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.

Saturday, 16 August 2014

Mysteries in Penang Traffic Dispersal project

In an announcement dated 15 August 2014, Astral Supreme clarified that the JV agreement for feasibility studies and design for the constructions of various roads and an undersea tunnel in Penang was terminated as Astral Supreme was unable to find consultants who could undertake the project within the budget and the funding requirements.

According to Astral Supreme's website, the group is principally engaged in the business of manufacturing, assembly and export of electronic products and components. There are issues with the company. Among others, the company has failed to submit its annual audited accounts for 2013 within the stipulated timeline. It has also received qualification in the auditors' report on its audited financial statements for 2013.

So why get Astral Supreme to involve in the feasibility study when i) the company is troubled and doesn't seem to be in the related industry? Why the client go through Astral Supreme instead of engaging engineering consultant directly to do the feasibility study?

The JV agreement for the feasibility study was signed in August 2013. The JV agreement was terminated in July 2014 with reason of failure of Astral Supreme to find consultants to do the job. If that is the case, how could Dato Zarul commented the feasibility study was ahead of time and was expected to be completed by April 2014 (source)??!!

Besides, according to Astral Supreme's clarification, the JV is expected to make RM60m of profit from the feasibility study that is expected to cost RM210m. What a whooping 28.6% profit margin for a feasibility study!!

Secondly, why was Consortium Zenith BUCG Sdn Bhd, an RM2 company, awarded the traffic dispersal project, when i) Zenith Construction Sdn Bhd has no related track record as the company was only registered in July 2012 ii) its Chairman, Datuk Zarul, was neither a director nor a shareholder of the company iii) how could Zenith secured the project award when they had not even registered the company when the tender for the project was closed in June 2012? (source: malaysia-today)

Another little known company is involved in the project. As partial payment for works to be carried out by Consortium Zenith for the major road project and the undersea tunnel project, 9 acres of land on Seri Tanjung Pinang 1 was granted to the consortium. The consortium has entered into a JV with Ewein Bhd to developed the land. Ewein is a player in the precision sheet metal fabrication industry. Why JV with Ewein and not a more reputable developer such as IJM Land and Ecoworld? I am sure for the same piece of land, a reputable developer would be able to generate much higher GDV compared to a small listed company without proven track record.

For a mega project with an estimated value of more than RM6b, I think the Penang State Government which has pledged to run its administration with competency, accountability and transparency (CAT) policy, owes an explanation to the public why Zenith Construction Sdn Bhd could get involved in the project? And shouldn't Penang government has some say and control over the appointment of consultant for the feasibility study and maybe also the appointment of the developer for land given to the consortium as payment.

Tuesday, 12 August 2014

About Selangor State Government crisis and democracy

I sensed something went amiss and I blogged about the Selangor State Government more than 3 months ago. Click here to read the previous posting.

Flip-flopping, inconsistency, disrespecting sanctity of contract, politicking, failure to protect the interest of the people do not make Tan Sri Khalid Ibrahim a good Menteri Besar, despite being well-known as a outstanding corporate figure previously.

Recall the power grab in Perak in 2009, if there is no flaw in our democracy system, how could the decision of just a few people override the voters' choice in 2008 general election. I thought the power grab would have some impact on Perakians' votes in 2013 general election, but it was not significant enough. It is hard to tell what will turn out in the Pakatan's crisis in Selangor state but democracy has to be respected.

I do not believe in being a die-hard supporter of a political party. I think a mature voter supports the right policies mooted by any political parties. Not all politicians put the interest of the people first.

Question if the power grab in Perak was right?
Question if there is any valid reason to sack the state exco in Selangor?
Question the reason why Consortium Zenith-BUCG was awarded the Penang Undersea Tunnel project when Zenith Construction Sdn Bhd, a member of the consortium lack of convincing record to undertake project of this scale and complexity.
Question whether the proposed reclamation at Middle Bank in Penang is destructive to the environment?

