Stocks Unleashed

Top 10 Plantation Stocks Summary Table (Based on Mkt Cap)

2012-02-10T16:10:00.005+08:00

Just read CIMB's report on regional plantation sector being upgraded to trading buy from neutral. Hap Seng Plantations is the cheapest in KLSE according to CIMB. I think a more appropriate phrase should be "the cheapest plantation counter IN OUR COVERAGE" as many of you might have known there are way cheaper plantation counters out there with lower valuations and higher growth prospects (available land, existing immature plantations etc). In the list above, HSPlnt has the lowest immature plantation hectarage and little available land for plantation, thus where is the growth coming from? Continue searching for available land (expensive land and another few years of waiting to bear fruit) or acquiring existing plantations (even more expensive)? Anyway, just something for you to chew on.

Maybank initiating report on TWS. Report mentioned sugar division almost free? Hmm...Not exactly, it comes at a price as well in the form of borrowings. Anyhow, TWS' equity stake in Bernas and TWSP should account for about RM2.87bil out of its total mkt cap of RM3.1bil. By attaching PER of 14x to its sugar division's profit of RM190mil, TWS should be valued at RM5.53bil. Minus off its debt of around RM800mil (excluding TWSP and Bernas debts which have been accounted for in their market values), TWS' fair value should be around RM4.7bil, or RM16.00 per share.

TDM seems to be going through correction now, but will be temporary as it's still trading at very cheap valuations. This would be an opportunity for you to pick up for long term investment.

Happy investing!

"Why China's housing market will slow, not collapse" By Nin-Hai Tseng

2012-02-08T03:20:00.005+08:00

A less negative article about China's housing market, contrary to many views that China's heading for a hard landing:

There's plenty of reason to believe China's housing prices will slide during what's expected to be a rocky economic year, but the market won't crash. Here's why.

FORTUNE – China's hot property market and its implications on the global economy has been on the minds of many investors, and for good reason.

In January, Barclays published its latest Skyscraper Index report, which tracks links between the rise in construction of tall buildings and economic busts over the past 140 years. This could be purely coincidental, but the index suggests that the East Asian giant is the world's "biggest bubble builder," and is on its way to an economic bust. China already has half of the world's existing skyscrapers (or buildings higher than 240 meters). And it plans to add more over the next several years.

However, let's not read into this too much. It's true, as Barclays notes, that the Great Depression coincided with the construction of three landmark skyscrapers across Manhattan: 40 Wall Street completed in 1929, followed by the Chrysler Building in 1930, and the Empire State Building in 1931.

No doubt, China's property prices have risen rapidly beyond the reach of much of the country's middle class. And there's reason to believe prices will certainly slide during what's expected to be a rocky economic year, but prices won't crash. Here's why:

China's nation of savers

It was the no-money-down mentality that partly brought down America's housing market. While it would be a stretch to compare the U.S. market to China's, it's worth noting that our neighbors to the East are nowhere near as leveraged.

China is known as a nation of savers, and consumers are relatively debt-wary, in part because the country doesn't have the kind of educational and health care safety nets that its Western neighbors enjoy.

What's more, Chinese officials trying to clamp down on rapidly rising prices have directly placed limits on how much homebuyers (and speculators) can borrow. For primary-home buyers, the government has set a minimum down payment of 30% of the home's total sale price while buyers of second homes must put down at least 60%.

In 2010, a total of 4.4 trillion renminbi (or about $697 billion) of residential buildings were sold in China. However, mortgage loans outstanding were far less, at 1.4 trillion renminbi (or $222 billion), according to a JP Morgan November 2011 report on China's housing market.

"As a result, the probability of mortgage default is quite low," analysts say, adding that the quality of mortgage loans will "remain solid" even under the hypothetical scenario that home prices drop by 30%.

There's plenty of pent-up demand

While the Western world has plenty of available options for investors to park their money, housing is considered one of the few relatively safe investments to most Chinese. As incomes rise and as more of the country's population is expected to move into urban areas (in January, China's urban population surpassed that of its rural areas for the first time in the country's history), demand for housing is expected to remain robust, says Shaun Rein, managing director of China Market Research Group, a Shanghai-based market research firm.

The demand, however, isn't just coming from the growing middle class but also the very rich. With tighter lending rules placed on Chinese buyers at home, many investors have gone abroad. Rein points to the formation of property bubbles in other parts of the world, as Chinese investors buy up homes in places such as Canada and California.

Even if home prices fall by 20% in China, it's unlikely that would spell disaster given that prices had surged so rapidly, says Bhaskar Chakravorti, executive director of Tufts University's Institute for Business in the Global Context. Lower prices would offer an opening to those who couldn't afford to buy a year or a few months ago (think about the 300 million middle class Chinese).

"Fundamentally, it's a deep market," says Chakravorti, after speaking recently on a panel about China's property market at the Bloomberg Link China conference in New York City.

Over the next year and a half, JP Morgan expects prices to fall 5% to 10% at the national level. At the regional level where prices rose much more rapidly (it notes prices surged an average of 82% between 2007 to 2010 in 35 major Chinese cities), prices are expected to fall much further by 20%.

The government won't let prices crash

China's central government has been known to tweak its economy as it goes. When officials saw property prices rising too rapidly for its tastes, it tightened lending rules. So the declines we have seen are welcome and are part of the government's plans to cool down its hot real estate market, making it more affordable for more Chinese to buy property.

The tricky part is in knowing how long officials adjust housing policies as the real estate market slows, according to JP Morgan. The bank adds that over the next year and a half, prices could fall 5% to 10% at the national level. At the regional level, where prices have risen much more rapidly, prices are expected to fall by 20%.

"This will likely slow the pace of economic growth but not lead to a hard landing," say JP Morgan's analysts.

To put China's property bubble in context, it's important to note that prices in major cities have risen much faster than the rest of the country, according to JP Morgan's November report. And major cities make up a relatively small portion of the national housing market. For instance, Beijing, Shanghai, and Guangdong's markets combined account for 16% of total real estate investment, 20% of the buildings sold (in value), and 10% of the floor space sold for the majority of 2011.

So before home prices at the regional level trigger a national market crash, the Chinese government should have enough time to change its game.

Sourced from here.

BusinessDay: Smarter people own shares, study finds

2012-01-31T10:24:00.000+08:00

The smarter you are, the more stock you probably own, according to researchers who say they found a direct link between IQ and equity market participation.

Intelligence, as measured by tests given to 158,044 Finnish soldiers over 19 years, outweighed income in determining whether someone owns shares and how many companies he invests in. Among draftees scoring highest on the exams, the rate of ownership later in life was 21 percentage points above those who tested lowest, researchers found. The study, published in last month's Journal of Finance, ignored bonds and other investments.

Economists have debated for decades what they call the participation puzzle, trying to explain why more people don't take advantage of the higher returns stocks have historically paid on savings. As few as 51 per cent of American households own them, a 2009 study by the Federal Reserve found. Individual investors have pulled record cash out of US equity mutual funds in the last five years as shares suffered the worst bear market since the 1930s.

"It's what we see anecdotally: higher-IQ investors tend to be more willing to commit financial resources, to put skin in the game," said Jason Hsu, chief investment officer of Newport Beach, California-based Research Affiliates LLC. "You can generalize a whole literature on this. It seems to suggest that whatever attributes are driving people to not participate in the stock market are related to the cost of processing financial information."

'So Strong'

While intelligence influenced things that might naturally increase equity ownership such as wealth and income, the authors said IQ determined who owned the most stocks within those categories as well. Among the 10 per cent of individuals with the highest salary, "IQ significantly predicts participation" in the stock market, they wrote. For example, people in the highest-income ranking who scored lowest on the test had a rate of equity market participation that was 15.7 percentage points lower than those with the highest IQ.

"If you look at the significance of IQ related to other factors like income or wealth, certainly it plays a very large role," Keloharju, a finance professor at Aalto, said in a phone interview. "It's very difficult to get around that problem, but the results are so strong here. We are playing with lots of different controls and lots of different specifications, and all the time things work really well."

Financial Education

Hsu of Research Affiliates said an explanation for why draftees with lower test scores owned less stock is that they found it harder and more expensive to receive financial education. Getting people information on investing at a younger age may help limit the disparity, he said.

"The costs to achieve that are certainly higher if someone isn't providing that at an earlier stage in one's education," said Hsu. "If we could provide advice, or provide education, to help reduce the cost of acquiring financial knowledge, that would seem like a good thing."

The paper is part of a broader debate about the role individual characteristics such as affluence and education play in investor actions. In the 1980s, so-called behavioral economists broke away from theorists such as Sharpe, who tended to think of all investors as rational.

Greg Davies, head of behavioral finance at Barclays Wealth in London, said his team tries to gauge clients' risk tolerance with personality profiles and investment strategies that appeal to "emotional needs."

Implications

"As advisers, of course, we see our role in overcoming the irrational, emotional, inaccurate elements on behalf of our clients," said Davies. "But the implications of this for the mass markets are much greater."

Markowitz said the argument that intelligence and personality sometimes trump rationality in guiding investors has little bearing on his work. His theory comes down to the view that anyone hoping to get the highest payout at the lowest risk should broaden their asset ownership.

"It's advice for the individual investor," Markowitz, 84, said in a telephone interview. "I am delighted to learn the more intelligent a person is, the more likely they are to act in the spirit of what I wrote."

Sourced from here.

Happy Chinese New Year

2012-01-21T12:31:00.005+08:00

Here, I would like to wish everyone a Happy Chinese New Year, good health and a prosperous year. May your dreams come to pass. 新年快乐，身体健康，心想事成！

Rendition of Getaran Jiwa by Tay Cher Siang

2011-12-27T01:47:00.000+08:00

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.

Blessed Christmas!

2011-12-24T21:20:00.000+08:00

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 :)

Stock take: TWSP, TDM, SOP

2011-12-14T17:45:00.003+08:00

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....

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

2011-11-26T11:17:00.001+08:00

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

2011-11-26T02:59:00.002+08:00

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

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

2011-11-24T20:03:00.004+08:00

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

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

2011-11-18T15:58:00.006+08:00

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

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

2011-11-15T17:28:00.007+08:00

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

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

2011-11-14T12:24:00.004+08:00

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

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

2011-10-17T19:03:00.004+08:00

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

Will this rally hold? - Justin Bennett

2011-10-07T10:27:00.001+08:00

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…

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.

The Greek solution?

2011-09-29T20:10:00.000+08:00

EURECA Project Greece Solution

A rumor-driven and politics-driven market

2011-09-28T18:21:00.005+08:00

11 Rumors That Have Kept Markets Cartwheeling For The Last Two Weeks
European Leaders Disagree On The Next Step For Greece
We're at the whims and fancies of media and politicians?

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

2011-09-28T18:11:00.001+08:00

THE EURO: A Machine Of Perpetual Destruction

Rolling blog: The eurozone crisis by Financial Times

2011-09-28T17:53:00.002+08:00

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

2011-09-28T08:36:00.004+08:00

Source: 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".

"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.

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

2011-09-19T01:25:00.001+08:00

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.

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

2011-09-10T02:30:00.003+08:00

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.

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

2011-08-28T16:24:00.003+08:00

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.

Tradewinds Malaysia: 2Q2011 Results Summary

2011-08-25T22:18:00.000+08:00

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).

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

2011-08-08T22:16:00.004+08:00

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

Some interesting IPhone Apps: FSM Mobile

2011-07-27T11:15:00.001+08:00

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

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

2011-07-04T22:42:00.010+08:00

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.

TWS (RM10.40; TP >RM15): Nice debut for MSM (RM4.58), let's compare it with TWS

2011-06-28T12:08:00.010+08:00

MSM's IPO performance was just fantastic and way beyond many investors' expectations. Within the first few minutes of trading, it has already shot up by more than RM1, currently trading at RM4.58 at the time of writing this post. Looking at how good MSM has performed thus far, inevitably I would start looking at TWS, perhaps the only comparable company which is involved in sugar business in Malaysia. I've written a few posts before (Click here to view) and TWS still remains my favorite pick. Take a look at the tables below.

As seen from the table above, the ratio of TWS:MSM in terms of revenue and profits from sugar division is approximately 40:60 to 45:55. Therefore, should TWS' sugar division priced similarly to MSM, TWS' sugar business alone should be worth RM2.6 bil. And at this figure we have not even accounted for TWS' rice and oil palm plantation divisions. Based on TWS' 69.8% equity stake in Bernas and 72.6% equity stake in TWSP, both of them are worth RM0.99 bil and RM1.4 bil respectively at market price though I still think Bernas is undervalued and has further upside.

