Thursday, January 25, 2018

Market expensive? I agree partially BUT...

Where else should one put their money? Cash (which literally means return of about 3% to 4% from deposits), properties which is not cheap now (rental return less than 3% in most cases), bitcoin (are you sure), gold, other commodities, JJPTR equivalent (even more are you sure) etc?

The market has been inundated with headlines - first from the head of EPF - who is a very powerful person due purely to the size of the fund he oversees and second from a fund manager from Affin-Hwang. Think of it this way, the head of Affin-Hwang can be a respected figure but his fund would not cause ripple (not the digital currency) but the action from EPF can cause aftershock to the market. EPF oversees some RM600+ billion or could be as high as RM700 billion of funds. That is some 36% of the capitalisation of Bursa Malaysia.

Of course, EPF has investments all over the place i.e. MGS, private investments, private bonds, but equity forms more than 40% of its holdings (local and foreign). To my calculation of where majority of its equity investments is still in Malaysia - the exposure of EPF in the local equity market is about RM200 billion. That is more than 10% of our market. Considering that many of our companies are either GLCs or family controlled, the 10% really play the king maker role - ala PAS, the political party - i.e, third force.

Hence in this respect, with EPF moving overseas and hunting for deals - I agree but once EPF goes overseas it is now a big fish in a big ocean or five oceans, no more a big fish in Selat Malacca where it does not have much room to manuever. A big fish in a big ocean though will have bigger fishes - even bigger sharks. Then in that respect (with all due respect) it is now a equivalent of Affin Hwang Asset Management in Malaysia. Not easy. That's why EPF is - to some certain extent - still back to Malaysian-related deals such as the Battersea. It is better to do what you know, than to invest in areas which you are not so sure.

Now back to the first topic in this blog. Is our market expensive? If one is to look at KLCI and the type of companies that represent it, I would say very - just like what the Value Partner guy, Cheah Cheng Hye said. In fact, back in late 2016, I have put up a blog (on our KLCI counters) where if I were given a choice to pick from the Bursa KLCI Composite 30, I do not know which companies to pick.

Investments is not just about the PE of today or next year, but how we foresee (with good hindsight) on where these companies will lead themselves into. Based on that same article above, I just do not have good positive view of these companies moving forward. These companies which forms the 30 Composite - AMMB, Axiata, Maxis, Digi, YTL, PDB, Tenaga Nasional - they are not exciting.

(Note: the last 1-1/2 year, there has been movement in the KLCI 30 where Press Metal, Nestle has joined taking over from IJM, Sapura Kenanga, BAT but the two new counters have since became expensive.)

So, is out market expensive? Based on that 30 stocks (which forms about half our our market capitalisation) - yes. Not just on current PE valuation but future valuations of these companies.

One should know, funds (local and foreign) form 2/3 of the movement of stocks almost daily. Many of them are exposed to the KLCI 30 and the mid-cap 70 stocks i.e. the larger capitalised companies. These funds when they make a mention of the market they look at the PE of the market as a whole. (I look at this as well but I like to look much much more micro - which means the individual companies - then only macro)

Our market, on the large part is a bit stale as there have not been much new exciting listings over the past few years. If there are new potential ones, it is more of a repackaging i.e. Sime split into 3 companies, KFC wanting to come back, eDotco - the tower arm of Axiata coming onstream.

As I see it, on the micro level, there are still a portion of attractive companies - which I am not going to discuss here. Because of the general perception that the Malaysian market is not cheap and some of them are avoided or missed out by the funds, they are surprisingly still very good in my eyes. As mentioned above, the global market is now running on low interest rates still and to find investments that secure more than 5% is not easy. It is hard to find companies that are consistently growing and yet traded at less than 10x PE. If you have one and quite confidently see that they will be having that good growth 10 years down the road - you and I have found gems.


At 8x PE for example and if the company is growing at 10% growth yearly in terms of earnings, one could get easily 15% return yearly over a long term period from its investments based on value - not price. Isn't that better than keeping cash? Of course, there are risks but in today's world keeping cash is risky - if you know what I meant.