'People shouldn't be afraid of their government. Governments should be afraid of their people.' - Alan Moore

Tuesday, 5 August 2014

Sold KEURO-OR, switch to KEURO

Sold KEURO-OR at RM0.19

The free warrants attached to the rights shares has a validity period of 2 years. Assuming KEURO comes to RM1.50 in 2 years' times, with warrant exercise price of RM1.18, the warrant may come to RM0.30.

This values the OR at most 18 sen [3 sen (difference between mother share price and subscription price of 3 sen, closed 1.11 on 5 Aug 14) + 0.5 x RM0.30]

I like the potential in West Coast Expressway so decided to sell the OR, which I deem expensive, and switch to mother shares at RM1.11

Eg.

Let's say KEURO rise to RM1.60 in 2 years' time.

1) Buy mother share at RM1.10
Gain = (1.60 - 1.10) /1.10 = 45.5%

2) Keep/buy OR and subscribe
Cost = 1.08 + 0.18 = 1.26
Warrant price at expiry = 0.42
Gain = [1.60 + (0.5 x 0.42) - 1.26 ]/(1.26)
= 43.7%

Let's say KEURO rise to RM1.70 in 2 years' time.

1) Buy mother share at RM1.10
Gain = (1.70 - 1.10) /1.10 = 54.5%

2) Keep/buy OR and subscribe
Cost = 1.08 + 0.18 = 1.26
Warrant price at expiry = 0.52
Gain = [1.70 + (0.5 x 0.52) - 1.26 ]/(1.26)
= 55.6%


MUIIND (3891) - Broken 23 sen resistance

Broken 23 sen resistance with convincing volume

Click to enlarge the charts

Weekly chart

Daily chart

WARREN BUFFETT AND THE INTERPRETATION OF FINANCIAL STATEMENTS: The Search for the Company with a Durable Competitive Advantage

Mary Buffett will speak at Wealth Summit 2014 in KL this weekend. Below is the summary of a book written by Mary Buffett

The salient points of this interesting book on investement are as follows... At first, it was summarised to 9 pages. I felt it too long to post here so I summarised further into 30 points... Enjoy

WARREN BUFFETT AND THE INTERPRETATION OF FINANCIAL STATEMENTS: The Search for the Company with a Durable Competitive Advantage
By Mary Buffett & David Clark

1. 2 purposes of the book:

i) How do you identify an exceptional company with a durable competitive advantage?

ii) How do you value a company with a durable competitive advantage?

2. Look for “superstars” which benefit from some kind of durable competitive advantage that create sustainable monopoly-like economics, allowing them to charge more or sell more of their products, making a ton more than their competitors.

3. The search for exceptional companies:

i) Either sell a unique product or a unique service

ii) Low-cost buyer and seller of a product

iii) Service that the public consistently needs

4. It is the “durability” of the competitive advantage that creates all the wealth. It is this consistency in the product that creates consistency in the company’s profits. Also, look for consistency in company’s financial statement such as high gross margin, debt level, earning, not have to spend large sums on R&D, growth in earning.

5. What creates a high gross profit margin is the company’s durable competitive advantage, which allows it the freedom to price the products and services it sells well in excess of its cost of good sold. A company in fiercely competitive industry without some kind of competitive advantage is never going to make us rich over the long run.

General rule: gross profit margin => 40%, company with some sort of durable competitive advantage

gross profit margin < 40%, company in highly competitive industries

gross profit margin < 20%, fiercely competitive industry.

A company with high gross profit margin can go astray and be stripped if its long-term competitive advantage. They include: high research costs, high selling and administrative costs, high interest costs on debt.

6. Companies that don’t have a durable competitive advantage suffer from intense competition and show wild variation in Selling, General and Administrative costs as a percentage of gross profit. Anything under 30% is fantastic. If a company is repetitively showing SGA expenses close to or in excess of 100%, we are probably dealing with a company in a highly competitive industry. ompanies with low SGA expenses can be destroyed by expensive R&D costs, high capital expenditures, and lots of debt. Their inherent long-term economics are so poor that even a low asking price for the stock will not save investors from a lifetime of mediocre results

7. Companies that have to spend heavily on R&D have an inherent flaw in their competitive advantage that will always put their long-term economics at risk, which means they are not a sure thing. And if it is not a sure thing, Warren is not interested.