In total, by adding TWS' 3 divisions i.e. rice, sugar and oil palm plantation, TWS should be worth RM4.96 bil or RM16.74 per share. At MSM price of RM4.50, PER and PBV are at 13.6x and 2.8x respectively, a lot pricier as compared to TWS. TWS' PER and PBV are at a paltry 6.4x and 1.5x respectively. Assuming a fair value of RM16.74 for TWS, TWS' PER remains at 10.3x only while PBV is at 2.4x at its fair value, which are still lower than MSM's!! Dividend yields for both companies are approximately the same at 4%.

Besides the cheap valuation of TWS, TWS has extra advantage over MSM by having 3 strong divisions as compared to MSM's single business while TWS growth prospects are better as it is already owning huge tracts of oil palm plantation land which still have relatively young tree age and provide availability for new plantations. MSM's business is rather stagnant as the bulk of its business is limited to the Malaysian market and it would still need to make acquisitions and investments for expansions.

In summary, TWS remains very undervalued as compared to MSM. and the strong debut of MSM should generate more interests in TWS.

TWS:
Market Cap: RM3.11 bil
Shares issued: 296.47 mil
Share price: RM10.48
Div Yield: 4%
PER'10 and PBV: 6.4x and 1.5x
Net Gearing: 80.4%

Some simple trades on call options

2011-06-23T12:29:00.005+08:00

I just attended a simple talk by Terence Tan on stock options in US which can help us earn regular income. Summary of the strategy:

Own a good and stable stock
Sell a call option of the stock (One call option only for 100 shares of the stock) and pocket the money from sales of call option.

Assumptions:

Historically, 90% of the options do not get exercised. Meaning 90% of the buyers of call options would let them expire and lose the money. Thus, why not we sell call options and pocket the money 90% of the time?

What are the risks?

If the stock price rises much higher than exercise price, highly likely the call option will be exercised and you are forced to sell at the exercise price. In other words, you don't get to profit from the upside of the stock price beyond your exercise price. But hey, you've already pocketed the money from selling the call option, so you're still profiting.
If the stock price remains the same as exercise price, the buyer of call options would likely not exercise, taking into account the transaction costs involved. You still pocket the money from call options sale and you're holding the stock.
If the stock price falls, the call option is worthless and will not be exercised. You still pocket the money from call options sale and you're holding the stock.

If you trade this repeatedly, the cash you receive from selling call option could help you buy more stocks and in turn enable you to sell more call options. It's just like buying properties and renting them out, the rental income you've got help you to own more properties and increase your rental income.

But of course, the catch is that your stock must be good and won't go bust anytime :P Eg. Exxonmobil, GlaxosmithKline, Microsoft etc.

I've yet to explore this kind of trades so I can't judge how effective it is. You could try this through Optionsxpress or stockoptions in Singapore.

MAA - Cried wolf again?

2011-06-09T09:49:00.010+08:00

The deal just gave me the impression of owners trying to make a last attempt at gaining profit from share trades. Who's the one releasing news of 70% MAAB shares sold for RM1.2 bil? (Figure out yourself) And the shares went ballistic. But just yesterday it made another application to sell NOT 70%, but 100% of MAAB, at ONLY RM344mil. What a huge difference!! From RM1.7bil to only RM344mil for 100% MAAB. Something seriously wrong there innit?

Another question: How will they use the proceeds from the sales? Do we have confidence in the management being able to deploy their cash to good use? A wolf will always remain a wolf. A tiger does not change its stripes. Minority shareholders will always be at a loss to these big wolves.

Moral of the story: These kind of shares (Bad earnings, management who is not bothered about shareholders, rumor-filled) are only good for hit and run. They just cannot be held for long term and cannot be hoped to be able to reward shareholders in the long term. As for MAA, we can't hold for long term, thinking that they will be able to utilize their proceeds efficiently or reward shareholders with some capital repayment or something like that. MAA still has the same boss and its history speaks for itself.

Tay Cher Siang (Pianist) - Simply Breathtaking

2011-06-01T12:38:00.004+08:00

I just have to post this after watching Tay Cher Siang on the piano at No Black Tie last Saturday performing Brazilian music with a band (The music of Milton Nascimento and Egberto Gismonti). His piano skills were just breathtaking. It's not only just about his dazzling virtuosity with octaves and heavy chords playing like single running notes at lightning speed, but also his touch and well-thought piano arrangement which were so filled with emotions, melting the hearts of the audience. He is one of the best and most exciting pianists that I've ever heard live and his playing reminds me of the world-famous Michel Camilo, a Latin composer and pianist. I really hope he would make it big in the international stage and am so proud that there is such a talented pianist hailing from Malaysia. Check out his blog here (mostly in Chinese). He was featured in Dali's post as well (I just realized he was the pianist Dali mentioned :P).

Tradewinds Malaysia (RM9.33; Target: RM15): A blip in 1Q2011 results

2011-06-01T00:06:00.005+08:00

Tradewinds Malaysia 1Q2011 performance was poorer as compared to the previous quarter. Revenue and earnings dropped by 8.2% q-o-q and 53.5% q-o-q respectively to RM1.46 bil and RM89.9 million respectively. The drop in earnings was mainly attributed to lower production from plantation division (Seasonal factors) and lower earnings from sugar refining division. Nonetheless, as compared to 1Q2010, revenue and net profit actually rose by 12.4% y-o-y and 16.4% y-o-y respectively.

Despite the higher revenue from sugar division, its operating profit was down. This could be due to the international sugar price which rose to the highest at 65.3 cents/kg in Jan 2011 before dropping to 53.7 cents/kg in April 2011. The following quarter could be better as Malaysian sugar price was hiked recently while at the same time international sugar prices continue to drop.

EPS for this quarter was at 31 sen while trailing 12-Month EPS was at RM1.67, thus PER remains low at only 5.6x. Net gearing continued to drop from 1.07x in 1Q10 to 0.8x in 1Q11. Owing to the favorable prospects arising from hike in Malaysian sugar prices and declining international sugar prices coupled with CPO prices which remain firm, Tradewinds remains attractive and profits should exceed RM400 mil this year. Plantation division's performance in the following quarters of this year is expected to improve over the current quarter's while its rice division is expected to maintain its performance. Just read an article from TheEdge Weekly which mentioned a target price of RM15 for Tradewinds, in line with what I have in mind as well.

Nonetheless, due to the current blip in 1Q11 results and the strong run-up in its stock price, we might see some profit taking at this moment. For longer term investors, do take advantage of the current price weakness as this stock remains very undervalued.

All in RM'000

"Sell in May and Go Away" OR "Hold in May and Go Away"? You decide.

2011-05-04T20:58:00.001+08:00

Here's another article by Bespoke on "Sell in May and Go Away". Click here for the article :) Postings will be very infrequent for now. Season of exams and thesis. Sorry guys. For me, I'm holding in May and go away for now. Happy investing!

MAA deal: More truth to NST report? (Amended - Additions)

2011-04-10T22:15:00.011+08:00

After a closer look at MAA’s past deals and the commentators’ views, there could be more truth to what NST had reported last week. MAA had been attempting to sell its insurance business since 2007 but with no results until now. Look at the sequence of events below:

July 2007: Plans to sell 49% of MAA Assurance

Sept 2007: News of talks with Allianz, AXA, Affin, Kurnia and Nippon Life to take up stake in MAA Assurance. Consequently, share price rose 47 sen to RM2.15

Oct 2007: Plans to take private mentioned by Tunku Yaacob (TY) in NST but company board announced it’s unaware of such plans

Nov 2008: MoU with AMG to sell general insurance business for RM274.8mil, representing a P/BV of 2.6x.

Nov 2008: TY announced that he will not be taking private MAA.

Apr 2009: Sales price of general insurance business revised to RM254.8mil

July 2009: BNM approved the sale of general insurance business.

Feb 2010: Sales price of general insurance business revised to RM180mil.

Dec 2010: Discussion on sale of general insurance business discontinued

Apr 2011: Discussion on sale of 70% stake in General and Life Insurance to Zurich with a rumored amount of RM1.2 bil.

Points to consider:

AMG kept on revising downwards the valuation of MAA’s general insurance business (General) from RM274.8mil to RM180mil. Why? Could it be due to the poorer prospects of the business or the business is found more and more screwed-up as AMG delved deeper into its business???

General’s revenue and profit had been increasing since 2008 whereas its life insurance business (Life) ran quite the opposite way. General’s revenue is about half of Life’s but General’s profits are far superior to that of Life’s. General’s operating profit (Note: Not net profit) at RM63.5mil whereas Life’s operating profit recorded operating loss of RM8.2mil as at 2010. Another question: Despite General’s revenue and profit increase, its valuation kept revalued downwards by AMG.

How much is Life’s business worth? AMG was only willing to pay for MAA’s General business at RM180mil but I guess TY thought this was too cheap for him to sell. Maybe TY will only sell it at above RM300mil (closer to the initial sale price agreed by AMG). Ok. If we just use sales as benchmark, Life’s business could be worth RM600mil. 70% of both businesses would be RM630mil ([RM600+RM300] x 70%).

Jerneh sale at P/BV of about 2.1x. (not 1.2x as written earlier, sorry guys) Kurnia Asia is trading at P/BV of 2x. What about MAA? MAA’s business is about twice the size of Kurnia Asia and >5x that of Jerneh. Perhaps P/BV of 2.0x to 2.5x would be a better gauge? That would value MAA’s shares at more than RM2.00 already.

As mentioned by Simon in the previous post, Zurich will certainly revamp the whole business and perhaps bring MAA’s businesses closer to Zurich’s performance. Let’s just say within the next 2 years, its profit margin could be improved from about 1% currently to about 5%, net profit will be at RM100mil. Attaching PE of 10x would value the business at RM1bil. 70% of it would be RM700mil or RM2.30 per share.

Having said all these, the worry point is whether this deal could fail again like in the past and the management's past record is not helping to convince investors.

My take: High risk, high return. You might have a profitable trade here but it could burn your fingers easily as well. It’s entirely your call :p Anyone could enlighten me further on this? Welcome further thoughts and commentaries!!

PS: Just read The Edge Weekly on MAA. Deal could be RM400-500mil? P/BV of 2x? This deal with Zurich most likely will materialize, but at what price? But even if it's RM400mil, the stock is cheap at RM1.34 with P/BV of 1.4x. For me, I'll place my bet for now that it'll rise :p Let's see how it works out :)

Some views on MAA's deal with Zurich

2011-04-09T14:28:00.006+08:00

Since MAA is quite a hot topic over the past week and looking at the extreme price movements, I think it's good to post some contrasting views on MAA below, thanks to the nice people who care to write and comment on MAA to me and other bloggers (I'm borrowing from Dali's commentators on MAA as well).

Simon:

"M&A for RM1.2b of the 70% is cheap as they are buying life insurance license, existing agent of 12K. Turnover is growing at base of RM2.2b. Zurich is making 10% profit, thus MAAB under Zurich will soon resemble Zurich's profit margins with cost-cutting and downsizing of workforce (as u know many are deadwoods). This would translate to RM220mil profit within the next 2-3 years. Given PE of 8x, the company is worth around RM2bil, 70% stake for RM1.2bil makes sense. Besides, Hong Leong bought a smallish bank just for the license, and paid RM1bil for the license back in early 1990s. Look at the valuation of Hong Leong bank now?

Another interesting thing to look at is, with the 30% remaining stake in MAA under zurich. Imagine the dividend it will receive every year if the profit is say, RM300mil. Assuming 50% is paid through dividend, RM50mil profit for MAA by just sitting there doing nothing. Going forward, when the govt allows 100% ownership of foreign insurarer, Zurich might fork out another RM1.2bil to buy remaining 30% stake. So, the fair value for MAA for longterm investor could be RM5 as a start. As it had been lying low for so long, many will think that it is not worth this much now."

