Tuesday, 30 December 2014

Monday, 29 December 2014

Oil Palm planted area by state as at December 2013


State
Hectare
%
Johor
730,694
13.9
Kedah
85,182
1.6
Kelantan
140,035
2.6
Malacca
52,704
1.0
Negri Sembilan
170,048
3.2
Pahang
710,195
13.5
Perak
384,594
7.3
Perlis
278
0.01
Penang
13,480
0.2
Selangor
137,003
2.6
Terengganu
169,520
3.2
Peninsular Malaysia
2,593,733
49.6
Sabah
1,475,108
28.2
Sarawak
1,160,898
22.2
East Malaysia
2,636,006
50.4
TOTAL
5,229,739


Source: Economics & Industry Development Division, MPOB

Friday, 26 December 2014

Why the delay in the issuance of CPC for KLIA2?

According to Clause 15.1 of Agreement and Conditions of PAM Contract 2006,


It is unsure whether the conditions of contract by Pertubuhan Akitek Malaysia was adopted in the construction of KLIA2 but practical completion generally carries the meaning above.

The operator of KLIA2 already has full use of the airport for its intended purposes for more than 6 months. Citing confidentiality agreements, the officer from Malaysia Airports Holdings Bhd (MAHB) could not give any specifics other than the fact that the remaining 2% of the works was contractors' failure to comply with certain criteria, including "some minor testing of the facilities and documentation",

What is so confidential?

Separately, in 1Q13, its Chairman and officer of MAHB reassured the public that KLIA2 was on-track to conclude the construction and internal works by 1 May 2013, and the airport commencement date to be on 28 June 2013. (source1, source2 ). KLIA2 eventually opened on 2 May 2014, about a year later. With just about 3 months to the targeted deadline, how could the Chairman and the officer be so ignorant, not knowing it was impossible for KLIA2 to be ready by 1H13?

Friday, 19 December 2014

Icapital.biz's return the bottom 20% in the past 5 years?

Referring to The Edge Lipper Fund Table dated 15 Dec 14, there were 67 funds under the category of Equity Malaysia (non-Islamic). There is no other closed-end fund listed in Bursa at the moment. So I guess the closest comparison I can make is versus open-ended funds under this category.

For the 5 year period of 4 Dec 09 to 5 Dec 14
Icap share price as of 4 Dec 09: RM1.79
Icap share price as of 5 Dec 14: RM2.36
Adjusted Icap share price* as of 5 Dec 14: (2.4/2.3) x 2.36 = RM2.46

*(adjusted for 9.5 sen special dividend in Sep 13. Closing price on 13 September 2013, a trading day before ex for dividend: RM2.40)

Icapital.biz's 5-year share price return, inclusive special dividend: 37.4%. This ranked Icapital.biz 57/68, the bottom 20% among the fund. The share price return is what the investors get when they invest in the closed-end fund.

If we look at the NAV for the 5-year period from 2 Dec 09 to 3 Dec 14, (a differencce of 2 days as Icapital publishes the NAV value once a week), the return was 53.8%, which ranked the fund 35/68, in the bottom half.

NAV as of 2 Dec 09: RM1.97
NAV as of 3 Dec 14: RM2.96
Adjusted Icap NAV:2.96/288.875 x 2.96 = RM3.03
Icap's NAV growth in 5 years: 53.8%

The performance of the fund does not excite the shareholders, despite the chances of success for closed-end funds are much higher. According to Icapital.biz, closed-end funds do not experience inflows and outflows of funds, their fund managers have a broader range of investment choices and greater flexibility in deciding where and how to invest. Since closed-end funds have a fixed number of shares outstanding, they do not experience constant inflows and outflows of funds. Therefore, closed-end funds have less trading activities. With less buying and selling to do, closed-end fund would have less reinvestment decisions to make. The more reinvestment decisions there are, the higher the risks of making the wrong decisions and thus the higher the chances that the performance of a fund would be inferior.

Read more:

Does Icapital.biz outperform Berkshire Hathaway Inc.?
Did Icapital.biz outperform open-ended unit trusts?

Thursday, 18 December 2014

Only World Group

This is a listed company that attracts my attention. To keep it short, I would just share the reasons why I am attracted to it. More information about the group can be found at its official website.