8. Companies that have a durable competitive advantage tend to have lower depreciation costs as a percentage of gross profit.

9. Companies with a durable competitive advantage often carry little or no interest expense. The percentage of interest payments to operating income varies greatly from industry to industry. Warren’s favourite durable competitive advantage holders in the consumer products category all have interest payout of less than 15% of operating income.

Investment banking business has average interest payments in the neighbourhood of 70% of operating income

10. To determine whether a company has a durable competitive advantage, see whether or not the net earnings are consistent and the long term trend is upward. Companies with durable competitive advantage will report a higher percentage of net earnings to total revenues than their rivals. If a company is showing a net earnings history of more than 20% on total revenues, there is a real good chance that it is benefiting from some kind of long-term competitive advantage.

11. Consistent earnings are usually a sign that the company is selling a product or mix of products that don’t need to go through the expensive process of change. The upward trend in earnings means that the company’s economics are strong enough to allow it either to make the expenditures to increase market share through advertising or expansion, or to use financial engineering like stock buybacks.

12. A company that has a surplus of cash as the result of ongoing business is often a company that has some kind of durable competitive advantage working in its favour.

13. Manufacturing companies with a durable competitive advantage that the products they sell never change and therefore never become obsolete.

When trying to identify a manufacturing company with a durable competitive advantage, look for an inventory and net earnings that are on a corresponding rise. This indicates that the company is finding profitable ways to increase sales, and that increase in sales has called for an increase in inventory, so the company can fulfill orders on time.

Manufacturing companies with inventories that rapidly ramp up for a few years and then just as rapidly ramp down are likely to be in highly competitive industries subject to booms and busts.

14. If a company consistently showing a lower percentage of Net Receivables to Gross Sales than its competitors, it usually has some kind of competitive advantage working in its favour.

15. The funny thing about a lot of companies with a durable competitive advantage is that quite often their current ratio is below the magical one. What really happening is that their earning power is so strong they can easily cover their current liabilities. Also, as a result of their tremendous earning power, these companies have no problem tapping into the cheap, short-term commercial paper id they need any additional short term cash. Because of their great earning power, they can also pay out generous dividend and make stock repurchase, both of which diminish cash reserves and help pull their current ratios below one.

16. Companies that don’t have a long-term competitive advantage are faced with constant competition, which means they constantly have to update their manufacturing facilities to try to stay competitive, often before such machine is worn out, creating an ongoing expense that is often quite substantial, and keeps adding to the amount of plant and equipment the company lists on its balance sheet.

17. An odd thing occurs with companies that benefit from durable competitive advantage. Companies such as Coca-Cola, Wrigley, Pepsi Co, McDonald’s, Wal-Mart benefit from having durable competitive advantage tied directly to its name yet the value of their greatest asset isn’t recognized on their balance sheet.

18. While many analysts argue that the higher the return on assets the better, Warren has discovered that really high returns on assets may indicate vulnerability in the durability of the company’s competitive advantage. Eg., raising $43 billion to take on Coca-Cola is an impossible task but raising $1.7 billion to take on Moody’s is within the realm of possibility.

19. Warren has always shied away from companies that are bigger borrowers of short-term money than of long-term money. While being aggressive can mean making lots of money over the short term, it has often led to financial disasters over the long-term.

20. Companies with a durable competitive advantage require little or no long-term debt to maintain their business operations, and therefore have little or no long-term debt ever coming due. These companies are so profitable that they are self-financing when they need to expand the business or make acquisition. Warren’s historic purchases indicate that on any given year the company should have sufficient yearly net earnings to pay off all of its long term debt within a three or four year earning period.

21. The company with a durable competitive advantage will be using its earning power to finance its operations and therefore, in theory, should show a higher level of shareholders’ equity and a lower level of total liabilities. Any time we see an adjusted debt to shareholders’ equity ratio below .80 (the lower the better), there is a good chance that the company in question has the coveted durable competitive advantage we are looking for.

