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Tuesday, December 27, 2011

Rendition of Getaran Jiwa by Tay Cher Siang

Ok. Something off the topic of stocks here. Just feeling very proud to have such good musicians hailing from Malaysia. Enjoy a beautiful rendition of our famous Malaysian song "Getaran Jiwa" played by Tay Cher Siang.

Saturday, December 24, 2011

Blessed Christmas!

A very blessed Christmas and a happy new year to all my readers! Thanks very much to you all for all your wishes, comments and visits :)

Here are some 'not-so-common' but beautiful Christmas songs for you all to enjoy :)



Wednesday, December 14, 2011

Stock take: TWSP, TDM, SOP

TWSP (RM4.70):
  • % Rise (From RM3.72): 26.34%
  • PER 2011: 7.5x
  • PBV: 1.3x
  • Comments: Some big players buying into this stock, often times in bulks. Just look at the heavy volume queuing up to buy. Buy queue ending today with 1,700++ lots at RM4.70!! The next superstar in the making IMHO. Just compare companies with earnings of RM350-RM450mil. Their market cap is way way up the sky at RM5bil-7bil. TWSP is still at RM2.49bil. Thus, I'm not surprised if its stock price shoots past RM6.00.

SOP (RM5.59): 
  • % Rise (From RM4.48): 24.8%
  • PER 2011: 9.0x
  • PBV: 1.86x
  • Comments: Concentrated big players buying into this stock. More erratic in volume. Not so cheap as compared to TWSP and TDM. Might shoot past RM6.00, who knows. RM6.00 is not expensive either if compared with the likes of IJMP and TSH. 

TDM (RM3.69):
  • % Rise (From RM2.98): 23.8%
  • PER 2011: 5.5x
  • PBV: 1.1x
  • Comments: Demand for its stocks too broad-based for now. Follow market sentiment too much, thus lull performance as compared to SOP or TWSP. Can only see small players nibble at it for now. Stopped at RM3.70-3.80 for some time. Still super duper cheap at this juncture. EPS could be close to 70 sen. Attaching PER of 10x will make it a RM7.00 stock. When will it arise from its current slumber? Hmmm....

Saturday, November 26, 2011

Sarawak Oil Palms Bhd (RM4.66; TP: RM5.80): Results in-line

SOP achieved a net profit of RM75.14mil in 3Q2011, an increase of 52.1% yoy and 7.4% qoq. 9M2011 net profit rose to RM199.6mil, an increase of 94.2% yoy. However, profit before tax in 3Q2011 dropped qoq to RM103.8mil from RM112mil in 2Q2011 as palm oil production growth could not offset the drop in palm oil prices. Net cash stood at RM104mil. Going forward, 4Q2011 might retain the same performance or a marginal drop in profits owing to slightly lower production (judging from its historical production in 4Q vs 3Q), assuming palm oil prices remain at RM3,000/MT.

Net profit is on track to reach about RM270-280mil in the whole year of 2011, equivalent to EPS of 62.2 sen to 64.5 sen. It is currently trading at PER 2011 of 7.2-7.5x which remains undemanding. PBV is at 1.48x. Fair value maintained at RM5.80 per share, an upside of 24.5%. Over the past 2 weeks, its share price remained very resilient supported by very strong buying power, despite the drop in the overall market over the few weeks. It’s a stock worth putting in your portfolio over the long term. Strong earnings growth would come from its young tree age profile as 43% of its immature trees mature over the next few years.


Market Data:
Share price: RM4.66
Shares issued: 434.146mil
Market Cap: RM2,023mil
PER 2011: 7.2-7.5x
PBV: 1.48x

Tradewinds (M) Bhd (RM9.30; TP: RM13.50): Another commendable quarter

TWS earned a net profit of RM144.4mil for 3Q2011, an increase of 16% qoq and 16.6% yoy. 9M2011 net profit reached RM358.7mil, an increase of 24.3% yoy. The earnings growth was mainly buoyed by superb EBIT of RM169mil from its 70% owned Tradewinds Plantation Bhd which I highlighted a few days back coupled with its EBIT from sugar refining division which improved to RM65.7mil from the previous 2 quarters of about RM49-50mil per quarter. However, the earnings growth was offset by its lower EBIT from rice division which slid to RM57mil from RM103mil in 2Q2011 and RM87mil in 3Q2010.

Going forward, its plantation division is expected to perform well owing to favorable prices and double-digit production growth. Sugar division is expected to perform comparably well. However, there might be pressure on the rice division due to the rising prices of imported rice from new paddy pledging scheme and floods in Thailand in addition to the Malaysian government’s constraints on price raise as GE13 is nearing. Having said that, TWS’ tone remains optimistic for all its divisions and expects satisfactory results for the rest of this year.

Assuming that TWS performs equally well in 4Q2011, net profit could reach RM500mil or EPS of RM1.69. Thus, its stock price of RM9.28 is trading at PER 2011 of only 5.5x. Giving TWS PER 2011 of 8x will yield a fair value of RM13.50. One thing which might hold investors back is its net borrowings amounting to RM2.5bil. However, this is not much of a big concern owing to its huge and resilient earnings of RM400-500mil annually, which could cover its debt in 5 years. Given its low PER, rather attractive dividend yield of about 4% coupled with its three business divisions that are recession-proof, this is a stock worth investing over the long term.

Having said all the above, I still think Tradewinds Plantation is a better bet as it is ‘leaner’ owing to its lower price at RM3.74 per share, better growth prospects (TWS’ rice and sugar divisions growth could be rather stagnant, thus dragging the growth of its oil palm division) and lower net gearing of 0.33x vs TWS’ 0.78x.


Market Data:
Share price: RM9.28
Shares issued: 296.47mil
Market Cap: RM2,751.24mil
PER 2011: 5.5x
PBV: 0.85x
Net gearing: 0.78x

Thursday, November 24, 2011

TDM Results (RM3.29; TP: RM5.40): Spectacular! The best quarter achieved thus far!

