Friday, December 29, 2017

C'mon Hengyuan is no Nestle, Dutch Lady

Don't be misled, Hengyuan is no Nestle, Dutch Lady, BAT. Not even Oldtown. It is not even Top Glove or Hartalega or Airasia. Hengyuan is Not near.

In investment, the most popular word as provided by Warren Buffett is the "moat" - which means certain strength - being special i.e. in another words think of it as a brand cult aka Nike, Nestle (Milo, Nescafe), Starbucks, Google, Facebook. In those companies, we do not even look at NTA value.

What is Hengyuan? Before the rapid share rise - less than 10% in Malaysia I guarantee would not even heard of the name. It has a 10 year supply contract with Shell. Luckily, at this moment due to global oil supply constraint, margins for refineries (oil processing) has gone sky high. That is in playing cyclical stocks, and one gets lucky or may not through luck but perhaps some level of manipulation these stocks goes up. Sometimes certain companies may see profit performance goes up but the share price does not rise the same.

A Nestle or Dutch Lady has sustainability. They can control their own destiny. They can control supply i.e. in Nestle's case milk, coffee beans, cocoa and put back the price control into the market i.e. consumers like you and I. Companies like Nike for example may price their products much higher than a much lesser branded goods, but they still sell. There are still people who buys.

Hence, companies like Hengyuan will not get the 30x PE. This is crazily manipulative. Nike, Nestle, Dutch Lady, Maxis can get the 30x PE.

30x PE means one is preparing to pay the price now and profits stays the same for 30 years, we will get back our money from this investment. As much as oil and gas refineries are a decent business, imagine this! By 2040, many cars will be much much more fuel efficient or even using electric. This is a clear and present danger in investing in refineries although I have put my money into Petron. This is probably why Shell sold off its refineries - so that they can reuse the funds to focus onto areas which they think it better for their growth. If it is 30x PE, they would not sell.

Hengyuan is not Shell. It is part of the oil and gas value chain and happens to be at this time refineries are doing well. Cyclical and it does not last.

A person who claims to have build IJM should understand that concept.

Why acquisition of IWCITY is a good move for Ekovest

As always in my investment philosophy, I have put importance onto what certain decision can bring towards the value addition of a company or whether it demerits the company as a whole.

We know that Ekovest has just decided to offer to purchase IWCITY for RM1.50 per share. One can read the detailed proposal from here and we can also digest the reason for the purchase in this well written announcement. The proposed purchase translates to valuing the assets of IWCITY at RM1.256 billion. We also know that the proposed purchase values IWCITY's assets at less than 50% of its market value, based on the announcement and valuations made by respected valuers. For that itself is a good beginning point to purchase a certain assets.

However, many investors are concerned over Ekovest's exposure to properties over the long run as unlike concession from toll business, property is cyclical especially is this down cycle. However, let me put into perspective what I see.

We know that Ekovest has 3 main line of business i.e. concession from highway tolls, construction and properties. Toll concession is its crown jewel as I see it, due to the sustainable growth as well as the location of its highway - right in the middle of the city. Last year alone, EPF has valued the DUKE 1 and 2 at RM2.825 billion through its 40% purchase of the highway. Besides the 2 highways, Ekovest has also another longer highway which is in its early completion stage called Setiawangsa-Pantai Expressway. If one looks at highways, technology cannot really replace the need to travel and move around. One real threat for these 3 highways is MRTs and I think we as a country does not build fast enough to cause real threat to Ekovest's assets.

Another business is its construction business. Unlike more established contractors like IJM and Gamuda, Ekovest usually complete its own projects but do not focus (as much) on getting external projects for obvious reasons. They are not in the mould of IJM and Gamuda in terms of construction, civil engineering but its own projects is enough for them to be kept busy. Hence, you do not see a Gadang, Advancecon (which focuses more on external projects constructions) as much in Ekovest. On the other hand, construction business has one major weakness, it has to continue to bid for projects and usually these projects are in a 2 - 5 years cycle. After one project, it has to obtain next projects to keep itself busy. Otherwise there could have idling manpower and machineries. This actually happens now to China, as this is the reason why Xi Jinping is helping its own state construction companies by pledging Belt and Road Initiatives in the name of helping neighbors, but in essence it is more to help its idling companies which have been building China at a furious pace years ago.

The third business for Ekovest naturally is the property business. As compared to toll and construction, this third business is the weakest among the three for Ekovest and in my opinion, it does not mean that Ekovest is in the mould of building like what Ecoworld is building. This is because Ekovest does not have the DNA of Ecoworld or SP Setia or even Sunway. In this respect, Ekovest is rather beginners. It has managed to secure prime land of 60 acres through acquisitions and exchanges from the Blue River project. Further to several other pieces such as the one in Cheras which is just opposite to Leisure Mall, Ekovest does not have much landbanks. To be a strong or prominent developer, first one must have land and these land must be in a place where one can sell properties. The ones in Cheras and Titiwangsa are good starts but they are not substantial.

Hence, they move to Johor. Happens to be, IWCITY another company controlled by Lim Kang Hoo has good landbank (1000 acres) in Johor and they are the most prime of landbanks. In this period of property slow growth, to be a successful property company - either one have to be Ecoworld which can still outsell others despite not in prime location or one must have the financial wherewithals to withstand slow growths. As an example, TA Global (a boutique developer) has that. It has I do not know postponed its projects in TA3 and 4 for I do not know how many times as it has the financial muscle to do that and wait for the right timing to launch. Ekovest, in times like this and with it being kept busy by so many projects at this moment has that as well. This, I think is the main reason the acquisition of IWCITY is an opportunist time as it can wait. And to top that of, it has signed a contract with Greenland group from Shanghai (one of the Top 5 largest developer in China - and when it comes to China it is really big) where that contract will bring strong cashflow for the next 3 years towards the Ekovest-IWCITY group. How is this deal not positive towards the acquisition for Ekovest?

I however fully agree that among the 3 more developed states - KL/Selangor, Penang and Johor, it does look like Johor is the worse off in this bad times for property. Why? Johor has large landbanks and it does not help that so many of the developers such as UEM, Sunway, SP Setia, Ecoworld, Forest City - all of them have massive landbanks in that area. The foreigners are not buying as what they would have wanted - and more so a country cannot be dependent on foreigners to purchase our properties for growth. In this respect, sustainability is the name of the game.

Come 2024, there is however one game changer. What I do not foresee will really happen is happening. What is that?

There is an MRT link between Johor and Singapore, and it is to be ready by then. Why is this important? It means Singapore is willing to open up more (slightly). For so long, the causeway is the clog point for Johor to develop fast. It is a joke if an affluent or white collar worker to say that they are ok with staying in Johor and work in Singapore as the commuting is so bad that it deters them from doing that. With the new MRT connecting Johor at the checkpoint towards Singapore, that unbearable commuting is made more bearable. With that, the real property buyers (to stay) will consider buying, as compared to those who are only investing and not stay as at now.

The game changer is especially important to the landbanks surrounding that area. Who in your guess has the most landbanks and one that overlooks Singapore as well? IWCITY.

As one can see, the landbank for IWCITY or reclaimation rights for land are very close to the causeway - the main connecting point for anybody between Johor and Singapore.

