Wednesday, February 27, 2019

Toll highways: When a Pitch has turned into a Promise but has now become a Problem

I was born and grew up from a "Project Perumahan Rakyat", one of the first of its kind during the 70s, when government during then was trying as usual solving housing problems. My parents was paying about RM36 a month to be able to rent the one bedroom 400+sq ft place which later on we were allowed to own. That by itself is a rent to own scheme. I know what B40 is about and obviously have gone through life being in that category. During then, the term B40 did not exist but in my community as a child, my grandmother was always careful that I do not take the elevator alone as there are a lot of drug addicts in the area where I dwell in. The place that I stay, we cannot fix a ceiling fan as the height of the unit is only about 8 ft. Among some of my neighbors, there could also be families with 10 people staying in a 400sq ft unit as during then and now, people are just hoping to have a roof over their heads.

Of course, over the period I have studied in a good public school and I have always been immersing myself with books and knowledge. My family as I can say it take books as our source of knowledge. I would claim that my fondness on numbers and later on finance and investment since young comes to the appreciation in understanding business. Of course, living in Malaysia, we have to understand politics and constant pressure faced by politicians. I am still learning and this is one area which I constantly overlooked.

2018 of course was unprecedented, and I do not need to say what happened as from May until now it is already 9 months. As in every Malaysian, we have to go on with life. We have to make Malaysia better under the constant pressure from new economic powers further from Malaysia or even among our neighbors. Today, North Korea's Kim Jong Un is talking to Trump on disarmament of nuclear weapons in a country called VIETNAM. Having that discussion in Vietnam itself is historic as who would have thought of that discussion being held in a country that just gotten itself out of war not too long ago. Malaysia is facing new pressure from these type of countries, never mind our four neighbours, Singapore, Thailand, Philippines and Indonesia.

In that, Malaysia has to move faster, smarter but still carefully. In my many discussions with businessmen who do business in Vietnam, Malaysia still has many advantage against that country. But yet, we are still competing against them on many fronts.

The new government in addressing the B40 (rightly so), still has to grapple with bringing the country forward. In that, the budget, expenses, policies and later deliveries have to right and precise. To bring forward economic comfort to the people, many forgot that one, as a country, we have to fix the economy first. With that, together we have to address the plight of the people. Of course, today the challenge faced by many government of the day is to fix the disparity of income. This is the flaws and product of globalism, where a particular company thrives and become stronger while few competitors survives. Example, how does one address a monopoly or soon to be of Grab, Lazada We complained about the taxi license holder of the past but these are one company dominating an important space on the new economy.

The new government, unfortunately, with the manifesto, todate it is more of a filling the potholes from the promises provided during the election. Some of the people that I talked to, still felt that Malaysia has not gotten itself out of the election fever. True enough, in one seminar that I attended recently, one of the politician turned government hence policy maker today still talk about the triumph of May 9 - 9 months after.

Since liberal democracy has been proven to be a governing model, it has been seen that one of the way to fix the economy is to promote capital markets, direct investments and entrepreneulism. Malaysia, in that respect practices open economy. Our DNA has been about getting companies to take up risk and we encourage them by giving incentives. When companies profited, we can once a while complain but of course in the process, we see better Malaysian entities come out of it. In fact, our open investment policy also helped non-Malaysian companies to thrive out of Malaysia. If one goes to Penang or even Johor, we see many, but we just do not realise it. We helped many non-Malaysian companies to be successful and we should be proud if it. However, our bigger hope is to see Malaysian company that is able to compete globally.

The elimination of tolled highways is one of the promises among the many promises. I however felt that it is an over-promise which has not been studied carefully. If we put it and give a simple question to the masses, they of course will not want to be paying toll. Nobody wants to pay anything especially when the B40 and M40 earn below RM8500 household income. However, the past government, since 80s i.e. Penang Bridge have already started privatisation of roads whenever we feel there is a need to develop infrastructure. Fast forward today, that perhaps been slightly overdone - but it is not easy to reverse a strategy that has been created for so long. In getting private to invest and charge, our budget on development has been allocated elsewhere. More recent analysis has provided that to buy out all the concessions it will costs RM150 billion.

The government has talked about RM1 trillion debt. While RM1 trillion is deemed high, another RM150 billion is not helping. Every year, in our budget, Malaysia for quite a while has not been putting that much on development expenditure as our operating costs has been a bigger problem. We tried to solve that through private-public partnership (the 3Ps). It is a good effort, but as usual to make that happen the one that takes the lead i.e. PUBLIC has to make themselves consistent i.e. then only the companies will be comfortable.

