Tuesday, December 27, 2016

What is one question to ask Airasia?

To me it is time to be really be excited about Airasia again. At my point of writing, it has dropped to RM2.23, hence even with the addition of shares issued to both Tony and Kamaruddin, its market cap would be around RM7.25 billion. In dollar terms it is around USD1.63 billion. If Asia Aviation, the leasing arm is USD1 billion as assumed, the entire airline ex-leasing is USD630 million. Let's ask ourselves, whether Airasia is a low costs operating airline or a leasing company. If our answer is LCC, we should be focused on how it can be operating advantageously as a LCC.

It is now the largest LCC with Lion Air being the second closer competitor in the region. To me, it is no doubt that USD being strong, it will impact Airasia as a company - not because of its current costs as most of its USD costs are already hedged - for fuel and currency. What is important as a question to Airasia is

How much of its future planes purchases in terms of USD is being hedged?

In the article on the Edge today, it is mentioned by Tony Fernandez
“We are looking good. The year 2016 is set to be a record year and we will build on it [in the coming year]. We have hedged 80% of our [anticipated] fuel [use in 2017], while most of our aircraft purchases are hedged against the US dollar with fixed interest rate loans. So, our risks are mostly covered,”.

For 2017 and beyond, Airasia will be getting lots of new planes to the tune of 20+ every year. That would be in USD. If it is already hedged partially, then that's good. If it is not, then not so good although it is not fully doomed as firstly, it is competing against other airlines that are also buying in USD terms. Prices will be adjusted according to competition. Secondly, if it is selling its leasing arm, Airasia is supposed to be leasing back some of its future planes from the leasing company in USD and I am sure the sale would incorporate the future planes (bought at attractive price) which are discounted to today's valuation (in USD). I am quite sure that the current assumed USD1 billion valuation incorporates the purchase terms of upcoming planes into the leasing arm - not just its current fleet.

Hence, if we assume USD is good pricing today, Airasia should sell its leasing arm. If we think USD will appreciate further over the next 5 years, then not so good for Airasia as selling the leasing company would deprive it of a better value in Ringgit terms in future.

I am not good at seeing where USD will head in the future but one thing for sure, United States cannot be a competitive country if its USD is too strong. Its imbalance of trade would grow worse and that is not what Trump wants.

Whatever it is, I am thinking it is oversold basically due to its high foreign holdings - which is good if we want to buy cheap, wouldn't it?

Saturday, December 17, 2016

Top Glove: Where it did not tell the truth...

Top Glove is a company which has done very well over the last decade or more. It has done well for itself, shareholders and the management. The CEO has done well too hence it has grown into the largest rubber glove company in the world. There are not much it needs to prove but to be more honest and be transparent for its shareholders.

I wrote an article last year. Actually the gist of that article was on Top Glove.

The most part of it reads as below:
It is easy to think that all companies that sells overseas (exports) their goods or services will do well in 2016. Nobody if I were to ask 12 months ago would think that our Ringgit would have dropped to 4.30 against USD. Nobody would expect the unusual exposure of the supposedly wrongdoings of our government would happen in 2015 - true or not many still think that it is true.

Same things may happen again for 2016 - I don't know. If one is to look at now, companies that mainly depend on local input cost and sells overseas would be an easy pick. They are of course all the companies such as the rubber gloves - Top Glove, Hartalega, Supermax, Kossan - or companies like Wellcall, Chin Well or the furniture companies like Latitude, Homeritz - or those in the electronics exports - Inari, Vitrox or even the new kid on the block, Aemulus etc.

Would they continue to perform. All these companies have already done well and their shares have reflected that - some have increased many folds. Of course, the companies claimed that they are better in costs control, manage the companies better (Hey, nobody would say that they are not good) but in actual fact it is the Ringgit vs Dollar - STUPID! It is the low oil price and price collapse in almost all other commodities - copper, gold, palm oil, iron ore, cotton. That's the story of 2015.

Now, if oil can drop to USD36 from USD100 a year ago, can it go back to USD60 in a year? What if Ringgit improves to 3.70 or 3.80 - let's not be too optimistic that it would go back to the level we see 18 months ago i.e. 3.3. What would happen to all those super performing companies in 2015? Would they look like an Average Joe again? Let's not forget their extra margins for 2015 was the currencies. Nothing else!

Hence a company that usually makes profits of RM100 million back in 2013, 2014 - for 2015 alone they could make RM300 - RM400 million. An example, an exporter that typically makes 10% net margin, just because Ringgit dropped 30% in one financial year suddenly stands to make that extra 30% margin without being extra smart. Hence, if the revenue is RM1 billion and typically the company would make RM100 million profit, they stand the chance to make RM400 million just for 2015 (see the change). There's no strategy involved. That's luck and they were at the right place at the right time. (Nothing wrong with that, but we think that they suddenly will continue to make the same)

But all of a sudden we think these companies are superstars. They are not. They are good but not extraordinary. One if looked further will know that the owners are not stupid and they have been selling. They know that this unusual situation does not come all the time and will not last. But we are that stupid to chase for them to sell.

Why did I highlighted that. Well, as below is the press release after Top Glove achieved its best ever quarter in 1Q2016 (ending October 2015) i.e. last year.

If you read the last sentence, "While we have benefited from the USD, our performance is not reliant on tailwinds, the effects of which are only temporal," Tan Sri... clarified.

What has it achieved in the same comparative quarter for this year? As below for same quarter in comparison, its Net Profit dropped from RM129 million to RM73.6 million. So what happened to the statement "not reliant on tailwinds."

I am not here to attack but when a company wants to provide "releases", guidance, projections etc. they have to be HONEST. Again, Top Glove has done well enough to not having the need to do this. You know, in some markets, the management can be sued by shareholders.

This is its share price after the record profit quarter last year.

