPF for the toll fees - cut it either way (discount or no discount), I still like it.

EPF has the cash, something which Johor Corp does not have much. In fact, I see Johor Corp needing to come out with more cash to buy up 51% of the franchise. No doubt, KFC has a strong franchise and this franchise is not something that Johor Corp is extremely good at managing.

If EPF can manage RHB and PLUS decently well, it can manage KFC well too - with good managers. If you look at facebook or youtube, the Malaysian KFC franchise has now turned into a little bit of a racial thing - which shouldn't be the case. C'mon, selling and eating fried chicken is not supposed to be a racial thing.

Johor Corp is deemed to be a state organization which I do not know why they are very eagerly into KFC so strongly. Political again? If EPF controls the chain - the franchise will be a people's asset which I think EPF (with some good IR) will be able to explain well.

Not cheap

After all, the price of RM4.00 - the total purchase price is going to be RM3.3 billion. At KFC's last year (2011) Net Profit of RM144 million, that translates to 23x earnings. Yes, KFC is a cash generating business, but this business still needs cash for expansion. EPF owning KFC will be in fact more beneficial as Johor Corp would probably be squeezing the cash harder than EPF.

I am not able to speculate on why the takeover takes so long to be completed. Who is not happy here? Minority Shareholders? EPF? YUM! Restaurant, the owner?

I already know that EPF is to take 25% stake of KFC, but wouldn't it be better for the fund to take up a majority stake? I think that would be less controversial and more beneficial.

By EPF owning KFC, I perhaps will frequent KFC more than McDonald's.

Sunday, September 16, 2012

Airasia experience: You do not play by the rules

Now it seems that Airasia may not be acquiring Batavia Air. What could have happened.

You should know by now that Airasia, under Tony Fernandez does not play by the rules (or rather whims and fancy) of each respective country that they it is operating in. Dealing with governments, they are always tough. Throughout the 10+ years that Airasia has been operating in, "simple" has never been in the dictionary of the airline operation business. You play by the rules, you are already dead by now. You get routes, you do not get routes. Unfortunately, that is the case and scenario of the airline business.

Prior to the MAS-Airasia share swap announcement, there was rumour that Airasia was moving its base to Indonesia which of course Tony denied. Of course then, after that Airasia announced the working partnership as well as share swap deal with MAS which I do not see the logic. Story turned, the share swap was off and Airasia was back to Indonesia and in fact they announced the acquisition of Batavia Air. Look at Batavia Air. The acquisition is never for the synergies but for the immediate penetration of the Indonesian market. The planes are not the same, The age of the airplanes, I am sure Airasia would be replacing them. The routes and agencies are probably what Airasia is going for. And then, there must be something wrong with the statement by this Indonesian minister. Anything wrong here? Something to do with someone is not getting what he wants? These guys have to be brought to their senses. On one end, they want to improve the efficiencies and status of the airline industry in Indonesia. On the other end, something else are more important.

Then of course with our Malaysian Prime Minister's endorsements, the set up of Malindo Airways. Scaring tactic? Of course, I am pro competition, but why an Indonesian airline. Why not Jetstar or any other private airlines that are more established? Then who is NADI? You do not bring an amateur to fight against a professional. As much as I like the stories of underdogs, most of the time, the David(s) suffered losses to the Goliath(s) - sometimes heavily.

The one advantage which is all above the rest for Airasia - operational efficiencies. As I have said, it is not easy to manage the operational efficiencies for an airline company and no country can deny that. Government will always play "hide and seek". They will come back seeking for help, in the end. As in the case of India just recently when the country opened up the airline industry after 5 years of deliberation, allowing 49% foreign ownership. You know what - because many airlines have failed and when comes to this stage, only then government come to their senses. Yet again, do I see them reversing their decision? This is why Third World countries will always remain Third World.