From Dali's commentator, Jeff:

"Bro, cannot be typo error. Look at MAA turnover & profits. That should explain all. TY has said previously that he wants 300 to 500m for the general insurance business. Now the deal is 70% of MAA that includes the life insurance also. Zurich gets management control hence the premium in the deal. Why the share does not limit up? Cos nobody trust TY as he has cried wolf to many times. So anybody who has the share will dump it. Someone leaked the news. That's why the earlier denial. Who benefits most from the deal? TY & gang who holds majority. Cash minus loan of 200m still translates to 1b bal. He will do a Melewar & declare RM2 capital repayment. Again who benefits? MAAH will still have 30% to ride on Zurich minus the headache plus Takaful which he can still sell later. Remain debt free & venture into new business. Still who trust TY? That's why everybody dump the shares based on lunch time vol of 45m . Who ultimately gain more if the deal goes through? This is a very smart wolf. since nobody trusts TY & repeated denial normally means there is some truth to the deal. Even if the deal is between 600 to 900m is still big money. TY wants everybody to dump MAA but he is not gonna fool the mkt all the time. Time will tell. See whether he can redeem himself now. But who trust TY???"

Will post reply soon if any :p Got to go now. Happy thinking!

Stocks Unleashed (ASX): Marengo Mining (MGO): A Future Takeover Target?

2011-04-08T17:09:00.003+08:00

By Peter Koay

Comparison of Marengo Mining (MGO) and Equinox (EQN)

With the news of the US$6.5B bid for Equinox from MinMetals hitting the markets yesterday, timed at a point where copper price is still hovering above $4, this helps provide confidence to the markets that there is a brighter future to copper beyond the immediate future. This suggests that copper price may well be set to be above $4 in the years to come (this confirms my earlier assumption of $4/lb average copper price for the years to come). Demand for copper is forecasted to be outstripping the supply for this year and the following year, and it seems that this scene won’t be changing in the near-term as it does take quite some time to prove and bring out copper resource from the ground.

I’ve done some comparisons of Equinox and Marengo considering that Equinox is a pure-copper play.

A summary of the comparison:

§ MGO’s M&I copper resource is about 50% of Equinox’ Lumwana Project

§ MGO’s capital cost is twice the capital cost of Lumwana (this may be due to cheaper construction costs in Africa compared to PNG).

§ MGO has the potential to become the top 15 largest copper producer in the world when it ramps up to 50Mt (at ~0.5% Cu), i.e. production rate of 250ktpa, making it to be in the league of Equinox.

§ MGO and EQN’s operating costs are similar.

§ Note the ratios (highlighted in green) to compare Yandera Project with Equinox’ Lumwana or Jabal Sayid projects. This indicates that MGO in 2-3 years time shall at least be 8-10 times the market price of today.

§ Note the comparison of Jabal Sayid’s project with Yandera project: This shows the potential that MGO has to become at least a $1B mkt cap company (even before achieving production). My thoughts is that it’ll reach $1B market cap when DFS is released, EPC Lump Sum contract signed, project financing completed(targeted for Nov’11) and offtake arrangement contracts signed. So, $1/share for MGO by end of this year is not an unrealistic target.

Note that MGO share price has been hovering between $0.30-$0.32 over the past week, with a breakout today to finish at $0.335. The share price was consistently capped by ~1M shares buying at $0.31 and 1M shares selling at $0.32. It is believed that some big funds are accumulating MGO shares to force out weak holders of the share in anticipation that the share price shall go up when the DFS is released.

These two caps have been removed today, with dad & mum investors to provide the next push to $0.40. The share has recently been also reported on the HeraldSun newspapers, promoting public awareness of this share. Refer to:

http://www.heraldsun.com.au/business/in-the-black/another-twist-on-copper-story/story-e6frfinf-1226034986286

So far, Eureka and HeraldSun have reported on this share. I’m expecting to see ‘BRW’, ‘AFR’, ‘The Age’ and ‘The Australian’ to report on this share shortly. This will provide some additional boost to the share price ahead of the DFS announcement.

DRB-Hicom Call Warrants: Simple overview

2011-04-08T01:13:00.007+08:00

I just did a simple calculation on the call warrants for DRBHicom, for those who want to have a higher leverage on DRBHicom. From the table above using simple calculation for the target prices (I'm not incorporating any time value to the target prices, requires some time and data to calculate, dependent on when and what price DRB can reach as well), DRB-Hicom-CE appears to be the most attractive. Nonetheless, one should take note of the expiry date as the closer the warrant gets to the expiry date, the less worth it will be. Thus, the faster the mother share (i.e. DRB-Hicom) moves, the more accurate the table would be and DRBHicom-CE would probably move the fastest in percentage terms as compared to other call warrants.

I'm just beginning to explore these instruments. Welcome any thoughts and suggestions. Thanks :)

Another dubious report??? MAAB's sale to Zurich, too good to be true?

2011-04-07T00:24:00.014+08:00

Btimes just issued a news report (Click here for the report) on MAA's sale of its 70% stake in Malaysian Assurance Alliance Bhd (MAAB) to Zurich at a price of RM1.2bil!!! This just sounds too good to be true to me. RM1.2bil just for 70% stake in MAAB. This could mean that MAA's 100% equity stake in MAAB could be worth RM1.7bil or RM5.58 per share!!! This price sounds even more puzzling when the price excludes its Takaful business, unit trust business and a host of other subsidiaries and associates (Mithril, Maybach and other international insurance businesses).

Expectantly, MAA came up with a statement to deny the report, a usual case of M&A denials which were highlighted again and again by Moolah. I'm very curious as well about the authenticity and credibility of the authors of these reports. Maybe the financial regulators should just look into the stakes these authors have in the shares they feature. Some people must be making big bucks out of these reports.

Anyway, MAA did confirm that they are talking with Zurich about the sale of MAAB. But the question is how much? For me, I wouldn't want to fork out RM1.2bil to acquire a business that hardly generates any decent earnings (Volatile earnings and very low margins, P/BV of >>4x, PE can't even be used). Last year, MAA even talked with AmG to sell its MAAB's general insurance business for RM180mil but even at that price the deal didn't go through, what's more with this incredulous RM1.2bil for just 70% stake in MAAB? Normally, takeover price is expected to be about 1.5x-2.0x P/BV for less quality insurance companies (Jerneh sale was at P/BV of about 2.1x (Not 1.2x as written earlier). Attaching P/BV of 1.5x to MAA's net asset/share of RM0.94 should draw the share price closer to RM1.41, provided that this sale is highly possible.

RM1.2 bil for 70% in MAAB? Nah..RM200 mil looks more like it.

ASX Marengo Mining Ltd (MGO): A better value proposition than Sandfire Resources (SFR)

2011-03-25T12:58:00.004+08:00

By Peter Koay

If one has to understand the value of MGO, one has to compare it with all the other copper producing companies. Based on the most recent SFR reported resource statement and its pre-feasibility report, the following comparison is made.

Resource comparison:

	MGO (Cu)	SFR (Au)	SFR (Ag)	SFR (Cu)
Measured	1000M lbs ($4B)	47k oz ($63.4M)	-	52.8M lbs ($211.2M)
Indicated	1900M lbs ($7.6B)	491k oz ($662.8M)	3750k oz ($112.5M)	1078M lbs ($4.31B)
Inferred	3600M lbs ($14.4B)	186k oz ($251.1M)	1305k oz ($39.1M)	286M lbs ($1.14B)
Total	6500M lbs ($26B)	724k oz ($977.3M)	5055k oz ($151.6M)	1416.8M lbs ($5.67B)

*Conversion using copper price of US$4/lb, silver price of $30/oz, and gold price of US$1350/oz.

	MGO Resource Value	SFR Resource Value
Measured	$4B	$274M
Indicated	$7.6B	$5.08B
Inferred	$14.4B	$1.43B
Total	$26B	$6.78B

Capital Cost comparison:

MGO: US$1.6B

SFR: A$400M (refer to: http://asx.com.au/asxpdf/20110304/pdf/41x7hft3k0lzyg.pdf)

The capital cost of MGO is 4 times SFR’s. In the right ball park considering that MGO’s resource is approx 4 times of SFR.

Operating Cost comparison:

MGO and SFR’s operating cost is almost the same, i.e. ~$0.90-$1.00 per lb.

Production Timing:

MGO 1^st ore concentrate produced: 2014

SFR 1^st ore concentrate produced: Q3, 2012

Note also that DFS completion for SFR is 2Q 2011 whereas MGO’s DFS report is targeted to be released to the market by 1Q 2011.

NPV Analysis:

Basic NPV analysis of SFR project gives us a price of $7.80/share with the following assumptions:

70kt/Cu and 45koz of Gold production/year.
Mine life of 7 years (as per PFS report)
1^st Production in 3Q 2012.
Net Cash Flow: Gross Cash Flow ratio: 0.56
Cost of capital: 10%
Capital cost: $400M
150M issued shares
$4/lb copper price and $1350/oz gold price

Based on NPV analysis, it seems that the value of SFR’s project is almost fully factored into the share price.

Based on market cap comparison,

Current market cap of SFR is $1.02B (@$6.90/share) with 148.3M shares issued.

Current Market Cap of MGO is $300M (@$0.30/share) with 994M shares issued.

Based on “Net Profit before tax, depreciation and interest” comparison, SFR is saying that it’ll have $330M-$350M cash flow. MGO will have ~ $600M cashflow per year. Almost doubling SFR’s cashflow!!

Basically, this comparison between MGO and SFR tells us that MGO should have at least $1B market cap NOW, which means that it’s share price should be about $1/share NOW. And in 2-3 years time, it should be ~$3/share when it’s producing copper at a similar rate of OZ Minerals.

Note: This comparison is done assuming that SFR has no value factored into the share price from all its other projects/investments.

SFR’s most recent upgraded Resource report:

ASX: Marengo Mining Ltd (MGO) – The Best Buy of 2011!!

2011-03-25T12:40:00.001+08:00

By: Peter Koay

The results of my research are getting much more interesting and exciting than I had envisioned earlier! I decided to compare Rex Minerals (RXM) with Marengo Mining (MGO) after reading an article in Eureka Report that compared SFR and RXM in Oct’10.

RXM & MGO Comparison Table:

	MGO	RXM
Copper Resource:
Measured	1 Billion pounds	Nil
Indicated	1.9 Billion pounds	Nil
Inferred	3.6 Billion pounds	2.64 billion pounds
Other resources:	Molybdenum	Gold
Measured	45 M lbs ($540M)	Nil
Indicated	68 M lbs ($816M)	Nil
Inferred	91 M lbs ($1.09B)	1.1 Moz ($1.5B)
Capital Cost:	US$1.6B	Not determined yet
Financing Strategy:	NFC offering to arrange financing of at least 70% of the capital cost of project
Market Cap:	$300M	~$430M
First Production:	2014	Unknown
Completion of DFS:	1Q 2011	Unknown (starting in 2012, but could last for more than a year)
Cash at Bank:	~$70M	$103.7M
Exploration Upside:	Project covers +100km of the highly prospective Bundi Fault Zone. Less than 5% of structural corridor drilled to date.
Operating Cost:	$0.90-$1.00/lb of copper	Unknown

If comparing JUST the inferred category of resource, MGO has $15.5B and RXM has $12.06B worth of resources (based on $4/lb for copper and $12/lb for Mo and $1350/oz for gold). This means that MGO should be at $550M market cap purely on an inferred resource comparison basis, i.e. a share price of $0.56!! We haven’t even factored the resource that MGO has in the measured or indicated category!!

In my opinion, MGO should experience a significant re-rating soon (if not NOW!!). It’s either SFR, RXM and OZL share prices that need to drop to the level of MGO, or alternatively, MGO rising up to the level of SFR and RXM.

In any case, if one is to buy MGO shares now and hold them for 3 years, one will have a stake in a $300M market cap company that will be producing US$600M cashflow per year in 2014! This will be a very attractive takeover target!!

ASX: Frontier Resources Ltd (FNT) – Moving into the next Frontier soon!