While in my past article, I am supporting the purchase of Gamuda's toll concession assets, to do it much more aggressively on several others is a dangerous precedent. We just do not have the capacity. The public, like it or not has to be educated, just the same where they have to be educated on personal financial management - to fish rather than to be given fish is an old proverb but still relevant. This toll topic is hugely complex and I believe only a small percentage can comprehend, but nevertheless a policy has to be clear and we have to stick to it. Otherwise, fewer companies will be willing to invest and that could present a bigger PROBLEM to the country.

Monday, February 25, 2019

The idea to buy Gamuda's related toll highways probably is the most rational (among the rest)

Prime Minister's Department made an announcement where it is in negotiation to buy the concession owned by Gamuda, and this is probably the most rational.

Gamuda as mentioned owns 44% of LITRAK which has LDP and SPRINT under that vehicle, 50% of SMART in partnership with MMC, and 70% KESAS in partnership with Selangor State. These highways pass through the most populated areas of Klang Valley, hence by buying them, it probably sends a message that they are doing something to their promises. It would impact the most number of people although we can say that whatever that is forgone towards development in the rural is provided to the urban. The fact of the matter is that, cost of living is most dearly felt in the urban area than the rural.

Most of Gamuda's related highways except for SMART is highly profitable. Most of those tolled highways additionally are left with short tenure, which makes it more reasonable to buyback. Costs to the government will not be as high. LITRAK's highways will end by 2030 while KESAS should have ended by 2024. I believe SPRINT should have ended by 2034 to 2036.

The most significant piece of the proposal is that the government is exploring to impose "congestion charge" pretty much like Singapore's concept - without the smartness yet, as Singapore's concept is charged based on traffic, where it is proposed for the current charges is charged as congestion charge for 6 hours during the peak hours. Between 11pm to 5am, it is proposed for non toll charges while 30% discount will be given for off-peak times.

This concept is a good idea as it probably disperse traffic more evenly, hence basically asking companies and people to relook at the working time. It is current, as most ideas are towards flexi hour working, which to me brings even more productivity than not. A simple fact that can be argued is that with people spending less time on the road as well as better utilisation of mass transportation services, it by itself already causes better management of facilities and time.

Before this, I have always wanted to suggest towards creation of a "transportation fund" as part of the ways to address the promise towards reducing toll highways. It seems that this one is a way to start. The collection from the full fare in peak hours and further 30% discount is a model that can be worked on. To impose congestion charges even on roads that are non-tolled at the moment will not be a popular idea, but that is one which the government must look at holistically, as in the future our KL city will be almost deadlocked, if we do not look at the revise transportation model. As it is MRT3 is being postponed and the current situation will not allow the government to even consider more tolled roads.

The transportation fund that I have thought of can be used to buy up some of the tolled roads as and when they become available for purchase. The government need not buy them off in one go but it can be done in stages. One of the entity that government could work with is Khazanah and I believe Datuk Shahril the current CEO of Khazanah should be experience enough to look at this.

Why Gamuda rather than PLUS for example?

If one looks at the highways that Gamuda has control of, they probably are less affected by gearing. LITRAK's debt for example is about RM1 billion. And if the government is to take over the concession, they can also take up the debt. The PLUS one is much bigger, which I believe the debt through bonds is still around RM30 billion. Moreover, who is to compensate the EPF's contributors whom have funded the purchase of the concessionaire 8 years ago at RM34 billion enterprise value?

The ones owned by Prolintas under PNB are also more challenging as we know PNB is an investment arm for a large part of the community and they can be sensitive. Many of PNB's highways are also just breaking even. And they are still building 2 new ones - DASH and SUKE - if I am not mistaken.

As above mentioned, LDP and KESAS should be the ones that are more compelling to be purchased back and show that this is the model to go forward towards highway or road charges.

I believe the purchase of the concessions of LITRAK, KESAS, and SMART should be at fair value with some small discounts. A look below shows that the majority of the shareholders for LITRAK for example are owned by funds. I believe except for Gamuda which owns 43.58%, funds own almost 50% of LITRAK.