Saturday, September 15, 2012

The Glenealy experience: How do we avoid them in future

After reading through the frustrations and anger that the disgruntled minority shareholders had gone through at the EGM for Glenealy, it reminds me of one event which I went through myself. Back in 2005, I invested in a now delisted small company with very attractive numbers during that time. Cash - RM18 million, market cap - RM20 million, business profit - RM2 to RM3 million every year hence the PE is below 10x and with such cash - attractive? Then, out of a sudden, the company proposed for a purchase of a VOIP business (at a time when that industry was on a downtrend) with Net Asset of RM1 million for RM24 million cash. It was approved at the EGM and let me tell you, I shouted - of course to no avail.

That anger, let us channel it to somewhere else and avoid these mistakes at best we can. How?

Management and owners

If anyone look at the numbers first in a company evaluation, change that approach. Look at the management team and owners first! Only if you are comfortable, then only look at the numbers. For example, I do not even bother about Glenealy even though the numbers can be attractive. Not that I do not have the time but look at who owns the listed company. They are capable family-run business. Desa Park City rings the bell? The development made many property investors rich. (Hence, this does not show that the group is not able to create value) But, the biggest problem which I am not comfortable with the group is - it is not run like a public listed company. It does not have the mindset of a public company. What is the most significant trait of a public company? Sharing.

Samling Group which controls Glenealy is a complex group despite they can be simplified. It has several listed companies in Malaysia and if I can remember, it has another in Hong Kong. It has many privately owned concerns. This is the biggest concern that I have. There you are, a very rich family group with strong connections in Sarawak especially but with many privately owned companies.

This shows that their wealth are not dependent on the public listed ones. Anytime there are good business opportunities, they may pass it to the private ones - possible? Humans are born greedy - remember that. Warren Buffett used to say that he had 99% of his own wealth in Berkshire Hathaway, the company he controls, his trademark-ed company and he earns a USD100,000 salary a year from that company. What does that tell you? Focus and concentration. Sharing and willing to spend most of his time on that sole company - because his wealth are all there. I am very sure Mr Buffett is a very greedy man as well but he knows how to share.

Very controlled shareholdings

Look below.

Who do you think could be controlling 92% of the company with just 43 shareholders? Remember, this is a family run business.

Underlying value
Of course I should not say this, if the company is too attractive in terms of valuation and with a very strong balance sheet, the tendency for the owners to delist the companies becomes very high. This is especially so when they have kept a substantial liquid and valuable assets in the group. Who wouldn't? Have you heard of LBO groups. They specialize in acquiring and delisting companies which are attractive with hidden unseen assets in the balance sheet. These are not illegal or wrong. If I am an owner, I would want to buy cheap as well. The issue here is that the controlling shareholder has a very strong control of the listed company and they have the resources (easily) to delist the company at an attractive price. I believe Glenealy has a very small minorities and sad to say their voices are not strong enough, but what to do, we are minorities. What we can do is to invest intelligently and not just look at the numbers. (Glenealy's minority shareholders are smart too as they know value when they see one, but the majority holder has the upper hand.) Stocks investments however is much more than that and everyone (including me) are still learning.

At least though, these investors in Glenealy had profited from the shares as in the share price trend below.

Friday, September 14, 2012

Between making money and needing money

Investing into companies that are able to generate cashflow is important. Otherwise, why would we put our money into these companies for, other than for fun betting. There is no harm injecting more cash into these companies, however the trick is whether they are able to pay us back more in future.

As an investor, I have looked at companies in the following 5 categories:
  1. Needs cash but most probably unable to raise them;
  2. Needs cash and able to raise them, but whether the turnaround is achievable;
  3. Needs cash, able to raise them and has proven to succeed many times before;
  4. Produces enough cash but still needs them for growth and expansion;
  5. Produces more than enough cash hence dividends are very high.
Now, let's look at the companies and see what are the traits of these companies in Malaysia especially. What types of companies come under each category.