HENCE. Do continue to keep looking because there are those types of opportunities still in Bursa. And sometimes being a small fish is perhaps better as I do not really need to eat a lot to satisfy myself.

Friday, January 19, 2018

MRCB is into something really BIG?

Seldom I see exercise done in this manner. And seldom an organization can do it at this scale. After raising about RM400 million a year ago in three tranches of private placement - expanding its share base by 20%, it does a rights issue in less than a year.

Back in November / December last year, MRCB raised additional funds at 1 for 1 rights at 79 sen per share. My question is why?

Although felt like not much, MRCB had a major fund raising exercise over a period of 18 months - as mentioned above first a 20% private placement, then rights issue which raised RM2.26 billion, followed by sale of land to EPF for RM1.144 billion and probably another big one in the sale of EDL i.e. Eastern Dispersal Link for another RM1 billion or more. Confused?

I am. But this potentially signifies something really big may come on stream.

I am not one of those who think speculatively, but with a total add-ons of funds of potentially more than RM4 billion, it definitely does makes me turn around and look further.

Cash add-ons of RM3.9 billion (excluding EDL deal with the government)
To understand their exercises, perhaps let me list down one by one:

  1. private placements of 20% raising RM408 million - which includes the MD's additional subscription, Bank Rakyat, Tabung Haji.
  2. sale of 80% of the land which MRCB gotten for refurbishing the Bukit Jalil stadium to EPF. This amounts to RM1.144 billion. Yet to compete, but potentially will be done in near future.
  3. the biggest one which is rights issue raising RM2.257 billion at 1 for 1. Obviously the MD and EPF took up the shares.
  4. Sale of Setapak land for RM100 million to Tabung Haji.
  5. negotiation with government to settle the EDL project in which case the toll collection has been stopped since 1 Jan 2018. One has to note that this is one of the toll highway which is loss making, hence the sale could be a goo thing for MRCB.
What are other major projects which the company has managed to secure or in the process of finalising?

  1. MRT2 projects at Cyberjaya City valued at RM148 million
  2. Cyberjaya City project which it will invest RM229 million for a controlling stake. See the link with the MRT2 project.
  3. Big one - Kwasa Damansara which it will subscribe for probably the most premium land (commercial center) there for 70% stake - project called MX1 - costing RM737.88 million.
  4. project delivery partner for LRT3 with George Kent - the project is a RM9 billion project.
  5. partnership with Gamuda to bid for High Speed Rail project - which I think the partnership has a fairly good chance of winning considering that Gamuda has experience in the MRT1 and MRT2 while as mentioned MRCB is working on the LRT3 with another partner.

Although it is still a big question, unless with the reason of improving the gearing of MRCB, I like the fact that the above exercises focuses on what the group clearly wants to own and what it wants to dispose. Of course, only a few companies can do the way they want it to. For example, not many would be able to have the chance to negotiate and dispose the Bukit Jalil land to EPF and have a fairly good deal out of it.

The group in the last 18 months exercise has managed to focus on three things.

  1. Get the large scale projects like PDP for HSR, LRT3, MRT3, DASH Highway;
  2. push for development into larger mixed development like Kwasa and Cyberjaya;
  3. sale of less strategic land while still be able to keep the construction work. The sale of land at Bukit Jalil and Setapak does not mean they are out of the projects but yet they are construction partner for these projects. I think this is sweet. 
In looking at the past, of course MRCB is not very attractive. Its margin was low and gearing was quite high - that gearing problem is almost being solved. Still, because of that I am not able to figure out how good is the group able to bring financial benefits to its shareholders.

But I like the exercises so far.

Wednesday, January 17, 2018


By Afiq Isa

A call warrant trader's diary

Part I : Who the Hell Fills Up at Petron?

Don't worry, this is not going to be a deep dive into the fundamentals and cash flows of refinery companies. It's just a full, uncensored, transparent account of my experience with two of last year's biggest gems : Petron Malaysia Refining & Marketing Bhd and Hengyuan Refining Company Bhd. 