TDM results just came out. It was the best quarterly results that TDM had achieved thus far and even beyond my expectations. Net profit for 3Q2011 at RM51.5mil, an increase of 82.1% yoy and 60.9% qoq. The rise in net income was due to double-digit production growth of CPO and PK by 25% and 13% respectively coupled with higher CPO and PK prices by 24.2% and 54.5% respectively. Net cash level rose to RM212.6mil (RM0.98/share) in 3Q2011 from RM155.4mil in 2Q2011.

YTD 9M net profit was already at RM112.5mil. Another RM50mil net profit for 4Q2011 would boost its net profit to surpass RM160mil for the whole year of 2011 with net cash level to surpass RM250mil by the end of this year. This translates to EPS of 67.6 sen and net cash per share of RM1.06.

In view of the spectacular results, fair value should be even higher at RM5.40, based on EPS of 67.6 sen and PER of 8x. Potential upside would be 64% from current levels. At current price of RM3.29, it is trading at a ridiculously low PER of 4.8x!!! This is perhaps the cheapest plantation counter I’ve encountered thus far!!

Market Data: 
Share price: RM3.29
Shares issued: 236.8 mil
Market Cap: RM779.06 mil
Net cash: RM212.5 mil/RM0.90 per share
PER 2011: 4.8x
PBV: 0.94x

Friday, November 18, 2011

Tradewinds Plantation Bhd (RM3.72; TP: RM6.24): Highlights

I just read the headlines this morning from TheEdge featuring TWSP and its results are just breathtaking. RM99mil for a quarter at net margins of 43%!!! Very seldom have I seen this kind of margins. Profits gonna be above RM300mil annually from now on. This should catch the attention of analysts and investors, right? Not so sure about Malaysian analysts though :( Some details on TWSP:


Financials:
  • Net profit (3Q2011/9M2011/Estimated 2011): RM98.8mil/RM237.5mil/RM330mil
  • Earnings growth 3Q2011(qoq/yoy): 9.7%/96.4%
  • Earnings growth 9M2011: 130.4% yoy
  • PER 2011: 5.96x
  • PBV: 1.01x
  • Dividend Yield: About 3%
  • Net gearing: 0.33x (Decreasing every quarter from 0.58x in 1Q2010)

Palm oil plantation details:
  • FFB production growth (3Q qoq/9M yoy): 15.7%/15.8%
  • Mature plantations: 70,166ha
  • Immature plantations: 20,940ha
  • Under development: 10,909ha
  • Reserves: 24,491ha
  • Expansion plans: 24,491ha in 4 years

Conclusion: A definite buy. PER 2011 only at 5.96x. PBV at 1x. Net gearing not excessive at 0.33x. Expected to be in net cash position within 2 years. Compare this with TSH’s PER 2011 of 11.9x, PBV of 1.64 and net gearing of 0.67x, TWSP is definitely superior!! But but but….TSH is flying to the sky…

TWSP is a giant plantation company in the making with profits of more than RM300mil. Just look at how many oil and gas counters with profits above this amount and the higher risks involved such as high gearing, dependence on projects handout, execution risks of projects etc; And they are trading way way up and above the level these plantation companies are trading at. I just think plantation companies deserve better. 

Going forward, production growth will come from their immature plantations of 20,940ha, 10,909ha that is under development coupled with 6,000ha p.a. plantation expansion over the next 4 years.

Fair value: PER 2011 of 10x will give a fair value of RM6.24 per share. I think PER of 10x is appropriate in view of its size of plantation (about 140,000ha inclusive of rubber plantation and other land) coupled with strong earnings and production growth. Proxy for exposure to TWSP would be TWS, another buy list which I’ve highlighted in my previous posts. Having said that, TWSP would be a better bet for now owing to its lower price (thus higher liquidity) and full exposure to the plantation sector (Favorable prices now and good growth prospects), but TWS would be more stable owing to its diversified businesses in rice and sugar in addition to higher dividend yield. It depends on your risk appetite in the end.

I can't help but to compare IJMP, TH plantations and TSH with TWSP, SOP and TDM. If TWSP, SOP and TDM are to trade close to the valuations of IJMP, TH or TSH, their share prices have to double up. 


Market Data
Share price: RM3.72
Shares issued: 529.15mil
Market Cap: RM1.97bil

Tuesday, November 15, 2011

Sarawak Oil Palms Bhd (RM4.48; TP: >RM5.80): High production growth, PER of ~7x, cash-rich

Another plantation counter worth looking at: Sarawak Oil Palms Bhd. Someone must have been buying up this stock lately looking at its rally over the past few days. Some details on SOP:

  • 10-months year-to-date CPO production growth (y-o-y): 31.6%
  • 1H2011 net profit: RM125.5mil 
  • Expected 2011 net profit: RM280mil
  • 1H2011 earnings growth y-o-y: 135%
  • Net cash position: RM116mil
  • Immature plantation: 25,063ha
  • Mature plantation: 33,877ha
  • Reserves: ~15,000ha
  • Plantation expansion: Historically about 5K-10K ha p.a.
  • Growth prospects: Favorable tree age profile as about 43% of palm trees are immature. This will underpin strong growth in palm oil production over the next few years. SOP also invested downstream into palm oil refinery coupled with property development, but muted impact on earnings until about mid FY2012.
  • PER 2011: 6.95x assuming RM280mil net profit
  • PBV: 1.5x
  • Fair value: RM5.80 assuming PER of 9x, an upside of 29.5%; RM6.45 assuming PER of 10x, an upside of 46%.
SOP is currently exhibiting strong earnings growth coupled with strong production growth owing to its favorable tree age profile. This puts SOP above many other plantation counters as it is already reaping the fruits from its rapid expansion over the past few years, rather than having to wait a few more years for the fruits to ripe. Another counter having huge production growth in palm oil production is Jaya Tiasa, but the counter is not as attractive in my opinion as it is very illiquid with a higher PER and weaker balance sheet in addition to its major business in the timber industry (not that it's not good now, it's just not as solid as oil palm plantation).