Type 1: Needs cash but most probably unable to raise them

Who are they: Quite a number of the ACE market companies and some especially the PN17 companies. Most of the times, we bypass these companies as the financial situations of these companies are so bad that it is wise not to even consider buying. Unless the business itself is viable and there are identified parties who are confident enough to turnaround the companies, do not even touch them. Once a while, you would notice that these companies are able to raise some private placement funds but they have become trading stocks i.e. the shares have turned to the hands of market makers or syndicates.

Type 2: Needs cash and able to raise them, but whether they make more is questionable

These companies need funds for growth. They have some believable stories. That's why they are able to raise funds. However, while the plans and business model are believable, the execution sometimes lags. These companies have the ability to raise more funds but unable to deliver. They will continue to churn out more business reasons and investors somehow continue to plow in more funds for them. In most cases, investors are failed by the attempts by these companies to do too much as the business are no longer viable - as there are little opportunities for these guys to have a strong positioning. More often than not, the industries they are in are still attractive but they are not able to dethrone the incumbents. This sometimes makes investments in these companies very frustrating.

Some examples: MAS, Green Packet, Catcha Media. 

Type 3: Needs cash, able to raise them and has proven to succeed many times before

One good example which I can immediately think of is Airasia. A good growth story. However, as the business that it embarks in is a very high capex venture type of model, the business will need more funds. For now the funds are for expansion. In future, if they are done with expansion, they will need funds for replacement of their fleet. Airline business will continue to be as such. No airline will be a pure cashflow generating business by itself as the successful ones will continue to be needing funds.

Once, they have grown to a sizeable and successful business, they would probably be able to grow by themselves without needing anymore equity cash injections. SIA is one example. From there, these companies would have progressed to Stage 4 or Type 4 companies.

Type 4: Those with enough cash for their own growth but will not be able to provide much dividend returns to investors

To me as an investor, this is the most attractive group. These companies have time and again proven to be successful. They have established brand names and strong capabilities to attract good management or they already have the people to successfully execute. Most of the time, models are already in place for growth.
The problem with this group however is that there are always questions on whether they should continue to look for opportunities or stay more conservative and reap the rewards that their businesses are able to provide for. In Malaysia, these companies most of the time are conglomerates. Names such as Sime Darby, Genting, YTL, IOI comes into mind.

Type 5: Strong dividend generating companies

The darling for investors for now. Names such as BAT, Dutch Lady, Digi, Maxis comes into mind. Sometimes, these companies are paying high dividends for a reason. They need to pay dividends or provide more cash for the parent to expand. Hence, on paper while these companies seem to be good growth generating companies, in actual fact the group is still expanding. Digi (parent Telenor), KFC (parent Johor Corp), Maxis ring the bell?

Investors who invest into the ones that pay high dividends however are enjoying potentially lesser growth opportunities but more predictabilities. These type of companies are more predictable as more often than not they are operating in a more stable environment. However, besides the cashflow from the business that they are operating in, more often than not, they are not able to find opportunities elsewhere. That is the reason why they distribute most of their cash.

Which type of companies are you interested in?

Thursday, September 13, 2012

Malindo vs Airasia

I think if the drop (from RM3.30 to RM2.95) in Airasia's shares are to be taken as a signal due to the launch of Malindo Air, do take a note of the joint venture. Based on track record, the JV party who probably would be bringing more food onto the table i.e. giving a threat to Airasia is the Indonesian party - Lion Air, not NADI. However do check on Lion Air in wikipedia.

I have mentioned before that a probable factor that Airasia is able to have a stronger presence in Indonesia is due to airline safety in Indonesia. The track record of airline safety in Indonesia is poor and probably the government of Indonesia felt that it needs to improve on that. Airasia is a Low Cost Airline but it is an airline with good track record in terms of airline safety. It is a private airline. It does not have the baggage of a "Scoot" partly owned by SIA, which has a low chance of getting into another country's airline ownership. SIA has tried owning a Chinese airline before and the attempt was rejected by the Chinese government - an example.