Hence, I am guessing the acquisition of IWCITY by early 2018 pace the planning made by Ekovest very well. Between 2017 to 2020, there are enough highway construction projects to sustain its growth and operating cashflow. Post 2020, they will be more busy with property projects down south. And with the collection from tolls continuing to grow, the planning made by Ekovest could be very sweet for investors.

As it is, now Ekovest is trading at RM2 billion valuation. The toll business alone is worth more that. It is buying landbanks at good value. How is that not good?

Happy New Year to all readers.

Wednesday, December 6, 2017

The CRRC-Ireka deal looks interesting

If one is to look at some of the tie-ups between Chinese large organizations and Malaysian companies, they are not between a giant and the largest of Malaysia construction or material companies.

Just recently, CRRC signed an MoU (yet to be confirmed) with Ireka (a smallish construction, property company with market capitalisation of just above RM100 million but with experience of 50 years) for the following.

Looking at CRRC which is the largest manufacturer of trains, it seems that it is not a just-for-show MoU. (There are some MoUs which are created just for announcements.) The fact that the size of CRRC which is a RMB224 billion revenue company, I do not think they will sign an agreement just like that.

Besides that, CRRC is putting in around RM9.2 million for a 8.48% equity stake which shows their seriousness in getting the deal to be done.

What is interesting is that with many rail projects in the plan in Malaysia and CRRC already having its foothold here, this deal could be an impetus for Ireka after being a non-covered company for a long long time.

One can find the announcements here, or for the press coverage here.

But these are very early days still.

Monday, December 4, 2017

Airasia: Analysts have been chasing updates than giving us directions

If an investor is to look over here and perhaps here, we can see that over the last 2 years, analysts have been upgrading their valuation on Airasia. To me, Airasia was already worth more (back in 2016) than what the most optimistic valuation given by any analysts in town, be it MacQuarie or MIDF.

Let me tell you why this is the case, besides you can also read this most written stock in my blog. Since, 2015 or even before that, analysts have been chasing after the the results and they forgot about the forest where Airasia is preparing itself to be the king of the airlines (in Asia). They have been dwelling into the numbers and let me quote what the latest from TA, whom have just upgraded Airasia's valuation from RM3.76 to RM3.83 based on Airasia's latest 3rd quarter numbers.

First paragraph, "AirAsia’s 9M17 core profit of RM1.34bn beat expectations, accounting for 91% of our full-year forecast and 103% of consensus estimates. The variance was mainly due to higher-than-expected RPK of AAB and TAA operations."

And this comes from Public Bank's analyst, "For 9MFY17, AirAsia core net profit was RM1.27bn, which came in above our and consensus full year expectations, accounting for 86% and 97% respectively. The discrepancy from our forecast is mainly due to better-than expected improvements in subsidiary and associate contributions. We raise our associate contribution estimate which, as a result, increases our earnings for FY17-19F by an average of 18%. We upgrade our call on AirAsia to Outperform, given an upside of 16.5% to our revised target price of RM3.69 (previously RM3.19) pegged on 8x FY18F EPS."

As I have mentioned, the analysts have been dwelling still on 2017 and 2018 numbers i.e. the furthest they have looked. What they have forgotten is that Airasia is positioning itself to take market share from MAS and Malindo in Malaysia, Cebu Air in Philippines, Nok in Thailand and several more markets. This strategy is taking time, and the results will be seen right up to beyond 2020s as they build their portfolios of routes.

Beyond the market share gain, one must also remember that tourism business is growing well exceeding the normal growth of a country i.e. between 4% - 5%. One can check that air travel is growing by double digit percentage. You can just check around - especially this month. There is literally no middle-income individuals that are NOT travelling.

Why is this?

Because of lifestyles change and technologies, people are travelling more than ever, but spending much less than ever on a single trip. They take Uber, Grab, Didi - they stay in Airbnb's lodging. They take the subway, MRTs.
This also means that people are travelling more trips. Who are the clear winners? Low costs airlines and to some certain extent, the full fledged airlines.

For airline analysts, they should look beyond an airline business, but look at the travel business. What has changed and what has not. Besides airline, Airasia is in the business of (digital) travel.

Even with the above range of RM1.27b to RM1.34b of core net profit for Airasia for the first 9 months, we can almost predict that its core net profit for the year is going to be RM1.8b or more as the final last quarter is typically a huge quarter for travel in this region. Profits and revenue are typically going to be more than 35% of the full year number. With the projected future, we can actually give a decent premium for Airasia - which is not 10x PE projections as provided by the TA analyst. So let's say for the fastest growth market operated by one of the fastest airline, should it not be in the range of 16x to 20x PE? What is a 16x PE for a core net profit of RM1.8b? RM28.8 billion valuation over at the more conservative side - which I am afraid to think, as Airasia's current market value is RM10.6 billion (RM3.17). On the more optimistic side it can be RM40 billion! Why not? A 20x PE for an above average growth company in a fantastic market space and current core net profit is almost RM2 billion.

The Airasia's management has actually done a lot in addressing the analysts - and in fact they are one of the few which has quarterly briefings. They in fact had an Investor's Day for Analysts only in October this year, and what do I get from the updates? Tony Fernandes talked more about its digital roadmaps. Can't they see, they are actually looking at a much dynamic company (still with profits to show) rather than our typical Malaysian companies.

I am not surprise that Tony Fernandes is frustrated with its valuation but I can only say he has targeted the wrong group and not provided the true messages. He has been talking to the group of guys who are taking quarterly reports and making assumptions from that results. They are the ones who dwell more on the deferred taxes and hedging policies than the business.

(I know because I listened to all the analysts briefings I can get hold of, watched the entire session of Investor's Day except the performance by David Foster, attended one of the sessions presented by its Chief Digital Officer in an event which excites me.)

All I can say is to the research firms, provide more budget for your airline analysts get them more exposed to the business than just the financial numbers. Attend beyond analysts briefings. With that, I am hoping that they provide me with more directions than updates.

To me on Airasia, what its tagline which was created when it started, "Now Everyone Can Fly" is even more than ever!

Thursday, November 9, 2017

Ekovest: seen many times funds vs owners & retailers

First of all, I am not a trader. Hence, this post does not mean I mainly look at trades, however as an investor I have to be smart on short term movements, psychology in among traders especially funds.

Ekovest, if one notice its latest Annual Report has added on institutional investors. While many have opinions that institutional are good, to me IT DEPENDS. Ekovest's shares have been bought by institutionals especially when Datuk Haris sold his block. During then, Ekovest's shares have huge volatility and of course when there are huge swings, many retailers like to take part. Some are caught at around RM1.45 to RM1.50 (one has to note that Ekovest's shares have split from 1 to 2.5 early this year and has given 25 sen dividend after its sale of 40% of DUKE).

This time around, it seems (while I am positive or rather see very little impact), I think funds are negative on Ekovest's proposal to acquire as they deem it as a rescue of IWCITY. I obviously differ in my opinion.

To me, it is quite obvious - the owners and sponsors see this deal as positive for Ekovest. They have hence in the short period of time decided to buy more shares of the company they control. I see this as quite common actually. While funds are funds and they can impact the short term trade of the stocks they own, they however move in herds.

