Thursday, October 27, 2016

Why I never got excited over Gadang

I have in the past provided my critical view on why I am not buying some construction stocks (not because of the companies are not well managed). The reason I am not doing so, is that I cannot see beyond the projects or order book that they have. One of the key measurement for a construction companies is "order book". That basically means how long more it can run the projects that it has gotten and by working out the margin that it is expected to get, we can probably provide a value to the company.

However for construction companies, their challenge is to continue to fight for projects. No one day they can sit tight and be comfortable with their business as it can be very volatile. As the order book starts to run out, they can get worried. If one is to read how IJM and Gamuda spread their risks, they went the toll concession and plantation route, areas where they can be defensive and more diversified while keeping their core strength.

Gadang is not really that company. I am quite wary when one pitch Gadang is traded below 10x PE blah and blah, hence it is very much undervalued. There is a difference between a stable, solid and growing business which is traded at 10x PE versus a company which has volatility and no strong sustaining business and traded at say 8x.

If one looks at Gadang, it has 2 main businesses (construction and properties) and 1 very small utility business - power plant. (I would probably love the business much more if I can say that it has 1 main utility business and 2 smaller construction and property business - it is unfortunately not.)

In fact, the composition of its construction, property and utility is something like 70:25:5. Gadang is a good contractor. It has managed to get good margins from this construction outfit but after operating for more than 20 years, it has never made its name to the size of IJM, Gamuda or even WCT. Its projects are much smaller than those guys.

At a market cap of RM850 million today, it is decent in valuation to its last year's profits but that's about all. If one is to look at many of my writings, I am a proponent of cashflows than profits. This however is on a case to case basis - which is why investing is not as easy as it seems. To give some strength to my argument, just look below. What people got crazy about is its net profit of RM95 million and its shares was trading at RM800 million - hence the PE of below 10x has been continually harp on. Does anyone however give a thought about its net margin of some 12% to 15% for a construction outfit. Is it non-recurring i.e. cannot be replicated often enough?

To provide a bigger thought, then let's look at its operating cashflow for the same financial period as below. I definitely am not comfortable with profit of RM95 mio but no cashflow.

Some portion of FY2016 cashflow statement

Several questionable events or numbers over the last 1 year

While it has been a decent contractor as I said, its corporate maneuvers are not so great.

Manuever 1

Private placement - 6 months ago, it did a private placement and in that event, it raised some more money at a price of RM1.85 per share. One is not ignorant that the parties who subscribed to the placements has made a healthy profit. It is however not the placements that I am complaining about. It is what the placement is for. As below mentioned, it is largely for property development expenses or land acquisition. This is the questionmark as the timing is not right. Why?

For Gadang to do this, why now? The company has not been a very prominent developer. If it want to do this, could have done much earlier - perhaps back in 2010 to 2013. Is the reasoning of utilisation came out of convenience?

Manuever 2

Whenever there is a private placement, and over the next 6 months, the share run, I could not help but to think that the investors want their invested money back. (I am SERIOUSLY not saying Gadang's investor or management is doing this, but I could not help with that thinking. Better be careful as I am dealing with my own, family and my friends money.

Manuever 3

Gadang is doing a bonus warrant. I have said before, I do not like the concept of bonus warrants. It feels like the company is trying to shore up its share price from nothing. Although I can be critical of bonuses as it is an accounting exercise, but those guys who do bonuses at the very least can brag that their company have been performing over the years, hence can afford to provide the bonuses by shifting numbers in the balance sheet. Bonus warrants is way worse - it is a call for traders to get excited - from nothing.

Any business is a business of building brand and solid strategy

If I have critical comment over construction or property businesses, I definitely cannot protect myself when I bought Tropicana and Ecoworld. These companies that I have bought if one is to look at the way they have strategized and worked out, they have executed flawlessly - especially in the case of Ecoworld. Today, as just announced Quek Leng Chan under Guoco has agreed to partner with Ecoworld International in its international part of business. Think about it, Quek would not do that if he does not believe in Ecoworld's management. In fact, Quek has been in the property business longer than Liew Kee Sin - and in this scenario letting him run and a certain extent control the business, is a big pat in the back.

I brought the above example is to say that for Gadang, I cannot see it being an exciting property business (for its size, it is not even a E&O which has several landmark properties). It is misleading to provide that Gadang will be one of the key beneficiary of the Kwasa Land project. It is a company that has been given a chance to proof itself being a Tier 2 developer. (You see for that piece, Tier 1 such as SP Setia, IJM etc are not even allowed to bid. There is a big difference between that story and actual fact)

What's dangerous for any Gadang's TRADERS?

