Saturday, April 24, 2010

Malaysia Ringgit still have upside, but likely be limited

The ringgit had a spectacular performance this year. It was the best performer among regional peers by strengthening 6.6% year-to-date against the USD. The second best performer was India Rupee which strengthened by 4.5% against USD, followed by Korea Won and Indonesian Rupiah which rose by 4.2% and 4.1% respectively against USD.

There were several factors which contributed to the stellar performance of the ringgit. Amongst them include Malaysia’s better than expected economic recovery, the central bank’s monetary tightening policies, the New Economic Model (NEM), speculation on revaluation of China’s yuan coupled with speculative funds inflow into Malaysia’s financial system.

Ringgit supported by firm economic fundamentals

The ringgit was supported by Malaysia’s stronger economic fundamentals, as evidenced by the recent economic statistical releases. Malaysia’s economy showed a significant turnaround in 4Q 2009. Its 4Q 2009 GDP beat analysts’ estimates considerably by posting a 4.5% year-on-year growth, backed by improving external and domestic demand. Macroeconomic numbers are improving as well, with exports and manufacturing sales seeing double-digit growth. In addition, MIER’s (Malaysia’s Institute of Economic Research) CSI (Consumer Sentiments Index) and BCI (Business Conditions Index) continued to trend upwards by rising for the third and fourth consecutive quarter respectively in 1Q 2010, indicating brighter days ahead for private expenditure, which will be driving the economy this year.

In conjunction with the optimistic economic recovery, the central bank started tightening its monetary policy by hiking OPR (Overnight Policy Rate) by 25 basis points on 4th Mar 2010 to 2.25%. This was later followed by the unveiling of the NEM (New Economic Model) on 30th Mar 2010 which proposed economic reforms aimed at alleviating Malaysia into a high income economy. Both have somewhat influenced the recent surge in the ringgit.

China’s yuan appreciation could further strengthen the ringgit

Speculation of China’s yuan revaluation further added to the strength of Asian currencies, including the ringgit. Pressure on China’s yuan revaluation is mounting as global imbalances resurface again, caused by faster economic growth in the Asian region as compared to the developed nations amidst a recovering world economy. As a result, the US and European countries are blaming Asian countries, especially China, for suppressing the strength of their currencies to give their exports an unfair cost advantage. In the recent Nuclear Summit held in Washington, US President Barack Obama once again urged China to let the yuan rise at a faster pace.

A higher yuan could actually spell good times for the Asian currencies. Historical data has shown that Asian currencies actually benefitted from yuan appreciation, mainly due to China’s rising position as a major trading partner among the Asian countries. To recap, Chinese government allowed its yuan to appreciate against USD in July 2005. The yuan had since appreciated by 1.6% over the next twelve months, giving rise to the appreciation of Asian currencies. Consequently, the Singapore dollar, Indonesian rupiah and Malaysian ringgit appreciated by 5.1%, 7.0% and 2.7% respectively during the same period.

Further appreciation in the ringgit on cards, but upside will be limited

The uptrend of the ringgit is likely to remain intact over the next six months as the ringgit appears undervalued. Based on The Economist’s Big Mac Index published on 17 March, it suggested that the ringgit is the second most undervalued currency under its coverage as the ringgit is still 40.8% below its fair value benchmark against the USD. In addition, the ringgit seems undervalued based on analysts' REER (Real Effective Exchange Rate) for the ringgit. As such, there is a high likelihood for the ringgit to appreciate further.

In addition, the ringgit will be supported by the widening interest rate differential between Malaysia and the US as Bank Negara is expected to hike OPR possibly by another 50 basis points by the end of 2010 while US Fed is likely to retain interest rates at low levels for an extended period of time. This could lead to higher capital inflows, thus supporting the ringgit.