I have actually seen this in many strong fundamental stocks - Airasia, NTPM, Padini are among some of them. All of them have funds relinquishing and frankly Airasia was the classic. One guy from Hong Kong gave a negative comment and some of the large funds (in US) started to sell (strongly advice to read this link and reflect again) - at a period when the fundamentals actually turned to the positive. It is most of the time started with the same concern - gearing and gearing.

As long as the fundamental of the company is sound - the idealogy is when funds sell, we slowly pick. Again, as long as the fundamental is strong - this is important.

In Ekovest, I see that same. Ekovest is not used to funds investing in their stocks. One can run through their annual reports of yesteryears. This year is the difference where funds are started to pick up the stock.

As a small retail investor, I see these as opportunities - which is why I say, one can be small but we can actually perform better. Some people simply call this as "contrarian" strategy.

Friday, November 3, 2017

Sold off Tropicana-WA and bought 6500 Ekovest

Through the sudden reaction on Ekovest's shares, I have decided to buy more Ekovest and sold off Tropicana-WA.

The reason I sold off Tropicana-WA is because it is a warrant and I wanted to reduce my short to medium term exposure risks. Also, as I am going to put my money into a construction, property related stock, it is better to keep the exposure at a certain percentage. Tropicana, on my other investments in fact I still keep to my investment as the emergence of Tan Sri Lim Wee Chai is good for the company business-wise and investment wise. It is just that my fund over here which I started with RM50,000 is limited and I have to make the best use of it.

Ekovest is a stock which I have liked. I have in fact invested into this company - for this fund - prior to it being split from its bonus issue early this year.

I also find it ironic that UOB KayHian is downgrading Ekovest from RM1.45 to RM1.04 i.e. a drop of 41 sen with the announcement of the proposed acquisition of IWCITY. That is a downgrade of RM877 million and this amount is more than what Ekovest is going to pay for the 62% of the minority stake of IWCITY which is RM800 million cash or RM1.50 / share towards the IWCITY minority shareholders if it is using cash.

I usually like to target these funds as funds are supposed to be principled when they write their calls as they are so-called professionals. Investors are supposed to trust them. I however find some of them to be not-principled as they put a price without good justifications.

I have written quite a bit on this company and here are some of them.

Is Ekovest Investible?
A look into Ekovest
Do not sell Airasia, WCE and Ekovest
What is IRR 10% - where I first invested into Ekovest for this fund at RM1.30 for its warrant

One can also find the funds here.

Wednesday, November 1, 2017

Lim Kang Hoo's reverse psychology

Lim Kang Hoo is either a brilliant strategist or a desperate man. However, come to think of it - how is the deal between Ekovest and IWCITY  a desperate deal? Ekovest, which is a family controlled (>60%) company of Lim Kang Hoo, family and friends is offering to buy MINORITIES IWCITY's stake at RM1.50 per share.

He is not buying his shares of 37% in IWCITY which is held through IWH. He is buying the shares held by the other parties 62% - 63%. There is no injection of cash into IWCITY. He is not desperate to rescue IWCITY. In fact, he is taking OPPORTUNITY. This deal is done at its best so that it does not touch KPRJ which is related to the Sultan of Johor - it seems.

I am of course perplexed when the shares of Ekovest dropped massively - so stupidly I buy some more.

As can be seen IWH which is owned by Lim Kang Hoo and KPRJ will still directly own IWCITY which will be delisted. Ekovest is not buying Lim Kang Hoo's stake in IWCITY

Having said the above, I can understand the investment communities concerns. IWCITY holds land in Bandar Iskandar which to them cannot be transacted as there is a doldrum in properties especially down south. Moreover, Ekovest will need to fork out RM800 million which it does not have to buy over the minority stake - hence delisting IWCITY.

However, that is flawed thinking. IWCITY just did a deal worth around RM2.1 to RM2.3 billion with Greenland group from China and they are paying for 127 acres of land in Bandar Iskandar.

Because even reading yesterday's one pager announcement cannot even be done properly by those who invested into Ekovest, I hence will put down the payment schedule for IWCITY - Greenland deal below. There are obviously a lot of milestones and the sweet side is that IWCITY has collected the first payment of RM46.2 million. I know that's small but it also means the collection will be going to Ekovest in future rather than the listed IWCITY.

As for raising the RM800 million to buy up the IWCITY minorities stake, I have this prophesy. The payment schedule above will help a bit, then the amount paid by EPF of RM147 million just last week AND more importantly, in its announcement yesterday, one can also opt for an Ekovest share equivalent which is valued at RM1.50. Obviously, Ekovest shares is not worth RM1.50 now and the latest as at my writing now - it is priced at RM0.97. No chance to trade in shares?

If the transaction is done now, all IWCITY minorities will be opting for the cash - me too. But obviously again, the deal is not done now. It is many months down the road, if it is ever pulled through.

Now, my question to Tan Sri Lim Kang Hoo (who is many times more brilliant than me) is which option he prefers - cash or shares. If cash, then obviously again Ekovest is worth more than IWCITY at per share price of RM1.50 or more as he does not want to waste the value of Ekovest to be given to minorities. If shares, then IWCITY is more valuable.

Having seen how he does his deals, it is not going to be that smooth and straight forward. There will be challenges and hurdles.

On the strategy with this deal, as mentioned above there will be challenges but strategically it is there. IWCITY is a land owner. Ekovest is a developer, contractor. There are still some 900 acres of land in IWCITY after the sale to Greenland. Moreover, part of the deal will need IWCITY to reclaim (worth RM400 million) the land which Ekovest can obviously do.

To me what was obvious yesterday has now become murky. An analyst said that the deal is bad. He is perhaps not being straight or thinking clearly.

Or could it be I am too slow to have a clear head as I have become too complicated.

To me if the deal can be pulled through, it definitely looks like it is positive for Ekovest. If however, the deal is not able to be pulled through then back to original as it is today - but why the drop of 20 sen?

Thursday, October 26, 2017

The connection between Tropicana and Top Glove

I like Top Glove, just like I like Hartalega, Airasia. I like companies in business segments which have room to grow as long as they are not expensive. I like companies that are dominant in their fields. In that respect, I had held Top Glove and Hartalega as well - not recently though.

I wish I had bought into Top Glove more than 10 years ago, as one would probably see a performance as below with the stock price achieving a more than 3x.

Price chart of Top Glove over 10 years
The company has not only provided its investors with capital appreciation but also improvement in dividends almost on yearly basis. This company has a good track record in terms of stock performance and that has to do with the management and with that, investors like them so much so that market is now giving it a more than 26x PE. To me, the Chairman of Top Glove, Lim Wee Chai is in the same mould as Liew Kee Sin, Tony Fernandes - Malaysians who are not only able to make their name from opportunities within Malaysia but also internationally. As an investor, I have always look upon and wanted to support them - as they are value creators. Wouldn't you and I as Malaysians be proud to have them?

Now what about the connection between Top Glove and Tropicana? One is in glove manufacturing, the other a property company. One would wonder, is there any synergy?

None at all - business wise.

However, if I am a shareholder of Tropicana, I would love to have a personality like Lim Wee Chai to be buying a significant stake in the company I invest into. And that just happened, where Lim Wee Chai personally - not through Top Glove - increased his stake into having a 10.24% portion in Tropicana. To me, that works well. If Tan Sri Lim is to have a controlling stake, that would have freaked me out - as he has never been a developer. That 10.24% act as an endorsement and beyond. Why?