In buying up assets especially on the part of the government, one should be very careful as it cannot afford to be seen as overpaying while the capital markets be seeing it as non-punishing towards them. A small step that is taken wrong would impact the market as well as the economy on a macro level.

On whether this is value depreciative towards the other highway concessionaires especially like WCE, Ekovest or even Taliworks, I think it should not. To make the transportation fund model (as above) works even better, I suggest for incentives through capital markets such as the ones like Real Estate Trusts (for highways) to be created. From this, renegotiation on toll rates could also be initiated as the companies that are incentivised through various means may even reconsider the pre-negotiated contractual rates. A simple example, the Transport Fund could invest into the listed highways and from there push for "congestion charges" type of model from within. Highways that do that could be incentivised through various means and that could also include maintenance contracts for other non-tolled roads.

In reality, as I see it, after the 9 months in power, the current government is getting a better hold of the situation and understands both segment - people and market economy - much better. As it is, one can see that remarks that are made suddenly has been much reduced. They also do seem to understand that to elevate the current situation, it is not just by giving but in its entirety: the people's cost of living, the business sector, the general economy are intertwined. Even this time around the Gamuda's situation is handled better than the one when part of the package for MRT2 was terminated suddenly.

I am actually seeing more positive signs last few months except for the constant pressure to win by-elections.

Thursday, February 21, 2019

CIMB's downward revision on Bumi Armada is weird

Since my purchase of Bumi Armada two days ago, CIMB came out with a downward revision of the target price of Armada from 70 sen to 30 sen. If the summary that TheStar is made correctly, I feel that it is weird that CIMB has taken the probability of a right issue to be called by Armada at 70% and it will stay status quo at 30%. Hence, based on that probability the analyst downgraded the call to 30sen.

First of all, if ever Bumi Armada is doing a cash call through rights issue, there should not be a revision in target price as a rights is a new call altogether. It should not affect the price unless, he is really looking at short term and not fundamentals. Secondly, as seen from his detailed analysis, he did a very thorough sum of parts analysis on the company identifying and valuing all the projects - after which he put a discount to the value - which to me is correct. However to put a weightage on the rights call probability and reduce the target based on that does not come from the "valuation book". There's no CFA that teaches that.

It additionally says that because Armada is contemplating to bid for new projects, hence it will need rights issue call. Again, the fact that Armada is looking at expansion by itself is not a bad thing, in fact it is a good thing.

Tuesday, February 19, 2019

Buy Armada, Sell Gamuda

For the last 1-1/2 months, Bumi Armada has been a highly traded stock, which is probably unusual considering that it used to be a Composite stock. On a daily basis, its volume can go as high as 500 million stocks traded, i.e. almost 9% of its 5.871 billion issued shares. This shows that there are a lot of traders and speculators with probably syndicates involve in the stock.

When this happens, usually the fundamentals are out of whack. At the moment, there is a tense situation concerning its short term fundamentals and among the analysts even they could not agree closely on the valuation of the company among themselves. The UOB Kay Hian analyst gave a 10sen valuation for Bumi Armada whereas the CIMB analyst gave a 71 sen valuation for the company.

Basically, for me if the UOB's valuation is correct it basically can almost call for bankruptcy or almost liquidation for the company as one of the major concern for Armada is its short term liquidity.

I had written a piece on the stock, and I have less fear over its short term liquidity. I think it is something that can be addressed, which is why I am more inclined towards the analysis provided by CIMB. Hence, I have made a 25,000 units purchase of Armada for the fund and at the same time Sold Gamuda. If one can remember, when I bought Gamuda few months ago, it was also probably out of whack in terms of its pricing for a very good company. The almost termination (underground portion) of MRT2 for Gamuda caused selldown on the stock. It was lingering at around RM2.30 to RM2.45. Now it has gone up and I am taking profits although I do think it will continue to go up.

At the moment, in my opinion, many of the stocks are attractive hence giving me difficulties to pick stocks. With Bumi Armada, I am taking opportunity of its volatility and selldown which I think is wrongly sold especially when it has become a traders stock.

I think over the long run, it will readjust itself, hence I decide to take a small purchase of the stock.

Wednesday, February 13, 2019

MMHE: A quarterly report which is not worth reading

MMHE, a 66.5% owned subsidiary of MISC which in return is a subsidiary of our largest corporate, Petronas just reported a poorer results turning in a net loss of RM25 million for the 4th quarter from profits a year earlier. I do not invest into MMHE and I just would like to know the trend of the business. However to my dismay, it is not worth reading. Just see below from its financial performance announcement.

