Wednesday, October 31, 2012

Genneva Gold or whatever Gold, where is the Gold craze heading?

I am no expert in Gold. Neither can I comment on the Genneva Gold scandal as I do not know much about it. If I may, I think and would like to claim that it is a scam (but that is being too irresponsible just to say that without knowing much about it.)

The fact of the matter is that anyone who invests into gold must know that it is a commodity which is dictated by supply and demand. I believe that the reason for people to go crazy over the investments into Genneva Gold's pitch is partly due to the craze over gold as investments. The buzzline has been "cash money as a currency has gotten weaker" if we hold on to cash. Possibly true.

Gold has been a good growth story for the last 10 years or less. Before that, it was not much of a story. See below.

1 year trend

Over the last 1 year, Gold's price has not been doing well for investors

5 year trend

5 year trend - its been good as investors rush towards alternative investments as the Fed keeps on printing money
15 year trend - see when the pick up in price started

Prices started to pick up since 2002 - pretty much when most commodities (in fact all) picked up
30 year trend - not much movement between 1982 to 2002

Hence, anyone who believed in Genneva Gold or still believes in just GOLD itself for that matter must know that as in any investments, it can go up as well as down. There must be very good reasons for it to move up even further. Inflation? Too much liquidity in the market? Gold is tangible, so you can touch it? - of course my question is what for? Does it pay you dividends? Does it gives a return besides you needing to find a place to store it?

What convinces a person that it will provide positive returns in future?

AEON Malaysia's statement on purchase of Carrefour in Malaysia

AEON Malaysia made a statement on the rumour of its purchase of Carrefour. Please be guided and see below.

I did mention of my opinion if Carrefour Malaysia is purchased by AEON. For now, as you can see this remain a rumor. If any approach is made, it would probably be between AEON Japan and Carrefour France. I however foresee that if this deal is made fruitful, it may involve AEON Malaysia as there are no reasons for AEON Japan not to do that due to its 51% holdings of AEON Malaysia's listed entity.

Saturday, October 27, 2012

It's really hard to envision YTL's 4G to work

Standing on the sideline, Tan Sri Francis Yeoh's statement may be more hopeful than real. He is a businessman where his role is to convince and execute. First convince yourself, then your investors, employees and then only execution. You would not be able to execute if you yourself are not convinced, which is why he has plowed a huge sum of money into the YES network. He believed in it, I should say.

YES has kept harping on its 4G network. What is 4G? I do not have to explain much but to point you to wikipedia. Basically it is an acronym for 4th generation network which is still grey-ish in terms of its qualifying claims - that is which network provider stands to qualify to claim that it has the real 4G deployment. For the sake of this blog-piece, there are 2 standards which are commercially deployed - Mobile WIMAX and LTE. I am not going to go technical here but if you really look at the success of deployment commercially, 3G has been a success. And that success has been partly to do with Iphone and Blackberry's in making them a success and about 1 to 2 years later, Android. I remember at one point of time before Blackberry (was huge) and Iphone, the mobile players were struggling to make 3G a success. They were really struggling, and  turned around, now there are not enough bandwidth. See how fast things have changed. To claim that network providers do have the solution is not true. The devices makers like Apple, Google and RIM are the ones that have the solutions.

3G and 4G

What type of devices where the mobile networks are used often? Smartphones (Iphone, Samsung Galaxy, HTC etc) and Tablets (Ipad, Galaxy, Kindle). Now, the latest version of all these smart devices - the Iphone 5, Samsung Galaxy 3, latest Kindle Fire etc. - all of them support LTE, but none (as I see it) support Mobile WIMAX.

YTL's YES 4G technology is a version which runs under the Mobile WIMAX. Hence, for these devices to run on the YES platform, additional device has to be plugged onto the smartphones or tablets. So far, I have yet to see Apple or Samsung or even Microsoft's Surface came out supporting WIMAX, and that is a problem for WIMAX network providers.

Remember the Sony Betamax vs VHS war! History will repeat. WIMAX will not win. YTL will claim that it is going to be awarded LTE a spectrum. Where are the advantage then when the network is not to your favour (as all the rest are to be given LTE as well) and definitely money is not in YTL's favour.