For an investor, one would want to buy a business that can grow and with some strong sense of certainty, it will grow. The worry for Gadang is that one may have bought at its high and for this kind of stocks it may take a long time to come back, once it has dropped.

Just today, it announced a result that even surprised me. Despite this, my say is not to look at the quarter to quarter results - it is the underlying fundamentals and where it has protected itself in its business. Gadang has not done well enough in that category.

I would like to have a disclaimer, Gadang is not a bad company but can be dangerous for traders.

Monday, October 24, 2016

TheStar: Part of WCE to open early

This came out in TheStar today. However, you may want to just read from below.

There are a lot of posts from me on this company i.e. from the early days of its change of hands in substantial shareholdings. Be prepared for WCE to do some fund raising - I am not gonna speculate how it is going to do it as I had the wrong theory once. If however WCE as mentioned would be collecting revenue earlier, there is a perception that some of those revenue will be equitised hence the need for fund injection could be lower than expected - which is a good thing. As below is a portion which is picked up from its 2016 Annual Report - which says a subsidiary is required to maintain a financial service ratio of at least 1.25x and debt equity ratio of not greater than 80:20 upon the toll commencement. (Keyword: upon toll commencement). Hence, it will not need to raise money as fast.

Personally, I have made losses from this stock considering my purchase at average of RM1.10 to now being traded at RM0.90. However, if you read most of my articles on this, I do expect a long term hold on this company as a hopefully decent retirement fund and part of it for my children. I am not sure I will still be around when this concession ends i.e. 2064/65 or even more (do continue to read this blog to see I am still writing). For some of you it may be grandchildren, as this is a 50 + 10 year concession!  The RM0.90 is in fact a good opportunity for me to collect more as I cannot imagine a RM900 million company will be building the second longest tolled highway (and in better part of country economically) in Malaysia.

Medium term - over next 2 years, I do not expect WCE to perform well in its income statement as it only projects to make RM10 million a year from construction and the other holding that it has i.e. Bandar Rimbayu may not be doing as well due to the poor outlook for properties in the near term.

Budget 2017: Increase visibility on mid cap stocks. Why?

As I said in my earlier article, I am not able to find value from the KLCI Composite. The market obviously find this as a problem as larger funds may not get interested with our markets as while there are enough value in some of the smaller cap stocks, the large ones are not attractive at all. In the latest Budget 2017, we see a rather weird mention and plan as below:

Although the above seem as rather vague but it is to allow increased visibility on small to mid-cap stocks. Why? Fund managers mostly are "herds". They would not dare to invest if other "funds" are not investing. They are afraid to make mistakes and be blamed.

It is OK to make mistakes when others make the same mistakes, but it is not OK for you being the only one who make the mistake. I find this very true in our exam mentality country especially.

If you notice, smaller cap stocks are not covered and hence understood. As an example, Ekovest a stock with RM1.7 billion market cap is not largely covered. Maybe one analyst? So is DRB-Hicom although it is a conglomerate in some sense. DKSH is definitely not followed at all. This means that if I am employed as a young analyst, my superior does not allow me to cover those stocks although they may be exciting. I am asked to cover what the others are covering i.e. Sime Darby, Genting, BAT, Nestle, Airasia etc. In a lot of cases, gems are found in the most obscured of places than in the cities. In the cities, they are anyway found in the shops and fully valued.

Now, by introducing RM3 billion fund, the government is hoping to invigorate investment or at least encourage coverage on the smaller cap stocks. Let's just hope for them NOT to make the same mistakes together on the smaller cap stocks.

Frankly, I would rather not have the above plan by the government as I like to look for gems myself and in the right places than others looking together with me.

In the investment terminology, value stocks are those unpolished gems that are yet to be found by many while the momentum stocks are those that are already found by many and may be sought after although they are expensive.