2011-03-19T01:24:00.011+08:00

Equity Analyst: Peter Koay

Target Price: ~$0.50 (Current price: $0.25/share)

Current Mkt Cap: $51.3M

I think that this article is long overdue, considering that I had my eyes on this company for a period of time. Imagine with me for a while the following scene:

“A river watering the garden flowed from Eden; from there it was separated into four headwaters.The name of the first is the Pishon; it winds through the entire land of Havilah, where there is gold. (The gold of that land is good)” (emphasis mine)

[Genesis 2:10-11]

“The gold of that land is good!!” Although PNG may not be the land of Havilah (it could very well be though!), the words above aptly describe the few pieces of land that FNT is exploring now. FNT has exploration permits for the following lands in PNG:

Andewa
Bulago
Leonard Schultz
Likuruanga
Central New Britain
East New Britain

I usually use a few key characteristics to determine which junior mining explorers I would invest in (and FNT seems to meet the few criteria that I have):

A potential resource in the ground that has a ‘WOW’ factor

Typically, we see a lot of 3 to 5g/t of gold results from many gold exploration companies. These grades are usually sufficient to justify a world-class mine (provided that it’s a huge land with similar grades). However, some of the FNT’s exploration results are showing in the order of 10-100g/t of gold! Look at their Bulago results!! WOWW!! “The gold of that land is good!!”. If the contained resource is only in the few hundred thousand ounces of gold range, this usually doesn’t cause sufficient excitement among ASX investors that is necessary to send its shares skyrocketing. With high-grade gold mineralization implied from high gold concentrations, FNT has a much greater potential to have a mouth-dropping effect on the investors. A mixture of outcrop channel samples and drilling results from FNT’s initial exploration lend a lot of weight to expectations that they will eventually be gigantic economical mines:

Andewa – 7.9m of 10.01g/t gold, 10.8m of 7.4g/t gold, 3m of 10.97g/t gold, 5m of 18.5g/t gold, 3m of 14.26g/tgold, 15.6m of 5.12g/t gold. (Potential Gold Mine)
Bulago – 27m of 66.8g/t of gold, 4m of 135.6g/t gold, 9m of 64.0g/t gold,16m of 36.5g/t gold, 18m of 40.3g/tgold, 7.5m of 67.0g/t gold and 9m of 24.0g/t gold. (Potential Gold Mine)
Leonard Schultz – 16m of 18.60g/t gold within 76m of 5.35g/t gold,22m of 2.71g/t gold and 36m of 1.15g/t gold. (Potential Nickel Gold Mine)
Likuruanga – 55m of 5.8g/t gold, 10m of 5.1g/t gold, 70m of 1.7g/t gold, 27m of 0.71% Copper & 66m of 0.42% Copper. (Potential Copper-Gold Mine)
Central New Britain – 7km x 2.5km Porphyry Cu/Mo (No results yet, but a potential Cu-Mo mine, similar to Marengo’s Yandera Project)
East New Britain – 10.9m of 26.9g/t gold, 2m of 16.9g/t gold,4m of 9.84g/t gold. (Potential Gold Mine)

Have a successful track record in exploration and Project Development Experience

FNT has been around the mining picture for a long time in PNG.In fact, they were very close to start developing a world-class project back in 2008…until the Australian Govt interfered by influencing PNG Govt to not renew FNT’s exploration lease as their deposit is very close to the Kokoda Track. Their indicated & inferred resource at that time was proven to be 213.6MT @ 0.51% Cu Equivalent (1.08Mt Cu Eq).

To read about their Feasibility Study on Kodu Deposit:
http://www.asx.com.au/asx/statistics/display Announcement.do?display=pdf&idsId=00784598

To read about the PNG Govt’s decision not to renew their exploration license, see:
http://www.asx.com.au/asxpdf/20081031/pdf /31dc2clxcrgdhq.pdf

Also, Peter McNeil had been managing director of FNT since he listed it in 2003. In words extracted from an interview with him (refer to
http://www.topstocks.com.au/stock_discussion_forum.php?action=show_thread &threadid=600357),

“I have a masters degree in geochemistry from the university of Houston and started work in PNG in 1985, but I have also worked in Arizona, Newfoundland [Canada], the Eastern Goldfields and the Kimberley of Western Australia. I was a consulting supervisory geologist when the discovery holes were drilled for both the Nimary and Sunrise Dam deposits in 1992 and 1993, and also worked at Lihir. After Nimary, I then stepped straight into Macmin, which was listed by my father [Robert] and Denis O’Neil in December 1993. Frontier [formerly called TasGold] we [Peter and his wife Paige] listed in April 2003 and it was formed as a JV with Macmin. Gold has been my primary career focus, but more recently I have worked with porphyry coppers and massive sulfide deposits. I guess you could say I am a bit of an epithermal, come porphyry person.”

Reliable drilling equipment with good (and cheap) crews

FNT owns all the rigs that are being used for drilling. FNT also operates the drill rigs by themselves. This is a cheaper way of drilling, considering that they can side-step all the troubles and higher premium that come with contracting others to perform drilling for them. That being said, for them to test deeper targets (up to 800m), they may have to either modify their existing rigs or to charter some other rigs to get the job done.

Good cash position for continuous exploration and drilling to prove up new reserves and does not have to significantly dilute existing shareholders to raise money for exploration

In most recent announcement, FNT spent ~$1.55M cash over past half-year ending 31 Dec’10 with ~$2M. Spending at this rate, this means that FNT has enough cash to last them to about Jun’11. Considering that they’ll be drilling at Andewa, they’ll need cash injection (via capital raising) to continue on with their operations. By releasing the 5000 rock chip samples from Andewa (promised to be done by end Feb’11 but not released yet), assuming that they will be good results, they will provide a lift to the current share price, and hence be to raise capital with less dilution to existing shareholders.

Also, FNT had secured a very good deal with Ok Tedi in that Ok Tedi has the option to earn 58% of Bulago and Leonard Schultz JVs and up to 80.1% of Likuruanga, Central; East New Britian JVs by spending US$12 million in each of the project within 6 years. This means that the drilling costs can easily be covered by Ok Tedi without the need to raise capital to drill these target areas. The only drilling costs that FNT would need to raise is for Andewa project and for the other suite of projects in Tasmania, Australia.

Have good local engagement and relationship

FNT’s boss, Peter McNeil had spent his past 27 years in PNG. Some of the PNG national crews he currently has had been with him from the beginning of this company. With someone who’s been inside for past 27 years, I would think he’s got quite some insights as to how to best operate within PNG. In addition, the JV with Ok Tedi will allow it to have access to many influential people within PNG as Ok Tedi is mostly owned by the PNG people.

Other reasons contributing to why FNT may be quite a good bet:

Peter McNeil has recently quit his chairmanship in CopperMoly Ltd to focus more on FNT. If FNT’s prospects were not good, why would the MD quit his other involvement to spend more time on it? Seems that he’s keen to move faster with the development of FNT, which he has a huge stake in it. FNT has recently submitted to obtain an exploration license for Mt Schrader. This new license is a license that covers the area that surrounds Mt Andewa. This new area shall be 2477sq km, compared to Mt Andewa’s license which covers only a 21 sq km area. Now, why did FNT make this move? If the results coming from Mt Andewa are not good, why would FNT grab more of the land surrounding Mt Andewa? Seems like they've got some real stuff coming out from Mt Andewa. You can see the land size comparison below:

OK Tedi’s involvement as a JV Partner Ok Tedi hosts a world-class copper mine, directly employs 2000 people, and had been producing for 20+ years. OTML's shareholders are PNG Sustainable Development Program Limited, (52 per cent), Inmet Mining Ltd (18 per cent) and the PNG Government (30 per cent). The PNG Government holds equity directly (15 per cent) and on behalf of the Western Province (12.5 per cent) and landowners from the mine area (2.5 per cent).

Considering that Ok Tedi’s mine is going to be shut in 2013 (with a potential for mine-life extension to 2022 that’s still in feasibility phase), they would be quite desperate to find another world-class mine to keep them in business. So far, Ok Tedi has only FNT as its JV Partner in prospecting for more resources. In one sense, Ok Tedi has all its eggs in one basket (i.e. FNT)!! Now, why would a world-class producer who had been operating for ~25 years, when facing an ‘extinction’ threat, bet the future of their company on one company, i.e. FNT? They must have very strong reasons to do so. And considering the results they’ve got in Bulago so far, it’s not a surprise that they have a higher priority to drill it in Apr’11 (5000m drilling program planned).

Share Price Analysis:

The share price of FNT had gone up from $0.07 back in Nov’10 to a high of $0.42 in Feb’11 (due to speculation that very good results shall be released from the Andewa’s 5000 rock chip samples). This is a highly active and volatile stock with speculators watching with eagle’s eyes, keen to exploit its potential.

It is not a share for the faint-hearted! With drilling upcoming in April on both Andewa and Bulago projects, I believe that there will be huge upside to the share price as the drilling results are released in 2Q’11. If speculation on Andewa’s results was sufficient to push the share price to $0.42, with definite results from both Andewa and Bulago (which I’m quite confident that they’ll bode well), $0.50 is not an impossible target to reach. With Peter McNeil giving a presentation next Wed in Melbourne (23 March), it’s quite likely that he’ll be talking about the plans for the drilling programme in Apr’11. And quite likely, he may release results from Andewa’s rock chip samples prior to his presentation, this will cause excitement amongst the investors and will push the share price up.

Conclusion:

FNT is a highly prospective junior explorer, a quite stable company from the perspective of having a very good world-class JV Partner who’s offered to pay for drilling costs for up to 5 of the JV areas and providing their own drilling rig + sample results analysis, having a good Managing Director who has a lot of experience in PNG, owns its drilling rigs with low-cost drilling crews, and having a diversified portfolio that have high-grade gold mineralization.

If FNT manages to prove 1 out of the 3 potential world-class mines (Bulago, Andewa and Leonard Schultz), this will transform FNT to become a stakeholder in a potential world-class gold mine. Its shares won’t be worth 25 cents anymore. FNT is moving to the next Frontier soon as the drilling program starts in Apr'11. Of course, if it manages to prove that it's got 3 world-class mines, this share would certainly be worth a few dollars. This can be a potential Lihir Gold in the making (taken over by NewCrest for $9.5B)!

Note: The projects within Australia have not been mentioned so far as I see them as peripheral projects that FNT owns. The main flagship projects for FNT shall be the PNG projects, which will bring much more significant cashflows to FNT. However, if FNT manages to discover more resources in Tasmania, that will be a bonus to the share price.

Go Go Go - MGO - Marengo! (A$0.275; Target Price A$1.00; Investment Horizon: 18-24 Months)

2011-03-12T00:40:00.009+08:00

Analyst: Peter Koay

Date: 11 March 2011

Target Price: ~A$1.00/share (18-24 months investment horizon)

MARENGO MINING LTD (MGO): The next OZ Minerals in the making

PNG can be considered to be the upcoming rising star as a mining destination of the 21^st century. It is a resources rich nation, soon to be able to get into the ranks of Australia and Chile.

Now, how do we get exposure to this upcoming mining giant country? Sifting through a number of PNG mining companies that are listed on ASX over a weekend, a very interesting stock had been discovered to have the potential to become the next OZ Minerals, i.e. MARENGO MINING LIMITED. (By the way, OZ Minerals had recently been a darling stock in ASX as it’s generating a huge pile of cash from its Prominent Hill copper and gold mine.)

OZ Mineral’s Prominent Hill mine has a remaining 8 year mine-life from now, with latest reserves (as at Jun 2010) of 5.5 billion pounds of copper (1.135 billion pounds Measured, 2.43 billion pounds Indicated, 1.88 billion pounds Inferred) and 3.1 million ounces of gold (0.5Moz Measured, 1.4Moz Indicated, 1.2Moz inferred). Refer tohttp://www.asx.com.au/asxpdf/20101109/pdf/31trr9pnqgpjlc.pdf .

Assuming copper price of US$4/lb and gold of US$1300/oz, that means OZ Minerals has $22B of copper and $4B of gold, a total of US$26B of resources (Measured+Indicated+Inferred).

Comparing MGO’s resources with OZL’s resources (refer to http://asx.com.au/asxpdf/20110228/pdf/41x36stqj3wspq.pdf) , MGO currently has 6.5 billion pounds of copper (1 billion pounds measured, 1.9 billion pounds indicated, 3.6 billion pounds Inferred). Assume same copper price of US$4/lb, it has a whopping US$26B worth of COPPER!!

In addition, MGO has a total of 204M pounds of Molydenum (45M pounds Measured, 68M pounds Indicated, 91M pounds Inferred). Molydenum is a material used to manufacture high corrosion-resistance stainless steel (e.g. super duplex steel). Assume price of Molydenum of US$20/lb, this means MGO has US$4B worth of Molydenum!!