What do we learn from this reporting? Nothing. I can get this done by a trainee employee, and I would not be satisfied.

MMHE has 9 directors and I am sure professionally hired management but when can we expect professionally provided report?

Sunday, February 10, 2019

Not all Oil and Gas companies are made the same

I have been reading this week's Edge which discusses about Scomi and the challenges that it faces. Under the title "Scomi Group on the Brink", it highlights the predicament that the group is facing as well as giving us an account of its colorful past where it was a vehicle controlled by Datuk Kamaruddin Abdullah, the son of Malaysian 5th Prime Minister, Abdullah Badawi. Of course, the best period experienced by Scomi was when Badawi was PM. After that, it was downhill for the company.

This gives us a lesson and remind us that it is hard to evaluate O&G companies. Why? To me, many O&G companies in Malaysia need a different type of business connection and it is hard to make out their actual strengths and capabilities. That we have seen - the best opportunity for several of the sons of Malaysian PMs to become successful in business is through this sector. It has been proven before.

Whether they are capable business, it is hard to read. This sector however does allow people whom have connections to either our country's oil business, the federal or state government to succeed. O&G is quite a unique business where in many countries, the assets are state owned. This is similar in Malaysia where the asset is owned by Petronas and ultimately the PM's office control.

This was especially so when oil touched $120 per barrel and at that period Petronas was probably more relaxed in developing Malaysian O&G companies. When oil comes down to $60, it will be a different story. I believe Petronas will be more careful. At this period, it will be the time to separate the boys from the men, as someone would say it.

As an investor, it is important to figure out and try to eliminate what is investible and which one is potentially high risk. The retail business is investible and those include PDB and Petron. Then there are the equipment suppliers, companies like Wah Seong, Favelle Favco. Dialog is another one where they have made it successful in the business and they are proven company.

Then there are those that very hard to read, in terms capabilities especially to our Malaysian service providers which largely only supplies towards local projects. Those include Carimin, Perisai, Perdana Petroleum, Dayang, Icon Offshore and few others.

There are several companies that have made it overseas. Those include Yinson, Bumi Armada, Sapura Energy, Wah Seong, MISC. These are the companies that will provide a good basis for us to make our study as this is an international business and the ones that are able to compete internationally shows their competitiveness. The ones that have more than 80% of their business dependent on Malaysian contracts is just too risky.

The recent rise among O&G companies brought back an early exuberant towards the sector but we must be able to separate which are capable to compete and which ones are not. What has not really happened and to my disappointment is the lack of consolidation among the companies. There have been very little M&As within the sector and I feel that there are just too many companies. Although there will be natural attrition, the amount of consolidation is just too few.

I do think that while there seems to be a pick up in the sector, many of these companies will still find it hard to make ends meet. A run through of what the companies say in terms of prospects for 2019 and near term just shows that the good old days are far and between. It is true though that many stocks have touched their all time low. These provides huge opportunities.

To understand the sector, it is not just about how many contracts Petronas can dish out as I believe they are also very careful nowadays. It is about geopolitical. It is also about the politics of Trump and Saudi with Russia in the fray as well. Even the killing of Khashoggi has its impact on the price of oil. Shale from US plays a big role. How will they impact the strategy among the oil majors and OPEC? What about the global initiatives on alternative energy such as solar, electric car etc?

If one is just promoting based on how many rigs Petronas has, I think it is pure shortsightedness and not thorough in their thinking. In this space, one has to be clear on the macro as well as micro economic situation. Is Hengyuan a retailer and refiner? What would the impact of excess supply from US shale brings to their margin?

What about the companies in the exploration space? Are there new activities and are there oversupply among the players. Can I call it the buyers (companies that awards contracts) market?

There are companies that have some debt issues and such are Bumi Armada, Sapura, Perisai Petroleum, Scomi Energy. Can they overcome that? As I have mentioned, some of them are world class competitors. Will they be back stronger if ever they are able to resolve their debt issues?

Then there are some companies which have taken opportunities as they are late entrants in the business when the oil price collapse. When others were struggling with overcapacity and debt, they had just raised new funds and their balance sheet were fresh and unleveraged. Such companies include Hibiscus, DNEX.

All in all, during times of uncertainty there presents opportunities, but we have to be very careful as not all of them are worthwhile.