Thursday, December 15, 2016

How KFM is dealt with is worrying

I came across the Kuantan Flour Mill (KFM) deal which went into a quick exuberant and I believe tomorrow it will just crash again.

The share price went from around 5 sen to 24 sen within 1-1/2 days of trading mainly due to an indication of interest coming from FELCRA.

Now who is FELCRA? By right, it should be a respectable party - a business entity of the government. Read the information of FELCRA below. It basically reads that it is a party that we can trust.

Basically, the announcement on the first day (13 Dec after market close) is that there is an indication of interest from FELCRA to do a reverse takeover of KFM. KFM, being a company under PN17 and having little life left with negative NTA would obviously jump as a government entity is interested. A day after the evening announcement, it jumped to around 25 sen - more than 4 fold increase. That obviously makes people excited as if there is life if FELCRA is to come in.

Trading price of KFM within last few days

Then FELCRA did a turnaround. Less than 2 days after the letter of intent, it informed KFM that the interest ceased.

Announcement of cessation of interest

I am just thinking, for an organization with FELCRA's stature, wouldn't they be more careful before they send a letter of intent. KFM is a public company and there are enough numbers to be studied before an indication of interest and before a due diligence is made as well. Why a sudden turnaround in such a short span of time? Tomorrow obviously would be a bad day for people who bought KFM on 14 December. And I do not know how to think of this event as it comes from FELCRA, not any organization which sometimes we may not trust as much.

Now the question is who can we trust now after this?

Note that I do not know KFM much fundamentally, except that it is negative NA and under PN17.

Wednesday, December 14, 2016

When is the right time to support a call for cash

I have a question recently on warrants. I believe it came out from an article I wrote 3 years ago, which is here.

The question from this person is as per below:

Hi there Felicity,

I read an old article on your blog regarding on how pure warrants exercise will only enrich the existing shareholders.

Isn't it warrants exercise is almost similar to a right issue? whereas they both:
1.) have the right to subscribe to certain amount of share at a pre-determined exercise price in certain period of time?

How is a pure warrant exercise worse off as compare to a right issue with free warrants as a sweetener?

I felt that it would be good to share my opinion on what's the difference between

1. free warrants ONLY, 

2. rights issue (together with warrants) and 
3. private placements.

The above are all equity fund raising. 

As you can see, all three above are exercise that calls for additional cash from shareholders. If the company is calling for more cash, one very important point to note (or question the company's management) is 


If the company needs the fund for expansion (or improve its debt / gearing level) and as shareholder, if we like the idea, it would be good to support if we have the extra cash. Do note that these are cash calls and the additional funds that the company is asking from its shareholders will go towards the management for them to manage and use.

One should read the prospectus to decide whether the call for cash is warranted for.

Now, let me go one by one as below.

Private placements

This usually goes to the third parties - meaning the call for cash can go through an investment bank and the company that is raising the funds will get help from the bank to help them to raise funds or the company can offer it to parties whom they probably know. Not my preferred method (for a minority shareholder) as this often can go to people they know and those people would get a preferential treatment over the existing shareholders. Why should that be as it is ALWAYS the shareholders that should get the preferential treatment - not another third party.

Only thing when this is good is when, the management or the Board felt a rights issuance will not be successful (as can be too difficult to justify whereas a small group may understand the company better) or the offering is small i.e. a 10% of the existing share base, then a private placement is made. However, private placements of this kind is not transparent enough and we also know that investment banks would be more than willing to help the companies rather than protect the minority shareholders.

Good thing about private placement though is the exercise is much faster than rights.

Rights issue (sometimes with warrants)

This happens when the management who is also the majority shareholders is asking everyone to chip in.

Shareholders have to weigh whether the strategy to raise cash is the right thing to do. I can give an example of WCE (Keuro), where it raised further cash for its equity injection portion for the building of the West Coast Expressway. That, I am definitely ok with it as it allows the shareholders to make decision and the project is a good project. The good thing about rights is that everyone (almost all the time) get the same treatment. A large shareholder will take the large portion, while small shareholders take smaller portion which is equitable.

Main thing to see here is whether the call for cash which will go into the hands of the management is the right thing to do as once a person parts with his money, he has no control except voting rights.

Why with warrant then? More than one reason actually. Sometimes, it allows the company to make the rights sweeter as it gives the party who come out with cash feel that they have more things than the newcomer shareholders. I agree that it is a debatable thing but for the person whom come out with new equity portion, it is still ok to be structured with warrants.

Moreover, the company may feel that they will not need all the cash at that particular moment, hence a warrant that in the event becomes in the money, it is possible for the company to raise more cash in the future rather than diluting the shareholders upfront. Note that warrants does not qualify for dividends while common shares do.

Free warrants (without anything that comes with it)

Worst of the lot. It is usually by companies with management who are speculating with their own stocks. They want to make the shares attractive - first for people to buy more of the parent shares (so that they can sell, usually) as the buyers will get so called free warrants. Speculators have to be warned that it is not a zero sum game for minority, it is a negative sum for minority as the controlling who decides what to do may sell to you above value. 

Second, for the majority shareholders to also sell the warrants as it is tradeable.

Third, if in the event the warrants become in the money, it will dilute the shareholders further and the cash (from exercising) goes to the management for use - in which case whether put to good use can be doubtful.

I strongly recommend good companies not to do free warrants ONLY as it just put the brand of the company into back-burner. Anyway, why would good companies do that as they have reputation to protect. Only companies who have no reputation to protect do weird stuffs.

In any case, whichever companies that are doing cash call, we as shareholders have to study the intention and objectives thoroughly.

Tuesday, December 13, 2016

How should one trade 2017

I looked back at what I have mentioned for 2016. I was not too far off except that towards the end of the year Ringgit dropped to 4.4 against USD. The drop actually happened from mid November onwards as the most part of the year, it was hovering around 4.10. Export stocks dropped as in Top Glove, Hartalega as well as companies such as Globetronics. Hence, those that have been buying those counters are experiencing a bad year.