Nonetheless, the ringgit’s upside might be somewhat limited. Malaysia being an export-oriented economy could be hurt by a surging ringgit. This is in addition to the resultant capital inflows which could lead to imbalances in pricing of certain asset classes. In view of this, the central bank might intervene to limit gains in the ringgit to ensure Malaysia’s exports remain competitive and prevent any asset bubbles from occurring. Consequently, any gains in the ringgit should be modest, which is in line with consensus view that the ringgit will hover at around 3.15 to 3.24 level against USD in the next six months. One way to monitor the intervention by the central bank is to look at the international reserves which should increase if the central bank wants to absorb the upward pressure on the ringgit.

Mixed effects on equities from higher ringgit. Economy to benefit?

Overall, a higher ringgit has mixed effects on Malaysian equities. On one hand, a higher ringgit environment will benefit sectors like automotive and food producers which have lower costs of imports while utilities companies such as Tenaga Nasional could benefit owing to its sizeable foreign debt coupled with lower coal costs. On the other hand, exporters such as glove manufacturers, E&E (Electrical & electronic) manufacturers and plantation companies might be adversely affected by the higher ringgit. Having said that, glove manufacturers at the moment seem to be able to pass the higher costs to the customers owing to the rising demand for gloves. As for plantation companies, they could have a natural hedge against forex risks as imports of fertilizers from overseas will be cheaper which could offset the higher palm oil export prices.

Notwithstanding its effects on the equities, a higher domestic currency could actually help Malaysia to move its economy to a higher growth path focused on knowledge and value-adding in addition to attracting foreign talents and retaining local ones. In view of this, a higher ringgit seems to fit in well with NEM’s objective to move Malaysia into a high-income economy. However, this is still dependent on the government's ability to see through their intended economic reforms.

Friday, April 23, 2010

Dufu (RM0.595) to benefit from strong earnings of Western Digital & Seagate

Western Digital and Seagate recently announced their results which showed huge improvement in their sales and earnings. This should bode well for Dufu Technology as Western Digital and Seagate are its two main customers. Dufu quarterly results for 1Q 2010 should be out in end May 2010 and expected to be favorable.

News on Western Digital as shown below:

SAN FRANCISCO: Western Digital Corp reported better-than-expected results and set a forecast for the current quarter that topped Wall Street's targets, as it forecast robust demand for its hard drives, according to Reuters. The company's shares rose less than one percent in after-hours trading.

Western Digital's results come on the heels of a strong report from chief rival Seagate. Both companies are benefiting from renewed demand for personal computers, as businesses finally begin to loosen their purse strings to upgrade aging technology hardware.

Western Digital forecast earnings for the current quarter of $1.40 to $1.50 a share on revenue of $2.475 billion to $2.575 billion. Analysts are expecting a profit of $1.36 a share on revenue of $2.45 billion for the June quarter.The company also expects fiscal 2010 capital expenditures to be at the high end of its forecast range, indicating it will bring additional manufacturing capacity online.

"The strength we've seen in the last 12 months in consumer, which has been considerable and above everyone's expectations, (is) now being augmented by the beginnings of a corporate purchasing cycle," Chief Executive John Coyne said on a conference call with analysts.

Western Digital's shares received only a small boost in extended trading. Wedbush Morgan analyst Kaushik Roy said the strong results and forecast were already baked into the company's stock price. "It was expected that they would have a good quarter and if you look at the chart, the stock is tired, it wants a break," he said.

Western Digital's shares are up roughly 90 percent from a year ago. The company's shipments in the quarter rose 62 percent to 51.1 million units, surpassing Seagate's total. Western Digital, which is more reliant on consumer sales, said it took share in the overall hard drive market.

There is ample evidence of an upswing in spending on technology hardware. Research group IDC said global PC shipments surged 24 percent in the January-March quarter. Western Digital said net income rose to $400 million, or $1.71 a share, in the fiscal third quarter ended April 2, from $50 million, or 22 cents a share, in the year-ago period.

The average analyst estimate called for a profit of $1.55 a share, according to Thomson Reuters I/B/E/S. Revenue rose 66 percent to $2.64 billion, above Wall Street's target of $2.54 billion. Gross margin was 25.2 percent, better than the consensus estimate of 24.4 percent.