This brings it to a total of US$30B worth of resource!!! MGO’s resource can be even bigger than OZL!! Doing a sensitivity analysis, you may say that that’s just a lot of inferred category stuff in MGO’s resource statement. If the inferred category is taken out and a comparison is made, OZL should have US$14.3B of copper and US$2.47B of gold, which brings to a total of $16.8B. MGO should have US$11.6B of copper and $2.26B of Molydenum, that brings it to US$13.8B. Basically, the message is, MGO would be in the comparable league of OZL category of companies!

Now, current market capital of OZL is A$4.81B with 3.24B shares issued. However, MGO’s current market capital is only A$273.36M. OZL’s mkt cap is now 17 times greater than MGO. However, both companies have almost the same amount of resources.

The following are a few reasons on why you may want to buy Marengo Mining Ltd at its current level (i.e. $0.27-$0.30/share):

Comparison Category	OZ Minerals (OZL)	Marengo Mining Ltd (MGO)
Resource (Measured+Indicated+Inferred)	US$30B	US$26B
Market Capital	A$4790M (at $1.48/share)	A$274M (at $0.275/share)
# of issued shares (M)	3240	994

Risk is proportionate to returns: the higher the risk, the bigger the returns. But the higher the risks, the bigger the discount to the share price too. If there’s a huge discount to the share price due to inherent risks of the share, then, we ought to ask: What are the risks that MGO have?

A few of MGO’s risks can be outlined and summarized as follows:

Management Risk: Low – Les Emery used to be the managing director for Lynas Corporation. Lynas is doing very well now, all thanks to Emery, who helped guided Lynas to get the lease for the mines that they now own. Do you think he has the capability to repeat a success story with MGO? Quite likely...

Capital Funding Risk:

Risk of getting the money to fund the capital cost to build the plant is low with China NonFerrous Metal Industry’s Foreign Engineering and Construction Co. Ltd (“NFC”) offering to provide at least 70% of the capital cost or help MGO connect with Chinese banks to lend their capital. If 70% of the funding is obtained via a Chinese bank debt, that means NFC has to fund it by equity issue of US$480M. With current share price, it needs to issue up to 1.8 billion shares – making it similar to OZL’s # of issued shares. But of course, the better option is to fund it all entirely with debt and pay it off. However, it is quite likely that NFC would try as much as possible to negotiate a higher % of equity stake in MGO.

Yandera Project Risks:

Risk of cost blow-out: Low, due to the arrangement of a lump sum EPC Project with NFC. In a lump-sum project environment, the real exposure is to claims lodged by the EPC Contractor against the company. However, with the partnering arrangement in place, this risk is minimized. The Chinese would not want to risk a backlash by Australian company when they are the ones needing the resource, and they wouldn't want to sink a company which they themselves have a huge stake in (when they participate in the equity offering and arrangement of bank debt). US$1.6B capital cost is needed to get the plant to 25M tonnes/year production.

Geological Risk: Low. PNG is a geologically active area (lots of earthquakes). However, this risk is low considering that there are so many major companies which are already investing into PNG on the same main island, e.g. ExxonMobil. If ExxonMobil (very conservative oil company) is comfortable with the risk, I think we should be quite comfortable with it too.

Environmental Risk: Medium. This is the only risk that could be a bigger challenge for the company. The possible ways for MGO to manage the mining tailings is to build a dam, use DSTP (Deep Sea Tailings Placement) similar to Ramu Cobalt-Nickel Mine and Lihir Projects, or to build a processing plant to treat the wastes. The PNG govt is quite likely not to have a huge appetite to build a dam to contain the mining waste as OK Tedi’s dam was damaged in an earthquake back in 1984, which was a factor contributing to OK Tedi dumping mining wastes straight into the river systems leading to a huge environmental disaster. Having a potential damage by earthquake of a dam, and end up releasing tonnes and tonnes of toxic wastes into the environment would be quite unacceptable. Possibly, the DSTP method may work for MGO.

Product Sales Risk : Low. NFC has already offered to off-take a portion of the product from the Yandera project as part of the MOU signed with NFC. MGO has already secured a big customer!! And with the rising world demand for copper (China being a big driver of this demand), there shouldn't be any concerns on whether they could sell the product.

Political/Sovereign Risk: Low. MGO has very good political connections. It has the former PNG Mining Minister (Samuel Akoitai) and the former PNG PRIME MINISTER (Sir Rabbie Namaliu) within its board of directors!! These men would be able to help MGO in navigating to get the mining licenses/leases renewed and to assist in getting the environmental approvals required.

Construction Risk: Low. With NFC successfully constructing the nearby Ramu Cobalt-Nickel mine, NFC should have the capability to construct and deliver the project in PNG on time for a early 2014 start-up.

Resource Upgrade Likelihood: High. MGO still has $71M in cash as of 31 Dec 2010. This money is enough for it to continue its drilling program around the resource and prove more of the inferred resource into the indicated category. As drilling continues, the company shall keep on adding value to the company. When good news is released on any upgrade in the resource, this will drive the share price even higher.

NPV Analysis:

A basic Yandera project NPV analysis based on available information shows us how much the share price should be. Based on a 10% discounting factor (i.e. 10% cost of capital), this will give it a current NPV of $2.67/share based on the following assumptions:

1. 0.57% grade copper equivalent (including Mo)
2. Copper/Mo recovery factor: 0.8

3. 20 year mine life (with startup in 2014)

4. 25M tonnes of ore per year

5. Net profit margin of 56% (as per OK Tedi most recent net profit margin)

6. 10% discounting factor

7. US$1.6B capital cost

8. AUD to US$ conversion ratio = 1:1
9. Copper price: US$4.30/lb

Sensitivity analysis:

Even if the capital cost of that plant is US$2.5B (assuming another extra US$900M to deal with the mining tailings), the NPV for the project will lead us to $1.76/share. This is not taking into account that the company will find and prove more reserves with its continuous drilling program.

Share Price Risk Analysis:

§ MGO has recently issued 110M shares (fully subscribed) at a price of C$0.25/share (which is about A$0.255/share) to institutional investors. This helps set a floor price. Major institutional investors will generally not allow the share price to go below the price for which they’ve obtained the shares.

§ Share price has a huge potential to spike up as soon as Definitive Feasibility Study (DFS) is released (targeted for 1Q’11). It’s now getting to mid-March, so the DFS report is not far away (in the next 2 weeks).

§ Strong institutional shareholders participating in recent offerings, implying low risk of share price falling any further than current levels:

Biggest shareholder: Sentient - 22.2%

Sentient has proven themselves to be very astute stock-picker of stocks that have potential to be a takeover target. MGO can be one soon! Refer to the following article on the track record of Sentient Equity fund: http://www.theglobeandmail.com/globe-investor/investment-ideas/private-equity-fund-shines-in-spotting-takeover-deals/article1918226/

2^nd biggest shareholder: Quantum Partners – 18.9%

Quantum Partners is a fund owned by George Soros. George Soros is a man who knows how to profit from financial crises. He still managed to earn $1.1 billion while the rest of the investment companies were reeling from the recent 2007/08 GFC.

3^rd biggest shareholder: OMERS (Ontario Municipal Employees Retirement System) – 6.1%.

Supposedly, a retirement fund usually should be quite risk-averse. This gives us another comfort factor that the risk of investing in this company is low.

Conclusion:

From market capitalization comparison, MGO will soon become another OZL with market cap in the order of $3B. This would mean that MGO will have to be $3/share to be a $3B market cap company with current # of shares issued. Assuming that 3B shares have been issued then, it has to be at least $1/share for it to be a $3B Market Cap company.

From DCF analysis, MGO will also be $1.76-$2.67/share provided that all risks mentioned above are managed properly.

From PE Ratio analysis, at 25M tonnes/year production, MGO will generate a net profit in the order of US$600M per year! Assuming a 3 billion issued shares (similar to OZL now), and at the price of $2.00/share for MGO, the PE ratio will just be 10. When it ramps up to 50M tonnes/year production, the PE ratio will just be 5!

Hence, MGO share price will be able to go up to at least to $1.00/share in 1.5-2 years time (very conservative estimate). This is not taking into account all the upsides that MGO has by its continuous drilling program in the 1900km2 tenement that it has in PNG.

Do you want to be a part of the exciting story of Yandera Project in PNG? It's your decision...

Note: Marengo is Napolean’s favourite horse who had faithfully served him for 35 years. I’m sure MGO will also faithfully serve those of you who’re willing to buy a stake into it!!

Note 2: Additional Chart from http://www.asx.com.au/asxpdf/20100901/pdf/31s8g5wswdv31j.pdf

You can see that Marengo is forecasted to be one of the lowest cost producers of copper (on a per lb basis), almost next to OZ Minerals.

Disclosure: The analyst is a long-term shareholder of MGO. This share analysis does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided here is solely your responsibility. You should consult your investment adviser before making any investment decisions.

High cash pile is good while high debt is bad? Not necessarily true...

2011-03-09T16:26:00.013+08:00

There are investors who have a general idea that having debt is bad and having huge cash pile is good. Not necessarily so. Maybe some of us had learnt this in some of our finance courses, MBA courses or online and it’s basically text book answer, but it’s good that I reproduce it here for the benefit of those I encounter who are having this ‘debt is bad, cash is good’ idea.

There is no doubt that I will actually prefer companies with high cash pile as cash could help to cushion the companies during downturns and gives financial flexibility for companies to undertake expansion projects etc. Nonetheless, having too much cash with little debt could also be a sign that companies are not utilizing their financial resources optimally.

The main benefit of using debt in this regard is to help lower taxes. In simple words, higher finance cost means lower profits and thus lower taxes. As a result, the company’s value could be increased by the amount of these tax savings. However, there needs to be a balance between having debt for tax savings and the risks of default and bankruptcy due to high debt. The higher the debt, the riskier the business, the more difficult it is to raise funds when money is tight, and the higher the risk of default and even bankruptcy during downturns.

Different companies have different methods of funding depending on the stage of growth of the companies and the industries they are involved in. Industries like utilities (Tenaga, MMC, Tanjong), telecom (Major ones like Maxis) and consumer (TWS) can afford higher debts owing to the resilience of their businesses. What does it matter if I borrow some money which I can repay in 10 years and my business is resilient regardless of the economic cycles, at the same time it helps me to pay less taxes and help me to fund expansion, acquisition or repurchase my own stocks which can lift up my share price? I will definitely go for it. As for start-up companies like tech or highly cyclical companies, equities as source of funding will be more appropriate as their cyclical earnings (or no earnings at all) would not be able to service the debt if they opt for debt as their source of funds. Therefore, it is imperative for us to analyze the company's debt levels individually, whether they are too excessive or risky for the companies, whether they have too little debt and can actually increase it for tax savings, whether companies with very high net cash position are utilizing their cash position more effectively.

The illustration of optimal use of debt/cash is best described using the charts shown below (Adapted from Harvard Business School)

Assumptions:
(1) Company has no debt initially;
(2) Issuance of debt to repurchase stocks.

Sequence of events:
(1) The company announces changes in long-term capital structure i.e. proportion of debt and equities.
(2) Stock price will reflect the changes in capital structure.
(3) Firm issues debt to repurchase stocks.
(4) PE ratio decreases to reflect riskier EPS (Earnings per share) while EPS rises.
(5) For lower levels of debt, stock price rises with higher debt. For increasing levels of debt, stock price will rise first and then fall as business gets riskier which will result in default and bankruptcy.

PS: Helpful additions from snowball and KC.

"Prof Damodaran has an interesting article on cash but he uses Apple as an example here: http://aswathdamodaran.blogspot.com/2011/01/how-much-cash-is-too-much-looking-at.html

I think if cash is good if the management is known to deploy cash at the right time i.e. during a crisis to make acquisition probably YTL? But, those management are rare. Most will just chicken out during crisis and prefer to sit on their cash. Others has no good record of deploying cash and prefer to sit on it e.g. Genting.

Sometimes, market tend to discount the cash on the balance sheet. So, certain companies may have a lot of cash but are trading at similar valuation with company in the same industry that has no cash. If the company indicate that they will be utilizing their cash to do buy back or acquisition, we may have a good catalyst for revaluation. Most of the times, cash hides the value of the business e.g. by artificially lowering the ROE and ROAs. If they can use it for expansion or buy backs, the value of business will be clearer."

K C said...