Let me start with a bit of background : At the start of 2017 I was completely biased towards an oil price recovery scenario. I'd love to buy a fundamentally sound oil and gas company, but there didn't seem to be any. For the most part, anybody involved in the upstream segment was still royally screwed. The lag time between crude oil's price recovery and the demand for upstream drilling services is too long (I've read and written many wishful thinking-type stories on this very subject). Or you may count on Petronas as a long term benefactor, but your earnings are constantly sucked into a debt-servicing vacuum. 

So who are the oil and gas players who can maintain stable earnings in a benign oil price environment but can quickly report fantastic earnings as soon as oil prices rally? It's the refineries. 

As an added bonus : were refineries deeply unloved by investors at the beginning of 2017, as shown by their single-digit PE ratios? Were they being completely ignored by analysts who were averse to being bold?* Yes and yes. 

I was enthralled by Petron's potential. Its 4QFY16 results announcement on February 22 caused a spike in the share price the next day : it went from RM4.50 to a peak of RM6.48. The price then stagnated for about a month (the stock prices have been adjusted to reflect dividend payouts during the year).

During this time (of stagnation), I thought long and hard about initiating a position. About half of its FY16 earnings came during 4Q alone, and it was ten times the 4QFY15 earnings. Their respective revenue and gross profit figures suggest that the earnings recovery was real. And this was a single-digit PE company that paid dividends during the bad times!

March 16, 2017 entry on my trading journal. 

1) The sloppier the handwriting, the more excited I am about a stock.
2) My best preliminary layman analysis at the time : 'they refine oil and sell it'.
3) The earnings recovery puzzle : did an extra 10,000 people a day started filling up at Petron stations in 4QFY16? Who knows. One clue was that they reported higher sales during a quarter where the government set petrol pump prices were higher compared to the same quarter the year before.

After a slightly more thorough due diligence process, I was confident that a rally of at least 30% is realistic - this is a prediction that Q1FY17 numbers will reflect a continuation of the 4QFY16 recovery trend. I'm aware of what the technical analysts are thinking - they will say that the next 'points of interest' are at RM6.48 (the recent peak) and RM6.70 (the previous peak in 2016). I began accumulating a cheap call warrant, Petron-CC, when the stock was trading at around RM5.70. 

Ignore the technical analysis. My parameters for this trade were very simple. It only needs to rally beyond RM6 and stay above that point over the next two months. That's only a 5% increase in the stock. At that 5% gain level my call warrants would already be profitable - from that point on I can stay with the position and rely on the profit buffer. But Petron's stock has to rise over this two-month period, or time decay will start affecting Petron-CC's value.

My deadline for this trade to work was the next quarterly earnings (since this is a one-quarter thematic play). And my conviction was strong enough that I accumulated a massive position gradually; a one sen move in the call warrants translates to a RM2,800 profit/loss. I finished buying by April 1.

By May 15 Petron's stock hit RM8.70 - a 52% increase. I hit the jackpot, but I made a pretty big mistake during this time.


I failed to stick to my own plans - a typical human failing. Instead of selling just before the 1Q earnings (sell on news; trading interest wanes once the anticipated material information becomes public), I decided to stick beyond May. I convinced myself that the warrants can weather any short term decline post-earnings and continue to rally further. Petron's price did recover but I was betting on the wrong horse (warrant) by that point.

May 26 journal entry. By this point I was trapped in a big position as the warrant plummets. 

As expected, there was an immediate decline in the stock after its earnings release (the numbers were excellent). It fell from RM8.67 to RM7 in a month - a staggering 20% decline. I then failed to remember that a volatile stock translates to a much more volatile warrant. My holdings fell enough to cut my profits by a third. Note that the warrants never followed Petron's trajectory thereafter. It stagnated until its September expiration date. 

This was the end result. I wasn't complaining, but it's normal to feel like an idiot when you threw away thousands of ringgit in profits. In other words, good planning, but terrible execution.

Some RM9,000 in losses were subtracted from this final net gain figure.