The shares of Lake Forest, Calif.-based Western Digital closed at $40.68 on the New York Stock Exchange and rose to $41 in extended trading. - Reuters

Source: The Edge

For previous post on Dufu, click here.

Sunday, April 11, 2010

CSC Steel (RM1.96): Dividend Yield above 7%; PER of 7X; Net Cash of RM303 mil !!!

Brief description of company:
CSC Steel Holdings Bhd (Formerly known as Ornasteel Holdings Bhd) is a flat steel manufacturer in Malaysia which is 48.5% owned by China Steel Pacific Holdings Pte Ltd, a Taiwanese steel giant. The other two major shareholders are Lembaga Tabung Angkatan Tentera (10.2%) and Lembaga Tabung Haji (7.7%). Having China Steel as its major shareholder, the company could leverage on the management, technology and high quality products to improve its productivity and operational efficiency.

It is principally involved in flat steel manufacturing, with core products such as PNO (Pickled & Oiled Steel Coils), CRC (Cold Rolled Steel Coils), Galvanised steel coils (GI) and pre-painted galvanized steel coils. The products are used in various industries such as automotive, furniture, roofing, construction, E&E parts, home appliances etc. Its customers are well diversified and is not dependent on any single customer. On the other hand, its supplies are mainly sourced from its mother company with the remaining coming from local players.

Attractive dividends:
The company has very strong operating cashflow and balance sheet. Its current net cash position stands at RM303 million, extremely rare for a steel company!! In addition, the company has no expansion plans for now. This would allow the company to continue paying good dividends to shareholders. Consequently, it has a dividend policy to pay out 50% of its net profit. It recently announced net dividend of 15.25 sen which translates into 7.6% dividend yield. Ex date will be on 28 June 2010. In view of this, its existing cash pile alone could actually sustain the current dividend payments for the next 5 years!!!

Demand for flat steel products are expected to remain buoyant in tandem with the economic recovery. Steel prices are generally expected to head north owing to higher raw material prices, which might be positive for company's margins. But peer competition could limit margin expansion. Over the past two quarters, it managed to achieve net profit of RM39 mil in 3Q 09 and RM37 mil in 4Q 09, owing to higher selling prices coupled with lower raw material prices. Conservatively, assuming that it could sustain above RM25 mil net profit per quarter for the rest of 2010, net profit could easily be above RM100 mil or EPS of 27 sen, translating into PE 2010 of 7.3X. From another perspective, if we take away the net cash per share of 81 sen (Net Cash of RM303 mil / 373.2 million shares) from the stock price, stock price will be at RM1.15 only. Based on this, PER of its business is only at a mere 4.25x.

In conclusion, the stock is attractive just based on its dividends alone. It is further supported by huge net cash position of RM303 mil in addition to its cheap valuations. Note that the trading volume has picked up over the past few weeks, some big buyers could have been accumulating the shares I suppose.

Net Cash: RM303 mil or EPS of 81 sen
Dividend: 15.25 sen
Dividend Yield: 7.6%
PER for 2009 & 2010: 8.0x and 7.3x
Shares issued: 373.2 mil
Market Cap: RM731.5 mil

Disclaimer: The above article 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 above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Friday, April 9, 2010

TDM (RM1.95): PER of less than 5X; Div Yield of more than 6%

TDM Bhd is principally involved in plantation business. It currently has 37,000ha of plantation land with about 32,709ha or 95% of matured plantation. The remaining land was replanted. It also has two palm oil mills with annual processing capacity of 600K MT of FFB (Its FFB production in 2009 was 530K MT, nearing 90% utilization rate).