"The main purpose of investing is to maximize the "after tax" return of capital and the tax shield provided by debt as mentioned in the article has certainly done the job nicely. Instead of having so much non-operating cash, corporations with good cash flows and high EBIT margin (higher than the cost of borrowings)should instead return those cash to shareholders or buy back shares and then load up debt to a certain limit to get this free lunch from the government. ROE will also increase tremendously. for example, if Kfima (as just posted in this website) returns the 107m non-operating cash (40 sen per share)to the shareholders, it will still return the same operating numbers but ROE will improve further from 15% to 20%. As the balance sheet will still be very healthy, it can in fact borrow more and get even better ROE."

Transfer to a new website in process: Occasional interruptions expected

2011-03-04T09:23:00.000+08:00

Hello. I'm in the midst of transferring this blog to a new website. There might be occasional shut downs of this blog to facilitate this transfer. Apologies for any inconvenience caused. Thank you :)

Kumpulan Fima (RM1.63; Target: RM2.20): Highest quarterly earnings, steady!

2011-02-28T20:21:00.009+08:00

Kumpulan Fima's quarterly results were out just now. Its earnings remained steady on an uptrend. Net profit rose to RM20.07 mil or EPS of 7.6 sen, a +35% q-o-q and +10.8% y-o-y. The increased earnings were contributed by higher earnings of all business segments, i.e. plantation, production & trading of security documents, bulking and food divisions. Net cash rose from RM120.7 mil in 3Q2010 to RM153,4 mil in 4Q2010 (calendar year), allowing the company plenty of flexibility for acquisitions or further expansion of its plantation business.

Trailing 12M net profit was RM64.6 mil or EPS of 25 sen, thus PER 2010 stood at only 6.6x, supported by net cash per share of 58.3 sen. Its share price movement had been rather lethargic lately, following the trend of the general market. I noticed that its shares have been moving rather close to the market (as opposed to TWS which could run quite contrary to market movement). Perhaps it could only rebound meaningfully when the general market is more favorable. As compared to Tradewinds, KFima's earnings growth is only 'decent' and rather predictable which probably led to its unexciting share price movement. It could also be due to the declining palm oil prices which plagued the plantation stocks, KFima is no exception.

In terms of valuation, putting an 8x PE to its EPS of 25 sen (most likely could earn more than that in 2011) will yield a share price of RM2.00, a 23% upside. I believe it should be trading more than 8x PE. Perhaps 10x should be a better valuation for it in view of its steady earnings growth backed by strong net cash position (reminds me of HSL).

For now, I am putting more chips in Tradewinds (M) as this company's businesses are superior to that of KFima, and I would say, can easily surpass Kulim. Yet, it's trading at a lower valuation than KFima in terms of PE. Looking at Tradewinds trading volume, seems that big players are coming in. Such an expensive stock (in terms of share price) with hundreds of lots queuing up to buy is something worth taking a look. Nonetheless, its shares are more volatile. You must have enough funds to stomach the high volatility. It could end up being the top gainer, and also being the top loser. Hahaha. But it's an upward trend. Ok. Sorry, digressed already. Back to KFima. Have a look at the charts below.

For previous posts on KFima, click here.

Keanpoh Photography

2011-02-28T11:43:00.004+08:00

Keanpoh, a high school friend of mine just ventured into photography and the photos he took are quite mesmerizing, especially those that feature the environment. His works were featured in the media such as National Geographic and Framework Magazine. Anyone who loves photography can check out his website here. Cheers :)

Stocks Unleashed (ASX): Frontier Resources in the news and new maps of New...

2011-02-28T11:25:00.000+08:00

Stocks Unleashed (ASX): Frontier Resources in the news and new maps of New...: "There is an announcement today from FNT. Basic points include: Multiple, areally extensive and strong copper and gold anomalous soil zones ..."

Tradewinds: The Shooting Star (RM8.23; Target > RM15) - A spectacular quarter!!

2011-02-28T02:07:00.012+08:00

Tradewinds just announced its 4Q results on Thursday last week. Its performance was beyond my expectations and it's nothing short of spectacular. This led to its jump in share price by 67 sen, the top gainer on last Friday!!!

Net profit for 4Q2010 stood at RM193.5 mil or EPS of 66.5 sen while its whole year's net profit was RM482 million or RM1.65 per share, way ahead of my forecast of RM400 mil. I really like their huge increase in turnover and net profit, almost doubled y-o-y (year-on-year). Revenue for 4Q 2010 and whole year of 2010 were RM1.6 bil and RM5.8 bil respectively. Their huge revenue also means that improvements in efficiency and cost control could result in huge increases in their earnings.

The increase in earnings was attributed to better earnings from sugar refining and oil palm plantations segments. Operating profit from sugar refining jumped from RM68 mil to RM93 mil while its plantation operating profit increased from RM99.4 mil to RM143 mil. Earnings from rice division remained solid and were slightly higher than its average in previous quarters at RM57 mil.

Net gearing declined continuously from 1.08x in 1Q2010 to 0.83x in 4Q2010 which is good. Its high net gearing is not much of a concern in view of its resilient and lucrative businesses. Net assets per share rose from RM5.82 to RM6.83.

Its plantation business is expected to fare well in view of the favorable palm oil prices coupled with its increasing matured acreage (Its tree age profile is rather young, means that there is plenty of room for expansion in production). According to its quarterly report, rice division is expected to perform well for 2011 despite a more volatile rice market as it has bought forward some of this year's requirements to mitigate the risks. On the other hand, sugar refining could benefit from sugar price increases resulted from subsidy cuts.

In view of its prospects and strong earnings, I see a RM15 stock in the making. Its earnings were even more fantastic than Kulim's RM360 mil net profit for 2010. By simple calculation, if Tradewinds is to trade at similar PE levels as Kulim, its share price should be at RM20!!!

Surprisingly, there is not even one news on its profits or surge in its share price. I'm curious why Tradewinds (M) is rather absent from the media and the stockbroking houses. Hmmm...

For posts on Tradewinds, click here.

Revenue and earnings are in RM'000

ATIC Free Entry Ticket

2011-02-23T15:48:00.003+08:00

ATIC (Asia Trader and Investor Convention) is coming to KLCC again on 2-3 April 2011. Anyone who wants to obtain free tickets for the 2 days can click on the link provided above. Nonetheless, it's only free for certain programs. For day 1 program, click here. For day 2 program, click here. See you there!

Tradewinds (RM7.89; Target RM13.50) 4Q2010 results preview: Still strong (A food giant conglomerate yet one of the cheapest stock in KLSE)

2011-02-23T10:01:00.012+08:00

Results of Padiberas Nasional Bhd (Bernas) and Tradewinds Plantation Bhd (TWSP) were out. Both of these counters are 72.6% and 69.8% held by Tradewinds (M) Bhd (TWS) respectively. Given Bernas net profit of RM36.9 mil and TWSP's net profit of RM83.5 mil, combined profit contribution to TWS' net profit based on its equity stake in both companies should be around RM85 mil already. Note that we have only incorporated its plantation and rice business segments.

It has another sugar business division. Assuming that its sugar refining net profit is around RM35mil (Historically it's about RM35mil to RM40mil per quarter), total net profit for TWS is estimated to reach around RM110mil to RM120mil or EPS (Earnings per share) of 37 sen-40 sen. Total net profit for the whole year could reach RM400mil or EPS of RM1.35. Based on current price of RM7.80, PER 2010 is less than 6x.

Pricing the stock at PER of 10x, it should be trading at RM13.50. This is one of the cheapest stocks in KLSE in view of its food conglomerate business which is able to rake in profits in the tune of few hundred million. Not many stocks can have this kind of profits. We could compare TWS to Kulim as this stock also bears some similarities to Kulim, another conglomerate with oil palm plantations and food businesses. Look at what levels Kulim is trading now. TWS profits are even more stable and higher compared to Kulim's albeit with a higher net gearing. Perhaps TWS should follow Kulim's footsteps in announcing some share split or bonus issues which could see greater liquidity and participation from the investors, then the stock is poised for an upward re-rating.

In addition, it is rather generous with its dividends. It just paid out 20 sen dividend in Jan 2011 and probably will pay another 10-15 sen (Just a guess) for its final dividend in mid year, a 4% yield based on current price. Not bad at all. Results should be out soon within one week. Let's see how it performs for the final quarter.

For previous post, refer here.

Frontier Resources Ltd - Doubled. More to come? Triple, Quadruple?

2011-02-17T16:56:00.002+08:00

For more info, click here.

Malaysian unit trusts: Good investment?

2011-02-14T20:12:00.013+08:00

I'm back guys. Sorry for the long absence. I just went to China for holidays. Thank God I went to Guangzhou during CNY season. The traffic was good since many had gone away to their respective "kampungs" for CNY. If not, I'd probably spent most of my time on the roads.

Anyway, for those contemplating buying unit trusts, I did some simple research on some Malaysian unit trusts (Only selected few: Malaysia equities, Malaysia bonds and Malaysia Shariah equity) using prices ranging from 2004 to 2010 and some reward-risk measures such as Sharpe, M2, Treynor, Jensen's alpha coupled with performance consistency measures such as Spearman Rank. Probably there are a few research materials out there which offered contradicting conclusions. I'm thinking maybe I should just give a shot at this :p It's also a good warm-up for me after the long rest :)

A gist of the results as follow:

Equity

Bond

Islamic Equity

Looking at the tables above, generally unit trusts underperformed their benchmark indices (unfortunately). There seems to be no additional benefits of investing in unit trust funds as compared to individual stocks or bonds. However, it seems that equity funds were more resilient during market downturns. This could be due to greater diversification of the funds though this would need further analysis.

In addition, the Spearman rank measure seemed to show that there was little correlation between past and future performance implying that investors would not have the upper hand of picking past winning unit trusts.

Equity

Bond

Islamic Equity

Having said that, there were a few funds which consistently appeared in the higher rankings and outperformed their peers and benchmark indices. The funds were Kenanga Growth, Kenanga Syariah Growth and AmDynamic Bond which were also winners of The Edge-Lipper Fund Awards for multiple years. In this case, investors would need to go the extra mile to identify consistent winners like the ones mentioned above rather than just buying any unit trusts recommended by your unit trust agents.

PS: Sorry about the small tables. You might need a magnifying glass to read them or zoom in the page :p

Market Outlook and Stock Picks for 1H2011

2011-01-23T01:13:00.028+08:00

How high will the market go? Most of the analysts are expecting a good run in KLCI in the 1H2011 while 2H2011 performance remains uncertain. KLCI at current valuations does not appear cheap anymore as it is already trading slightly above historical average 1Y Forward PER of 15x but remains below PER’s historical peak of about 18x. Should the market breach historical levels, it should be able to touch above 1,800 points. However, I do not want to be too optimistic. Consensus is targeting KLCI to reach around 1,700 points which is at PER of about 17x (+1σ), about 10% upside from current level. Corporate earnings growth is going to be about 16% y-o-y this year based on consensus. The impetus for 1H2011 would be QE2 (Quantitative easing 2), roll-out of ETP projects, earnings growth and election play.

QE2 is going to flush the market with a lot of liquidity, at least in the early part of this year, causing money to flow into markets with higher returns including Malaysia. Foreign shareholding remains relatively low, though it has risen from a low of about 20% to current levels of close to 22%. Its 10-year peak was about 27.5% in mid-2007. Nonetheless, this could also contribute to greater volatility in the stock market. Investors should have the holding power to invest in stocks or risk losing out. One should take note of monetary tightening policies in major economies such as US in 2H2011 as QE2 ends in June 2011 which might adversely affect equities and bonds. Tightening measures could cause money outflow from Malaysian market, thus dipping the KLCI. Nonetheless, tightening measures will likely be gradual in the form of draining excess reserves via increasing fed funds rate-discount rate spread and interest rate hikes (or having the word ‘extended period’ erased from their announcements :p). Economic conditions in US such as lower unemployment, higher inflation and improving financial conditions should drive tightening measures. But for now, we are still seeing low inflation and high unemployment in US, thus tightening measures should be rather distant. Therefore, I think we could just enjoy the ride for now before unloading our chips off the table as KLCI approaches 1,700 points.

Elections should benefit sectors like construction, property and O&G sectors. Contract newsflow should be more intense ahead of the elections. Construction sector is going to benefit from rollout of LRT and MRT projects, Pahang-Selangor Water Transfer, LCCT 2 and SCORE projects. I still like Sunway Holdings (RM2.25; Target RM2.90) with news of merger with Suncity to form a newco. I’m seeing more than 30% upside from here. Naim Holdings (RM3.60; Target >RM5.00) looks attractive and could ride on Sarawak election play, another stock with possible >30% upside.