SOP's current valuation remains attractive at PER of 6.95x, underpinned by strong balance sheet and solid growth. Having said that, TDM is still more undervalued as compared to SOP, but SOP receives wider coverage from research houses such as Maybank and OSK and it's recently included in the Mid-70 index as well, which might give some impetus to its share price and attract more investors. It's a stock worth putting into your basket of shares over the longer term. Exercise some caution though when buying as there might be some profit taking owing to the huge run-up in its share price.



Market Data:
Share price: RM4.48
Shares Issued: 434.15 mil
Market Cap: RM1,945 mil

Monday, November 14, 2011

TDM Bhd (RM2.96; TP: RM4.40): Grossly undervalued. A forgotten or ignored counter?


I've written about this company before and I will write it again now, so please bear with me for my cheong hei-ness (in Canto.) :P

After looking through some of the plantation counters, TDM Bhd stood out again as a very promising stock to go into. Despite its huge increase in profits over the past year with 1H2011 profits increasing by 90% year-on-year, its stock price didn’t really move much, still staying at about RM3.00 (Resilient as well as it dropped only about 10% in Oct 2011 before rebounding back close to RM3). Its balance sheet remains solid with a strong net cash position of RM155 million. This probably explains why it could pay generous dividends with dividend yield of approx. 6%, among the highest in the whole plantation sector.

In addition to that, it remains one of the more aggressive planters. It currently has matured plantation of 33,284ha and additional plantation landbank of 40,000ha in Kalimantan, Indonesia, of which 3,000ha has been planted. TDM plans to develop 20,000ha of oil palm plantation within the next 3 years, which is considered more aggressive as compared to other plantation counters (In the words of TDM's CEO in its 2010 annual report, TDM's Indonesian plantation is expanding very fast). TDM is at a very favorable position as it not only has an existing landbank to develop, but it also has the financial resources to do just that in view of its huge available cash pile. Recall how IOI wanted to buy Dutaland landbank at a massive price tag of more than RM69,700/ha. TDM plantations are currently valued at less than RM22,000/ha which is less than a third of what IOI wanted to pay for Dutaland landbank (Market Cap of RM700mil divide by its matured hectarage of 32K ha). If we include TDM's healthcare division plus its 40,000ha of plantation landbank in Kalimantan into the equation, its matured plantations are valued even lesser.

1H2011 net profit was already at RM61mil as compared to just RM32mil in 1H2010. Total net profit for 2011 is expected to be RM130mil. Production of FFB is also increasing in the double digits. For the first 9 months of 2011, production already rose about 15% year-on-year.

So, here you go. A company paying 6% dividend, PER 2011 at 5.4x, PBV at 0.9x, double digit production growth, an existing plantation landbank of 40K ha and net cash of RM155million which already smoothened the way for aggressive organic growth (no more troublesome and expensive search for funding and landbanks) in addition to expansion plans of 20,000ha plantation within 3 years which are already taking place. For myself, this is one stock that I must add to my portfolio.

For a comparison between EPIC and TDM of which both are controlled by Terengganu Incorporated S/B, EPIC was valued at PER of 10x with net profit of only RM60-70mil with growth prospects much lesser than TDM’s. Therefore, I see no reason why TDM shouldn’t be trading close to EPIC’s valuation or even higher since TDM is in many ways superior to EPIC. Thus, what’s the upside? If TDM is valued at PER of 8x (About the average for smaller planters), its fair value should be at RM4.40/share, an upside of almost 50%. If it’s valued at PER of 10x, its fair value should be at RM5.50/share, an upside of more than 80%.


Details:
Share Price: RM2.96
Shares Issued: 236.562 mil
Market Cap: RM700mil
Net Profit for 2010 and 2011: RM93.6mil and RM130mil
PER 2011: 5.4x
PBV: 0.9x
Dividend Yield: 6%
Net Cash: RM155mil
Expansion Plans: 20,000ha in 3 years

Monday, October 17, 2011

Merger between OSK (RM1.79; TP>RM2.20) and RHB Cap

BNM had just given approval to OSK and RHB Cap to start talks on possible merger of the two firms. Dateline is 3 months from 13 Oct 2011. OSK share price had a good run since its announcement of its application to commence merger talks with RHB Cap on 29th Sept, surging from RM1.39 in Sept 29 to RM1.79 today. Will its shares have further leg for upside from current price? It depends on the likelihood of the takeover and the pricing.


The merger is in line with RHB Cap’s intention to expand its investment banking operations and RHB intends to follow the footsteps of its peers such as Maybank and CIMB. RHB Cap is currently the third largest broker while OSK is the fourth largest. Thus a merged entity of the two firms would make RHB the largest broker in Malaysia with a market share of 13.6% vs CIMB’s 10.5%. In addition, the merger would allow RHB Cap to expand overseas through OSK’s exposure to markets in Singapore, Indonesia, Hong Kong, China and Cambodia fast. Or else, it will take years for RHB Cap to expand organically. The major shareholder of OSK, Ong Leong Huat, was rumored as having the intention to sell OSK since last year but only at a substantial premium, perhaps around 2x book value (This rumor was heard last year. Times had changed since then, thus 2x book value would be less likely than last year). In addition, BNM seems supportive of a merger between the two looking at its rather quick response in approving the merger talks. 

Pricing could be around 1.4x to 1.9x book value of OSK, or takeover price of RM2.20 to RM3.00. Maybank recently acquired Kim Eng at 1.9x book value while CIMB acquired GK Goh at 1.2x book value. Besides, Kim Eng tried to acquire Inter-Pacific Securities at 1.4x book value. Since OSK is much larger and more established than Inter-Pacific Securities but trails behind Kim Eng, OSK’s takeover price could be anything between 1.4x to 1.9x. However, this depends also on whether OSK’s Ong would be willing to let go at any price below 1.9x book value. 