What's attractive about this share is its cheap valuations and attractive dividend. P/E could just be at 5x with estimated EPS of 40 sen or net profit of about RM90mil in 2010, assuming CPO price hovers at RM2,300/MT. If average CPO price stays above the current RM2,500/MT for the whole year, P/E ratio for 2010 earnings could even be lower than 5x. On the other hand, P/BV is at a mere 0.7x. It was also well supported by a healthy balance sheet with net cash of RM107 mil. On dividends, its dividend payout has been increasing from a mere 3 sen for FY2006 to 12 sen (Net div) for FY2009 which is equivalent to 6.2% at current share price of RM1.95 (Ex-date: 21 May 2010).

Barring 2009 which was an exceptional year for plantation, margins were improving over the years which was in line with restructuring of its businesses over the past 5 years by divesting its non-core businesses such as Pelangi Airways, A&W and Perhentian Island Resort coupled with improvement in management of its plantation business. The recent 4Q09 net margin was high at 22%.

However, the downside is that TDM is tightly held by the Terengganu State Govt which has about 70% equity stake. Nonetheless, the management has expressed its intention to improve the liquidity of its shares and also to work out a dividend policy which could be an added boost to its attractiveness among investors. TDM could also benefit from the introduction of NEM which might prompt the government to divest more stakes in GLCs which could improve the liquidity of GLC counters.

Going forward, growth potential will come from its expansion into Indonesia in which the company has rights to develop 40,000ha of land into oil palm plantation. But the venture could only bear fruit probably in the next few years and not in the near future.

Overall, a good stock to have just based on its cheap valuation and dividend payout. Attaching a PER of 8x is enough to send the share price to above RM3.00.

EPS for 2009 & 2010F: 25.1 sen & 40 sen
PER for 2009 & 2010F: 7.7x & 4.9x
Dividend Yield for FY09 and FY10F: 6.2% & 7.2%
Shares Issued: 218.9 mil
Market Cap: RM426.8mil
Disclaimer: The above article 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 above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Wednesday, April 7, 2010

Taking Stock: Performance of Recommended Stocks in Oct 09 - Mar 10

Fund Focus: OSK-UOB Asia Consumer Fund

For those of you who are interested in investing in unit trusts, this fund looks rather interesting. Here is a gist of what this fund is all about:

OSK-UOB Asia Consumer Fund is one of the very few funds in Malaysia which offers us exposure to the growing consumer sector in Asia which is expected to thrive for many years to come. The fund is a feeder fund invests at least 95% into United Asia Consumer Fund, a fund managed by UOB Asset Management Limited in Singapore. The main sectors which the fund invests include consumer staples and consumer discretionary companies in Asia ex Japan.

Consumer staples are related to consumer needs such as household products and food & beverages that face inelastic demand. On the other hand, consumer discretionary products which cater to consumer wants will have greater growth in tandem with the growing wealth of the population. In view of this, the fund could have a versatile allocation between growth companies (consumer discretionary) and income & dividend companies (consumer staples) to adapt to different economic conditions.

Let us have a look at the Asia consumer sector:

One of the fastest growing populations:
Asia currently has the largest population in the world at 3.9 billion which account for 60% of the world’s population. Asia is also expected to have the second highest population growth till 2025 after Africa and ahead of other developed nations, according to United Nations database. This could pave way for greater consumer demand amidst larger consumer base.

Increasing wealth to underpin consumer growth:
The rapid economic growth of Asian countries such as China and India has lifted huge number of the population out of poverty especially in rural areas which helped to drive demand for consumer staples. GDP per capita for China and India almost doubled within 6 years and 9 years respectively.
Owing to the rapid rise in GDP per capita, demand for consumer discretionary is also experiencing speedy growth owing to the rapid increases in urban household income. The high net worth individual category has swelled, coupled with rising white collar and service industry jobs which underpin a growing middle class population, demand for consumer discretionary products and luxury products such as cars, mobile phones, electronic items and branded goods are escalating swiftly. Usually, as GDP per capita crosses the US$5,000 threshold, discretionary spending starts to gather pace. Chart below shows retail sales accelerated when China GDP per capita surpassed US$5,000 level.
This bodes well for the consumer sector in Asia as many Asian countries have achieved or are approaching the brink where mass consumption of discretionary goods starts to take off.