The more I looked (or searched) at Malindo Air, the more I think this is just a scare to show to Airasia that if Airasia can move some of its operations to Indonesia, the Malaysian government can do the same i.e. attract an Indonesian airline to partner with a local Malaysian here. The problem is though that this Indonesian airline does not have the standing of Airasia.

I am just thinking - is this due to open skies policies or more of a "dare" thing...whatever it is, competition is good. However I felt this is more like - if you attack my base, I will attack your base back kinda thingy?

Wednesday, September 12, 2012

Err...we could have gotten more at RM4.45 IPO price

EPF claims that the position it has taken on FGV is a long term bet. Well, I would say that it is a very rationale answer. After all, FGV has big plans with downstream investments, having a large landbank for plantation, expanding to Africa etc.

However, my say is that when FGV was looking for investors, EPF could have asked for a larger share (especially the MITI portion). FGV has no problem with float, so why not ask for more IPO shares at RM4.45 which was the original IPO price? I have to agree that FGV has some fundamentals considering that it is one of the largest palm oil planted landbank company. With EPF largely invested in Malaysian equities, I am not surprise of EPF's involvement in FGV. I see EPF buying beyond 10% in fact. It is a no surprise as EPF does own many large Malaysian companies beyond the 10% holding. What I do not understand is that if it sees FGV as a long term hold investment, why not ask for more IPO shares?

Instead, EPF has been buying off from the market at between RM4.70nish to around RM5.25. That seemed like buying off from short term holders especially the MITI recipients. What say you EPF?

Given more at RM4.45, then the EPF contributors would have made much and probably you inclusive. IPO is never a sure win, but the way the purchases are conducted by EPF, KWAP etc provided the indication that they are there to buy at a premium despite selling pressure.

This action by the fund where it is more willing to buy off the secondary market indirectly assisted the ones that were given IPO shares. Is the fund being used as a tool to help the pre-IPO investors or is this what you call it long term investments? What about a bigger share for your contributors by asking for a larger chunk of the pre-IPO or IPO shares next time?

Other article on EPF's buying of FGV:

EPF, KWAP continuing to support FGV?

Malindo Airways: Impact to Airasia

Tony Fernandez says MAS will be affected more. What do you think?

Malindo is a low costs airline operated by NADI (51% - Malaysia) and owners of Lion Air (49% - Indonesia). Hence from this news, what do you gather? Low costs carrier business is opening up. All the better. Will there be overcrowding? For sure there will be. Few or many will "kaput" in the future.

The opening up of the airlines business goes to show that the airline industry is to be shaken up. There will be a change in business model as well as how people travel. However, more often than not, the surviving players will be few.

The airline industry was shaken up in US before. Many airlines have given up or went bankrupt. Names such as American Airlines, PanAM are either no longer around or in trouble.

In the business where the final buyer is the consumer itself, you will see few survives. This is different from the B2B business.

High barrier of entry

The fact that airline business is a high barrier of entry business does not deter quite many to attempt at targeting this business segment. Aircrafts are not cheap. So are the systems that are put together for this business. The trick is not just in the pricing but the traffic pull by the airlines to people who purchases. Airasia, if you notice does this very well.

The high barrier of entry will become lower, actually. Once bankers believe in the business model, they now are more daring to fund. Also, once the skies are more open, it will allow the operators to obtain routes more easily, I hope. This is positive for Airasia, a private operator as it is no longer a Government to government initiative anymore to open up routes. Countries are more willing to open up routes due to competition as travelling becomes a race to pull in visitors - business and pleasure.

All these are positives for Airasia as it is the largest, fastest and most successful Asian low cost airline operator. Usually, the one that has that trait will win as it is the race to be the biggest and most cost competitive. Unless, it becomes too arrogant - things can change. We shall see!

Meantime, you notice Airasia's price has pull back. I am buying!