What do I see for 2017 then? For the next one year, I expect our economic growth to go below 4%. While it does not seem very good, it is not all that bad. Our economy cannot afford to overheat, hence growth of close to 4% is good enough for now. For past many years, our lending institutions including the banks and such like BSN, Bank Rakyat and other lending agencies have been pushing for consumption growth. At least once a week, there would be those who would called me for personal loans. This shows how much push the banks are still towards personal loans. Our private debt to GDP has grown to more than 90%, one of the highest in the region.

2017 may be an election year but our own pump priming is running out of steam mainly because the government is fearing of if it pushes too hard, we may break as our own consumption driven economy has been running out of steam for more than a year now. Hence, anything that is discretionary i.e. houses, automotive would be bad for next year. This does not mean however one should not touch some of these companies as the pessimism has already sunk in since last year.

The good part in Malaysia is that unemployment is still low although I do expect them to get worse. Inflation is still in check and in that respect interest rates are also low.

How about investment?

I am an optimist. How and why as I have been painting the gloomier outlook for the country for 2017? The country (people) probably have been gloomier than me for 2 years now. Foreign funds have not been positive on our stocks.
I have written about our KLCI stocks, few months ago. True enough, if one is to follow the Top 30 index, it would look bad as personally, I do not know which company to put my money into. There are some due to poor long term fundamentals such as telco and oil & gas stocks while some others are due to the state of the economy. Also, these stocks are probably fully invested by our own funds hence they are probably pushed to be overprice (for a while now), with the fundamentals are without much potential for growth. (so, be careful if you are dependent on EPF to bring you your 6% return - the more I think the more I do not think it is possible)

What do I look at

The bad part is very large stocks are not interesting at all. The smaller ones which is better for retailers is not that bad actually. I am looking at a handful of stocks and some of them have become even more attractive since I have looked at them. Who are they?


It is a transport cum travel stock which is very much related to the height of people's engagement with travel be it for business or leisure. The beauty about Airasia is that it is in Asia Pacific, being one of the largest airline growth area - it is the largest low costs airline in Asia and low costs carrier business is flying high. If Singapore Airlines (SIA) is thinking budget, what more an incumbent. Airasia is not very far off from SIA and have a better structure than SIA or any other airlines. SIA is strong in Singapore but Airasia can be stronger in Malaysia, Thailand and many other countries it is operating in. It does not have the problem of being a national carrier.

Of course, many would fear the competition but basically budget is the new normal and Airasia is in the lead. I do expect airspace to open up - and it is even better for Airasia. One year ago, when so much pessimism on the stock was happening - it went to 78 sen i.e. market cap of below RM3 billion. Now it is trading at RM2.51 or market cap of RM8.5 billion (inclusive of the new shares to be issued to Tune Live), is it expensive? Definitely not. I definitely wish I could have bought more at RM1.20, but I bought enough then.

Even today, I am looking at buying the stock as its fundamental is continuing to improve and if the sale of its leasing arm transpire, investors will be able to clearly see its value as its balance sheet will be very different.


I did not catch the stock at RM1.00 traded about a year ago but fundamentally it is still worth more than where it is trading now (RM2.35). Why am I interested? Several factors. It is defensive, hence if economy goes south, it will not be so badly affected as compared to many other types of companies, and it is not expensive - in fact still undervalued. I have mentioned of its value for DUKE 1 and 2. In fact, if economy severely slows, defensive stock typically can be the ones that are sought after.

Another reason is that the founders cum controlling shareholders seem to be willing to expose and create value for the shareholders. Of course they own a large chunk of the shares, but not all the time shareholders are willing to do the right thing - i.e. declare a decent 25sen dividend from an exercise (in this case when they sold 40% of DUKE highway to EPF).

Due to the several projects that the owners are involved in, I believe it is a period where it will want to create value and exposure for its holdings. Additionally, I have studied road infrastructure stocks such as PLUS, WCE, LITRAK etc. Some are good, some are not worth it - such as Silk.

For Ekovest, it is bringing value earlier than another one of my favorite stocks i.e. WCE. Hence if I am willing to hold for WCE, I am glad that one which is already bringing cashflow is now in my horizon.


I guess I am the only one talking a lot about WCE and still losing money over this one stock. You may not like it if I am to say I do not mind losing money for another 2 - 3 years so that I can accumulate more over the period. I have been thinking, even if it is RM2.00 by next year, I will not sell, although it makes me feel good. Hence, might as well let it be 90 sen.

At RM0.90 it is below RM1 billion and looking at a project that is 50 + 10 years (the additional 10 years is if it does not achieve a certain IRR) and a tolled highway that is second longest and situated in the west - I have much positivity over this project.

It may not be a brownfield project but it is managed by a good team of managers.  Only thing, is if you are looking to make money next year, I doubt it. But if you are not looking to put your money that earns less than 5% elsewhere, this is for consideration. That's all I can tell now.


This is one counter which is defensive, even if I say it, no one seems to believe. I traded it at a high price but I guess (just to console myself), it is ok if the amount is small. It is now at 45 sen. It has been bad due to poor financial performance last year mainly from weak Ringgit, weak stock market, hotels have been closed for renovation and what many did not really notice is pure accounting reasons. End of this year, it is changing even if our Ringgit is weakening further.

I am not putting very detail information here but for TA, does enough people know it is the other way round? It owns many assets overseas (and debt as well which are naturally hedged) and if RM drops it is in fact better for TA and TA Global especially. It is a naturally hedged stock against poor RM sentiment. Just that accounting wise, it will not show and in fact it will show bad numbers with accounting losses. How? Accounting playing mind tricks again, as it is forced to declare accounting losses for its foreign currency denominated loans while nothing is done for its assets held overseas.