Rising urbanization:
Asian countries are experiencing increasing urbanization owing to growing modernization and industrialization with growth rate exceeding that of the developed world. Nonetheless, urban population of Asian countries remains low as compared to the developed world.
Greater urbanization could boost consumer spending on FMCG (Fast moving consumer goods) such as F&B (Food and beverage), tobacco, pharmaceutical goods, toiletries and cosmetics, lifestyle products in addition to telecommunication and internet services.

Furthermore, increasing urban population is boosting demand for public and private transport. Vehicle sales in Asian countries have been rising at an exponential rate, especially in China, India and Indonesia. However, according to International Road Federation (IFR), vehicles per capita in major Asian countries remains low with China, India and Indonesia having approximately 100 vehicles per 1000 population as compared to US, Germany and Japan which have 550 to 750 vehicles per 1000 population.

Increasing working population to support consumer demand growth:
Asia’s working population is expected to rise over the next 20 years, especially in countries like China, India, Vietnam, Indonesia and Philippines which have a huge young population as compared to more developed countries. This could support continuous growth in consumer demand in Asia as more people are becoming economically productive in the coming years.
Asia consumer equities outperformed the broader Asian equities:
Over the past 10 years, consumer equities far outperformed the broader Asian equity funds as the consumer sector has some of the fastest growing companies in Asia. MSCI Asia ex Japan Consumer Discretionary Index and MSCI Asia ex Japan Consumer Staples Index far outperformed the general MSCI Asia ex Japan Index for the past 10 years by 54.4 percentage points and 114.2 percentage points respectively. This outperformance could continue based on the reasons stated above. This will benefit OSK-UOB Asia Consumer Fund which is well-positioned to benefit from the thriving consumer sector.
Capturing the best of both sectors:
Owing to the fund’s allocation into consumer discretionary and consumer staples sectors, the fund has a dynamic sector allocation which has the flexibility to allocate between growth companies (Consumer discretionary) or dividend and income companies (Consumer staples) depending on the economic conditions. On one hand, consumer discretionary stocks present greater growth opportunities in the event of a booming economy. On the other hand, consumer staples stocks could partially hedge the downside of consumer discretionary stocks as consumers limit spending on unnecessary items during an economic decline.

Underlying investments attractive:
As at 26 Feb 2010, about 73% of the capital is invested into consumer sector, with the remaining portion allocated to information technology, healthcare, industrials and telecommunication sectors. Investments are more skewed towards China/Hong Kong at the moment which account for about 70% of total investments. Furthermore, most of the stocks held by the fund are trading below PE of 15X with many of them in their single digit. The valuations are considered very attractive as most of the companies expect earnings growth of more than 20% in 2010.

Low risk to downside of Asia consumer sector:
Despite the severe economic downturn, many companies held by the fund managed to deliver 30%-40% earnings growth. Barring any major collapse in growth rates in China or India, which I think it is unlikely to happen, consumer demand will continue to be strong. This will further be supported by favourable policies set by the governments to encourage domestic consumption such as subsidies for purchase of cars, houses and electrical appliances in China and reduction of value added tax in India. Consequently, risk to the consumer sector in Asia remains low.

Experienced investment team; Manager of a top performing fund in Malaysia:
The fund is currently managed by Paul Ho, an experienced manager who also manages OSK-UOB Asian Growth Opportunities Fund which was the top performing fund in Malaysia last year. He is well supported by a team of 13 in Singapore alone which covers Asian equities. This is in addition to the resources available from the entire UOB Asset Management network which has presence in Malaysia and Thailand coupled with UOB’s partners in China, India and Korea such as Ping An Insurance, UTI in India and Hyundai Investment Group in Korea.

Price Performance:
You can actually purchase this unit trust from which is an online portal allowing you to buy and sell unit trusts online, in addition to very cheap sales charge of a mere 2%.

For more info, please click here.