Sunday, September 9, 2012

EPF, KWAP continuing to support FGV?

Should I call it support or should I deem it as buying from opportunities? If you read the EPF's Chairman's statement, he calls it buying from lower price opportunity. I beg to differ in some cases. Do look at the trend below. EPF has been buying FGV daily. If I am buying smartly, I would let the share price drop rather than continuing purchase.

If I put the trend into a chart, please see below.

EPF, KWAP's purchase have been on uptrend while FGV's shares on downtrend
As an investor (value that is), I may sometimes continue to buy the shares on its downtrend. Of course, you can't call me supporting the share price as I only buy in small quantities. However, both EPF and KWAP have been buying a huge percentage of FGV's daily trade. Remember in my previous article, find out who have been provided IPO shares of FGV (read those). These trend are seen in IHH's IPO as well together with another upcoming large IPO in Astro. I could not wait when the lock up period is over when the cornerstone investors are allowed to sell (especially IHH). Will these shares be bought in even larger quantities then by these pension funds?

I am just wondering (can I call it) are large funds being used to support these stocks? Is this the reason why large Malaysian IPOs have been doing well? Who are to lose from here - you tell me.

Thursday, September 6, 2012

Cypark: Warning signs

There are quite some positive evaluations on Cypark - a renewable energy company. It has all the "Buy" calls from investment research firms, blogs etc. I do not claim that I know the business well enough to make a call. However just would like to highlight on how they make their claims, billings etc.

Let me highlight where I do find worrying:
  1. it has all the politically linked people in the organization - good that it gets projects, but BAD that will it deliver? This delivery issue will be magnified from the 2nd point below if it is not good at it.
  2. receivables - let me highlight this based on the Balance Sheet.
Revenue of about RM160 million to RM175 million over last 2 years but receivables of more than RM232 million and growing...
On the receivables, it has passed through Ernst and Young - the auditor (Big 4). Now, let me highlight another part which I have picked up. It says below, "Revenue recognition - There are circumstances where revenue is recognised based on work performed but yet to be certified by customers, which are commonly encountered in the final claim submitted upon the completion of the entire project. Hmmm...I wonder how does the company know how much to bill when the customers has yet to acknowledge the completion of the work? There is no invoice yet as it seems from what I read. (I know to a certain extent based on contract, but still it is yet to be acknowledged.)

Cypark has huge unbilled revenue - RM194.4 million as at Financial Year 2011 - more than its entire year's revenue for the same year.

Another thing, it is not that the company has low debt. It is burdened with debt of RM169 million - ya, you can say that it is a high capex business hence the investments are needed. True.

But can someone explain on the unbilled revenue and high trade receivables - which until now is growing. I can't claim I know this well - but it is good to follow the progress in future.

Astro-Maxis tie up: Wake up guys!

So at last Maxis and Astro decide to do tie-up, although the nature of the tie-up is yet still blurr. What was not possible due to each party's "protecting the brand and turf's" mentality, is now made possible probably from the Number 1 in this case - Ananda?

What is the outcome in this?

Astro is way-way stronger in terms of content production and channels delivery to the masses in Malaysia. It is Number 1 by far. Who is Number 2? Media Prima - some may not even know the name ... err TV3, NTV7 ring the bell?

In my previous article, I have mentioned at length of Astro's dominance but yet its growth is to be curtailed in future not due to local competition but the nature of the content deliveries technologies (and content itself) moving forward. IPTV is to gain dominance and who has the best infrastructure in terms of IP delivery - TM. Astro's delivery infrastructure is old!

Maxis rents the HSBB (fiber) infrastructure from TM. And from there, Maxis offers its own fiber packages to the Malaysian masses. Sounds confusing? Well, let's put it in another way. TM build the roads with the help of the government. TM puts its own toll booth and Maxis does that as well renting the booths and toll roads from TM. Who provides the transport? Astro. But so far it only offers that to Maxis using the toll roads that Maxis rents from TM.