Since Trump won the election, Tony Tiah has been buying almost daily and there does not seem to be anything fishy from his purchase - just pure fundamentals as TA also owns some stocks and bonds in US as well. I do not treat TA as a long term 10 years hold as it is not as dynamic as some of the companies out there but it is certainly very sweet in terms of being defensive and great value.

Tune Protect

If I mention this stock, the Tony Fernandes sceptic would say I like another of its stock. (Well, I do not quite like AAX actually) I however did mention that this company will have better cashflow as well as less volatility as against Airasia. If Airasia (and AAX) sells more seats, Tune Protect will sell more insurance due to the nature of its exclusive arrangement with Airasia. Airasia, as we know will sell more seats especially over the next few years when the group is busily ramping up its number of planes. It is also changing from 180 seat plane to 186 seater.

In fact, if Airasia goes aggressive (in pricing) or any of its competitors go aggressive (such as MAS in 2012 to 2014), Tune Protect is the one within the group to hold (or buy).

I also like it because of the democratization of the insurance industry and it is the right time for that to happen with advent of e-commerce. I am betting Tune group to be one of the more aggressive group (due to also lack of legacy issues) to jump on it. Typically, if the insurance business are kept simple especially on the product side, this company will do well.

Happy Investing.

Friday, December 9, 2016

Is this downturn the same as Sep 2015?

On daily basis I receive reports of whether local funds, retail or foreign institutionals are net buyers or sellers for Bursa. Over the past 2 - 3 weeks, foreign funds have been net sellers by a large quantum. It is not rocket science that these money are flowing back to US after the Trump's election win. Many stocks have dropped to a level which to me are considered very attractive. This drop however, is not as bad as the one last year i.e. September 2015.

That September 2015 was different. We were fresh from the 1MDB debacle which was exposed 2 months earlier in July. That time as well, most markets were dumped, mainly due to there were fears over the overheating Chinese economy. I guess they were news driven largely from the Western news agencies.

This time around, I believe it is because of the funds which comprise of many US funds are pulling out of developing countries (or emerging markets) and putting more money into US. They have a genuine belief that Trump is going to pump prime the US economy. There seems to be a huge shake up by Trump, when he becomes the President as he seems to be able to do them as Republican has the Senate and House as well. Also the US economy is in much better shape than when Obama had them.

One of the earliest country which the funds pulled out from is definitely Malaysia. Sigh! We are becoming a weak market, but I would presume we are not that weak an economy. It is just that we are seen to be weak because of many factors which I do not need to discuss here. There are some obvious stuffs. Our economy is largely dependent on our trade with US with many long term investments from US firms. I do not know how that will play out with the Trump administration. The current Malaysian administration is seeking China as one of partner but whether that will replace US is yet to be seen.

On whether how bad the global economy is going to be, (I am not an economist, but anyway economist also get it wrong many times) I do not see anything that will cause mass depression. Usually crashes occur out of situation where there were over-exuberance. This market all over the world (except for US recent weeks) have been rather cautious over the last 3 - 4 years. This makes investments as a stock investor rather permissible. I can see stocks that are trading at single digit PEs while cost of funds are below 5%. To me, there is no better place to put money than the stock market. Properties, bonds, banks are not giving good returns.

What hence am I doing? I am buying. I am usually a contrarian. I am looking at companies that the foreign funds are buying and selling because they are repositioning their portfolios. We usually think that these are smart guys. Yes, they are smart but they have to move as a herd except for a few. When funds move back to US, they move back to US. I am thinking one of my favourite stock last 1-1/2 year - Airasia, has that notion. It was largely sold by funds second half of last year, then they bought back first half of this year. Now they are relinquishing the same stock. The funds are mainly trading. I do not have the same strategy. Also, have anyone notice, or is it me alone that has witnessed how much movement people have been doing travelling by air either it is business or leisure? It is not just Airasia that is benefiting but also MAS, I presume. Hence, I am buying more.

What others?

Usually, I am too slow to catch the first wave i.e. when Ringgit drops, export counters will be the ones that are excited first. This round, it does not however as they have yet to enjoy that exuberance that they enjoyed last year. For those companies, it has to be a sector where Malaysian companies benefit because we compete against other countries (think semiconductor, furniture) as compared to a sector which we compete against ourselves (rubber gloves).

Also, look for companies that are able to withstand shocks - i.e. companies that are more defensive in nature. Companies where with either 2% or 5% economic growth, it matters little or less. Banks, properties, automotive and retail do not come under this category. Infrastructure, insurance to some extent have that tendency to sustain better in this situation.

Tuesday, December 6, 2016

Not sure BNM doing the right thing

Saw the below news. It seems that BNM is controlling the exporters when it is the time that exporters are one of the most important arm in our economy. We need more companies to bring in foreign currencies. BNM has now imposed a rule that companies that bring in foreign dollars to convert 75% of them into RM.

Rubber gloves makers have consistent order due to their nature of business which is manufacturing. Hence, they are even lesser affected. There are definitely other businesses which involve foreign currencies which will be impacted as well or even more. This order will only allow banks to make more money at the expense of companies who are doing the trading.

I used to be in a business which involves selling in USD and hence bringing in USD and other currencies. It is definitely convenient to keep foreign currencies as we do not know when we will be using them rather than changing them into RM and later change them into USD when we need to pay them. Companies that keep USD gets much lower interest rates as US Dollar provides negligible interest, but it is due to business nature that one keeps the USD or any other currencies they trade in. BNM has to understand business more so that these guys are not affected and losing money due to the conversion. Businesses stand to lose between 3% to even as high as 10% (such as THB, IDR etc.) due to this.

