Saturday, November 29, 2014

Strategies for 2015

What OPEC decided about 2 days ago is very significant to the market as well as the economy. It has decided to keep the production among OPEC members to 30 million barrels a day. Some say that the decision is to allow it to eliminate the weak players in the shale oil boom. Many players in the shale boom have been borrowing to put themselves at play for the boom. As much as 15% of the junk bonds are being issued to energy companies. Yes, to me that is true, but I also believe that there are economic reasons and as much as political reasons.

Imagine what a $60 per barrel would do to some of the net oil producing countries - Russia, Venezuela, Iran? US does not need to send troops to fight but this war itself would have a very strong impact to US in its international political policies. Putin would not be so bold and confident anymore.

On the local front, low oil prices especially when it is traded below $70 per barrel, it seems would not be good for Malaysia. Petronas came out with all guns blazing saying that it cannot be the one who will be solely helping the government's coffers anymore. So we know that for this year Petronas contributed RM68 billion to the governments budget. That's huge. Oil price at $75 per barrel would drop Petronas payment to the government to RM43 billion i.e. a reduction of RM25 billion. Is it so?

In any case, in Malaysia we are seeing the reduction of subsidies on all front - from sugar to petrol. To me, that is a good thing and it seems that it will be the new normal for Malaysians. For 2015, we are seeing 2 significant things. GST while petrol will go free float. On the international front however, many commodities are dropping like there is no bottom. With that what are the strategies?

Oil and gas - obviously it is already seeing drop such as what happened to Bumi Armada and Sapura Kencana just over the last 1 week. Obviously, I do not foresee this sector to be able to see the light at the end of the tunnel soon. Perhaps few years down the road but not 2015. Imagine Petronas is even contemplating postponing or shelving the Pengerang project. That is significant as Pengerang is supposed to allow Malaysia being as a major player or at least a competitor in the bunkering business.

Consumption business i.e. retailing - unfortunately for Malaysia the drop in oil price is not good for Malaysians as we are actually paying more for petrol or diesel as opposed to many countries we read of. So, this sector will not be showing a rebound soon until we Malaysians are used to higher or floated oil prices. The GST will also do not good to this sector at least in the short term.

Palm oil - Malaysia is lesser of a significant player in this sector now that Indonesia is the largest palm producer and they are running away as the leader. With that, what we have been used to see may not reoccur again. Malaysia may not be the one who will be able to dictate the market. It will now be Indonesia. That has already happened several times as Indonesia has been the one taking the first shot. In chess it is like you have the white pieces and usually that is a slight advantage. In any case, Malaysian palm oil companies will continue to do well despite the prices not enjoying what they used to be. My only problem is that, their share prices are not attractive yet.

There are several sectors whom will benefit from the drop in commodity prices. The first will be the construction sector. Prices of raw material which comprise a large portion of costs to this sector will drop - or already and they will enjoy a better margin in the event these companies have secured the contracts in advance.

Also, probably surprising is that the margin for properties sector may not be that largely impacted as originally thought despite the GST effect. They are just complaining. The bigger factor however will be the Bank Negara's action - i.e. whether will it be loosening up the lending guidelines especially to first time house buyers. A week ago, China did the unexpected - reducing its benchmark lending rate by 40 basis points. That again is huge. It may impact the decisions of many other central bankers in the region - Malaysia included.

For me as compared to 2014, I may have to relook at the portfolio especially for the retail businesses as it seems that e-commerce is making an impact although many of these companies are yet to make profit - but they are definitely a disruptive factor. Jobstreet will be out of the way now as it has already completed its sale of the online business to Seek. With that, I am looking for new opportunities.

The above mention of cost reduction for construction sector may bring positive impact to Keuro. Definitely, Parkson and Padini may be impacted by the GST as it is already, due to stronger competition, this year.

The bad press on Malaysian Airport - I am just hoping that the single sector which benefited from the low oil prices alone - airline would bring positive impact to MAHB, with higher traffic.

All in all, I think 2015 will be better than 2014, despite the pessimism.