Let’s see how this deal pans out. In view of this friendly takeover being in line with RHB Cap’s regional expansion plans and Ong’s intention to sell OSK with BNM being supportive of it, it’s likely that the deal will go through. The deal will likely involve some share swap, maybe half cash half shares. Potential upside for OSK stock price would be at least 22% assuming that takeover price would be at least 1.4x book value. Holding period: 3 months

Market Data - OSK

Shares issued: 963.6 mil
 
Stock price: RM1.79  
Market Cap: RM1,725 mil  
P/BV: 1.14x  
Trailing 12M PER: 13.7x

Friday, October 7, 2011

Will this rally hold? - Justin Bennett

Will This Rally Hold?
by Justin Bennett, Editor

How would you describe the stock market right now?

Maybe the words uncertain, volatile, and stressful come to mind.

European debt worries have investors the world over pulling their hair out.  And it’s painfully obvious, the US stock market is being held hostage by the ominous possibility of a Greek default.

When will all this madness end?

If you can find somebody with a definite answer to that question, you can safely assume they’re full of hot air.

Why?

Because no one knows with absolute certainty when all these worries will finally come to a close.  There are simply too many variables and unknowns, which is precisely why investors are so worried.

In my opinion, there are too many European politicians and bankers with their hands on the steering wheel.  And they’re all trying to steer the problem solving process in different directions.

You can call it the ‘too many cooks in the kitchen’ syndrome.

Everybody has an idea on what to cook, but nothing goes in the oven. And this lack of leadership and decisive action is taking its toll on global markets.

But beneath all this uncertainty, there’s a glimmer of hope…

The markets have risen the past two days on hopes European politicians will finally pull their heads out of their you know what.  A plan to recapitalize and backstop European banks is giving market bears a reason to start covering their short positions.

And that’s fueling a market rally.  In fact, the S&P 500 is up over 5% from its lows on Tuesday.

So does that mean it’s safe to dip your toe into this market?

I think it is…

However, let me be abundantly clear… we’re not out of the woods yet with Europe’s debt problems.  Even it the market finds a way to deal with the issues in Greece, there are other European countries in the same boat.

We’ll be hearing about Europe’s problems for months… if not years.

But here’s the kicker…

If European politicians can get their act together and develop a viable battle plan, we could see some of the worry dissipate from the markets.  And that could lead to a nice fourth quarter rally for stocks.

You see, the 20% plunge in the S&P 500 from the 2011 highs has been quick and unforgiving.  But the gut-churning move has also priced a lot of worrisome news into the market.

In my opinion, a slowing US economy and much (but not all) of the Greek default worries have been discounted.  A controlled default would actually be good news at this point!

And if we get some ‘better than expected’ data about the US economy in coming weeks, a nice year-end rally could restore investors' confidence.

Remember that shopping list of stocks you want to own?  I urged you to put together your list a few weeks ago.  Go ahead and start nibbling at some of those undervalued stocks right now.

But keep an eye on this important technical level…

I’m talking about the low set this past Tuesday morning.  Take a look…

SPX Chart

The green line marks 1075 on the S&P 500, a key level of technical support.  If the market can keep from closing below that level in coming days, it’s safe to stay in the market.

But if the S&P 500 closes below 1075, exit your position and wait for a better entry in coming weeks.

It all comes down to this right now…

Stocks are just too undervalued not to take a chance on them right now.

Whatever you do, don’t load the boat on stocks just yet.  But given how far they’ve fallen recently, even a small position can lead to nice profits in coming months.

Wednesday, September 28, 2011

A rumor-driven and politics-driven market

The Euro solution: Dissolution of EU or a United States of Europe?

THE EURO: A Machine Of Perpetual Destruction

Rolling blog: The eurozone crisis by Financial Times

Want to follow the commentaries and news of the Euro crisis, click below:

Rolling blog: the eurozone crisis | The World | International affairs blog from the FT – FT.com

Goldman Sachs rules the world: UK trader


A financial trader in London caused a storm of outrage by suggesting that world leaders cannot do anything to prevent a global market collapse, saying that investment bank Goldman Sachs ruled the world.

Alessio Rastani's comments on BBC Television on Monday have gone viral, viewed by more than 360,000 people, but they fit so closely to the stereotype of a heartless banker that rumours are rife that he is actually part of a hoax.

Answering questions about world leaders' response to the eurozone debt crisis, the 34-year-old said traders "know the stock market is finished. The euro, as far as they're concerned, they don't really care".

"Goldman Sachs rules the world" ... Alessio Rastani.

"For most traders, we don't really care that much how they're going to fix the economy, how they're going to fix the whole situation, our job is to make money from it," he said.

"Personally I've been dreaming of this moment for three years. I have a confession, which is I go to bed every night, I dream of another recession."

As the BBC presenter looked on in shock, he added: "The governments don't rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither does the big funds."

A Goldman Sachs spokeswoman said the bank had no comment. (Probably this is what they've been doing :P)

The remarks by Rastani, described by the BBC as an independent trader, caused a storm on Twitter and in British newspapers, and prompted Spanish Finance Minister Elena Salgado to brand him "mad and immoral."

The Daily Mail website said it was the "moment trader told shocked BBC presenter the City just LOVES an economic disaster," while The Independent described him as "the trader who lifted the lid on what the City really thinks".

The Guardian asked readers in an online poll if they were shocked, with two options: "No, this is how capitalism works", or "Yes (but only by his honesty)".

Asked about his warning that millions of people's savings could vanish in the next year, Salgado said this was not the case as savings were guaranteed across Europe.

"He thinks that he can get money simply with this threat, with this statement," she told Spanish public television TVE.

"So he is not only mad, he is mad and immoral."

Other commentators meanwhile speculated that Rastani was simply expressing views in public that were privately held by many.

BBC business editor Robert Peston said on Twitter that Rastani had merely "voiced what traders working for big firms and funds say in private," while the Financial Times asked in a blog entry "Do traders dream of defaulting Greeks?"

Some media reports have suggested Rastani is a member of The Yes Men, a US-based protest group who claimed responsibility for a bogus report in 2004 on the BBC that Dow Chemical would compensate victims of the Bhopal disaster.