1. No offer for sale in IPO
The owners are not cashing out. Post IPO, the founders (husband and wife) are still very substantial shareholders, collectively holding 69.08% of the group. This is a good sign. It is likely that they will continue to work very hard for the group given their very significant stake in the group.

2. Competent and Experienced Management
The CEO and COO, husband and wife, have led the group for over 30 years. They brought in Ripley's Believe It Or Not Museum and Haunted Adventure to Genting Highland First World Hotel. Besides, the group runs 20 food outlets, 9 retail and other service outlets in Genting Highland. OWG is the largest 3rd party F&B operator in Genting Highland. Being able to be a significant partner at Genting Highland is a strong testimony of OWG's strength and competency.


And the Chairman and Group CEO Dato' Richard Koh is a veteran in the industry. He is:
i) The President of Asean Retail-Chains & Franchise Federation
ii) International Association of Amusement Park USA Board of Director & Asean Advisory
iii) Advisor of Malaysian Association of Amusement ThemePark & Family Attractions

3. Good margins
Skeptics are less impress that OWG's F&B brands are not so well-known. But when comparing with well-known brands such as Burger King Malaysia and A&W Malaysia which struggle with profitability, I would rather opt for margin. When analysing OWG, one has to understand that their business strategy is different from other F&B operators which adopt "scattered gun" approach. For these F&B players that have branches in shopping malls, brand awareness is important to attract patrons. 

OWG services a captive market at Genting Highland and its theme parks that have sufficient attractions and activities to extend the visitors' stay in the areas. Visitors rarely go all the way to Genting mainly for the food there. But when visitors look for food in Genting, there is good chance of the visitors frequenting one of OWG's F&B outlets there. 

When one visits a water theme park, the visitor has little choice but to purchase the food from the F&B outlets within the theme park. Brand is not so crucial here but how the operator retain visitors for longer stay at the theme park to increase their spending at the F&B outlets. 

4. Expansion and Upgrading at Genting Highland
Genting Group is expanding the number of rooms at Genting Highland and upgrading the outdoor theme park. This should bode well to OWG.

5. Cash business
OWG's businesses are mainly cash business. So cash collection is not a major concern.

6. Net cash position
Based on the pro forma consolidated balance sheet, the group is expected to be in net cash position post ipo and utilisation of listing proceeds

7. Low rental rate at Komtar
The rental rate for the 130,333sq ft of space at Komtar Penang for the
i) proposed multi-purpose hall and open air bazaar at 5th floor;
ii) high end international food service outlets, entertainment outlets and ballroom at 59th and 60th floor; and
iii) High end international food service outlets and lookout deck at 64th and 65th floor (rooftop)
is only RM0.69 psf.


2 exterior sky bubble lifts linking the 5th floor directly to 59th and 65th levels are intended to be installed to allow passengers riding in the sky lifts to experience distinctive bird's eye view of Georgetown and Penang.

I would say the Penang State Government has been successful in transforming Penang into a tourism hot spot. Some places of interest near Komtar includes street art and wall painting in Georgetown, Armenian Street Got Talent on every Saturday,  Project Occupy Beach Street every Sunday, Chew Jetty, and various famous hawker food nearby. After Komtar is revitalised by OWG, it could potentially becomes a tourist hot spot.

At IPO price of 88sen/share, it is pegged at a historical PE ratio of 11x. Given the reason above, and potential significant growth from the Komtar revitalisation project, I think it deserves a higher target PE ratio.

Friday, 12 December 2014

Increasing risk in the warrants of oil & gas SPAC

Oil & Gas SPACs have dropped to a very attractive level where they offer almost "risk free" investment with attractive return of 10% to 15% per annum. See here for more details.

This can be achieved by:

i) hold the shares in SPAC until liquidation.
ii) vote against if there is any qualified acquisition. Those who vote against will receive their pro rata portion of the amount held in trust account plus interest even if the acquisition goes through.

However, this is not the case for their warrants.

The warrant can only be exercised from the completion of the qualifying acquisition until the expiry of the warrants.