By this time (June), the market has begun paying attention towards refineries. Petron continues to rally towards RM9 by August. By then I knew there will be further opportunities to trade. 

Part II : Hengyuan Emerges.. and FOMO Strikes!

If you're still reading at this point, I'll reward your tenacity with a brief fundamental background on Petron. It currently has the third biggest market share in the country (from zero brand recognition in 2012), it opened more stations than any other brand in 2015 and 2016 AND 2017, it counts on its big Filipino parent group for support, and it's an integrated downstream player (they refine, sell, and distribute the oil to their Petron stations). 

The company owns the bulk of the stations after taking over Mobil's sites, but they also have a franchisee program that offers better rates for vendors than Petronas. Their improved sales numbers seem to come just from having more stations and having better brand recognition among customers - aside from improved selling prices. Geographical focus must have helped too - they focus on underserved locations in states like Johor, Pahang, and Kelantan, not the Klang Valley.

You get the idea.

However, having retail and distribution activities as well as new station openings involve substantial and ongoing non-refinery related capex commitments (it's easier to calculate a 5-year capex when you're just building/upgrading a refinery). Lower gross profits from these other operations can eat up into the fantastic margins reported by Petron's refining and sales activity. So you'll likely get lower gross profit margins at the group level.

So if you really only care about the refinery angle,  the solution is to buy Hengyuan shares. They just do refining and sales, and the Shell Group buys their stuff under a long term agreement. It's owned by a Chinese company who bought a 51% stake for the low, low price of RM1.92 a share. On paper the Chinese are currently sitting on a 750% gain in less than two years.

This is all Hengyuan needs to keep doing : take care of the 'products' and the 'pipe'.

'Pure play' (focus on one thing only) companies like Hengyuan promises higher profit margins than integrated players like Petron because its commitments are more concentrated (build refinery, maintain refinery, increase production capacity). They don't have to spend ever-increasing amounts of money on building and operating petrol stations. 

I've had a cursory look at Petron's and Hengyuan's respective refining operations and their average production capacities; assuming they're selling the same type of refined products, their gross margins from refining during a typical quarter should be similar. 

It's the other stuff that eats you up - old capex, new capex, forex hedging, anything. Petron also does not disclose an earnings breakdown of their refining, retail, and other operations. In each of the past three financial quarters, Hengyuan's profit margins have been consistently better than Petron's. 

I just wanted to mention the oil price recovery theme in all of this, but beware of how boring the following sentences are : Improving oil prices are generally good for refiners up to a point ; it depends on their crack spreads. Another variable for these companies is stockholding gains ; higher oil prices translate to higher inventory values on all the stuff they store in their tanks. To reflect improving oil prices, they can recognise the quarterly increase in inventory value as part of their profits. Their selling prices are based on global benchmarks, so a short term supply disruption globally can be good for these guys, even if they predominantly sell oil in the domestic market.

Anyway, Hengyuan has rallied alongside Petron since March, but it didn't have a call warrant. Only in August did one investment bank issue Hengyuan-CA and a few other call warrants, and the market went nuts. External factors didn't seem to have led to this - Brent crude prices were still languishing in the 50s. 

Whether by luck or design, the stage was set for speculators to demonstrate their FOMO - they simply can't afford to miss out on another Petron. Hengyuan was hit with a market query just a couple days before Hengyuan-CA was listed. It ensures that the first day of trading on August 2 will be crazy, and so it was. Hengyuan-CA went from 38 sen to 74 sen in two days, or a 138% gain. Speculators, syndicates, crooks, and investment bankers rejoiced (I'm not saying you can't be one but not the other...).

I had a bout of FOMO too - a typical human failing. So I bought some Hengyuan-CA for short term trading. Plus, I had Hengyuan in my watchlist since March - I was preparing myself to trade this thing for about five months, or so I thought.

It turned out to be a very good investment indeed! By now you may have noticed that Hengyuan-CA is worth around RM1.25. That's a 300% increase in about four months.

This was the outcome of my trade in September:

It's like owning bitcoin in 2013 and selling it in 2013.