In an interview with Forbes website, he denied he bore any resemblance to the fictitious Dow spokesman who orchestrated that hoax and insisted he was a genuine trader who worked for himself.
The BBC also stood by him, saying it had carried out "detailed investigations" but could find no evidence to suggest Rastani was not what he claimed.

Monday, September 19, 2011

Does the euro have a future? | The Great Debate by George Soros

By George Soros
The opinions expressed are his own.
 
The euro crisis is a direct consequence of the crash of 2008. When Lehman Brothers failed, the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed. At a memorable meeting of European finance ministers in November 2008, they guaranteed that no other financial institutions that are important to the workings of the financial system would be allowed to fail, and their example was followed by the United States.

Angela Merkel then declared that the guarantee should be exercised by each European state individually, not by the European Union or the eurozone acting as a whole. This sowed the seeds of the euro crisis because it revealed and activated a hidden weakness in the construction of the euro: the lack of a common treasury. The crisis itself erupted more than a year later, in 2010.

There is some similarity between the euro crisis and the subprime crisis that caused the crash of 2008. In each case a supposedly riskless asset—collateralized debt obligations (CDOs), based largely on mortgages, in 2008, and European government bonds now—lost some or all of their value.

Unfortunately the euro crisis is more intractable. In 2008 the U.S. financial authorities that were needed to respond to the crisis were in place; at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe. The political will to create a common European treasury was absent in the first place; and since the time when the euro was created the political cohesion of the European Union has greatly deteriorated. As a result there is no clearly visible solution to the euro crisis. In its absence the authorities have been trying to buy time.

In an ordinary financial crisis this tactic works: with the passage of time the panic subsides and confidence returns. But in this case time has been working against the authorities. Since the political will is missing, the problems continue to grow larger while the politics are also becoming more poisonous.

It takes a crisis to make the politically impossible possible. Under the pressure of a financial crisis the authorities take whatever steps are necessary to hold the system together, but they only do the minimum and that is soon perceived by the financial markets as inadequate. That is how one crisis leads to another. So Europe is condemned to a seemingly unending series of crises. Measures that would have worked if they had they been adopted earlier turn out to be inadequate by the time they become politically possible. This is the key to understanding the euro crisis.

Where are we now in this process? The outlines of the missing ingredient, namely a common treasury, are beginning to emerge. They are to be found in the European Financial Stability Facility (EFSF)—agreed on by twenty-seven member states of the EU in May 2010—and its successor, after 2013, the European Stability Mechanism (ESM). But the EFSF is not adequately capitalized and its functions are not adequately defined. It is supposed to provide a safety net for the eurozone as a whole, but in practice it has been tailored to finance the rescue packages for three small countries: Greece, Portugal, and Ireland; it is not large enough to support bigger countries like Spain or Italy. Nor was it originally meant to deal with the problems of the banking system, although its scope has subsequently been extended to include banks as well as sovereign states. Its biggest shortcoming is that it is purely a fund-raising mechanism; the authority to spend the money is left with the governments of the member countries. This renders the EFSF useless in responding to a crisis; it has to await instructions from the member countries.

The situation has been further aggravated by the recent decision of the German Constitutional Court. While the court found that the EFSF is constitutional, it prohibited any future guarantees benefiting additional states without the prior approval of the budget committee of the Bundestag. This will greatly constrain the discretionary powers of the German government in confronting future crises.

The seeds of the next crisis have already been sown by the way the authorities responded to the last crisis. They accepted the principle that countries receiving assistance should not have to pay punitive interest rates and they set up the EFSF as a fund-raising mechanism for this purpose. Had this principle been accepted in the first place, the Greek crisis would not have grown so severe. As it is, the contagion—in the form of increasing inability to pay sovereign and other debt—has spread to Spain and Italy, but those countries are not allowed to borrow at the lower, concessional rates extended to Greece. This has set them on a course that will eventually land them in the same predicament as Greece. In the case of Greece, the debt burden has clearly become unsustainable. Bondholders have been offered a “voluntary” restructuring by which they would accept lower interest rates and delayed or decreased repayments; but no other arrangements have been made for a possible default or for defection from the eurozone.

These two deficiencies—no concessional rates for Italy or Spain and no preparation for a possible default and defection from the eurozone by Greece—have cast a heavy shadow of doubt both on the government bonds of other deficit countries and on the banking system of the eurozone, which is loaded with those bonds. As a stopgap measure the European Central Bank (ECB) stepped into the breach by buying Spanish and Italian bonds in the market. But that is not a viable solution. The ECB had done the same thing for Greece, but that did not stop the Greek debt from becoming unsustainable. If Italy, with its debt at 108 percent of GDP and growth of less than 1 percent, had to pay risk premiums of 3 percent or more to borrow money, its debt would also become unsustainable.

The ECB’s earlier decision to buy Greek bonds had been highly controversial; Axel Weber, the ECB’s German board member, resigned from the board in protest. The intervention did blur the line between monetary and fiscal policy, but a central bank is supposed to do whatever is necessary to preserve the financial system. That is particularly true in the absence of a fiscal authority. Subsequently, the controversy led the ECB to adamantly oppose a restructuring of Greek debt—by which, among other measures, the time for repayment would be extended—turning the ECB from a savior of the system into an obstructionist force. The ECB has prevailed: the EFSF took over the risk of possible insolvency of the Greek bonds from the ECB.

The resolution of this dispute has in turn made it easier for the ECB to embark on its current program to purchase Italian and Spanish bonds, which, unlike those of Greece, are not about to default. Still, the decision has encountered the same internal opposition from Germany as the earlier intervention in Greek bonds. Jürgen Stark, the chief economist of the ECB, resigned on September 9. In any case the current intervention has to be limited in scope because the capacity of the EFSF to extend help is virtually exhausted by the rescue operations already in progress in Greece, Portugal, and Ireland.