For an acquisition to go through, it needs at least 75% of the total value of shares held by all shareholders present and voting. However, it may become increasingly tougher to obtain shareholders' approval to proceed with acquisition, due to:

With the high uncertainty and fluctuation in the oil price, existing  SPAC shareholders who are risk averse may want to play safe and vote against any proposed acquisition to get their money back.

The current share prices of SPACs may have attracted some investors who jumped in for the "risk-free" investment and yet offers at least 3x the return of fixed deposit. This group of investors who seek "risk free" high return will vote against any proposed acquisition regardless how attractive the acquisition is.

These make investment in warrants of oil & gas SPAC very risky, with the risk of the warrants becoming "toilet paper", so to speak (we have gone scripless since the introduction of CDS).

This can be seen from the sharper drops in the warrant prices of SONA and CLIQ recently as compared to their mothers.

In these cases, the investors 要乸唔要仔

Saturday, 6 December 2014

Does Icapital.biz outperform Berkshire Hathaway Inc.?

On its facebook page, Capital Dynamics used the chart to compare the performance of Icapital.biz vs. Berkshire Hathaway (Tan Teng Boo vs Warren Buffett)


Icapital.biz was listed on 19 Oct 2005.
IPO offer price: RM1/share
Special dividend of 9.5sen/share went ex on 17 September 2013
Closing price on 13 September 2013 (a trading day before ex for dividend): RM2.40
Closing price on 3 Oct 2014: RM2.43. 
Adjusted closing price on 3 Oct 2014: (2.40/2.305)*2.43 = 2.53

Berkshire Hathaway closing price on 18 Oct 2005: 84,600

Berkshire Hathaway closing price on 3 Oct 2014: 208,750

18 Oct 2005 - 3 Oct 2014
Icap's return: 153%
Berkshire Hathaway's return: 146.7%

For this period, Icap outperformed Berkshire Hathaway by 6.3%. However, the gap in the above chart appears to show wider gap (about 25%) between the performance of these two listed companies.

18 Oct 2005 - 5 Dec 2015
Closing price on 5 Dec 2014
Icap: RM2.36
Icap adjusted share price: 2,40/2.305*2.36 = 2.45
Berkshire Hathaway: 225,640

Icap's return: 145%
Berkshire Hathaway's return: 166.7%

Berkshire Hathaway outperformed Icapital/biz by 21.7%


When Icapital.biz was launched, it was targeting CAGR of 15% to 20%. Icap is into its 10th year. At CAGR of 15% to 20%, the NAV should worth at least RM3.52 and RM5.16 by now.

Tuesday, 2 December 2014

Another mind boggling statement from Tan Teng Boo

“The real issue is whether the 11.39% should control icapital. If they can block the reappointment of one director with only an 11.39% share ownership, what is there to prevent them from abusing their power again?” (Source)

Again... Another emotional and manipulative statement by Mr. Tan Teng Boo.

Why blame the 11.39% and not the remaining 88.61%? How the shareholders who hold 11.39% abuse their power?

Thursday, 20 November 2014

No point focusing too much on forecasts

Totally agree with the article below that forecasts are made to please clients.

http://www.reuters.com/article/2014/11/19/risks-forecasting-kemp-idUSL6N0T92DJ20141119

It is very important that the analysts understand the business, revenue generators, cost components, variables and industry trends well. But when it comes to earnings models, I see little benefits of having too sophisticated models, with too many variables.

Not to mention forecast for next year, can analysts correctly forecasts most of the variables such as prices of raw materials, prices of commodities, forex, economy, interest rates etc just several months ahead. How many analysts correctly forecast the slump in crude oil price say 6 months ago?

It is better to be roughly right then precisely wrong...

Tuesday, 18 November 2014

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MSWG Letters to PLCs
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Monday, 17 November 2014

Malaysia house price to annual income ratio at 5.5x

House price to annual income ratio

US: 3.5x
England: 4.7x
Ireland: 2.8x
Singapore: 5.1x
Hong Kong: 14.9x
Malaysia: 5.5x

Does this reflect the existence of property bubble in Malaysia, given the land in Malaysia is not as scarce as Singapore? Furthermore, Malaysians have to cope with high cost of car ownership

Friday, 7 November 2014

IFCAMSC


It is quite common to see companies writing something like "the operating environment remains challenging and the company is working to improve its performance" in their quarterly results notes.