Tropicana, under Danny Tan (the brother to Vincent Tan) - has been a developer for many years of his life - and a pretty good one as well. He has built Tropicana in Damansara into a premium brand and location for the wealthy and if one is to Google, Tan Sri Lim Wee Chai happens to stay there as well.

Today, Tropicana is not just having development in Damansara - as it is now an old address but also several major development in Kota Kemuning, Kajang, Bandar Iskandar and Penang - riding on the Tropicana brand. Agree, Tropicana is not able to create the aura of an EcoWorld development - but I would say it is one of the Top 5 - although in terms of size it in more like in the Top 10 in Malaysia.

As a business, there is not so much qualms about Tropicana, but in terms of it being an investment concern - I am sure there are those that would have advised people like me to stay away. I understand the concern. That single stock is more than 70% controlled by Danny Tan. It is an illiquid stock. It is not invested by any of the major funds. Understandably it is hugely undervalued - hence under my portfolio I bought a small portion of Tropicana.

Nobody, including me would have guessed Danny Tan would relinquish a portion of his shares - although he still comfortably controls the group with >60% stake.

However, in inviting Lim Wee Chai - it probably would have changed the perception towards Tropicana. Lim Wee Chai - as mentioned above is totally a different person when handling Top Glove as a traded stock. Top Glove is having a dual listing in Malaysia and Singapore - hence, he is the sort that is promoting to funds and markets beyond Malaysia.

Top Glove is invested by many of the funds in Malaysia - EPF, KWAP and various unit trust funds. I would say it is a darling stock although it is not a Composite Index stock. That basically tells that Top Glove knows how to attract outside investors and not having the fear of these investors making corporate moves against the company.

Hence, in terms of personality and experience - Lim Wee Chai's 10% stake could have made a difference to the perception of Tropicana towards the future. I am sure, based on observation it is not a short term holding - i.e. getting people to buy and then dump onto them as that is not the personality of this Top Glove Chairperson. He does not need to do that and for sure, do not want to be perceived as that.

By reducing the stake to a strong personality, it also POSSIBLY shows that Tropicana can be more open to investors.

When I bought Tropicana, besides the attractive valuation - I was attracted to the change in strategy within the group. As mentioned, it has a good brand name and its strategy of selling non-core assets (basically the investment assets like hotel, malls) and concentrate on large mixed development.

Obviously, this investment does not materialise to be successful yet. At that time, I was putting on the "contrarian" cap - where investors and analysts were fearful of its high gearing ratio. I was in fact correct in figuring out that the gearing would have improved as  when I studied the company it was buying several landbank while the sales of its assets have yet to translate to positive cashflow yet.

Today, as one can see Tropicana is carrying a very manageable 50% debt to equity ratio while allowing several of its development to mature despite the tough property market.

What's your guess on the price point that Tan Sri Lim Wee Chai bought from Tan Sri Danny Tan? While, the announcement was made when Tropicana was trading around RM0.93, I doubt it was transacted between the two at that range of pricing.  Why?  Tropicana has been buying back shares and subsequently redistribute the shares to shareholders since 2015. Most of these buybacks were made at between price range of RM0.90 to RM1.

It would not be easy to obtain shares at 93 sen from the market considering the low free float. Anyway, that's the transaction between the two. Lim Wee Chai as substantial shareholder can come in as being strategic towards the profiling of the company.

What I hope now, is that I see what Lim Wee Chai sees as well.

Thursday, October 12, 2017

As it is Dataprep is worth 16 sen or less

Early this year, Dataprep which has very little business direction and continuous deterioration in revenue was being pushed - most probably by, various parties - bloggers, speculators and perhaps syndicates to 60 sen.

We can see that it is a company which does not have much left. This IT solution provider was dependent on government related projects back in 1990s to early 2000. After that, the company just went spiralling down with poor fundamentals. It was in fact controlled by Mirzan Mahathir and later when it was in trouble, the Genting's youngest son took over.

A lot of these businesses are very thematic at the particular part of time with very little core strength and competencies to be built into a competitive company. Moving passed 2005 and beyond, IT business is no longer the theme of the decade for Malaysia as we have moved on to oil and gas for the last decade and of course even that many O&G is now facing challenges.

Just yesterday, the controlling shareholder i.e. under Datuk Lim Chee Wah - the youngest son of Lim Goh Tong - sold off its controlling stake to one Tan Sri Muhamad Ikmal for 16 sen a share. We know that usually a company for its controlling stake would be sold at a premium and this possibly was sold at a premium.

Several times in my blogs, I have been critical and warned of businesses which have become of little value (or dwindling in value) as it is not able to turnaround and at the same time managed or led by non-visionary leaders in a tough competitive space. Dataprep is in that space. For people whom are deep into speculating such companies for sure they had hoped that Dataprep would have gone towards RM1.00 but these companies have no fundamentals that would enable them to stay at 60 sen and be deemed still undervalued.

From the surface, I am not able to see what the new owner will do with the listed company as it is still unknown. Through buying a 64% stake though, I can see that it is a significant controlling ownership - and from this, many types of structures it can do.

I am also sure there will be continuous speculation, but to me as it is 16 sen is the closest I think it is. Even then, until the company is clear on its direction - who would want to own the share of a company where we are not sure of its business direction.

Monday, October 9, 2017

Are you buying Media Prima? Seriously?

I remember a friend of mine whose parents owned TheStar's stock which they bought for RM2000 for ownership of 2,000 units way before it was listed - and years later (if I can remember in 1993), that 2,000 shares of TheStar became 22,000 stocks before listing. Basically, that one investment allowed his parents to send him and his sister to New Zealand and Australia to do their degrees as the shares later was easily worth more than RM150,000. That was 1990s.

Now, if I want to ask. Do you bother to reach out to newspaper the first thing you wake up? Berita Harian, NST, Star or would any person who is below 50 be reaching out to their mobile phone. Remember, 20 years ago it was a very different world.

Today, I can get my news from my facebook account, google - basically everywhere.

Now, there is this blog that have been asking people to buy Media Prima stock which I do not understand. Where is Media Prima heading? I don't know. Most probably downward. Basically, for a company which owns NST, BH, TV3, NTV7 and some of the radio channels - things are NOT looking brightly for the company.

Yes, one can possibly make short term upside as it could probably be oversold - but what if it does not pick up. This kind of stock will NEVER pick up anymore if it does know how to. What one gets is that one last puff from his cigarette butt.

And the last time I saw, it is not like Media Prima is on firesale. How much can one make from that company. Will it move to RM1.20? The way I see it is that the downside is clearer than the upside. If one got caught at the high, it will not come back.

This is the kind of stock which I would not even bother to read their financials and try to understand the purchase of Rev Asia's digital business as Rev Asia never really make money anyway. If RevAsia is good business, the owner would not sell. Whether, Media Prima writes off its Malaysian Newsprint Industries ownership or not does not matter.

There are space which we can easily figure out. Even if Media Prima will make extra from its advertisement - taking opportunity of the pending election spending. That is one last hurray.