Will taxes on vehicles drop as well?

Now the burden on rakyat to claim that we are the ones that causes inefficiencies to government spending as the bulk of government's expenditure is on subsidies is soon over. Petrol is going to be on managed float from 1 December 2014 which means that there is very little and no subsidy from the government at all.

At last, I feel that this is one of the best decision to be made by the government as we have been doing all the wrong things in the automotive, transportation policies. We have subsidies on petrol and diesels, but high taxes on vehicles, lots of tolled roads.

It is time to reverse that, by eliminating subsidies, reducing taxes as it have been burdening the people. There is no doubt that the high car prices and many years of financing (up to 10 years) for cars is a burden and indirectly causes consumption borrowings to be high. By reducing taxes on cars, it also means reducing on borrowings for the people. Forget about those who will own more than 1 car per person. That's a small community. It is time to reduce burden on people with high borrowing costs on cars especially to the youth in which probably car is the first ever significant debt for them.

Saturday, November 22, 2014

Hiccup for MOL Global

The number rule of thumb for newly listed companies are "To treat your CFO well".

This is because is he or she resigns just after the IPO, it usually spells trouble for the listed company. This is just what happened to MOL Global. Barely a month after its listing in NASDAQ, which is supposed to be a good thing as it was already valued at more than RM1 billion with that listing, has seen its shares dropped more than 50% yesterday.

The way investors community looks at it is that usually the burden of the reporting relies on the CFO and if he is not happy and resign, that is a bad sign towards the financial conduct of the company.

This is especially so for a company that has just listed, more so on the news that its CFO resigned after having joined for less than 3 months. To top off that it announced a postponement in announcing its results.

Well, I have made my review or opinion on the company previously before. Seems like it is a lesson learnt through the hard way for MOL in Nasdaq although it provides them with much higher valuation, but it can also discredit the company easily, unlike Malaysia's stock exchange. Well, it has that short selling tool, as well!

Friday, November 7, 2014

What happened to YFG?

I blame it on myself to even consider it as this stock is highly risky. Firstly, if you look at the below which was last year's annual report I thought that it is a cheap company with its new management having a view to make things right.

The front page of the Annual Report says, "Engineering Change". Two years before that, it did change most of its management, major shareholders and the way they do business. The past management and owner were parties that are connected to a political party. Hence, in usual cases contracts were signed through that means but with poor management.

With the takeover, I was thinking that it could have changed fast. It definitely has proven that is not easy to turnaround a company even with the change in management, change in name and changing the way business is done. In fact, they were so adamant to change that they changed to a Big 4 auditor (may not be a good thing). How many sub-RM100 million companies in Bursa has a Big 4 auditor?

With this, I thought since YFG is in a space where there are opportunities, it would have a good chance for growth. But the company's past probably still haunts the company. If you look at the accounts, its biggest challenge is the amount due from contract customers.

I am not so sure whether these were issues that were brought from the old management. If this is, then their due diligence were not done proper. They were probably too keen to rescue the company from collapsing. Just look below.

I am pretty sure that YFG cannot afford the hit totalling that amount of RM20.908 million, as if it does the company will go under PN17. Usually, if it potentially is a bad debt, many parties may opt to take the hit slowly - I think this could be the case for YFG. As YFG has substantial projects in hand, I would think that they would be able to absorb the impact especially where they have stronger major shareholders now.

But it will take a longer time to recovery. And not as fast as I would have envision.

Probably for the company, the fastest way for it to get back on track are just to do these 2 things:

- raise more capital - capital injection via private placements or another rights. It may also consider acquisitions of contracts (but at this traded price, probably not the best thing to do for now);
- write off whatever that is doubtful.

There is no point dragging over these issues as its business continuity is at stake.

And I think the reason for the health reasons for the CFO to retire is a bit coincidental judging from the amount mistakes on this case i.e. underestimating the amount to write off from one of the projects which ran into a change in management, non-ability to address the qualifying statement by KPMG early and the poor cashflow management as well as having to suspend the stock trading due to the company's quantum of impairment.