The above is part of the IFCAMSC's notes to 3QFY14 financial statements. It is not so common to see a company giving such a bullish outlook of it business.

If I interpret this sentence (The group expects order growth to continue to surge, with,,,,) correctly, it is not only the order is expected to grow, but there is GROWTH in order GROWTH!

The share price is now 10 folds of that at the beginning of the year. Has the share price run ahead of its valuation? There is possibility that the share price may succumb to profit taking after a strong surge. But when investing in a stock, I think the outlook and future earnings are more relevant than the historical share price movement.

If we simply annualise the diluted EPS in 3Q14, the stock is traded at a PE ratio of 14.1x, which I think is not too demanding for a growth stock in net cash position. The PE ratio will be reduced if there is earnings growth in future quarters.

BFM's interview with its CEO, Ken Yong, provides a good insight into its business, why the surge in profit, whether the share price can go higher, how it competes with other players in China, its competitive strength, how much the company is expected to benefit from GST implementation etc.

Cost to develop the software has been sunk in. It is now making profit by "duplicating CDs"

Wednesday, 5 November 2014

Poh Huat Resources Holdings Berhad: Quietly increasing dividend payout

Poh Huat Resources Holdings Berhad has been increasing its dividend payout. It used to pay first and final dividend once a year but for FY14 period ending October 2014, it has already declared two interim dividends.


FY09: 2% less tax first and final dividend
FY10: 2% tax exempt first and final dividend
FY11: 2% tax exempt first and final dividend
FY12: 2% tax exempt first and final dividend
FY13: 2% tax exempt special dividend + 3% tax exempt first and final dividend
FY14: 3% first interim single tier dividend + 2% second interim single tier dividend +?% single tier final dividend?

Will the company pay and maintain its final dividend of 3%?


The increase in dividend payout was in tandem with higher profit recorded in 2012, 2013. Margins in 2012 and 2013 improved significantly as compared to the years before.

Its director, Mr. Lim Pei Tiam @ Liam Ahat Kiat has been accumulating the stock since he served notice of interest on 22 July 2013




Thursday, 23 October 2014

Boilerm now the largest company in ACE Market

As of noon break today, Boilerm has taken over YTLE to be the largest ACE listed company with market capitalisation of RM866.88m.

It won't stay as no.1 for long. It will migrate to main board... Big fish in bigger pond soon....

Will the dual-listing of Tan Teng Boo's new global fund happen soon?

The CAGR of his funds since inception are as follows:

icapital.biz (NAV): 13.42% (as of 15 October 2014)
icapital Global Fund: 4.29% (as of 30 September 2014)
icapital International Value Fund: 7.79% (as of 30 September 2014)

The proposed dual-listed global fund will be a new fund. (Source)

With the global fund and international fund performing less impressive than icapital.biz, will investors apply for the IPO of the dual-listed global fund, given a considerable discount to the NAV of icapital.biz has persisted for some time despite the fund achieving a reasoanble CAGR of 13.42%?

Will the dual listed fund be fully subscribed?

Will the dual-listing happen soon? It may or may not. I am inclined to think that the later is more likely the case.

It is said free warrants will be given as a sweetener. It will be interesting to see how the warrants narrow the NAV discount of icapital.biz and what entices investors to subscribe to the new dual-listing global fund.

Friday, 17 October 2014

Tay Por Yee and his associates: What they own and their directorship

Tey Por Yee
16.7% in Protasco Bhd (non-independent non-executive director)
24.6% in Nexgram Holdings Bhd (CEO and managing director)
Sold 9.7% in Ire-tex Corp Bhd, ceased to be a major shareholder (Executive director)
4.5% in Wintoni Group Bhd (executive chairman)
5.2% in Malaysia Pacific Corp Bhd (executive director)
29.1% in Asdion Bhd

Ooi Kok Aun
3.7% in Protasco (independent non-executive director)
14.1% in Nexgram
21.1% in Ire-tex  Corp

Na Chiang Seng
18.1% in Asdion (executive director)
Independent non-executive director of Ire-tex Corp

Fu Lit Fung
Independent non-executive director of Nexgram
Independent non-executive director of Wintoni

Soo Tee Wei
Executive director of Wintoni
Independent non-executive director of Ire-tex Corp