In the meantime the Greek government is having increasing difficulties in meeting the conditions imposed by the assistance program. The troika supervising the program—the EU, the IMF, and the ECB—is not satisfied; Greek banks did not fully subscribe to the latest treasury bill auction; and the Greek government is running out of funds.

In these circumstances an orderly default and temporary withdrawal from the eurozone may be preferable to a drawn-out agony. But no preparations have been made. A disorderly default could precipitate a meltdown similar to the one that followed the bankruptcy of Lehman Brothers, but this time one of the authorities that would be needed to contain it is missing.

No wonder that the financial markets have taken fright. Risk premiums that must be paid to buy government bonds have increased, stocks have plummeted, led by bank stocks, and recently even the euro has broken out of its trading range on the downside. The volatility of markets is reminiscent of the crash of 2008.

Unfortunately the capacity of the financial authorities to take the measures necessary to contain the crisis has been severely restricted by the recent ruling of the German Constitutional Court. It appears that the authorities have reached the end of the road with their policy of “kicking the can down the road.” Even if a catastrophe can be avoided, one thing is certain: the pressure to reduce deficits will push the eurozone into prolonged recession. This will have incalculable political consequences. The euro crisis could endanger the political cohesion of the European Union.

There is no escape from this gloomy scenario as long as the authorities persist in their current course. They could, however, change course. They could recognize that they have reached the end of the road and take a radically different approach. Instead of acquiescing in the absence of a solution and trying to buy time, they could look for a solution first and then find a path leading to it. The path that leads to a solution has to be found in Germany, which, as the EU’s largest and highest-rated creditor country, has been thrust into the position of deciding the future of Europe. That is the approach I propose to explore.

To resolve a crisis in which the impossible becomes possible it is necessary to think about the unthinkable. To start with, it is imperative to prepare for the possibility of default and defection from the eurozone in the case of Greece, Portugal, and perhaps Ireland.

To prevent a financial meltdown, four sets of measures would have to be taken. First, bank deposits have to be protected. If a euro deposited in a Greek bank would be lost to the depositor, a euro deposited in an Italian bank would then be worth less than one in a German or Dutch bank and there would be a run on the banks of other deficit countries. Second, some banks in the defaulting countries have to be kept functioning in order to keep the economy from breaking down. Third, the European banking system would have to be recapitalized and put under European, as distinct from national, supervision. Fourth, the government bonds of the other deficit countries would have to be protected from contagion. The last two requirements would apply even if no country defaults.

All this would cost money. Under existing arrangements no more money is to be found and no new arrangements are allowed by the German Constitutional Court decision without the authorization of the Bundestag. There is no alternative but to give birth to the missing ingredient: a European treasury with the power to tax and therefore to borrow. This would require a new treaty, transforming the EFSF into a full-fledged treasury.

That would presuppose a radical change of heart, particularly in Germany. The German public still thinks that it has a choice about whether to support the euro or to abandon it. That is a mistake. The euro exists and the assets and liabilities of the financial system are so intermingled on the basis of a common currency that a breakdown of the euro would cause a meltdown beyond the capacity of the authorities to contain. The longer it takes for the German public to realize this, the heavier the price they and the rest of the world will have to pay.

The question is whether the German public can be convinced of this argument. Angela Merkel may not be able to persuade her own coalition, but she could rely on the opposition. Having resolved the euro crisis, she would have less to fear from the next elections.

The fact that arrangements are made for the possible default or defection of three small countries does not mean that those countries would be abandoned. On the contrary, the possibility of an orderly default—paid for by the other eurozone countries and the IMF—would offer Greece and Portugal policy choices. Moreover, it would end the vicious cycle now threatening all of the eurozone’s deficit countries whereby austerity weakens their growth prospects, leading investors to demand prohibitively high interest rates and thus forcing their governments to cut spending further.

Leaving the euro would make it easier for them to regain competitiveness; but if they are willing to make the necessary sacrifices they could also stay in. In both cases, the EFSF would protect bank deposits and the IMF would help to recapitalize the banking system. That would help these countries to escape from the trap in which they currently find themselves. It would be against the best interests of the European Union to allow these countries to collapse and drag down the global banking system with them.

It is not for me to spell out the details of the new treaty; that has to be decided by the member countries. But the discussions ought to start right away because even under extreme pressure they will take a long time to conclude. Once the principle of setting up a European Treasury is agreed upon, the European Council could authorize the ECB to step into the breach, indemnifying the ECB in advance against risks to its solvency. That is the only way to forestall a possible financial meltdown and another Great Depression.

Saturday, September 10, 2011

Valuation models and value drivers of stock returns: The Malaysian context


This post is a summary of the research I’ve undertaken for my thesis with regards to price multiples valuation models such as price-to-earnings (PER), price-to-book (PBV), price-to-sales, price-to-cash flow, EV/EBITDA, EV/Sales etc coupled with value drivers of share prices in the Malaysian context. The aim of this study is to give investors a better understanding of the appropriate valuation models and value drivers of stock returns in making investment decisions coupled with providing a faster way of analyzing the whole stock universe (though still nothing beats an in-depth analysis of individual stocks). This could be quite lengthy, so pardon me. If you don’t feel bored, read on :p Perhaps you could get a tip or two if you’re interested to do similar studies on other markets probably, and maybe share with me as well :)

Samples used are 373 firms listed in KLSE that cover most of the constituents of FBM EMAS spanning from year 2000 to 2010.

Identifying comparable firms:
Firstly before analyzing the appropriate price multiples to use, identification of comparable firms is needed. There are basically three industry classification systems available from Bloomberg terminal (The lifeline of most investment or finance professionals) for Malaysian firm such as Global Industry Classification Standard (GICS), Industrial Classification Benchmark (ICB) and Bloomberg Industry Classification System (BICS), though there are plenty of other classification systems such as SIC, Dow Jones, Fama and French Classification etc which are not available in Bloomberg though. To determine the most appropriate classification system, the system which has the highest explanatory power of industry’s averages of variables over the individual firms’ variables coupled with the lowest intra-industry variances is considered the most appropriate. The variables tested include PER, PBV, PS, ROE, operating margin, sales growth and stock returns, representing the valuations, profitability and growth of the firms. It was found that GICS clearly had the best results by having the highest explanatory powers and lowest intra-industry variances. The results were consistent with prior researches on EU and US markets as well where GICS clearly outperformed other industry classification systems. Therefore, next time when you want to extract comparable firms in Bloomberg terminal, GICS would likely give you the closest comparable firms for your analysis.