Are we living in a country where one day - in the near future - Facebook, Google, Whatsapp, Baidu will be banned? Can one see who will win the content war? Why is it that TheStar introduced in an ever crowded content platform. TheStar will not go anywhere with that introduction as it is facing a tough task to compete against many - Astro, iFlix, Netflix and all the OTTs (Over The Top) out there. Even with that, variety of platforms are trying to get our attention as compared to the traditional TV and Radio in the old days.

Today, TV is not even our second screen that we are using. First, it is mobile, then PC. TV is not needed anymore. Radio is something nice to have when we are in the car.

Has anyone heard of FANG stocks - basically the company that are dominating the content sphere - Facebook, Amazon, Netflix, Google.

Nothing that the government introduce will dramatically change Media Prima. The company's distribution could go fully digital - but that's about it. It can go save some money but how much will that save the traditional media business which Media Prima is largely immersed into?

One just have to be really careful and not be excited even if Morgan Stanley is buying.

The gist of thing is that if one wants to get people to push up Media Prima shares - why don't promote something else - as this stock could be a really painful stock to own.

Monday, September 25, 2017

Is UEM Edgenta sweating?

Today, The Star came out with the news that UEM Edgenta is looking at a longer term contract between UEM Edgenta and PLUS. I wonder why suddenly...

We also have read of news that there is a proposed acquisition by Abu Sahid to acquire PLUS at a price of RM36 billion. I am also wondering whether there is a possibility of savings in the maintenance of PLUS highway considering that the proposed acquisition is quite bold at a price higher than when UEM and EPF did a buyout of the highway back in 2011. At that time, the Enterprise Value (cash plus debt) paid for PLUS was RM34 billion. And one can imagine, for a concession that has enjoyed about 6+ years of revenue, another party would come and propose for an acquisition at a higher price considering that the concession period is now reduced.

The below is the filing made during Faber's acquisition of PROPEL in 2014. We now know that the icing in the cake for UEM and UEM Edgenta is Edgenta Propel (formerly PROPEL), the maintenance outfit for PLUS highway.

I can only imagine that if ever this very hard to maneuver deal is pulled through, contract between PLUS and Edgenta may not continue. Hence, I can also imagine that another sweet side of the cake besides the highway revenue is the maintenance contract.

Monday, July 31, 2017

WCE's new equity raising

I am an investor of WCE Holdings since 2014 and I hold significant portion of my assets in WCE. It is no coincidence that when its Annual Report is filed, I would take no time to go through them (especially the important portion).

This time, for 2017's Annual Report which was presented today, I noticed something new and significant which no one of us especially the minority shareholders do not know.

As some would know, West Coast Expressway has 3 forms of funding i.e. Government Support Loan, Commercial Loan and equity injection. That would be in the quantum as above i.e. RM2.4 billion (GSL), RM2.5 billion (commercial loan) and RM1.2 billion (equity).

While WCE has managed to secure the loans from the government earlier on in 2014 and all the debt financing by 2015, one of the component which it was supposed to raise is the equity portion.

It is also to be noted that the Redeemable Unsecured Murabahah Loan Stocks (RUMS) is issued for RM990 million and it appears that the profit rate is 10% - quite high for my liking. This is a 40 year instrument. (If I am not wrong, it could potentially for tax reasons, it is structured this way.)

Also, would like to highlight that none of this instruments was mentioned either in the press or the AGM (which was held late August 2016) although the issuance was done on 12 Jul 2016.

Note: A reader below has highlighted that the loan stocks is issued by WCEHB to WCE Holdings. Hence, the equity issuance is still needed.

Wednesday, July 26, 2017

Moving from DKSH to Tunepro and Ekovest

After reading the article on DKSH, I decided to reduce my position on DKSH. In the long run, DKSH is still a strong company and I believe its business model and positioning is very strong.  It will be the least impacted by the revolution in retailing that is happening now - at a very fast pace i.e. a lot of purchases are moving towards online. Just a note, I have made more than 20 transactions purchasing things online from buying shoes to padlock to fridge this year alone. That was from zero online purchase 2 years before.

That behaviour of mine is going to affect traditional retailing as I can really see the effects that Jack Ma and Jeff Bezos are impacting the traditional business lines.

Anyway, the reason why companies like DKSH may probably not be enjoying very good growth for this year is due to the prolonged impact of GST as well as weak Malaysian currencies. In fact, the blame on GST I think is not as correct, but most probably the weak Malaysian currencies as well as reduction of subsidies are really affecting many people on the streets. This as mentioned is going to affect DKSH who is distributing goods such as milk, cheese and pharmaceutical products.

On the other hand, I am putting my money on Tune Protect which has dropped from circa RM1.60 to now RM1.12. I am also putting more money into Ekovest.

The reason I am putting money into Tune Protect is because it is largely tied to how well Airasia's volume performance. IT IS TRUE that Tune Protect is affected by the ruling to bar automatic add-ons by Malaysian Aviation, however I felt that the price dropped is already compensated by that ruling.

The general thought is that with the barring of that automatic add-ons, it has affected Tune's revenue by some 35% - 40%. The below graph by Airasia in its slide presentation says that it has dropped by 39% on a per passenger contribution basis.

With that drop, Tune Protect's travel insurance business should hence start from this piece of situation. I believe that it is now growing in tandem with Airasia's passenger volume growth which is low double digit - from 2017 onward. In the long run, as long as the travel insurance business is tied to Airasia's growth - it should be above average.

Tune Protect is also building its other parts of insurance business i.e. motor, personal accident etc. The deregulation of the motor insurance rates may provide opportunities for Tune Protect to be more aggressive and winning market shares as its business model is less complex against the more traditional insurers whom have been around for a longer period.

Anyway, lets see as I purchase 8000 units of Tune Protect for this portfolio.

I have also added 5000 units of Ekovest as I feel that the impact of IWCITY - whom may not be bidding for the Bandar Malaysia will be minimal towards Ekovest. I felt that the drop in its price is an opportunity for me to add-on to the company - and this also follows my thoughts of having Airasia, WCE and Ekovest as my 3 main holdings.

One should note that the contract that Ekovest has is for the upmost long term - up to 50 to 60 years. As in any country, once a contract has commenced - it will be almost impossible to terminate them - be it there is a government change.

The case of IWCITY and Bandar Malaysia is different as it was not effective yet - although my initial propagation was that it was not going to be terminated.

Anyway, as I can see for Ekovest it is now completing half of DUKE 2 and has already commenced Setiawangsa-Pantai Expressway.

Those will be the main revenue generator for the group in the long term to come. I also do not think the market is putting any value towards its new projects such as River of Life and the proposed highway to Klang.

Monday, July 17, 2017

Why I would buy Petron over Hengyuan

There is no doubt that I like companies that tend to be able to control their own destiny. I also like companies that are operating in oligopolistic arena, but yet they act like it is open competition. These kind of companies will tend to do well as they are competitive. Some of the petrol retailing companies are such in nature.

The downstream operations of O&G for the listed companies in Malaysia
As I have mentioned before in previous articles over here and here, Petron may have some advantage due to its competition that exists. In this business, there are 5 players (in the order of size) - Petronas Dagangan, Shell, Petron, Caltex and BHP (under Boustead). It is also quite obvious that we can see they are sized up in such order. Petronas being the local player and supported by Petronas in terms of supply. Shell has been one of the largest and earliest player. It also had a refinery which can produce 156,000 barrels per day (bpd) - which was sold to Hengyuan.