Monday, December 5, 2016

Mark Chang's offer of JCBNext at RM1.20

I no longer hold JcbNEXT (formerly Jobstreet) and do miss a great business and management. Although there are similar traits in Jobstreet and MYEG in terms business nature, certain moats, the management of the 2 companies are different. One care for its shareholders, the other more of its own pockets - not going to tell which is which but for you to find out!

I just would like to comment on JCBNext towards its offer to purchase all its shares at RM1.20. I do not think it is its intention to delist or make purchases all its shares from the minority shareholders. The offer is out of the requirement under the SC guidelines.

As shown  in the red boxes above, the major shareholder has acquired a 20.17% stake from SEEK, to whom Jobstreet.com was sold to. Since the group has now own more than 50% of JcbNEXT, it is obliged to offer the same offer to all other shareholders. I do not think JcbNEXT is to delist its company.

However, as the deal that Mark Chang has gotten is pretty sweet i.e. RM1.20 while some of the people have claimed that the actual value of JcbNEXT is much more than the RM1.20 value, I feel the right thing to do is to offer the sale of RM1.20 by SEEK to shareholders rather than a single individual takes the entire deal up at an attractive price. This means the 20.17% should have been offered to all shareholders rather than 1 individual.

Sorry to the main shareholder of JcbNEXT (Mark) but this is the right thing to do. All food should be offered on the table and not for one to just take and eat it.
(You know what, in his interview with BFM, Mark Chang has mentioned he wanted to invest into companies that have social impact to the community - this is one as largely minority shareholders are considered the social group, to me as most shareholders just want their investment to see through)

Thursday, December 1, 2016

DKSH should still be a strong company

I know I do owe some of you some of my opinion on DKSH. It has done well for the 2Q16 registering RM20.4 million net profit. However, that number has dwindled to RM5.4 million in its 3Q16, which can be shocking for some shareholders as we may not be used to such volatility for a company like DKSH. To be frank, there should not be much seasonality in this business, but I believe the quarter with Hari Raya could have impacted it as it is in the distribution business.

Other than that, there should not be much of a reason for its profits to be that way except that it took a much higher provision for impairment in receivables of RM9.72 million (see below). While it is not a good thing for the company, I guess it sometimes an unavoidable thing - being part of business.

The company took a RM9.72 million impairment charge for 3Q16
For those that are worried over this, I do not think this is a concern.

I actually have someone who asked me and being concern over its low cash in the balance sheet. Its cash as shown below was left at RM9.674 million. Again, I do not think that it is a cause for concern as DKSH certainly has short term working capital funding from banks. It may just happen that for its closing 3Q16, its cash position seemed to be on the low side.

Cash at RM9.7 million
Because of the nature of its business, do not expect DKSH to have very high profit margin - as it is more of a trading company. I would however be happy if it is able to manage that better. It did better in 2Q16 as compared to 3Q16.

For DKSH or many companies for that matter, we should not be too concerned over its quarter to quarter results but more of its medium to long term fundamental.

It does provide guidance and below is what it says. It does provide a decent to positive outlook of its future.

The reason I own DKSH is that it does have a certain moat as its actual competitors in terms of what it can do is not that many. It is a distributor, not a retailer. Retailers are getting challenges from e-commerce, but DKSH should be able to survive that as its business is more of a B2B rather than B2C.

Further, if one is to look at its reasoning for its growth, the second reason is a very strong reason - companies are more and more looking at doing ONLY what it does best. Which means especially the foreign importers, they will focus on using companies like DKSH to do the market expansion, distribution rather than doing it themselves. This is a global trend now and moving forward.

Tuesday, November 29, 2016

The true fact on Airasia's sale and leaseback

To those who have read my blogs, you would know that I have written about Airasia and some other airlines for many years. Throughout that, I have learned a lot through my own research as well as being part of the community that have been using the services provided by Airasia, MAS, Malindo, Firefly as well as several other airlines.

As an investor, I am always on the mission to know further what these companies are doing and I am not entirely and purely a numbers person (although my background is). I am fascinated with the business as much as the numbers. In my previous short article, I have highlighted that the Bloomberg's article is not quite correct. I respect Bloomberg as my source of business news and have pointed their articles to many of my friends but this time around it is with a wrong message.

Below is another after I said to myself, did I miss something. I looked through Airasia's AUDITED accounts since 2013 and try to search for any sense of sale and leaseback from the airline as I have said I have been following the airline and this also mean I read their annual reports year after year.

For FY2014, there was not even a mention of sale and leaseback. There are leases that Airasia embarked on being a lessor as well as lessee (if you are not sure what is lessor and lessee, check it out) but they did not do sale and leaseback.

Further for FY2015, as I checked further - this time around there are such arrangement - i.e. as in sale and leaseback. This shows that sale and leaseback has been a new thing since 2015 only, not prior. As shown below, where in 2015 there are sales of RM1.527 billion with gain of RM27 million. This shows that the gain that was registered is not as much as purported in the Bloomberg article.

2015 sale and leaseback as shown for FY2015 while there were no numbers for FY2014
Again disposals as shown for FY2015
What the above shows that Airasia was getting ready for an upgrade of planes with Airbus to deliver the new 320neo. Airasia, in my mind wanted better fuel efficient planes and 3rd quarter 2016 is the time which started to get these deliveries. Obviously, it cannot be operating with much lesser planes hence the sale and leaseback. I guess once it starts to get deliveries of the newer and one which has 186 seats, it will start to let go of the older planes. If you have noticed, Airasia over the last few years have had its maintenance costs increased and these shows that its fleet is getting older.

What some have been thinking that these older planes do not have value. They actually have, especially the narrow body planes as compared to a lesser sellable wide body planes.

Airasia has been having a depreciation policy of 12 years straight line for its plane assets and besides operating as an airline, it definitely knows what is best for its operations.

What Airasia has been doing in this case is not so much an accounting ploy but a business decision i.e. reducing its debt level, while preparing for purchases of newer planes. It is not buying new planes at low price (because of its bulk deal), sell them and lease them back. It is selling older planes, lease them back while waiting for newer planes.