Do I see something missing? There is still the monopoly element here. Astro does not compete against TM. Neither does it competes against Maxis as Maxis is not into content. Not that I see it.

Where are the tie-ups between Astro and TM, Digi, Celcom, P1, YES?

Bring it on. And lose the monopolistics element in content deliveries! Drop the exclusivity(ies).

Value is what you get, price is what you pay

Wonder who says this? What does this mean? This proverb means that each individuals perceived value on a purchase could mean differently. We may pay the same price, but we may value them differently. A stock that I bought with average yearly return of 5% could be perceived differently in terms of value to another person who gets the same return from the same stock.

It could also mean that while currently I see value in bank stocks in US, others, may see continued warning signs due to the yet to be solved real estate crisis in that country. I may think to a large extent, while Malaysian stocks are relatively expensive although with decent consistent growth (and see other places as more attractive), others may think of it differently due to the low interest rates offered by banks.

People who do not invest into stocks or anything else for that matter may still see haven in bank's deposits - and they may think of it as safe bet while stocks continue to be risky bet. Those kind of people will always say "high risk high return". Hence they go for low risk bet, which is 3% or less, currently.

Some may put their money into gold. Some into other commodities. Well, value is what you get - or perceived to be. As long as you say to yourself you want to learn by getting your hands dirty.

Wednesday, September 5, 2012

ECM: Something interesting for traders?

For many many years, I have not looked at any stand-alone investment banking (or stockbroking houses) stocks. It is because the performances of these companies are almost like "short term speculation" in the market itself. I have no ability to foresee what is beyond the subsequent week in terms of how it will perform. You will have noticed that most of these stocks are trading below the book value which spells the sentiment over these companies for many years now.

Now, the merger between Kenanga and ECM Libra ("ECM") has changed my sentiment a little bit, not for the fundamentals but for the short to medium term trade opportunity. One of the directors of ECM has been snapping up the stocks of ECM over the last few weeks. Of course, he is the Managing Director and yes, he has control over the company himself but that also calls for the "siren" for me to do a checkup on the deal.

Funnily, if you search around, I could not find much analysis about this deal. However, let me provide my version. Basically, ECM is getting out of the investment banking business by selling to Kenanga for an amount said to be RM875 million. ECM's directors have the same sentiment as mine i.e. stockbroking (or IB) is a tough business. Remember the franchise thing I was talking about in an earlier article. When comes to this area of business, the dominant franchise is CIMB (of course). If you study properly, it most probably dictates the deals surrounding the government controlled companies - be it already owned or not. IHH is one company created out of nowhere - remember? What other deals are left beyond government nowadays?

How is the deal from Kenanga to ECM? Kenanga is paying ECM 1.27x book value. There are better deals (example OSK-RHB) around but most probably ECM's majority shareholders are trying to get rid of the business as fast as possible, anything premium to book value is a premium!

Kenanga is offering 3 things (to ECM) for the deal:
  1. cash of RM660 million;
  2. Shares of Kenanga at RM120 million par value. It is actually worth RM79.2 million as Kenanga's shares are traded at discount to par value;
  3. RCULS of two tranches at around RM95.5 million in value. The RCULS is tagged with a 5% coupon to it.

Offer from Kenanga and what ECM gives back to its shareholders. See some of the calculation.
From the sale, ECM will be entirely out of the banking business. Unlike the OSK-RHB deal, ECM did not even bother to keep the shares of Kenanga, which it in fact offered (all) to the shareholders. Now what keeps me excited from the deal?

ECM is proposing to distribute the following to its shareholders:
  1. cash of RM442.6 million;
  2. all shares of Kenanga worth RM79.2 million at the moment;
  3. Series A of the RCULS assuming certain condition is met - it needs some approval from the SC on taxation matters apparently.
After the distributions, ECM will be keeping around RM300 million in cash as well as a small asset management company which contributes around RM2 - 3 million in profit. It intends to keep the listing status with a view of using the cash for investments. (I hope that it does what it says.)