Mohd Farid Mohd Yusof
Independent director of Wintoni
Independent non-executive director of Protasco

See Poh Yee
8.9% in Nexgram (executive director)
Independent non-executive director of Asdion

Source: The Edge Weekly 20 October 2014

A guide to understanding annual reports: Malaysia Listed Companies

http://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/reporting/understanding-annual-reporting-malaysia.pdf

Saturday, 6 September 2014

Investment Philosophy of Apollo Investment Management

Apollo Asia Fund recorded impressive CAGR of 25.5% since inception in 1997.Net asset value of the fund is calculated after fees and incentive allocation. Below is its investment philosophy.

  • We value businesses as would a long-term private buyer, and generally ignore the short term views and price influence of other market participants, except in so far as these create opportunities. In Benjamin Graham's classic analogy, the investor is in business with a manic depressive partner, Mr Market, who obligingly sets a two-way price every day. Most of the time, the investor will listen to Mr Market, politely decline to take action, and get on with real life. Sometimes however, Mr Market's price is wildly in excess of any intrinsic value, and the investor may take these opportunities to sell, perhaps even to retire. At other times Mr Market's price is ludicrously low; we have at times in the past been able to buy good businesses with honest management for less than their net cash balances. At such times, the sober investor will buy, without worrying unduly about whether Mr Market's price may be even lower tomorrow.
  • We like value – buying a dollar of assets for 50 cents, for example – but never at the expense of quality. In developed markets, legal protection may (perhaps) be good enough to base decisions on numbers alone. In Asia, management integrity is paramount. We also prefer "operating assets", which generate cash or will do so in future, rather than "dead assets" reliant on the price someone else may pay.
  • We like growth as much as value - but "growth at a reasonable price". One of the easiest mistakes is to overpay for a good company, or a good story.
  • Given the impossibility of infinite growth on a finite planet, and a suspicion that growth may in future be harder to find, "sustainable income at a reasonable price" is attractive too.
  • Sustainability is never absolute. We value resilience.
  • We seek good businesses: internal returns are important. Deep value buys may rise from very cheap to somewhat cheap and remain illiquid. The managers of our holdings do most of the work for us when they continue to generate good returns internally, and this reduces reinvestment risk.
  • Free cashflow is good; sensible capital allocation is key.
  • We like dividends - especially in those parts of Asia where there are no tax disadvantages, but anyway it is generally a good idea that excess cash be returned to the shareholders. (If companies with a good value-adding record want cash for expansion, investors can be relied upon to stump up enthusiastically for a rights issue.) We dislike buyback-and-issuance schemes designed to enrich insiders, but buybacks shrinking the capital base at discounts to intrinsic value are sometimes constructive.
  • We try to know our companies inside out¹. We visit the companies, try to read their annual reports and announcements from cover to cover², talk to their competitors, and so on. The longer we've known them, the better.
  • We don't worry about missed opportunities. Most companies are too complicated: we look for businesses we like and think we can understand, and focus on relatively few.
  • We buy securities on a 3-5 year time horizon. (Maybe even more - ideally we would like to buy good companies at good prices and hold for ever, but in an ever more volatile world, 3-5 years may be as far ahead as one can realistically hope to see, and certainly we need to keep reassessing.) However, if a security appreciates rapidly to the point where it no longer represents reasonable value in absolute terms or relative to prospective purchases, or if new information comes to light which causes us to reevaluate, we may sell with alacrity. Restraining fund size helps us to maintain selling discipline³.
  • The emphasis has changed slightly over the years, due to changing market conditions and sometimes-painful experience. Our style will, we hope, continue to evolve: in a changing world, we see no point in narrowing options unnecessarily.
Claire Barnes
January 2014