I hope Bloomberg can get its facts correct.

Vivocom is potentially a Hoa...

I do not want to deliberate on a very good discovery on the early release of report by CIMB prior to the quarterly announcement by the company itself. How can it be?

This however also shows one should not trust a company as such and its perpetrator.

If one is to look at the company and at its free cashflow, one should wonder. They raised funds to cover the operating expenses. How is it valued at RM0.60, I wonder.

I cannot remember how many rounds of placements that it has made and the beauty of this company is that it is better at doing this kind of work than Asia Media. It still survives and can still have a valuation of 60+ sen by a respected IB. Just count, how many free warrants it has created.

I have written about Vivacom (formerly Instacom) and I think not much has changed, perhaps even more cruel and unsympathetic over people, but to enrich themselves.

Sunday, November 27, 2016

Airasia: Article on Bloomberg quite inaccurate

There was quite a bit of brouhaha on an article on Bloomberg which I think is largely to sell readerships.

One of the statement, which reads as below:

I do not think it works for Airasia like what is mentioned unless the Airasia group is not telling us the truth. See below:

From 3Q15 financial statement
The above basically shows that Airasia is doing its planning for the deliveries of newer A320neo aircrafts which has better mileage and caters for 186 seats for Airasia (an extra of 6 seats from its current fleet). 6 extra seats makes a significant difference. It does not seem to be doing a financial engineering as mentioned in the article on Bloomberg.

Further testament to that even if it is doing a sale and leaseback, the accounting treatment does not allow Airasia to be doing a financial engineering as mentioned. See below which is picked from its 2015 annual report.

Nowhere do I see Airasia locking in huge profits for its sale and leaseback in its accounts in the last few years. Yes, it does make profits from its leasing business but not to the tune as mentioned in the article.

I do agree that Airasia's financial performance for its airline business can be more volatile, which is why there are seemingly good interests for its leasing arm which has much less volatility.

What I think of the proposed sale of AAC
An aircraft leasing company seems to be able to garner a good 20-30x PE while as most people know Airasia is trading at mid single digit PE now. If the group is able to sell the leasing arm at a good price, it will see its balance sheet much improved while it can get ready for the deliveries of the A320neo which is much important for the next stages for the group as its fleet is getting old.

From my reading, not all the new planes that it purchases will be under the leasing arm (although new deals including the A321 does include AAC to have options for some of the new planes. This will make the sale of AAC much sweeter, in which case a DCF from the financial numbers of the company would probably be much better).

I also do not think the group would be so stupid to obtain all its planes under lease as a combination of owning and leasing are being done by airlines such as Southwest and Ryanair.

I think if it is able to get a good price for AAC, would be good to sell as it is now focusing on growing the brand rather than being also deemed to be a leasing company - which it should not be. Airasia is a low costs airline which it does best.

Thursday, November 17, 2016

Airasia's forex hedge

I am reading some of the articles or even comments that came from analysts or other investors per se. They are saying that the rise in USD against MYR would be bad for Airasia as I am presuming that they think since the aircrafts are bought at USD pricing, it would be bad for Airasia. I am also asking did they read the financial report? As below is the financial report that is extracted from the 2Q16 announcement.

It is clear that a substantial portion of its liabilities are hedged at a low 3.2368 exchange rate. Yes, Airasia will take some losses in forex, but most of them are book numbers - it will be reversed in the event MYR strengthens.

Also, some may think that all transactions for Airasia is in MYR. It is not. They have Renminbi, Thai Baht, USD, AUD, SGD etc. Airasia is not a domestic business only. MYR comprise of perhaps around 40%. Hence, that is already balanced by the hedge.

What about future planes? Other airlines that compete against Airasia face the same thing. So, they will increase price as well - hence evened out. This is not like MAS, SIA, Qatar, Lion Air are buying in their own currencies but Airasia is doing it in USD.

What could even be positive for Airasia is in the event it sells its leasing arm - that is in USD, would even translate to even bigger profits for Airasia and this is real number as I do not think it is even provided for anywhere.

Tuesday, November 15, 2016

Why would Buffett buys into airline business?

So the below video on CNBC, shows that Warren Buffett is really in the know on the purchase, so much so that he felt he was not doing justice to Southwest if he did not buy the airline's stock after buying the other big three i.e. Delta, American Airlines and United. This action also shows that he is picking industry and not really picking stocks as he bought all 4. (He puts more money actually into American Airlines)


This obviously made a big turnaround that caused some of observers to be wondering why would Buffett buys into a low profit airline business?

Let me take some guesses:

- Things change, industry changes as well. From a fiercely competitive industry, it has now become somewhat more conducive for players to co-exist. Airlines have now become more aware of their costs as well. Flying is no longer a rich people's travel alone. It is towards the masses, hence the full-fledged are also cutting down on frills.
- Low cost of oil. One of the largest costs component is oil depending on at what price, oil comprise of around 30% to 50% of airlines operating costs. It seems that oil price at this low USD40 - 50 is here to stay for a longer period.
- Transportation is ever more important. In the age of Uber becoming mainstream as compared to old days "sapu-teksi" was illegal, there are many spaces or industries that are or could be affected. Hotels can be affected by AirBNB. Banks is in a precarious situation. (I do not know how to invest on banks, although I still feel it is not that bad, hopefully). Media has obviously been the one that has changed. Shop retail is affected by e-commerce.
The one that could be triumphing is transportation be it towards people transport or goods transport. People travel more and more - so much so that these people are constantly on the move. They do business from one city to another, one country to the other. Casual tourists are also growing above average economic growth.
This calls for roads, rail, air transport to be positively affected. But the way some of these companies do business have to change.
Cathay rebranded its DragonAir. Why?
SIA bought into Tiger Airways. Why?
(This does not mean these airlines can be purchased. See Cathay Pacific and SIA still, their returns have not been good.)
In US, it is about the same or could even be better. New airlines are now into a business that is mature but still growing healthily - in which point it refers to lesser competition from newcomers but healthier and not careless competition among the status quo airlines.
- lesser more obvious areas to invest in. As mentioned earlier, media, banks and additionally insurance may not be what they seem to be 20 years ago. It was different then from today.
- airline business can be structured differently more so today than the past. Airlines can be leasing planes and operate as an airline rather than owning planes and operating them. This will cause lesser stress towards balance sheet than the own and operate. In any case, I am seeing airlines having a mixture of both.