Property stocks that caught my attention: Plenitude (RM2.15; Target RM2.80) and Hunza Properties (RM1.73; Target RM2.60) appear undervalued. Plenitude has a huge cash pile of RM325mil or RM1.20 per share, about 55% of the current stock price (Wondering how they are going to utilize the cash. Acquisitions? Projects? Privatization? Bumper dividends? Plenty of financial flexibility for land purchases and projects), trading at P/BV of 0.7x and forward PER of 6x. At least the management is now taking interest in its share liquidity, as indicated by its recent 1-for-1 bonus issue in Nov 2010. On the other hand, Hunza Properties is trading at P/BV of 0.7x, relatively low gearing, forward PER of 5-6x.

O&G stocks: Generally I shun most O&G stocks, highly leveraged, high PER, earnings instability and therefore high risks in project execution. The one that I like is Coastal Contracts (RM2.46; Target RM4.00), a counter which has been highly recommended by most research houses for the longest time. At least it appears to be moving now. Having said that, it’s still trading at absurd forward PER of below 5x!!! Its ROE remains one of the highest in the industry. A Forbes’ Asia 200 Under A Billion company. Consensus target price is at around RM4.00. For my previous post on Coastal, click here. Another counter is EPIC (RM2.30; Target >RM3.00), trading at PER of 7x. Recently its shares were bought over by Terengganu Inc from AZRB for RM3.09. In view of its strong balance sheet, resilient earnings and beneficiaries of greater O&G activities in the east coast, it should be trading around 10x with fair value at around RM3.10. For EPIC posts, click here.

Consumer sector: Beneficiaries of removal of subsidies such as Bernas (RM2.81; Target >RM4.20) and Tradewinds Malaysia – TWS (RM7.40; Target >RM13.00). For Bernas, please refer to here. TWS is a giant food conglomerate with three gigantic business segments, namely oil palm plantations, rice and sugar. Its rice and sugar businesses are monopolies in their respective fields and have the ability to set the prices of sugar and rice. Its expected profits will touch RM400 mil this year, or EPS of RM1.35. There have been worries over its high debt which is at RM2.2 bil. However, judging by its resilient earnings (Who does not need food?) of about RM400 mil, RM2.2bil is not a big issue at all. 5 to 6 years of earnings will be able to cover that. Besides, it holds more than 70% of Tradewinds Plantation which has 150k ha of plantation land, with matured plantation of 70K ha and immature plantations of 20K ha. Looks like it is going to be another Kulim in the making. Currently trading at PER of 5.5x, it is “super duper” grossly undervalued. Should it follow other F&B counters such as QSR, F&N, Mamee, QL etc, it should be trading at PER of above 10x, which is still conservative. Target price works out to be RM13.00 based on 10x PER!! Judging by its monopoly businesses, it should trade close to valuations of QSR and F&N which are trading at PER of 15-18x. Oh well, you could calculate the fair value. Just to be conservative, let’s just set it at RM13.00 first, which is already a 76% upside from current levels!!!

Conglomerates: Kumpulan Fima (RM1.70; Target RM2.20), DRB-Hicom (RM2.07; Target >RM3.00). Kumpulan Fima I’ve covered quite extensively in my previous posts. Refer here. I’m looking at another 25-30% upside for Kfima. DRB-Hicom is another giant, covered extensively by Dali here.

Automotive: MBM Resources (RM3.26: Target RM5.00) looks good fundamentally. But its share performance has been disappointing thus far as it has been stuck at this level for a very long time. Investors will just get fed up with it and sell the stock every time the stock price rises a little. Its PER is at 6x, net cash of RM120m or RM0.50 per share. Proton (RM4.54; Target RM6.00) remains attractive at PER of 7x supported by net cash of RM1.4b or RM2.55 per share.

Plantation: The sector very much depends on CPO prices. How long could CPO prices hold at this level? Will it be sustainable? I can’t really see where it is going. But this level is at historic high, I see limited upside from here. Plantation stocks might have a short run only during 1H2011 and likely cool down in 2H2011 in anticipation of higher production and potential bumper crops in 2012 especially from Indonesia (Assuming stock prices run ahead of fundamentals by half a year). The weak US dollar could be a drag to plantation stocks as well. TDM (RM3.04) had a really good run lately, as with other plantation counters as well. Hahaha. But I will be more careful at this level.

Other counters that look attractive at a glance: Pintaras Jaya, Protasco, RCE Capital, Mitrajaya, Century Logistics, Freight Management, Harrison Holdings, Poh Kong, MFlour, White Horse, Paramount (Might be rather quiet after its corporate exercises though attractive), Leader Universal, Leong Hup Holdings, Ajiya. – To be continued when I delve deeper into these counters. Please share with us as well if you find any good counters. Thanks :)

PS: I find it harder to pick undervalued stocks as many good ones have moved up :( Maybe after the rally in 1H2011, I will start unloading my investments from the stock market and put them into some bond funds. Btw, not a single research house covering TWS??!! Hopefully someone will get the ball rolling :)

Want your returns to be in multiples, not percentage terms? Try OZ mining stocks!

2011-01-18T11:12:00.006+08:00

Link for OZ mining stocks, especially Frontier Resources (FNT):

http://stocksunleashedau.blogspot.com

Syed Mokhtar stocks 'kena goreng': Missed out DRB-Hicom? Missed out TWS? No worries, don't miss out BERNAS (RM2.83; Target: >RM4.20)

2010-12-27T21:46:00.015+08:00

From the way Tradewinds (TWS) is moving up for the past two weeks, we can clearly see that this is the right stock that will continue to rally in the coming days and weeks. This is going to be the darling stock of KLSE next year. In every bull run, there are always a few Superstar counters. TWS might be one of them.

Here comes Bernas, a subsidiary of TWS which owns 70% stake in its paid up capital of RM470m. Share price of Bernas rose fantastically last Friday and caught the attention of all Malaysians who invest in KLSE. It went up by more than 50 sen in one day and was the top gainer.

Let's look at the business of Bernas .It has a near monopoly business of rice in Malaysia. Its profit was quite unpredictable for many years due to its inability to raise the price of rice which was a controlled item in Malaysia for many years. When the price of rice went up in international market and the government did not allow it to raise the selling price of rice locally, it lost money in that particular quarter or that year. Thus, it used to be a laggard stock for a long time and very few people wanted to buy and keep it. Nonetheless, since TWS bought the majority stake of 70% at the end of last year, things started to change. The present government is more flexible in allowing the company to raise the price of rice locally when the price of rice in international market goes up. Thus, from now onwards, its business and profit will be more stable as shown by its three quarter results this year making near to RM50m profit in each quarter!

It will make close to RM200m net profit this year. Based on the closing price of RM2.83, the EPS and PER are just 42 sen and 7x only. In other words, even with current share price of RM2.83, the share is still considered cheap as compared to many other food companies which have PER of at least 15x. Look at F&N, QSR, KFC, all are industry leaders. Bernas is another industry leader. It has no business trading at current levels. At PER of 10x, the share is worth at least $4.20 and at PE of 15x, it will be $6.30.

In addition, Bernas is very generous in its dividend payment. It paid a 24% dividend last year, giving a net yield of 6.5%. It has a near monopoly in the rice industry in Malaysia and thus has the ability to set the selling price of rice in Malaysia. It also has 30% stake in Gardenia Bakeries which is one of the most popular bread manufacturers in Malaysia and 45% stake in United Malayan Flour. Thus, it is a gigantic food company generating a turnover of more than RM3b per year and making profit of RM200m yearly. How can its share price stay low for a long time? Incomprehensible!! It has just started to roar and will continue to do so just like other food companies like QSR and KFC.

Thus, I think it will become another Superstar just like its mother TWS. Syed Mokhtar counters are getting very 'garang' and hot lately. DRB-Hicom and TWS have moved up substantially, though I believe there's more upside, Bernas is just starting to move up. Therefore, don't miss out on this possible winning stock!!

By William Koay

Who is this NENO or TAS or whatever? Someone who has lost money and spam people's blogs with his rants? - In reply to his post

2010-12-19T00:54:00.012+08:00

neno said...

Dali called to buy JCY @ 1.60 , JCY is now 0.77 , proof here >

http://malaysiafinance.blogspot.com/2010/02/jcys-new-pricing.html

JCY looks likely to slash its IPO price to RM1.60 from an earlier indicative RM2.00. At RM1.60, its a good price level to get in. I still think its fair value is at RM1.80. Enough said.

My reply:

"We're living in a fast changing financial market. Sentiments can change just overnight without warning. If I want to invest long term in stock market, better choose blue chips and avoid all these small cap cyclical stocks. Recommendations from just a month ago might have changed several times already. If invest in these stocks, watch closely, act wisely. It's all about entry and exit points. It's a skill which we have to develop. I can't really judge Dali's recommendation based on his prediction like 10 months ago!!! (MY GOSH!! IT'S BLOODY 10 MONTHS AGO. I might not even consider recommendations like a month ago. They're just good for information sake.) Many things have changed since then. His style is based on momentum play backed by fundamentals, meaning it's fast changing. If you want investment horizon of like 1 year, go to unit trusts. Thus, if we lose money, we have ourselves to be blamed. That's my standpoint. We are responsible for our own money, decision, judgment. If we're not careful enough, blame ourselves. That's all. Thanks."

So, dear readers, exercise your own judgment. Read my entries with your critical eyes and analyze the stocks by yourselves. Don't follow my recommendations or others' blindly. I'm no Sotong and I'm not God. If you agree with my entries, it's a compliment for me. If not, I'll be more than glad that you could provide constructive comments. Thanks.

PS: Stop spamming people's blogs if you lose money or for whatever reason. Moolah's blog and a few others also kena.

Free Piano Jazz Radio

2010-12-16T22:15:00.003+08:00

Stumbled upon some cool radio channels. For those who favor piano jazz music, check out this site. They have really good stuff here.

"Why I Like Kumpulan Fima" by Dali: Malaysian research houses, please expand your horizon :p

2010-12-08T20:55:00.011+08:00

Looks like the ballrolling has to start from the bloggers eh? There're still no research reports on Kumpulan Fima though probably everyone in the bloggersphere is recommending it (including Dali, Moolah and myself) and already investing in it!!!??? Maybe bloggers who are doing the hardwork of picking out these undervalued stocks should demand some payment eh..hehe..Ok, I'm just joking :p Some of the stocks which are not in the Bloomberg's analyst coverage list at all which have strong potential such as DRB Hicom, TDM, Kumpulan Fima, Cepatwawasan (though there's a write-up from CIMB with no recommendation).

Dali's article on Kumpulan Fima, click here.

PS: Another Forbes' Asia 200 Under A Billion award winner is Coastal Contracts which is trading at RIDICULOUSLY low PE of less than 5x!! Wakarimasen!!!

Siaran Tergendala: Will be away for a while

2010-12-07T08:58:00.003+08:00

Dear readers,

I'll be posting quite rarely from now till maybe next Feb (Not that I post as often as other finance bloggers in the past...Sorry guys :p) as I will be busy with other matters. Nonetheless, I will be checking my chatbox to see if I can give any constructive responses to you all.

Thanks. Happy trading!

A short commentary on EPIC results

2010-11-30T22:46:00.006+08:00

I just glanced through EPIC results. Looks good.

EPIC results were good. Earnings remain resilient with net profit of RM13.4 mil or EPS of 7.9 sen for 3QFY2010. 9MFY2010 net profit reached RM38 mil or EPS of 22.8 sen. Give it another EPS of about 8.0 sen for 4QFY2010 will push EPS to about 31 sen for the whole year of 2010. PER 2010 will be around 7.5x. It's rather difficult to understand a company like this trading at PER of 7.5x. I would rate it at least PER of 10x, looking at its resilient business and earnings coupled with strong balance sheet with net cash of RM74 mil (Though strong net cash might not be the optimum capital structure for the company). This stock should worth at least RM3.00. Thus, Terengganu Inc was quite right to buy EPIC's shares from AZRB at RM3.10 per share.

Kulim says Carlyle offer not attractive: Just keep QSR, no need to sell lah...

2010-11-29T20:50:00.004+08:00

KUALA LUMPUR, Nov 29 — Kulim has rejected a non-binding offer from Carlyle Group to buy over its subsidiary QSR Brands, the company said today.