I have done my calculation (as above). It seems that shareholders will be getting about RM0.69 return per share assuming the Series A is given up as well as Kenanga's shares stays traded at RM0.665. The cash that ECM is holding after the distribution, is worth around RM0.36 per share. Would ECM's shares be traded at a huge discount to its cash holdings? I do not think so. It perhaps would be trading at 70% to 80% discount. Anything more would deem the company as being way undervalued.

Now, assuming it will be trading at 75% of its net asset value after the exercise. That comes to total value of RM0.96 for ECM's shares currently, whereas ECM is now trading at RM0.86. That's easily a RM0.10 discount and with RM0.53 to be distributed in cash, it's attractive for any short term traders. Another RM0.06 i.e. RCULS is to be given a year later, assuming the Series A are distributed to shareholders as approved.

What about Kenanga's shares? It is worth another RM0.10 (to shareholders of ECM) from its trading price of RM0.67. I do not think Kenanga will drop too much as it is already trading at much discount from its Net Asset Value.

Do you think that ECM is worth it rather than keeping your money in the bank for the next 6 months? For me, it is worth a try as probably the reward far outstrip the risk - and we are supposed to learn how to manage risk here, not avoiding them!

Note: If you read the announcement, do not be bothered about the new issuance from the ESOS as ECM's shares are now traded at below par value, hence nobody will exercise their rights.

And of course there are political twists to this stock which makes ECM sells the banking unit. ECM is not a simple stock (politically - look at some of the director's name), but the cash and other liquid assets distribution may be worth it as its cash holdings (post distribution) to possible trading value may make the stock worth it for half year to a year trade.

Tuesday, September 4, 2012

Value is not about Low PE alone

I know many investors who are value investors would look at PE. I do. PE is the simplest benchmark to evaluate how attractive a company can be. But we cannot use them all the time. In fact, we can only use them only as a guide. Let me give some examples for this article. You may think of many more...

Value investing in Stocks is about investing into great business

The easiest way into any investment is about your comfort level. When investing into certain companies, as I noticed, some people have commented that they buy because so and so company gives good dividends and has low PE ratio. Are you sure? Can they last?

Let's look at it this way. A company may provide good dividends but are those dividends sustainable. An example, Masterskill gave 7 sen dividend / share in September 2010 and 7.9 sen dividend per share in May 2011. During that time, the price seemed to be cheap - based on dividend yield that is. However, those numbers were not sustainable. Look at what happened now. This is because its business is risky. It did not have fundamentals. It was relying too much on government's loans to those students who did not know the options that they had. Getting education at the end of the day is about getting jobs from the qualifications that they obtained. Many of the nurses that Masterskill trained could not get jobs as the demand was not as much as the number of trained nurses they produced yearly. What happened then? These students could not get the jobs they were looking for, hence their loans from the government are not paid. PTPTN, the lending party hence came up with tougher rules.

Compare that to a company that I have liked. Oldtown. Originally, I have gone on the unconventional to say that Oldtown was an attractive IPO. Most IPOs during the last few years underperformed. Oldtown underperformed actually for the first few months. However, for one you can easily noticed this business that the owners built is there to stay. Customers frequent. Its location are fantastic. (Ever wonder why McDonalds prefers to have outlets along the highways than in a mall? - make themselves noticeable - they go on eyeballs per dollar invested!) Oldtown is not Starbucks or McDonalds but it is a company which gave some goosebumps until rumours that Vincent Tan who owns franchises for the two offered Oldtown's owner for the business. I wouldn't be surprise actually.