Appropriate valuation models:
Valuation models include market value multiples and enterprise value multiples based on 1-year forward and 1-year trailing net income, profit before tax, operating profit, EBITDA, sales, book value and cash flow. 1-year forward values are based on ex-post data, assuming perfect foresight by research analysts. Two empirical tests were done to determine the appropriate valuation models. Firstly, OLS cross-section regression and valuation errors were done to determine how best the fair values computed by different valuation models explain and fit onto the stock prices, a method commonly used by prior researches in the past. However, this could be of little contribution to investors as they would not be able to take advantage of the arbitrage opportunities if the fair values fit perfectly the stock prices. A more practical empirical model would be the convergence test where the convergence rates of the market values towards the fair values are measured. The winner among all the valuation models for the OLS regression as well as convergence test was price-to-earnings before tax (P/EBT), followed by PER and PBV. The worst valuation models appeared to be price-to-sales (P/S) and price-to-cashflow (P/CF). For convergence test, price multiples based on forward values outperformed trailing values, implying that investors would have greater arbitrage opportunities using forward values. Other observations included: (1) Market value multiples outperformed enterprise value multiples; (2) As we move the value drivers from bottomline to the topline of the income statement (i.e. net income to sales), results were poorer; (3) Convergence rates of market values towards the fair values improved as convergence duration increased, an indication of the inefficient market that Malaysia had and contrary to US findings where convergence results deteriorated as time went by.

Some of the industries in Malaysia and their appropriate value drivers for valuation models are shown below:



In summary, forward earnings and book values are appropriate models to use in equity valuation. EV/EBITDA and EV/Sales which were highly revered by some researchers in the past appeared to be poor valuation models to use. P/CF and P/S also might not contribute much to equity valuations in Malaysia. Hmmm…..The results are quite in line with the valuation models that are commonly used among research analysts. Perhaps the popularity of PER and PBV among research analysts could have caused the results to favor these two, as this might be a self-fulfilling prophesy as investors use these models to bring the market values towards the fair values computed by these models.

Firm-specific value drivers of stock returns:
This could be useful for deciding which firms to invest should the firms have similar upside based on their fair values. Several value drivers are tested, such as beta, book-to-market (inverse of PBV), earnings yield (inverse of PER), dividend yield, net gearing and market capitalization. Multivariate analysis using panel data regression tests is used to determine the explanatory powers and significance of these value drivers. All in all, book-to-market and market capitalization had the most significant impact on stock returns, followed by net gearing and beta. Earnings yield and dividend yield appeared insignificant in most of the industries. Book-to-market, market capitalization and dividend yield are negatively correlated to stock returns whereas net gearing, earnings yield and beta are positively correlated to stock returns. Surprisingly, beta appeared to be not so significant in affecting stock returns, rendering the application of CAPM in Malaysia rather pointless :P On the other hand, higher net gearing in fact favor stock prices, of course provided that the borrowings do not bring the firms close to default risks. This could be due to greater efficiency in the capital structure where higher borrowings could bring in tax savings and at the same time allow greater expansion of business operation. Most of the industries have more or less similar results as the overall market, except for agricultural products (Mainly oil palm companies) which had net gearing as the most significant driver, and construction firms of which dividend yield was significant in the negative direction to stock returns. Banks and industrial conglomerates (like Sime Darby) are not affected by net gearing at all.
In summary, lower market capitalization, lower book-to-market ratio and higher net gearing favor higher stock returns. 

Summary: 
GICS provides the best industry classification of firms

Most appropriate valuation models: Market value multiples based on forward values of earnings and book values performed the best. Enterprise value-based models coupled with sales, cash flow and EBITDA multiples performed poorly.

Lower book-to-market, lower market capitalization and higher net gearing significantly affect stock returns in the positive direction.

Sunday, August 28, 2011

Notice on EPIC's Compensation Scheme for shareholders who sold their EPIC shares

The offerers will offer the Claimants, cash compensation equivalent to the differential amount between the offer price of RM3.10 and the price at which their EPIC shares were sold. Claimants must be an owner of EPIC shares as at 10 Dec 2010 and who has sold his/her shares during the compensation period at a price lower than RM3.10. The documents regarding this compensation will be sent out to Claimants within 21 days from 24th August. For more details, see here.

So, lucky for those who still hold their EPIC shares after 10 Dec 2010. My first time seeing this kind of compensation scheme. "So good one ah". But but, last time the offerers said there're no plans to take EPIC private. Oh well, as usual. What to do. 


PS: Compensation document, please click here

Thursday, August 25, 2011

Tradewinds Malaysia: 2Q2011 Results Summary

Revenue and net profit rose 24% and 42% y-o-y to RM1.6 bil and RM124 mil respectively. In terms of segmental profits, rice and plantations operating profits more than doubled as compared to last year, raking in RM103 mil and RM155 mil respectively. However, sugar profits were not fantastic and remained stagnant at  RM49 mil. Prospects for plantation and rice will remain favorable for the rest of the year while sugar performance would remain unexciting. Overall, expect better results ahead. This year's performance very likely will exceed last year's results. They just announced an interim dividend of 20 sen per share (before tax), making their dividend yield per year of about 4-5%, rather attractive. 

Long term wise, it's a stock worth holding. PER 2011 at less than 6x!!! Dividend yield at 4-5%, huge earnings growth especially from the plantation division (just look at Tradewinds Plantation huge growth in its net profit, could easily exceed RM300mil for this year).