Petron exists from its acquisition of Exxon Mobil's (merger from the two) retail operations. Caltex is a unit of Chevron and understandably it gets its supply through import. BHP is a smaller unit owned by Boustead where it purchased from BP (British Petroleum).

From above, it sounds like it is a crowded market. It is true that it is a crowded market especially if one does not have the supply and support. Hence, I believe that all the players have their own supply support. It is also known that Petron's supply comes from Exxon as highlighted below.

Hengyuan bought the refinery which on paper can produce 156,000 bpd from Shell Refinery. In that exercise, Hengyuan took over a RM1 billion debt from Shell from that operation. In return, Shell which still operates more than 900 petrol station in Malaysia promises purchase contracts so that its supply is guaranteed. What Hengyuan now needs to do is to make sure that its petrol is Euro 4M compliant and it has to meet that deadline by next year.

It is also a known fact that if the sale to Hengyuan did not materialise, Shell could have converted the refinery into a storage facility. That was a drastic business change and this could also mean that Shell was not willing to invest further in Malaysia. Having Hengyuan picking up and willing to invest have changed Shell's direction. It is now buying the refined oil from Hengyuan for its Malaysian operations. This also means that it trust the quality that Hengyuan's produces.

I have also wondered what makes Shell not interested in the refinery but it will continue to operate the retailing business. Like Exxon, it could have also sold the Malaysian retailing arm - but understandably this is not the direction Shell's went for.

That could mean that the IRR is not attractive enough for an oil giant such as Shell but good enough for Hengyuan, a smallish refinery back in China. At the same time as well, Chinese companies are busily acquiring assets overseas and they could have good support from their government.

Although it looks like quite similar, the two exercises - Petron and Hengyuan - have vast differences in terms of post exercise strategy.

Petron will need to obtain the trust from the final retail customer as the brand is not a name which we are familiar with. It needs to work on many things on the B2consumer front. On the other hand, Hengyuan needs to invest more on the refinery - getting good margins from the crack and sell to Shell at a predetermined price (MOPS).

Needless to say Petron, while still needing to get its refinery efficient as well, will have the harder task. The reward however is more fulfilling as it "can control its own destiny" better. The more it gets consumer trusts, the better it will become. As the final price at the pump is now based on a certain formula - largely following MOPS, margin volatility could also be lower for Petron - as it is less dependent on the demand and supply of crude at any point of time as its produce is sold at the final pump price.

Hengyuan on the other hand is like the furniture manufacturer for Ikea where Ikea controls the supply and demand. Raw wood will be supplied by Ikea - the furniture manufacturer will try to manage the costs - and later sell the manufactured furniture to Ikea back. I do not like this kind of position although one can also make good money.

I like the position where one buys the raw crude from Exxon and I determine myself how one sells its finished products. Do I go aggressive by signing more commercial contracts and opening more stations or do I go slower.

At the end of the day, if I sell the produce where my brand is carried that should worth more money. This is like if you are a Nestle and carry your branded products rather than being white labelling company providing processed chilli sauce for Maggi brand - which you think would be more valuable at the end of the day?

Of course, to sell your own brand - it is a different strategy altogether. Hence, I do not think one should do an apple to apple comparison based on a similar PE.

Sunday, July 16, 2017

It will take a big "Leap" for people to show their net worth

I am reading the new third board that Bursa is introducing. I feel that not many people would be bothered as it is only open to people of High Net Worth and the definition is as below.

Although the full detail is yet to be unveiled, I can almost be sure that the above which is open to high net worth individuals is there. One can read the full article, on the Star here or below.

Market works best when it is open to the public - not a certain group of individuals. When there is lack of liquidity, there is little market. I know of a certain work (given to and managed by Cradle) that is done to attract high net worth individuals to invest into tech startups and they will get to enjoy tax breaks. That has not done well. Firstly, even in today's age, very few people is going to share their net worth - and moreover these investors will find their investment having little opportunity to be cashed out.

On top of that, if I can invest anywhere in the world, why would I be bothered to let my income and net worth be known. There are enough areas and platforms to invest into if I have the means and knowledge.

The traditional public listing in Bursa, the arranger will charge a high fee for one company to get into the market. In the "Leap" case it will be lower as mentioned below - but I doubt that it will be low either. Startups or SMEs will not be willing to pay anything more than RM500,000 to get their fund raising. This platform is moving towards that kind of fees.

Investment is also a place where there is competition. And I will compete in places where I have a higher chance to win. Leap is not that place.

Thursday, July 13, 2017

Collusion between MAS and Malindo?

As an investor, I do look at pricing to understand where some of the companies stand (Airasia especially). I have been following pricing by Malindo and MAS as well besides Airasia. As previously mentioned, I notice that pricing by both Malindo (soon to be Batik Air) and MAS (Firefly) has actually gone up since 2014. These trend is actually going the opposite direction against oil price which has dropped around 40% from then on.

Recently, there is this trend where there seems to be pricing collusion between Malindo and MAS (I say Malindo because it seems to be the bigger airline flying off Subang). Two - three weeks ago, I noticed that Malindo was pricing its tickets at RM129 while MAS was pricing them at RM128.

Today it is RM139 by Malindo and RM138 by Firefly (owned by MAS). See below.

Malindo's minimum pricing for its ATR flights

Firefly's flight pricing
Does the Malaysian Competition Commission really exist?

Monday, July 10, 2017

Airasia is just killing competitors locally

When I wrote the article on Airasia and MAHB working together, I meant to be for both to do well. You know whenever I read the monthly traffic report by MAHB, there is feeling that MAHB just wanted Airasia not to be doing well. That strategy just failed although Malindo and MAS probably treat the MAHB people better. (I am just speculating but that is a norm - especially when dealing with a Group CEO like Airasia who can be difficult and loud.) Why I say this, just read the report by MAHB - it may sound neutral but it is not.

But just look at these numbers as above for example which came out today (10 July 2017). Airasia is delivering and taking up market share. If you look at the ones on yellow box, one can already see it. Which airline does local flights in KLIA2? Airasia only. Which airlines do local flights in Malaysia through KLIA Main? MAS and Malindo. Airasia's June 2017 against June 2016's number grew 16.6% while those that went through KLIA Main dropped (surprise? - as this is a Raya month for 2017 as against 2016 which was in July 2016)

Note: It is harder to analyse numbers for KLIA Main as all other airlines use that terminal as against only Airasia, Airasia X and perhaps Tiger and Jetstar use KLIA2 (in a small way i.e. flight from Singapore)

Perhaps some of the traffic went to the international flights for MAS and Malindo as they probably have reduced their quantum of local flights in Malaysia. Or it could also be their load factor just dropped.

Just note that one should not look at year to date numbers or LTM numbers for comparison as Malindo moved from KLIA2 to KLIA Main last year 14 March.

Let me tell you - based on my observation (and not just from the above table) - Airasia is just flying in terms of bringing traffic as against its main competitors. For Airasia, it is not just load factor that has gone up but also its margin from higher ticket prices and lower fuel costs (as against several years ago). The main costs for Airasia that has gone up is the higher purchase price (from foreign exchange) for new planes and staffs costs. But yet again that happens to its competitors as well. The new planes that it brought is apparently this time is not to replace the old ones but to increase its total seats - and that is because it cannot meet new demand.