So what happened? The simplest explanation is that I bought it and sold it at the wrong time. I did not have the confidence to stay invested and my timeline for the trade was all wrong. The warrant remained flat at 30 sen for about two months with no recovery in sight - until November when it skyrocketed. I understood the fundamentals and the sentiment behind Petron, but I failed to do the same kind of due diligence on Hengyuan. It's just hubris - you think you know so much, but you don't. The lesson here is : do your homework. 

The whole experience taught me the value of having real convictions and sticking to what I know. In this case, it was Petron.

Back to August 2017 : the mania in Hengyuan warrants (Hengyuan-CA was just one; CB, CC, CD equally went nuts) sparked a resurgence in Petron call warrants. The stock has well and truly recovered from its post-earnings lows and the upsurge in sentiment toward Hengyuan is benefiting Petron. I should note that in this situation this is a sentiment trade, it is strictly not a fundamentals-backed trade - I'll explain this strategy another day.

I anticipated this and quickly bought some new Petron warrants (Petron-CC was too close to expiry). The end result from a trade lasting 20 trading days:

The second lesson is : stick to what you know and understand. Also, there are few clean outcomes in investing or trading. But you'll come out ahead if your gains (correct analysis and optimal execution) outweigh the losses (sheer foolishness). 

* By this time it's not a bold call anymore. 


- Everything you need to know about structured warrants can be found on Macquarie Malaysia's excellent knowledge portal :

- Search for all currently available structured warrants on Bursa Malaysia on N2NConnect's database :

- i3investor is the best source for market chatter on all Bursa Malaysia stocks :

- I use iTrade@CIMB for all my trades (stocks and futures). Their online trading interface, price charts, real time P&L calculator and broker execution are second to none :


Dislaimer : This is an investment newsletter outlining my market views on trading, Bursa Malaysia, economics, global markets, currencies, and other financial topics. On a regular basis, this will be an outlet for expressing somewhat contrarian views backed with some empirical research and personal market experiences. From time to time, I will also share the progress of ongoing trades and what I think of them, but they should not be construed as stock tips. 

I hope to provide thought provoking content and investment ideas which you may not find elsewhere, as well as some that you may vehemently disagree with. Feel free to berate me with your thoughts and thanks for reading.

Brief background on the author : I'm a finance journalist who has worked with The Edge and StarBiz, two of Malaysia's top business publications for a number of years. I started out as a remisier, but I'm glad to say I was a terrible one (don't take your remisier's advice seriously; your economic incentives are misaligned). I've been trading for about four years, although my focus is more on longer term holdings nowadays instead of day trading. 

I'm currently based in Hong Kong working on bank risk management practices and European financial market regulations. Look up my professional profile here .

Monday, January 15, 2018

Airasia: The REAL BIG Picture

Before I go onto the topic which I want to discuss above, I would like to be clear that unlike some of the blogs out there, I will try to stay out of writing a particular company especially when the stock price of the company is rising.

This is because during a run up of "that" stock, investors being short term to medium term sometimes are not sure what to do. When a particular stock attracts attention, there could be investors who do not look at the underlying fundamental anymore but could be buying because other people are buying. They buy based on the volume and up-trends of the particular stock.

I usually stay away because I am worried that my writing may influence the purchase (or selling) behaviour. I do not particularly cue people to purchase because I do not want to get into a situation where it is overbought - and I am not confident enough to  say whether it is overbought or not.

Usually, when I get interested and felt that the stock is attractive, it will most probably be at the period where it was dropping or stay very attractive in terms of VALUE (NOT PRICE).

This happens throughout my writing on several stocks - among them Ekovest when it rose from RM2.00 (before split) to above RM3.00. Similarly, many years ago DKSH. If one may have noticed, I also wrote about Latitude Tree when it was 60 sen. That goes to others as well like Insas, Bonia etc.

Now I want to get into Airasia because of some frustration over comments which I do want to get the impression on the fundamentals right.