The Malaysian Guiness World Book of Records under the retail chain category


COMPANY
RECORD TITLE
1
7-Eleven Malaysia Sdn Bhd
Largest Convenience Chain Store
2
Bonia Corporation Bhd
Largest Leather Store Chain
3
Clara International
Largest Beauty Centre
4
Fitness Concept Specialist Chain Sdn Bhd
Largest Fitness Specialist Chain Store
5
Focus Point Holdings Berhad
Largest Optical Chain Store
6
Golden Scoop Sdn Bhd
Largest Ice Cream Specialty Chain Store
7
King’s Confectionary Sdn Bhd
Largest Confectionary Chain Store
8
Kopitiam Asia Pacific Sdn Bhd
Largest Kopitiam Chain
9
Modern Mum Sdn Bhd
Largest Maternity Boutique Chain
10
Nelson’s Franchise (M) Sdn Bhd
Largest Corn In A Cup Franchise Outlet
11
OSIM (M) Sdn Bhd
Largest Healthcheck & Care Equipment Chain
12
Pets More Sdn Bhd
Largest Pets Chain Store
13
Poh Kong Holdings Berhad
Largest Jewellery Retail Chain
14
Popular Book Co (M) Sdn Bhd
Largest Bookstore Chain
15
Secret Recipe Cakes & Cafe Sdn Bhd
Largest Cafe Chain
16
Senheng Electric (KL) Sdn Bhd
Largest Electrical Outlet Chain
17
Sinma Jewellery Centre Sdn Bhd
Largest Costume Jewellery Retail Chain
18
Sushi Kin Sdn Bhd
Largest Sushi Restaurant Chain
19
Thai Odyssey Sdn Bhd
Largest Thai Spa Operator
20
Urban Idea Sdn Bhd
Largest Sandwich Chain
21
Chatime
Largest Pearl Milk Tea Beverage Chain
22
BMS Organic
Largest Organic Retail Chain
23
Eu Yan Sang Sdn Bhd
Largest Herbs & Healthcare Retail Chain

30 April 2014

Tuesday, 2 September 2014

Adjustment to exercise ratio and exercise price for warrant pursuant to subdivision/ bonus issue

Adjustment pursuant to the subdivision/ bonus issue

1. Adjusted exercise ratio = (1 + N) x E

2. Adjusted exercise price = (1 / (1 + N)) x K

Where

E: being 1/exercise ratio prior to the subdivision/ bonus issue

N: being the number of additional shares (whether a whole or a fraction) received by a holder of existing shares for each share held prior to the subdivision/ bonus issue

K: being the existing exercise price of warrant immediately prior to the subdivision/ bonus issue

Sunday, 31 August 2014

I think KEURO is cheap and safe

I perform 2 tests before deciding whether to invest in a listed company. Firstly, whether it is in the right business with good prospects. Secondly, whether the price is right.

KEURO has 80% stake in West Cost Expressway (WCE) concession. It is a 233km long highway with concession period of not less than 50 years. Upon completion of the highway, the concessionaire will be the third largest highway concessionaire in Malaysia, after PLUS and ANIH Berhad.

I think WCE will be doing well, given:

1. Well connected to various existing expressway:
Federal Highway, KESAS, SKVE, NKVE, NNKSB, LATAR and LKSA etc

2. Safer route to coastal areas and avoid mountainous terrain in Jelapang – Kuala Kangsar area. Less fuel consumption and can avoid the annoying speed breakers after Menora tunnel as well

3. Cheaper toll expense:
For a total length of 316km, 83km of the West Coast Expressway will be toll free, much longer compared to the toll-free stretch between Jelapang and Ipoh Selatan on North-South Expressway. So if the toll-rates for both the expressway are comparable, travelling from areas such as Shah Alam, Klang, Subang, KLIA to Taiping or further North is likely to be cheaper in term of toll expense. For those travelling to/from Southern region of Peninsular Malaysia, it is well-connected to ELITE too via SKVE.

4. Traffic flow supported by several completed and ongoing townships such as Setia Alam, Bukit Raja, Bandar Botanic, Bukit Tinggi, Canary Garden, Kota Kemuning, Bandar Puteri, USJ, Subang Jaya, Shah Alam, Pantai Sepang Putra, Putrajaya, Cyberjaya, Dengkil as well as towns along the expressway such as Banting, Klang, Kuala Selangor, Teluk Intan, Setiawan, Manjung. Note the presence of Ecoworld, Gamuda, Tropicana in the Southern corridor.