I am not just optimistic on Airasia because of my investment that I made 2 years ago but because they are continuously outperform my expectation. I think the message to MAHB is to just face it - Airasia is to dominate in the future - it will probably do the company well - unless higher traffic and profitability is not the main agenda for MAHB.

Airasia and MAHB should just communicate more

It seems we have no choice and Airasia has less choice as well. Most of Malaysian airports are operated by a single operator - MAHB and that will not change in the next 5 - 10 years. There are (almost) no competitors. The entire KLIA2 seems to be for Airasia and Airasia X. I know Airasia is now a regional airlines and they could have focus their energy and routes into Thailand, Philippines or India for example, but MAHB is not stupid to know that Malaysia is probably still the most profitable base for Airasia.

I was at KLIA2 a week ago, and I noticed the self check-in machine can now print baggage tags. From this, I thought that I do not need to queue to check in my luggage anymore, but that is not so. I was telling the Airasia's staff that was assigned to help those to do self check-in that the printing of tags does not change anything as I still have to queue to to deliver my bags. She agreed. As I would have thought, there is a missing step which Airasia would pursue in the future.

From reading the below article (, I guess now what the self-service printing of tags are for. In some airports, once can actually do self check in of bags, hence reducing manpower costs - i.e. part of better automation which we need.

Tony Fernandes slams MAHB for allegedly failing to provide bag drop machines

PETALING JAYA: AirAsia Group CEO Tan Sri Tony Fernandes has criticised Malaysia Airports Holdings Bhd (MAHB) for its failure to offer the low-cost carrier baggage facilities at its airports throughout the country.
Expressing that he was "fed up" with MAHB, Fernandes claimed that the airport operator had promised 30 bag drop machines this month.
"Zero and now they say no budget!!!!!!!!," he said in a Facebook posting yesterday.
Fernandes also claimed that AirAsia Bhd CEO Aireen Omar had offered to pay for the machines two years ago, but MAHB had insisted on providing the facilities.
Calling on MAHB not to behave like a "monopoly", he further praised the Senai Airport in Johor, describing it as a "hard working private entrepreneurial".
The airport is currently operated by Senai Airport Terminal Services Sdn Bhd and one of the few in the country not operated by MAHB.
"We need more 'Senai airports' in Malaysia. Create more entrepreneurs. More economic activity. Hope the new (MAHB) chairman Tan Sri Syed Zainol Anwar Syed Putra Jamalullail and (MAHB chief strategy officer) Azli (Mohamed) will sort out the mess," he said.

My reading of this is also bringing to me that actually there is very little communication between MAHB and Airasia. I think both are at fault as it could have been resolved amicably. I know and I have also complained before MAHB is really monopolistic in behaviour, but that is what we have to put up with in Malaysia. Unless, Airasia does not intend to operate Malaysia as a significant base.
As mentioned, Airasia has some negotiation power as it is not an airline that is dependent on Malaysia alone - but still close to 50% of its passengers are using Malaysian airports (those that are run by MAHB). I guess both parties have to suck it up  - and I have to admit it will not be easy to do for both the bosses - as MAHB can really act like any Malaysian GLCs. 

Monday, July 3, 2017

Why was Esso sold to Petron

As discussed in my earlier article, Exxon would probably be lesser interested in downstream operations of a mid-size country. My biggest question when Exxon sold the Malaysian downstream operations to Petron - was why would Petron be sold at RM3.59 per share or at total valuation of RM939 million back in 2012.

The final Net Asset value on the books for Esso Malaysia before sold to Petron

If one is to refer here, Exxon basically sold a 88k/bpd refinery (albeit an old one), 560 petrol station business where 420 assets are owned (a very valuable asset), 10 fuel distribution terminals (very valuable as well) and the rights to the retailing business (even more valuable) rather than one starting and building the business one by one - which is almost impossible. Think about it. That to my surprise was sold at a valuation of below RM1 billion.

If one can remember, Petron Philippines which bought the 65% stake, subsequently offered to purchase all the remaining 35% shareholders at the similar RM3.59 offering. About 8+% took up and that is why they now hold 73+% of Petron Malaysia. I made a reference to the Independent Advise by Kenanga during then, which one can read them here and here. Basically, what Kenanga advised was for the 35% minority shareholders to not accept the deal as it was deemed unfair.

For those whom do not intend to read the advise, basically Kenanga based upon the advise from Esso Malaysia's past performances and dividends that it had provided prior to 2012. Needless to say, I am not impress with the information that was provided as they have not much data to provide beyond the past performances.

Something more that was amiss that it missed out in the advise. Esso Malaysia was sitting on very old assets which probably have not been revalued. I am not able to determine what are the Revised Net Asset Value (RNAV) for these assets as most probably these assets are never revalued. It is good to note that for Esso or Petron now, these revaluation is not important as the exercise would probably benefits WTW or Raine and Co rather then the shareholders. However, during a disposal, usually these are done - but in this exercise during 2011/12 it was not considered at all.

In the last probably 9 years of Petron's / Esso's disclosure, these assets are not revealed but I managed to dig through and see what was disclosed in 2005. Many of those assets were bought decades ago and how much would they be valued now? Note that there are 420 of these petrol station assets.

Some of petrol station assets in KL

Some of assets in Selangor

Even more petrol station assets in Selangor

Assets in Perak

Assets in Negeri Sembilan
The ones which I picked are a portion of what they revealed in the 2005 Annual Report. Subsequent to that, Esso (later Petron) just picked the top 10 assets to disclose. Anyway, as in many businesses, I would agree that these assets are for its business and there are little possibilities Petron would be selling them - unless they are really strategic or the assets may not produce the return that is expected of them from the petrol marketing business.

Another key point in the agreement between Exxon, the seller and Petron is the supply. What probably is key is that (as provided below) Petron gets its continuous supply from ExxonMobil. This works both ways as Exxon gets to have its product taken up while Petron's refinery continuously gets its supply. One should note that for a refinery, consistent supply is very important if one is not able to get the supply from its own fields (which Petron does not have any).

Without yet looking at the business profitability and future prospects, one should note that these are very key features for Petron Malaysia to continue to position itself among the downstream players.

My observation is that Petron Malaysia at this stage - its hardest period is perhaps a thing of the past. The early 3 years, I felt that it was at the stage where it had to prove to people as Petron is a new brand in Malaysia - it could have gone the Projet direction, and maybe not as well received as we see in BHP. The way I see it is that Petron is now at ramping up stage.

I have also been asked on my observation on Hengyuan (which purchased the Port Dickson refinery from Shell) as against Petron Malaysia. Again, I am not an expert in this, but based on what I am able to gather Hengyuan seems to be a capable refiner (which is why the Shell petrol that you buy in Malaysia most probably all of them come from Hengyuan's refinery). However, on its operational efficiency, that has yet to be seen as Hengyuan which fully completed the acquisition in early 2016, it seems to me has yet to make the upgrades towards  the current refinery.