As in many of my holdings, be it WCE, Ekovest, TA, Ecoworld International, I usually look at the fundamentals over a very long term. I wrote the most about Airasia when it was trading at RM1.50 and below - where at that time it was at ridiculous price, and in fact my writing was critically put down by some. That on hindsight is good.

Today, as I am writing it is trading at RM3.97. You hence can blame me for not following what I mentioned above - however, one can be assured that my comment on the below is purely genuine and I am not selling in the near future.

What is the BIG PICTURE for Airasia?

  1. It is playing in the tourism space and tourism is growing more than the average growth of an economy. Why is this important? Well, we do want to invest in a space where growth is high - and from there look for the best or most exciting player out there. Luckily, Airasia is a stock that is traded in Bursa and run by Malaysian and it is potentially the most dominant low costs carrier in Asia.
  2. It (Low cost carrier business) is now not a low barrier of entry business - it used to be a lower to barrier entry business, but the consolidation or rather weaker players opting out is consolidating the play. New would be players now know it is not easy to create and keep the business stay profitable or alive. Airasia is one of the most dominant player in its space - which is low costs in Asia. Low barrier of entry means lots of competition, while high barrier of entry - means competition is more manageable.
  3. It is run by a group of capable entrepreneurs. 2 keys word here - capable and entrepreneurs. Even in a airline business environment where some of them are run by bureaucrats, you want the entrepreneurial spirit to be there, and they must have that liking and capability to be there. The Airasia group amazingly used to be a group of music industry people who were running airline business. Today, they are "true blue" airline people as they already have more than 15 years of experience and - they are doing very well. Also, unlike few years ago, Tony is much more involved today as against the days where he was stretched into F1 and EPL.
  4. Costs is more manageable for airlines - especially low costs airlines. Oil used to be USD50 a barrel. More recently, it has gone up to USD70. 3 years ago however, it was more than USD100. The shale venture in US very importantly, act as a balancing act for the price of oil. This is very important as jet fuel costs comprise 25% to 30% of an airline costs. I obviously do not know whether how much more higher oil price will go but I guess shale is keeping oil price in check - OPEC is no longer as strong as what it used to be 10 year back. Having said that, the current oil price at USD 70 will impact Airasia a little - and it will not enjoy the costs as per a year ago. That however may be partially balanced out by a stronger ringgit - as their lease and purchase of planes are all in USD.
  5. Between low costs and full fledged - it seems that low costs is the model to go. I have mentioned before, even SIA is getting serious in low costs - by buying Tiger Airways. I trust the foresight of many of the Singaporean managed companies.
  6. Having said whatever, Airasia - I find is one of the most visionary airline company. The fact that they spend effort, time and money into data and automation, shows that they look at the future rather than the current. I hence am seeing a portion of its profits to be spent on tech investments. It takes guts and vision to do that from the management perspectives. To those investors out there, do not just look at Airasia's revenue and profit numbers - do look at their strategies and what they do operationally.
  7. In Malaysia, MAS is no longer competing on price, as much as it used to. Positive for MAS and Airasia. This is because MAS realise it needs to get profitable.
  8. Airasia's strategy can be dynamic. It is not dependent on a single market anymore. If Thailand is tough, it can expand into India for example. Similarly, few years ago when Indonesia was tough, it expanded in Malaysia. That model works best especially when it is committing to plane purchases. Its size and strength allows it to have a better negotiation power.
  9. The owners (controlling shareholders) are partially debt funded. This I have learned a lot - some companies can be very attractive but if the controlling shareholders are not interested - to be even fair to minorities - in terms of sharing, the share price may not rise. Tony Fernandes and Kamaruddin have geared to increase their shares and they will need to pay interests from their debt. Hence, capital appreciation and dividends are important to these shareholders.
Airasia is not all rosy. I am mindful that it is still a high capex business, but so are the rest of airlines. What is important though is that the operational cashflow is strong to address the capex expenditure and with other airlines getting more serious into staying afloat price competition is more manageable.

Airasia will still get into some bumpy (or turbulent) ride, be it in its price or profitability - however, I see it to be the doing well in the long run.