“As QSR and (its) subsidiaries are currently experiencing a robust growth, the board believes that more value can be realised in the long term,” Kulim said. — Reuters

No need to sell (lah). There are news saying Johor Corp wants to pay off debts. Why can't they just restructure or refinance the debt and use some of its subsidiaries' shares as collateral? Better to keep this cash cow gem and realize its value years later which could be a lot higher than current valuations. OR could it be that QSR shares are played up to give a boost to Kulim's share price and Johor Corp will be able to sell Kulim's shares at a more handsome price which could give Johor Corp even more cash? Just a thought :p

TDM (RM2.43): Spectacular Results

2010-11-27T10:34:00.004+08:00

TDM just released their results yesterday. It was just fantastic, above my expectations. Net profit for the quarter was RM28.8 mil or EPS of 12.7 sen. Cumulative 9MFY2010 was RM61.6 mil or EPS of 27.3 sen. Given the current CPO price, net profit for the whole year could easily exceed RM90 mil or EPS of 41 sen. PER 2010 is going to be around 6x only, supported by net cash of RM122 mil or 55 sen per share. To me, TDM is still cheap to go in with attractive dividends of about 5%.

For previous posts on TDM, click here.

Carlyle offers RM1.9b for QSR, tops Idaman bid: Now it's RM6.70 per share. Any more bidders? Above RM7.00 per share perhaps?

2010-11-25T22:19:00.004+08:00

News:

Kulim today said private equity firm Carlyle had offered to acquire its majority-owned QSR Brands for about RM1.94 billion, topping a previous offer from a company linked to tycoon Tan Sri Halim Saad. Carlyle Asia’s offer of RM6.70 a share for the majority owner of KFC and Pizza Hut in Malaysia is 20 per cent more than Idaman Saga’s offer of RM5.60 a share earlier this week and QSR’s current stock price.

“It’s a very lucrative offer and it’s hard to imagine somebody up that number,” said an analyst with an international brokerage who could not be named as he is not authorised to speak to media. The offer values QSR at 20 times forward earnings compared with its current valuation of about 15 times earnings.

QSR’s sale will automatically trigger a general offer for KFC Holdings, the jewel in QSR’s stable of companies. KFC, the 51 per cent-owned subsidiary of QSR, owns US based Yum! Brands’ Kentucky Fried Chicken franchises in Malaysia and Singapore. “It’s already a good price at RM5.60 because QSR by itself is of little value. The value of QSR lies in KFC,” said the analyst.

“At RM5.60, it was valuing KFC at 20 times earnings. At RM6.70, it could value KFC at about 25-26 times.” KFC currently trades at 21 times earnings, well above the sector average of 17.8 times. Four analysts rate it “buy” or “strong buy” compared with two with a “sell” recommendation.

Kulim, which gets about 60 per cent of its profits from its plantations business, holds a 55 per cent stake in QSR Brands. The sale of QSR Brands will provide a quick injection of about RM1.07 billion for Kulim, which is owned by the debt-laden state investment arm Johor Corp.

In a statement to the local bourse, Kulim said its board will deliberate on the offer and that Carlyle had not indicated a time-frame for the offer. It also said QSR and its subsidiaries will not raise capital or declare dividend, while Carlyle conducts due diligence on the company.

Carlyle, a US buyout fund with US$90.9 billion (RM281 billion) in assets under management, has been eyeing deals in emerging markets of Asia and Africa. Earlier this year, it had raised an additional US$2.55 billion for deals in Asia, taking the total of Carlyle capital committed to Asia outside of Japan to more than US$5 billion.

Shares of QSR were up 2.75 per cent, KFC was up 0.77 per cent and Kulim shares were up more than a per cent, before being suspended for trading on the local bourse. — Reuters

For previous post on QSR, click here.

Some comments on Halim Saad's offer to buy QSR

2010-11-20T08:41:00.004+08:00

News: Halim Saad, partner offer to buy QSR

Just read the news. Valuation for the take-over could be just two times the book value??!!! This means that the takeover price could be at RM5.20?? Why would price-to-book value be used for this takeover? The valuation is way too low. QSR is a cash cow, bringing in more than RM100mil profits every year. QSR is a market leader in the restaurant industry, super resilient and consistent earnings growth, somewhat similar to F&B companies like F&N which is trading at PER of 17-18x. Therefore, PER should be used to value QSR. PER of 17-18x would value QSR at more than RM6.50. We should not discount the fact that QSR owns 51.2% of KFC and its stake in KFC is worth RM1.7bil already, similar to the whole QSR's market cap. This implies that QSR's Pizza Hut and Ayamas businesses are totally free!!!

In addition, I think Johor Corp will not accept the offer if the takeover price is lower than current market price. It is extremely hard to own such a company like QSR. No matter what, Johor Corp will be at a loss to let go of QSR unless the takeover price is very high, let's say RM7.00.

Therefore, using P/BV of 2x or takeover price of RM5.20 as reported in the news is purely ridiculous.

My take on AZRB and EPIC (Amended)

2010-11-10T22:27:00.004+08:00

My guess is EPIC will be a privatization target. Terengganu govt won't stop at owning over 60% and not make a GO. It makes very good sense for them to privatise as EPIC is a cash cow. Around RM250mil++ of borrowings (Accounting for their net cash position) could help Terengganu govt to privatize the whole company (To buy another 60% of EPIC shares since they're owning 40%). Less than 5 years of EPIC earnings could easily pay off its entire debts.

As for AZRB, unless AZRB is paying a bumper dividend or invest in a business at least same or more profitable than EPIC, I see little upside to its stock price. Without EPIC, AZRB will lose about RM10-12 million of profit p.a. from its stake in EPIC, thus potentially making its PER very high. Though AZRB has 40 sen per share of cash if EPIC sale goes through, I'm afraid it'll end up the same as Fajarbaru with a lot of cash but have no idea what to do with it.

For me, EPIC will be a better bet. Will the share price shoot up to more than RM3? Hopefully :))

See previous related post.

PS: The RM10-12 million is not a loss. Rephrase: AZRB will earn RM10-12 million lesser p.a. if its 21% stake in EPIC is sold since EPIC is earning RM50-60 million p.a. The RM10-12 million p.a. is not the borrowing costs :)

Utusan's "May 13 is sacred"

2010-11-10T13:37:00.002+08:00

Speechless! Utusan says "May 13 was a blessing in disguise. It's a sacred day". I hate to post political posts but this news is really too much to bear. There are just too many warped minds surrounding us. Read the news and judge for yourselves.

News: Utusan calls May 13 a sacred day

Kumpulan Fima (RM1.30): Quick note on quarterly performance

2010-11-03T18:32:00.006+08:00

Kumpulan Fima just released their results today. Net profit was decent at RM14.8 million, which was a 50% increase year-on-year. Earnings growth were observed across all business segments. Nonetheless, earnings were down by 15% quarter-on-quarter, triggered by lower profit from manufacturing, plantations and associates.

EPS for the quarter was at 5.63 sen, with cumulative 9-Month CY2010 (Calender year) EPS standing at 16.9 sen. EPS for 4Q CY2010 could hit 6 sen easily, making EPS for the total year at 22.9 sen. Thus, PE for CY2010 could be at 5.7x. Net cash position continued to rise to RM120.7 million or 45.9 sen. I'm seeing another Faber in the making, quite similar in terms of the numbers. Recall that Faber was still at RM1.40 when net cash was at RM100m, PE of 6x, dividend yield at about 4% and stable and diversified earnings. Its stock price eventually doubled.

Click here for related posts.

News on Ho Wah Genting in The Star

2010-11-01T09:49:00.001+08:00

News:

Interesting note:

Ho Wah Genting is 35% owned by Perak royal family.
Going to mine 1,800MT of tin in 2011 and double capacity to 3,600MT in 2012. Revenue could reach 1,800MT x RM80K/MT = 144 mil. Earnings could be in tens of millions by 2011, which will make this company stock price extremely cheap.

India PM invites Malaysian bids for infrastructure projects

2010-10-27T16:18:00.003+08:00

News from The Malaysian Insider.

News from TheEdge.

Beneficiaries: WCT, Gamuda, IJM, Mudajaya, Sunway, Binapuri, MTD, Scomi Engineering and Zelan.

Stocks Unleashed

Top 10 Plantation Stocks Summary Table (Based on Mkt Cap)

"Why China's housing market will slow, not collapse" By Nin-Hai Tseng

A less negative article about China's housing market, contrary to many views that China's heading for a hard landing:

There's plenty of reason to believe China's housing prices will slide during what's expected to be a rocky economic year, but the market won't crash. Here's why.

BusinessDay: Smarter people own shares, study finds

Happy Chinese New Year

Rendition of Getaran Jiwa by Tay Cher Siang

Blessed Christmas!

Stock take: TWSP, TDM, SOP

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

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

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

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

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

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

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

Will this rally hold? - Justin Bennett

The Greek solution?

A rumor-driven and politics-driven market

European Leaders Disagree On The Next Step For Greece

We're at the whims and fancies of media and politicians?

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

Rolling blog: The eurozone crisis by Financial Times

Goldman Sachs rules the world: UK trader

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

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

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

Tradewinds Malaysia: 2Q2011 Results Summary

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

Some interesting IPhone Apps: FSM Mobile

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

TWS (RM10.40; TP >RM15): Nice debut for MSM (RM4.58), let's compare it with TWS

Some simple trades on call options

MAA - Cried wolf again?

Tay Cher Siang (Pianist) - Simply Breathtaking

Tradewinds Malaysia (RM9.33; Target: RM15): A blip in 1Q2011 results

"Sell in May and Go Away" OR "Hold in May and Go Away"? You decide.

MAA deal: More truth to NST report? (Amended - Additions)

Some views on MAA's deal with Zurich

Stocks Unleashed (ASX): Marengo Mining (MGO): A Future Takeover Target?

DRB-Hicom Call Warrants: Simple overview

Another dubious report??? MAAB's sale to Zurich, too good to be true?

ASX Marengo Mining Ltd (MGO): A better value proposition than Sandfire Resources (SFR)

ASX: Marengo Mining Ltd (MGO) – The Best Buy of 2011!!

ASX: Frontier Resources Ltd (FNT) – Moving into the next Frontier soon!

Go Go Go - MGO - Marengo! (A$0.275; Target Price A$1.00; Investment Horizon: 18-24 Months)

High cash pile is good while high debt is bad? Not necessarily true...

Transfer to a new website in process: Occasional interruptions expected

Kumpulan Fima (RM1.63; Target: RM2.20): Highest quarterly earnings, steady!

Keanpoh Photography

Stocks Unleashed (ASX): Frontier Resources in the news and new maps of New...

Tradewinds: The Shooting Star (RM8.23; Target > RM15) - A spectacular quarter!!

ATIC Free Entry Ticket

Tradewinds (RM7.89; Target RM13.50) 4Q2010 results preview: Still strong (A food giant conglomerate yet one of the cheapest stock in KLSE)

Frontier Resources Ltd - Doubled. More to come? Triple, Quadruple?

Malaysian unit trusts: Good investment?

Market Outlook and Stock Picks for 1H2011

Want your returns to be in multiples, not percentage terms? Try OZ mining stocks!

Syed Mokhtar stocks 'kena goreng': Missed out DRB-Hicom? Missed out TWS? No worries, don't miss out BERNAS (RM2.83; Target: >RM4.20)

Who is this NENO or TAS or whatever? Someone who has lost money and spam people's blogs with his rants? - In reply to his post

Free Piano Jazz Radio

"Why I Like Kumpulan Fima" by Dali: Malaysian research houses, please expand your horizon :p

Siaran Tergendala: Will be away for a while

A short commentary on EPIC results

Kulim says Carlyle offer not attractive: Just keep QSR, no need to sell lah...

TDM (RM2.43): Spectacular Results

Carlyle offers RM1.9b for QSR, tops Idaman bid: Now it's RM6.70 per share. Any more bidders? Above RM7.00 per share perhaps?

Some comments on Halim Saad's offer to buy QSR

News: Halim Saad, partner offer to buy QSR

My take on AZRB and EPIC (Amended)

Utusan's "May 13 is sacred"

Kumpulan Fima (RM1.30): Quick note on quarterly performance

News on Ho Wah Genting in The Star

India PM invites Malaysian bids for infrastructure projects