Warren Buffett buying into airlines!?

Yup, hear this right!. For those whom have been saying that airlines are bad business - they are into too much debt etc. Things could have changed. This could be, a similar bet that Buffett have made a decade ago when he started to buy rail businesses and later made a huge bet on Burlington Northern Rail. Railroads need money but they are also very oligopolistic in a natural way now. This is similar to airlines in almost all parts of the world.

Although the barrier of entry to start an airline is small, but in making a successful airline is not easy - hence it is becoming oligopolistic in nature.

The below is an article on Forbes


When Delta Airlines was trading below $20 a share, billionaire Warren Buffett dismissed airlines as a place where his conglomerate Berkshire Hathaway would invest, stating at a May 2013 annual shareholder meeting the sector has “been a death trap for investors.”

Now, with Delta trading at far higher prices, Berkshire Hathaway is buying the stock and its peers, American Airlines, United Continental Holdings and Southwest Airlines.

On Monday evening, Berkshire Hathaway released a quarterly 13-F filing with the Securities and Exchange Commission, which showed it built new stakes in three airlines during the third quarter. Berkshire now owns 21.8 million shares in American Airlines, worth nearly $1 billion at current prices, in addition to stakes in Delta and United Continental of around $300 million apiece. CNBC separately reported Berkshire purchased shares in Southwest Airlines.

The buying marks a reversal of opinion for Berkshire Hathaway, which earlier in 2016 closed a $32 billion takeover of Precision Castparts, one of industry’s biggest parts suppliers. Three and a half years ago, Buffett was pressed by value investor Bill Miller on whether Berkshire would consider buying airlines due to the industry’s consolidation and rising pricing power. Buffett responded by stating “investors have poured their money into airlines and airline manufacturers for 100 years with terrible results,” citing the losses Berkshire took on a 1989 bet on the preferred stock of U.S. Air, a predecessor to American.
Now, with Precision Castparts inside the coffers of Berkshire Hathaway to go with over $1 billion in airline stock bets, it seems Buffett’s calculus may be changing. It also indicates Buffett and the firm’s up and coming portfolio managers Ted Weschler and Todd Combs spot value in the industry’s single digit price-to-earnings multiples.
American, Delta and United Continental currently trade at a multiple of less than 9-times their forecast 2017 profits, and enterprise values of less than 5-times forecast earnings before interest, taxes, depreciation and amortization, according to FactSet. Southwest Airlines trades at a more expensive P/E of 12.4x, closer in line with industry upstarts like JetBlue and Alaska Airlines.

When compared with a market multiple approaching 20-times profits and an economy showing signs of life, perhaps airlines aren’t the deathtrap Buffett once made them out to be. That being said, airlines traded off sharply during the summer as industry-wide capacity began to increase and some pricing power abated. The selloff gave Berkshire a nice opportunity to enter the sector, but it could also indicate investor concern after years of sharply rising profits.

There is a chance it is Buffett’s lieutenants Combs and Weschler who are spotting the value in airlines and caused a change of opinion inside Berkshire’s Omaha, Nebraska headquarters. After all, it was Combs who brought Precision Castparts to Buffett’s attention. Meanwhile, many of Berkshire recent stock bets such as Charter Communications, Liberty Media and Twenty-First Century Fox have come from either Combs or Weschler.

Thursday, November 10, 2016

Ekovest: What is IRR 10%

In the deal that EPF has signed with Ekovest, as mentioned, there is 1 most important clause - which is the guarantee of 10% IRR by Ekovest to EPF over the period of 5 + 2 years.

What is this IRR for those non-financial people. Basically, what EPF and Ekovest have agreed is a valuation of RM2.825 billion on the DUKE Expressway (DUKE 1 & 2). That valuation has a condition i.e. it must provide a IRR of at least 10% to EPF - a good deal to EPF as it gets guaranteed 10%.

What both parties do is that they most probably use a Discounted cashflow (DCF) method and work backwards whether the revenue, cashflow and profits achieve the intended minimum 10%.

As mentioned, there is a target to get into an exercise be it IPO or trade sale etc for the asset. If Ekovest does not achieve that, it will have to payback to EPF at a certain guaranteed arrangement.

Based on the below table, this is the assumed valuation of the highway in the event there is no dividend paid. It will on compounded basis grow 10% every year. I have provided a row on what would the value be for EPF and Ekovest as well since it still owns 60% of the highway.

Please click to enlarge
As an example, by 2020 the value of the highway if it achieves the 10% IRR to Ekovest would be RM2.481 billion. (This is the reason why I am so positive on Ekovest as this is one of its few assets)

In the event, it does not achieve the intended 10% IRR, it would be however detrimental to Ekovest - which is also why in several news report they have mentioned of their intention to quickly do an IPO probably by 2018.

I however do not think it is that bad as I trust the management to have that confidence that it will achieve 10%. In fact, if I read between the lines, EPF sees it will achieve more than 10%.

By the way, as I know despite I write so much I have not put in my money under this particular personal fund for Ekovest, I have decided to do what is obvious by buying 5000 units of Ekovest-WB (this is how confident I am) as it still has about 2.5 years to go before expiry. I took the opportunity of yesterday's slump to do that.