On the other hand, Petron Malaysia has done so after taking over the business since 2012. It has managed to be Euro4 compliant. To me, at this stage Petron seems to be the safer hands for an investor but that does not necessarily mean that Hengyuan will not be a good investment in the long term.

Whether Petron Malaysia is expanding its refinery business, that has yet to be finalised. I believe the management would have weighed the situation carefully and smartly. Malaysia itself has enough refinery capacity for our own usage especially for gasoline consumption. And at the moment, Petron's 88k/bpd seems to be not fully utilised. Or it could be going for a much efficient one in the long term. From what I have read, Petron may look for other downstream opportunities from the potential new refinery - i.e. petrochemical products.

Friday, June 30, 2017

Petron Malaysia has a bright future ahead if...

Back in 2004, I remember I invested into a stock which would have provided a 10 bagger. That stock was Digi - where at that point of time after the acquisition of the telco from Vincent Tan by Telenor, it had made a dramatic turnaround from losing market share and eating up cashflow to drastically improving its cashflow until it was debt free within 2 years. That Digi which was bought at RM5 during then has split into 10 shares and many "x" of dividends. I of course being not very clever, sold most of them off much too early although I made some good returns.

That discovery will not come very often and once a while, I thought I have seen some resemblance of the same kind of stock or company - but either I was too slow and stupid to make decision or it actually created a false sense of happiness. In any case, we do not need to find a 10 bagger but my believe is to continue to look for a stock which has that similar track.

Petron is a stock which I stumbled upon when reading several comments on the oil retailing stocks. Since then, and over the last 2 - 3 weeks, I have taken an interest to understand the petroleum retail business after at first looking at Petron Malaysia's financials for the first time (in detail).

I am not an expert in oil and gas businesses, however I believe I am good enough with my observation as well as investment research if I put enough efforts to understand the business.

[I had a similar stock which I had bought - PDB probably back in 1996 (or sometime around then), I had the stock for around RM3. Again, I did not wait long enough to reap its RM24 today (and a lot more of its dividends). During then, also I was way too raw to understand these kind of businesses.]

In mentioning oil and gas, actually Petron - unlike companies like Icon Offshore, UMW O&G, Bumi Armada etc. etc. - is in a much different type of business. It is in the retailing business which Lazada, Amazon or 11street cannot replace. (It can be threatened by Tesla or BYD though)

Just to get things started, what makes me spending time to look at Petron is basically because of the below - its net cash or debt position over a short period of time. Of course in investment, it is not as simple as that, but the below signifies strong and consistent free cashflow.

Net Debt improved dramatically from RM1 billion in 1Q14 to almost no debt now

Before, we even look at numbers in detail - many would have (as well as me), been wondering why would I invest into a Philippines controlled oil and gas company where firstly the country does not even have a strong O&G industry.

Then, as I have seen what really happened to BP (which turned into BHP, under Boustead) as well as Projet (if anyone remembers - which was later sold to Shell) - the same could happen to Petron. It is not an easy business. This is not entirely a technology business but involves operational execution strength and marketing - which is what San Miguel, the parent company of Petron is strong at.

One may also say that Petron is also doing refinery then retailing. Correct. That is one of the concerns, but it seems that it is able to cope well. Its 88,000 barrel/day refinery in Port Dickson is smaller than competitors like Petronas (obviously) and Hengyuan (bought from Shell) at 156,000 barrel. However, it manages to bring back profitability from the refinery - which is important.

What is questionable is that why was it Esso which sold the entire business (refinery and retail) to Petron back in 2012 could not really make much money from this refinery - but Petron could as it has shown especially over the last 8 quarters.

Petron has turnaround from losses in 2013 - 2014 to strong profits over last few quarters
Of course, when one questions oneself - if it could be such a good business, why would Esso sell. And in that same period Shell sold its refinery to Hengyuan while BP has left the country having sold the retailing arm to Boustead. These are the oil majors leaving the country in the downstream operations except for Shell and Caltex (owned by Chevron) which keeps the retailing business.

That answer lies in them being "focused" and the Malaysian market being not big enough. However, what is not big enough for Esso is big enough for San Miguel. In the era of consistent and extreme competition, the big giants can only focus on few things that they think they can be better and make much more money than others. ExxonMobil, Shell and BP are strong in exploration and pretty much the upstream business - an area which not all players can be deemed to be good at. Beyond technology, it is also involving geo-political relationship. Why would then, a CEO of Exxon-Mobil be given a Secretary of State position...

At the same time, as many would know - this business is getting challenged from the shale guys (using a different technology and business model). They are also being challenged from the alternative energy guys such as solar, battery technologies, wind, biofuel etc. Hence, downstream, refining especially is the least of their problem.

It is like manufacturing to Apple and Google.

Petron actually was having a similar deal back in 1973 when Esso sold its business to the government of Philippines. Today, Petron is the largest petrol station operator in Philippines with 40% of market share and operating 1900 stations. In Malaysia today, Petron has close to 600 by now being the 3rd largest player after Petronas (1000+) and Shell (900+). That 600 stations over time, however may bring in very significant return to San Miguel group as one must note that Malaysian oil consumption is about 600,000 barrels a day while in Philippines it is below 300,000 (if I am not wrong).

With that backdrop, more importantly to us investors, Petron is willing to invest in a competitive ground with the backdrop having players like Petronas and Shell. It is growing at a pace of 30 - 50 stations a year now while the likes of Shell is growing in teens. Caltex (400+ stations) and BHP are even further behind, if I am not wrong.

Although the petrol retailing business is growing at just an average 3 - 5% yearly, Petron is probably the ones that has the highest growth. Fighting against negative perceptions in the first few years of its operations, it is now growing faster than Shell and Petronas (which I will show in my future article). This is probably as I believe, the other guys have a larger giant to slay. Shell, Caltex have much bigger agenda to worry about than Malaysia's petrol station business while Petronas will continue to worry over the low oil price environment and its revenue contribution to the government. BHP? Well nothing much to say. Maybe not so competent.

Further from the very nice cashflow which I shown above, Petron is now trading at just below RM2 billion (RM7.25) market capitalisation. Against the significantly bigger giant of about 2.6x revenue larger, Petronas Dagangan - it is really cheap as PDB is now trading at RM24 billion market capitalisation. Translating into PE over last 12 months, it is even a nicer story. Nevertheless, I am also careful over the fluctuation in the oil price which will have some impact to the bottomline numbers - hence I am not reading too much into the profit numbers over the last 2  - 3 quarters. I believe the rise and drop in oil price has some impact as it has certainly has some inventories to hold. When oil price drops, the inventory value will drop, vice versa.

Over time, however this should not be an important benchmark - as we cannot do a projection over the price of oil into the future. The more important benchmark is whether their refinery is creating a healthy margin and secondly - is it able to sell through its petrol pumps as most of the oil that it refines - goes to the pump - if not mistaken. THAT, over the last 2 years have shown mark improvement for Petron - and it is a very important denominator for this business.

I know, I am a bit late in the game - as Petron climbed from around RM5 - RM6 last year - at its current valuation and if it is manages to continue its growth momentum, this is not expensive at all. In fact, it is cheap.

(Over next articles, I may want to discuss the impact of technology - electric cars etc. and introduce more financial numbers towards this business. Obviously, I do not have all the answers.)