5. Less threat from double track ERL by KTM as compared to North-South Expressway as the alignment of the double track is closer to the alignment of North-South Expressway

The concessionaire is investing RM6b in this highway. Based on 20:80 equity:debt financing, the concessionaire is injecting RM1.2b of equity investment into the highway. Based on my rough calculation, after deducting KEURO's 40% stake in Radiant Pillar (developer of Rimbayu township) and remaining stake in Talam, at RM1.13 per KEURO share, investors are investing into WCE at a discount to the equity investment of RM1.2b.

Besides, IJM-KEURO has been appointed as the turnkey contractor for WCE. The turnkey contractor will earn some fee over the construction cost of the WCE. To me, this is just an accounting profit but during the construction period, KEURO is likely to be profitable, also boosted by earnings from Rimbayu development.

WCE is divided into 3 phases. It is expected to achieve overall completion by 25 August 2019. The good news is that the highway will be open to public when it achieves sectional completion. The first section, a section with high traffic volume in Selangor section, is expected to start collecting toll in 3-4 years' time.

KEURO has warrants with exercise price of RM1.18 and validity of 2 years. The proceeds raised from the warrant conversion is to be utilised to partially fund the development of WCE. I believe the share price of KEURO will have some premium over the exercise price of RM1.18 near the expiry of the warrants to entice warrant holders to exercise their warrants. Else, the company may need to do something else to get the further funding for WCE. At share price of RM1.13, this may give better return than putting money in fixed deposit.

It will take a few years before WCE starts generating toll revenue but I am already a bit excited over its prospects given the encouraging maturing of the Southern corridor of Klang Valley.

KEURO is unlikely a stock for those who want to seek quick gain and thrill in share price fluctuation, but I believe long term investors in this stock will be well-rewarded.

Friday, 22 August 2014

Disagree with Tan Teng Boo's stock valuation method

In his latest newsletter dated 22 Aug 2014, he named some stocks that are deemed bubbles floating around the KLSE.

The stocks are A&M, BOILERM, COASTAL, ECOWLD, GDEX, HLCAP, IJACOBS, INARI, MUH, MYEG, N2N, NARRA, PELIKAN, PTARAS, SBCCORP, SCGM, and SMRT.

I have great respect for him. However, I quite disagree with the valuation method he adopted in his article. Look at some examples:

A&M
"It has a market capitalisation of over RM500m. For its financial year ended 31 Dec 2013, A&M Realty recorded sales of only RM145m and net earnings of only RM32m. If a PE ratio of 10 times is applied, the market capitalisation of A&M should be RM320."

BOILERM
"It has a market capitalisation of over RM861m. For its financial year ended 31 Mar 2014, Boilermech recorded sales of RM242m and net earnings of over RM31. If a PE ratio of 10 times is applied, the market capitalisation of Boilermech should be RM310m. Wow!"

SBCCORP
"It has a market capitalisation of over RM336m. For its financial year ended 31 Mar 2014, SBC recorded sales of RM139m and net earnings of over RM33m. Can such a high profit margin be sustained and for how long?"

Is stock valuation as straight forward as merely looking at PE multiple? What about other aspects such as assets, cash flow and future prospects? I also disagree that the justification is based on historical earnings and not future earnings.

Was A&M's 60% stake in 2,000 acres of land in Pulau Carey taken into consideration? Assuming RM10psf, the 60% stake alone is sufficient to cover its market cap. Besides being profitable, it is in net cash position (RM95m at group level as at 31 March 2014), and have long list of assets in the group.

For Boilerm, does he consider the growth potential of the group? Boilerm is acquiring another piece of land for expansion. Does a company with growth potential not warrant higher PE multiple? And maybe premium attached to it given the name of the major shareholder in the company? Besides, Boilerm has very strong cash position.

I believe the potential of Sbccorp lies in the upcoming development of Jesselton Quay in Kota Kinabalu, which is also a factor why TTB likes Suria, the Sabah port operator that has 18% share of GDV in the development. It has GDV of RM1.8b and expected PBT margin of 20%. Even so, I think the GDV and profit margin could have been understated. Besides, Sbccorp has other developments and assets in the group. With an estimated RNAV of RM6.60.share (CIMB) and a combined GDV of RM6.2b to be developed over 10 years, is there bubble in the stock?

While I think Boilerm is not cheap and Sbccorp is fairly valued at the moment, I am inclined to think A&M still has some upside potential when the development at Pulau Carey commences.