Purchase of Ekovest-WB at RM1.30
The purchase is partly helped by my sale of Insas-PA as I think the remaining more than 5% of return could be better now.

Sale of Insas-PA

Wednesday, November 9, 2016

TA and TAGB: The 2 stocks that took the brunt from Trump's almost failed election

Market was jittery. The world seemed like it was going to collapse. S&P's futures dropped 800 points triggering a circuit breaker. It seems like it is now recovering with both DJIA and S&P indexes are on the positive. So now the market is discovering and anticipating what kind of president Donald Trump is going to be. Pro-development? Pro-business?

Of course, during the run towards his presidency, he was expected to lose - and that has some bearing towards 2 stocks. The 2 stocks are TA and TAGB. Just look below.

TA Global over last 6 months

TA Enterprise over last 6 months
Why? Trump and TA Global have a project together. Well, now it is all luck as along the last few months Trump was a depreciated brand - i.e. bad for business partners. That seems to turnaround together with the stocks valuation of TA Global and TA as their shares were two of the not so many which rose yesterday.

The project with Trump managing the hotel is in Vancouver Canada

Both of them rebounded when it was almost certain that Trump was going to win. Prior to this (and now as well), TA and TA Global are trading at below 1/2 of their NTA.

TA and TA Global's share price rose yesterday

The drop in TA and TA Global's share price actually happened over last 2 years. The market is either not knowledgeable or fond of foreign exposed companies. That is quite ironic, as now many of TA's assets are overseas. When Malaysian currency depreciated, it should have been positive for these 2 companies but because of their exposure to foreign denominated loans, in the books it look really bad as they took losses from currency exposure. However, many people did not realise that the assets that they sat on appreciated in value as well just because of they are in other currencies in countries that are in appreciated against RM - Australia, Canada, China, Thailand. In fact, net net it is positive as their asset value (for sure) should be higher than the loan value. It is mainly accounting - not so much about the fundamental of the business.

Despite all this, I am sure there were some uneasiness and concern as well among the members of family of TA when after the Trump is declared the winner, they bought some shares of TA as shown below (just yesterday).

Just in case, you may want to read this.

Ekovest is for the long term

Yesterday, Ekovest came out with a long well crafted filing for its sale of 40% of DUKE Expressway, and when I asked my dealer on whether there are any analysts that provide report based on the filing made - I guess most analysts went home early, more interested into deciphering the US election than looking at the long-winded filing(please read them if you can) made by Ekovest. Ironically, the dealer of mine passed me an article and that article is this. I did not know they follow me too. Hence, I decided to write another one.

In deciphering the entire purpose of the company and what they intend to do, I would say Ekovest's management have been very fair to its shareholders, thus far. This is in considering that it is the type of management that is able to get into Iskandar Waterfront and Bandar Malaysia projects. They have done well in this respect.

What's important in this filing?

(Again: I request you to read yourself, even though can be tough - http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=75898&name=EA_GA_ATTACHMENTS)

  1. Special Dividend of 25 sen per share;
  2. Split share of 2 into 5 shares of Ekovest - hence par value will reduce from RM0.50 to RM0.20 per share
  3. IRR guarantee - The way the agreement between EPF and Ekovest is drafted, it is with a purpose (I would say) for a listing of the highway business within 5 + 2 years from the completion of this deal
1. Special dividend - 25 sen

I guess I do not have to explain this much but upon completion of the deal with EPF, Ekovest will pay 25 sen per share of dividend to its shareholders that hold the parent share (now RM2.35). This includes those warrant holders that have exercised the shares into parent within certain allowable timeframe.

Few things to note, based on below (if I am not wrong), even if you hold the warrant the warrantholders will not lose out as its exercise price will be adjusted accordingly after the dividend payment. Also the share split which I will discuss in the next point, the warrants will be equally split as well.

Proposed distribution means the special dividend distribution
Do also take note that from the sale valued at RM1.13 billion, RM244 million will be distributed as dividends while RM400 million to repay borrowings. The rest are for working capital and other purposes such as fees.

Details as follows:

2. Share split

As usual, the share split is to make the shares more tradeable - nothing significant but I guess the number of tradeable shares will increase to about 2.44 billion shares (inclusive of the converted warrants). The dividend will be paid first then only the shares will be split from 2 into 5 shares. As mentioned, the warrant holders will not be prejudiced. If I am not wrong, assuming the warrants exercise price is RM1.35 and after the dividend payment of 25 sen - it will be adjusted to RM1.10 before the split. (Do let me know if I am wrong.)

Proof of additional warrants to be issued

3. Exit via IPO, trade sale etc.

This item 3 is the most important and one which we have yet to see prior to this. (I DO expect good dividends, prior to this announcement).

To cut things short, basically there is a guarantee of 10% IRR to EPF for the next 5 + 2 years. (EPF has protected itself well - so everyone thats working should be happy). If Ekovest does not achieve the intended target, it will have to pay EPF the difference through the monies that are allocated under the escrow account (RM149 million). The whole negotiation as I see it is to find another place for the highway asset - most probably IPO (see below).

I would say that itself will allow shareholders of Ekovest to benefit from the dis-entanglement exercise. Most shareholders, I presume would prefer a direct exposure to the highway assets as compared to now park under Ekovest, the holding company.

For me, this is the most important element in the entire filing as it inherently explain the intentions of the organization in discussion with EPF.

I have mentioned of the intrinsic value of Ekovest. It depends on whether the management will want to surface them and allow shareholders to participate. In some events (cases like Tradewinds Plantations, old Maxis, Mamee example), the major shareholders wanted to take most of the value by privatising their controlled companies.

Seriously, I was concerned that it could have done that as the shares was trading at around RM1.00 - RM1.30 for some time.

With this exercise, I am convinced of the company even more, I should say.