No network advantage and no cash advantage = NO WIN.

Friday, October 26, 2012

Aeon buying Carrefour Malaysia: If it's real it's positive

Read about Aeon is closing in on Carrefour's Malaysian operations. A quick check - Carrefour is the third largest hypermarket operator in Malaysia with 26 outlets as at 2011. Although Carrefour has some of the best locations in Malaysia, I feel that Carrefour is not as strong an operator as compared to Aeon. I do not think Carrefour manages its hypermart well with the impending tough competition especially from Tesco.

By buying Carrefour's operations, Aeon will immediately double its number of outlets although I have doubts that it will continue operating as a hypermart as I feel that Aeon is better off positioning itself as a supermart. Some of the locations may just be overlapping like the one in Mid Valley. Nevertheless, it is a very good way to increase its reach despite the purchase price being a factor as well.

Although I do not know how many of the outlets Carrefour owns its premises outright, for an immediate expansion the price tag of USD250 million may not seem expensive for Aeon. I am sure Aeon will need to spend quite a bit for renovation as some of Carrefour's outlets seem old and need refurbishing. Aeon's balance sheet nevertheless will be able to absorb that without even having the need for a cash call from shareholders.

I like this deal if it's real. Based on Carrefour's Annual Report, revenue from its Malaysian operations totalled RM1.6 billion last year.
As for the total sales area, Carrefour Malaysia has 173,000 sq mtrs of retail space.

Thursday, October 25, 2012

Buying NTPM should not be that difficult

There are not many locally owned companies that have built strong positions in the consumer market. I can think of Mamee which is already delisted. Two others in the apparel market, Padini and Bonia. Another - NTPM which stands for Nibong Tebal Paper Mill. I don't think many Malaysians would know what this company does. It is not a printing company. Neither is it a paper company.

What does this little company do then? Some of the below brands look like a foreign brand to you? If you think so, I would think that NTPM has done a very good job building and strengthening its brand.

In fact, it is the leader in facial and toilet tissue in Malaysia with brands such as Premier, Royal Gold and Cutie. As for its Intimate (for sanitary napkin) and Diapex (for baby diapers) brands, they are lagging behind much bigger companies such as Kimberly-Clark (Kotex, Huggies) and P&G (of course Pampers and Whisper).

I would consider with the massive number of brands in the sanitary napkin and baby diapers, that space is pretty tight as well as competitive. One thing that amaze me is that the tissue space, there are only 2 major players in Malaysia - Kimberly-Clark (Kleenex) and NTPM. NTPM is in fact the leader in Malaysia with about 50% share. A tough fact to digest but it is a fact. Besides Kleenex, other competitors if you notice are mainly house brands - Tesco, Carrefour, Guardian etc.

The fact that the Premier and Cutie brands can fend off competition from Kleenex is amazing. Yes, it only happens in Malaysia and a lesser extent Singapore, but it is a strong show by this Malaysian company nevertheless. In fact, the strong push by NTPM in grabbing market share for its tissue products which consists of 80% of its total revenue only started about 10 years ago. Before that, NTPM;s market share was much lower and it was not the leader in the tissue market space. Now, it is.

Since we now know NTPM has done a good work in pushing its brand, what about its financials.

If you look at the above numbers, its revenue has a consistent growth while its operating profit is very much controlled by several factors - pulp and paper, labor and electricity costs. But so are the other companies that compete against NTPM. Hence, that will even out in the medium term and in the business such as what NTPM is in, it will definitely pass the additional costs to the consumers. What is more important to me is its competitiveness and growth. It has decent revenue growth with bigger percentage coming from the baby diapers and sanitary napkin market though.

At its current market capitalisation of RM500 million (share price RM0.45), NTPM is trading at around 11 - 12x PE. Its Balance Sheet is very decent. So are the cashflow. Is that attractive enough? Quite. To me considering that many other companies in the consumer space are already with 20x PEs or more and considering that the brand which NTPM carries are already quite established. The brand value that it carries should already be of some decent value especially when it carries a strong market share.