Wednesday, October 19, 2016

Tune Protect: Selling insurance direct

The Tune group has done it before and it can do it better this time with another product (see article below on Thestar by BNM's governor) - this time insurance. Earlier I have written about Tune Protect and its business. Many people may not realise that back in early 2000s when Airasia started, one of its bigger differentiation as against MAS and others is its direct delivery channel of selling air tickets. MAS and other airlines which had legacy delivery channel back then - i.e. through travel agents were not able to react as fast as Airasia which was a "new kid" then.
Now, the group has been selling its insurance products through the current internet channel and I see this as the way to go for the future and a winner - if executed correctly. Direct channel especially for those companies that do not have legacy issues (such as agents) - they would be able to do better. Traditionally, one of the biggest issues for insurance is its high costs of delivery or distribution. It can be overcome with a better delivery channel as long as the products are explained well. In today's world, information for these services as long as they are frank and accurate would do better than through agents.

Tune Protect I can see in fact do better if it works on making its products easy to understand. In Malaysia, there are 2 types of insurance licenses - life and general. Tune has the latter but it can still do certain type of products like Personal Accident, travel, medical and health besides the typical motor and fire insurance.

I expect a major change in this industry when Bank Negara allows price competition.

Friday, October 14, 2016

Forget FBM KLCI as benchmark - for now

There are enough companies to invest in Malaysia and some of them I still consider cheap and attractive at this moment. This is the reason why I stay invested. However if one is to invest into Malaysia and use the FBM KLCI as the benchmark (I myself actually do), it may not be the right benchmark.

Typically, in the example of US stocks, one would use either S&P 500 or DJIA 30 stocks as benchmark.

Let me tell you why.

Just look at the list of companies as at 30 June 2016 and how much strength they will have moving forward in the near term.

    1. AMMB Holding - One of the banking stocks, challenging for banks nowadays with low interest rate environment and high debt / GDP ratio in Malaysia
    2. Astro Holdings - tough operating environment for Astro (I was right). Its IPO price was RM3 back in 2012. Now it is trading at below RM3.
    3. Axiata - it is getting tougher for telco in Malaysia and most of the mature countries where Axiata is trading in.
    4. British American Tobacco - even its manufacturing operation is shutting down. Just imagine, a solid stock like BAT having difficulties for the first time in many decades.
    5. CIMB - just like AMMB above, loan growth is slow, NPL cropping up slowly and worse its investment banking (usually mainstay) is not doing well for several years now.
    6. - just like Axiata and in fact could be worse than Axiata as it is exposed to just Malaysia which has a tough telco operating environment.
    7. Genting - slightly better but the business it is in is not getting easier as compared to the good old days.
    8. Genting Malaysia - hopefully, the theme park - Fox will bring some cheers in 2017.
    9. Hap Seng - probably the better performing stock in terms of performance but I am not so sure of its upside.
    10. Hong Leong Bank - another challenging one, but probably better than AMMB and CIMB.
    11. Hong Leong Financial - small significance as its weightage is very small.
    12. IHH Healthcare - good nice growth but probably very expensive - tightly held with low free float of less than 10%.
    13. IOI - palm oil stock is not that great as compared to perhaps 5 years ago.
    14. KLCC Prop - will have decent consistent growth.
    15. KL Kepong - another palm oil stock, same as IOI.
    16. Maybank - perhaps better than AMMB, CIMB but still another bank which is facing challenges in Malaysia - for growth.
    17. Maxis - same as and competing head on aggressively. Little or no growth.
    18. MISC - large portion of business dependent on oil and gas. Bad for last 2 years.
    19. Petronas Chemical - oil and gas related, tough now.
    20. Petronas Dagangan - a trading company, one of the better potential among the 30 companies.
    21. Petronas Gas - gas related, another one in tough operating environment.
    22. PPB Group - dependent on Wilmar which is largely operating in palm and edible oil industry. Not that bright in short run.
    23. Public Bank - one of the solid banks, but growth will not be good as before.
    24. RHB Bank - another bank, perhaps better than CIMB or even Maybank.
    25. SapuraKencana - oil and gas, one of the better surviving operator, but the keyword is surviving.
    26. Sime Darby - its 4 main operating businesses - properties, automotive, properties, plantation - all do not look bright.
    27. Telekom Malaysia - has good potential but seems not be able to manage well, all the while.
    28. Tenaga Nasional - the largest of the lot, and future seems promising now with the old IPP contracts out of the way.
    29. Westports - one of the better ones and still with good prospects.
    30. YTL Corp - future not that bright with its IPP (less prospects), other utilities and construction.
As you can see, the brighter prospects ones are like Westports, Tenaga and PDB. There are not much upside if one is to look at it. And if one is to benchmark your performance against KLCI, it perhaps may not be right.