Monday, August 8, 2011

Are you listening? Buffett says: US Rating Still AAA, No Matter What S&P Says

From: CNBC


Warren Buffett says there's no question that the United States' debt is still AAA and that he's not changing his mind about Treasurys based on Standard & Poor's downgrade.


Warren Buffett is not changing his mind about Treasuries. "If anything, it may change my opinion on S&P," the legendary investor said. Buffett is a big shareholder in Moody's rival to S&P.

And Buffett is putting his money where his mouth is. As of June 30, Buffett's Berkshire Hathaway had $47 billion in cash and equivalents. Buffett tells me that at least $40 billion of that is in U.S. Treasury bills. Not only that, Buffett says almost all of his own personal holdings in cash and equivalents are in T-bills as well.

"I wouldn't dream of putting it anywhere else," says Buffett, adding that at Berkshire, the only reason he's sold U.S. Treasurys in the past is to buy stocks or make acquisitions. And Buffett says Berkshire is still buying T-bills, even though yields have fallen so low. "If I have to buy (Treasurys) at a zero percent yield, I will," he says. "I don't like it, but we'll do it."

That's not to say that the nation's recent spending habits, the Fed's propensity to print money, and Washington's political gridlock haven't taken its toll on investor sentiment. Buffett recognizes that, as well. "Our currency is not AAA, and in recent months the performance of our government has not been AAA, but our debt is AAA," Buffett adds.

S&P and other bond ratings agencies are responsible for rating whether entities can pay off their obligations. Buffett argues that as the richest nation in the world with a GDP of $48,000 per person, America should have no problem meeting that obligation. And, of course, there's also the benefit of having a Federal Reserve that can print money. "I can go out drinking all night, but if I've got a printing press, my debt is good," says Buffett.


Anyway, allow me some rantings: When everyone expects the market to fall, the market fall would be limited. It will not be the expected news that will crash the markets. The market will only crash when whatever that's crashing the market is totally unexpected. So, is US downgrade something totally out of expectation? A total NO! And the fears of financial crisis, economic crisis, PIGS default etc etc, are they new? What's new now? Sometimes I'm wondering whether I'm reading news 2 years back or current news. S&P has been crap, are they trustworthy after all? I still remember how they rated Taiwan lower than Spain a few years back. See what happens now. So, I'm expecting a rebound soon.


Aside from this, some interesting quotes:
"I can already smell QE3...next week will be important to see if Bernanke is a true money printer or an amateur, and if he is a true money printer he will start printing soon" - Marc Faber
"At 8:45 AM ET, we asked Bespoke readers whether they thought the S&P 500 would trade higher or lower from the open to the close of trading today.  As shown below, 6 out of 10 respondents said higher." - Bespoke

Wednesday, July 27, 2011

Some interesting IPhone Apps: FSM Mobile

A friend just introduced to me an application from Fundsupermart which caught my attention. You can download this application over here

For myself, I would use this application more for macro views such as forward & trailing PER and valuations of markets (updated daily) coupled with updates and video interviews from some of the most influential fund managers in the world. Other interesting features are portfolio simulation (For funds available in FSM) in addition to daily and historical performances of individual funds and equity indices. 

You can try it out for yourself. After all, this app is free :) For more info on this app, click here.

Do take a look at some of the app's features as shown below:

Video interviews of fund managers:
  

Investment Ideas and Research Materials:

Equity Index (Performance, valuations and description)
 

Equity Indices Tracker

Individual Funds Info

Portfolio Simulation

Monday, July 4, 2011

Kumpulan Fima (RM1.74; TP>RM2.00) - Merger between KFima and FimaCorp

TheEdgeWeekly just had an article on KFima and FimaCorp of which both of them could be merged under a single entity and could be somewhat similar to the merger between Sunway and Suncity OR it could be via privatization of FimaCorp. KFima is also cash rich with net cash of RM151.2 mil. If KFima is to take FimaCorp private, it has to fork out RM200 mil to take FimaCorp private and might need to borrow additional RM50 mil. TheEdge mentioned that it doesn't make sense for the exercise to be fully paid by cash. It's quite true in the sense that if fully paid by cash, KFima shareholders would benefit more than FimaCorp shareholders as KFima shareholders would stand to benefit from the additional earnings contributed by the extra 39% equity stake in FimaCorp while earnings from FimaCorp would not be diluted by extra share issuance. However, FimaCorp shareholders could not participate in the potential upside of KFima's share price. Perhaps a share swap would be more ideal as FimaCorp shareholders would stand to benefit from potential upside of merged entity's share price. A bumper dividend from FimaCorp could be ("Could be only :p") on the cards to sweeten the deal and could pump in cash from FimaCorp to KFima. Another thing, just to make things clearer as the article could be somewhat vague about the plantation hectarage, they would have a total of about 23,000 hectares of agricultural land (Oil palm and pineapple) if both entities are merged. Usual benefits of merger are economies of scale and elimination of inefficiencies etc etc. The merger would be good for the shares as well as FimaCorp shares are hardly traded, remains illiquid and trading at such low valuations, thus better to be taken off KLSE. On the other hand, KFima's or the merged entity's shares could have a larger share base to enhance liquidity when merged.

Major shareholders of KFima are buying KFima shares over the past few weeks. There should be some good deal in the offing for KFima. Valuation  remains very attractive as KFima is still trading at low PE of only 6.4x based on historical earnings while PBV is at about 1x. KFima share price has remained at this level for a very long time, thus it's about time to make a move. At this price, it's still good to go in. Dividend yield remains commendable at 4%.  It has strong balance sheet with net cash of RM151.2 mil coupled with cash cow businesses in  printing government security and confidential documents in addition to oil palm/pineapple plantations. 

Having said all these, the deal remains uncertain as there is no official announcement yet on KLSE. Nonetheless, based on its fundamentals alone, KFima is an attractive share to accumulate.  

PS: It just recently acquired an extra 5,000 hectares of plantation land in Sarawak. Thus, total plantation land is about 27,000 hectares, not 23,000 hectares as stated above. My apologies.