Why? Sentiments may say that Oldtown is facing a very competitive challenge in a very competitive space. Yes again! Remember PCs. Were PC business competitive? Most competitors failed. Lesser and lesser survived. And those who survived did very well at least for a period - Dell, Compaq, HP, Acer, IBM. Starbucks has that similar competition. It is now a USD38billion company - still with tonnes of competition. Well. this is because the business makes sense. That's why there are tonnes of competition. But only few survived and those who have proven to do so will most probably thrive. Starbucks thrives.

Business is about collection

Simple logic. Why else would you do business for. List them? But to face tough collections problems. See below. EA Holdings trades at about 4x PE. How low can it go some more? But its (yet to be collected) collection is about 1 year its revenue. Collectible you may wonder, I don't know actually - I have doubts.

Big business is easier actually

Listed in Malaysia, there are some franchises - but not many. Most are small companies. Nestle is a franchise for its cocoa drinks - Milo, Nescafe. Oldtown and Airasia are successful franchises which are built amazingly over a short period. Other franchises - CIMB, Public Bank, KFC, Amway etc. To run these businesses are much easier than most SMEs CEOs. These large companies CEOs may not agree with me, but at least they do not worry over money, paying salaries, survival. They mostly worry over their own survival first, then only the company. Try to be in position of SMEs - some of them are listed. If you look at the balance sheet of these smaller companies, they have no budget. Each and every action needs to be thought of properly as they have limited funds. Raising funds is tough as convincing people - such as investors, bankers. Now you know, that Tony Fernandez has said it many times - where were the banks when he needed funds. Now he can have it, It was tough though when he started. Believe that.

Because of this - would you pay a higher PE for larger companies which already has a franchise - be it in its process or brand? If you do not believe me, try looking for some of the smaller companies which has low PEs - invest in them. Chances are for them to survive they have to be consistently successful not once, but many instances - much tougher. Because of that, they are unable to build a solid franchise name.

Hence, in future when invest in value, try thinking all of these. It can be easy. And do not think complicatedly.

Monday, September 3, 2012

Maxis, Celcom, Digi: Who is grabbing whose market share?

At the stage where revenue from mobile business is growing at a snail pace, it is important for each of the big three telcos continue to chip away market share from its competitors. As such, a simple statistics - "revenue" is much important to have a view of what each mobile represents and has managed to build on.

Why as simple as "revenue" number is important
Much of mobile players investments are fixed investments i.e. the equipment investments and staffs costs (except for the subscriber's acquisition costs). As a result, it is very important for these guys to build on revenue. This is the stage where we are able to view on who is able to build on its brand better, and who potentially has lost market share via higher churn rate.

These mobile players (except for Axiata) have become largely a dividend stock with dividend per share just as high as earnings per share. Why Axiata is not a full dividend stock is due to its regional presence than just Malaysia.

As a result, it is important for investors to still have a view on who is growing faster.

"Click the picture for larger view" - basically it tells of Digi has better revenue growth compared to Celcom and Maxis which came in last.
As you can see above, the one that is able to produce bigger revenue growth is Digi with a 3-year Compounded Quarterly Growth Rate ("CQGR") of 2.05% against Celcom's 1.44% and Maxis' 0.23%. Among the three mobile players, CQGR over the last 3 years was a mere 1.10%.

Produce the market share on a pie chart, it looks like below.

"Click the picture for larger view"
Now, as you can see, Digi's market share among the 3 was about 24.79% 12 quarters ago and it has now grown to 27.73% in its latest quarter numbers. The increase in market share for Digi is at the expense of Maxis with Celcom registering growth from 32.06% to 33.37% revenue market share among the 3 mobile players.

In fact, the numbers that I took includes some revenue (although minimal) from fixed broadband for Maxis, as now Maxis is more actively into fiber broadband than Digi and Celcom. I have not heard of the two players dwelling into fixed broadband actually. Over the last 12 quarters, I can in fact go on to say that for the mobile business alone, Maxis may not achieve any revenue growth perhaps. If that is that case, things does not look good for Maxis in terms of its competitiveness as it is losing market share to its other 2 competitors.