Why has this happened in my opinion. Besides the performance and their outlook, many of the KLCI component stocks are government linked companies and it has been well supported by the large funds in Malaysia - i.e. EPF, KWAP, Khazanah, PNB and few more. As they have remain hugely invested, it is harder to do more with the investments in these companies.

This however does not mean there are no performing companies - just happened to be not many are from the KLCI companies.

Additionally, this reflects that most fund managers may have opinion that the Malaysian market is not cheap. This is true on the perspective of the large blue chip stocks. But as is most of the time, the more attractive counters are not these 30 companies but those that are valued at between RM500 million to RM5 billion.

Thursday, October 13, 2016

Tune Protect: The less volatile part of Airasia's business

Although I like Airasia - and still believe that it will grow more than average economic growth of the countries in Asian region, there is another company that may follow the growth of Airasia but has better cashflow. It is Tune Protect. I have in the past written an article on Tune Protect - then Tune Insurance. During then, I was not sure on the company as I was not able to imagine an insurance business which was newly formed but with such little claims.

I sincerely felt that it was quickly structured to go for IPO during then - still think that way and the pricing was not right. Of course at its latest traded price of RM1.57, it is ironically around the same IPO offer price (3-1/2 years ago) of RM1.55. Now, Tune Protect is a more mature insurance company and riding high with improved profitability over the 3 years period.

It has of course since moved on to offer several other products - including the motor, travel, medical and fire class insurance. The way I read its business strategy is it goes for small premium but highly profitable range of insurance products. The highest profitability is of course its travel insurance tagging along the sales of Airasia's tickets. Of course one has the option of not purchasing the insurance when buying flight tickets, but as more and more business travellers (especially) are opting for low costs tickets for short trips, I see travel insurance which is sold as an add-ons will continue to do well.

In the long run, I think Tune Protect will follow the growth trend of Airasia's revenue while it will continue to grow its other portfolio of insurance. Travel within the Asian region has been growing at much higher rate than GDP growth for the region - much due to China and India and as the percentage of middle income group is growing, it will still be a good growth number. Just look at the data here by Mastercard - many are markets for Airasia.

For investors who are concerned over Airasia's need for high capital expenditure due to plane replacements, one will not have that kind of concern over its insurance business. As a result of that, naturally Tune Protect may provide better dividends (as proven with 5 sen recent payment - see below) return than Airasia as its cashflow is much better. Further, its P&L numbers will also be more insulated from the fluctuations of currencies as opposed to Airasia.

Dividends for Tune Protect (last 3 years) has been strengthening
2014 - 3.86 sen / share
2015 - 4.04 sen / share
2016 - 5.00 sen / share

On its business segments which are not dependent on its travel segment (contribution from Airasia), I hope and think that the dynamism of Tune group will take opportunity of the internet landscape to grow its insurance business. I believe that the insurance industry has opportunity to change much just like where industries such as the transport (courtesy of Uber), air travelling (low costs airlines), finance (potential next wave of change), TV (or media, Netflix etc). My observation is that Tune Protect's products are sold differently as compared to the much traditional insurance companies.

At its current price of RM1.57 (RM1.18 billion market capitalisation), I am forecasting it to be trading at a good 10x PE as usually the best numbers will come in its 4th quarter where travel volume is the highest. With that multiple, it is definitely attractive especially for an above average growth business. Its PE Growth will be low (the lower the better and if any company with PEG of below 1, is considered very good) and with a good free cashflow, it is exciting.

Tuesday, October 11, 2016

Misleading statement on Gadang

There is no doubt that Gadang is a company on the run, however I would like to highlight misleading statement after misleading statement given by a well-followed guy.

Here is his statement:

This statement is as if Gadang has the right over the entire development at Kwasa Land. He says, if there is no market for houses and condominiums, Gadang will not build while the land continues to appreciate in value - utterly misleading.

Here is what the Gadang has won in its bidding.

Gadang has won bid over a 24.08 acre of land. The entire Kwasa Land is 2,330 acre of land. There is no doubt that from what is presented by Kwasa Land, it is a prime land but the piece is only 24.08 acre - not the entire development.

I am sure that the award from Kwasa comes with condition. Gadang will not have 20 years to develop the piece - I can vouch for that despite not needing to read anything from Gadang.

It does not matter how old the person is and if he has no intention to cheat - but the writing is very misleading.

I am sorry as I cannot take it this time.

Here is the details of the award, where is it mentioned of Gadang getting the entire development? If one is to write, it has to be with great responsibility.