22. Unlike the interest paid on debt, which is deductible from pretax income, the dividends paid on preferred stock are not deductible, which tends to make issuing preferred shares very expensive money. So one of the markers we look for in our search for a company with a durable competitive advantage is the absence of preferred stock in its capital structure.

23. If a company is not making additions to its retained earnings, it is not growing its net worth. If it is not growing its net worth, it is unlikely to make any of us superrich over the long run.

24. Companies with durable competitive advantage, because of their great economics, tend to have lots of free cash that they can spend on buying back their shares. Thus one of the hallmarks of a company with a durable competitive advantage is the presence of treasury shares on the balance sheet.

25. Some companies are so profitable that they don’t need to retain any earnings, so they pay them all out to the shareholders. In these cases we will sometimes see a negative number for shareholders’ equity. If the company shows a long history of strong net earnings, but shows a negative shareholders’ equity, it is probably a company with a durable competitive advantage.

26. Avoid businesses that use a lot of leverage to help them generate earnings. In the short run they appear to be the goose that lays the golden eggs, but at the end of the day, they are not.

27. A company with a durable competitive advantage uses a smaller portion of its earnings for capital expenditures for continuing operations than do those without a competitive advantage. If it is consistently using less than 25% of its net earnings for capital expenditures, that scenario occurs more than likely because the company has a durable competitive advantage working in its favour.

28. Since shareholders have to pay income tax on the dividends, Warren has never been too fond of using dividends to increase shareholders’ wealth. If a company is buying back its shares year after year, it is a good bet that it is a durable competitive advantage that is generating all the extra cash that allows it to do so.

29. Occasionally, even a company with a durable competitive advantage can screw up and do something stupid, which will send its stock price downward over the short-term. Warren has said that a wonderful buying opportunity can present itself when a great business confronts a one-time solvable problem. They key here is that the problem is solvable.

30. In Warren’s world you would never sell one of these wonderful business as long as it maintained its durable competitive advantage. The simple reason is that the longer you hold on to them, the better you do.

Times it is advantageous to sell:

i) When you need money to make an investment in an even better company at a better price

ii) The company looks like it is going to lose its competitive advantage

iii) During bull markets when the stock market, is an insane buying frenzy, sends the prices on these fantastic business through the ceiling. A simple rule is that when we see P/E ratios of 40 or more on these companies, it just might be time to sell.

Monday, 4 August 2014

Submit proxy form by electronic means

Not sure if this is the first listed company in Bursa Malaysia to do so but this is my first time seeing company accepting appointment of proxy by electronic means.

Time saving, efficient, effective and cost saving. Good job Icapital.biz! Hope other listed companies will follow suit.

See Notice of Meeting

The appointment of a proxy may be made in a hard copy form or by electronic means.
(i) In hard copy form In the case of an appointment made in hard copy form, be deposited at the Company’s Registered Office at Level 18, The Gardens North Tower, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur not less than 48 hours before the time appointed for holding the Meeting or adjourned meeting at which the person named in the appointment proposes to vote.
(ii) By electronic means
In the case of an appointment made by electronic means, be received via facsimile at fax number 603-22822733 not less than 48 hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote. Any authority pursuant to which such an appointment is made or a copy of the authority, certified notarially or in some other manner approved by the Board, must, if required by the Board, be received at the Company’s Registered Office at Level 18, The Gardens North Tower, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur not less than 48 hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote.

Friday, 1 August 2014

Where to get Bursa Malaysia market cap?

Where to get historical and current Bursa Malaysia market cap?

For historical Bursa Malaysia market cap, go to this SC website. Select the desired year and month. Monthly historical data can be obtained by dividing the (total NAV of funds) by (% of NAV to Bursa Malaysia Market Capitalization).

For current one, I get it from Hong Leong eBroking trading platform. Log in to the trading platform. Click "Market" in menu bar, the select "Summary"

The total market cap will appear as follows:


Market cap by sector is also available at the bottom of the page. The total market cap includes warrants and structured warrants as well.