To me, NTPM will continue to do well as it has been managed at a very conservative manner- read its Annual Reports, and in most cases, the management are quite careful in their statements, surprisingly - while the following years after the carefully made statement, its results just turned out fine. An example of a careful company, look at the decision where the management decided not to pay final dividends for FY2012. It may not be positive for some but to me, it is the right decision in preparing for competition for the future. You do not want to pay dividends while overly gear the company of worse still for some companies, they do a cash call.

What about the growing debt? I believe that a large part of it is short term debt as well as the position that the company is trying to do in building its competitive strength in the future - newer machineries and bigger capacities.

Who is buying and who is selling

If you want to look at its movement in stocks, NTPM's share price has been dropping which makes it even more attractive and to me that drop is mainly due to the selling by Lembaga Tabung Haji which has been reducing its stake from 9+% to a current low of 5.5%. At the same time, the controlling shareholders have been nibbling at the shares themselves and they have made some share buybacks as well, albeit in small quantities. If you look below at the distribution of shareholdings, the shares for NTPM can be fairly liquid if it wants to but the selling have been largely done by LTH which caused the shares to be hovering around RM0.45.

Looking forward, the business that NTPM is in will no doubt continue to be competitive but I see the company to be moving towards the right direction rather than being shaken by the competition. The position that it has built over the last few years have shown that NTPM is not a pushover.

Because of that, I have bought 16,800 shares at RM0.45 today.

Tuesday, October 23, 2012

What iCapital did last one year

The closed end fund made its Annual Report announcement last Friday. Last year was a decent year for iCap to my account, not a fantastic one. Anyway, here are some of the details.

Size of Holdings and Market Value of Holdings as at 12 Sep 2012

The transactions iCap made are as below. It basically shows that iCap did not make any purchase at all, signalling that they rather hold cash than increased positions into stocks. Cash level, hence increased.

What about performance over a longer term. It is a long term fund and the little transactions that the fund has shown to us guides that by having less transactions, they can still outperform the market substantially.

The weird thing is that despite its consistency in outperforming the market, its share price kept more and more further apart from its NAV. Why? Well, according to my mum the fund does not pay dividend. To me, it is not a problem but perhaps to many investors it is. I can see the point.

Other articles on iCap:

Why I bought iCap

ICap: An overperforming fund with underperforming price

Astro's management in a show of support for its shares

In a strong show of support for Astro's shares, the management of Astro made purchases of their company's shares.

Remember, it can be an Investor relation exercise and who's best to do it, other than from the CEO, COO etc of a media related company. Remember, they are media people! At the same time, it can be a message that the price of Astro is undervalued.

And, they are insiders as well. So, which is which or are they just trying to please their own bosses?

Monday, October 22, 2012

You still think Astro is a good bet?

Just notice where is Astro heading or at least it is also targeting from below's advert? Mobile.

This is not an advert. You wanna click, click the one below :)

Why? Because it is losing viewership in the big screen TV. But, let me ask you, do you seriously believe in watching your show on your Android phone or tablet? Of course, they will say they are targeting multi-platform. True, if you believe it.

Read this, it is talking about how companies like Google, Facebook, Microsoft are still struggling with monetising mobile revenue while more and more people are turning to their little devices for anything - news to games to stocks quotes :). Who are winning at the moment? Apple, Samsung cause they are the devices sellers. In fact, Apple and Google are dominating what Steve Jobs called the post-PC era. The post PC era seems more and more real despite apprehensiveness (even myself). Just that Apple is making money from selling the devices, while Google is giving away its software for free, hoping to get back from adverts and apps. It is actually hard to believe that Samsung has now become the main beneficiary from the handset sales to the extent that the Korean company profited more from it than Google at the moment - until Google found a better model to make more money from mobile adverts that is.

Back to Malaysia, the poor performance in Astro's IPO is not just due to the awareness of the general public in turning their attention to other devices or content, but the price is just too expensive. It is now at RM15 billion, current price of RM2.90 and at its IPO offering price of RM3.00, it was RM15.8 billion. Remember, Astro's profits are dropping. I read with disbelieve when some analysts mentioned of there are still huge untapped potential in the subscription model for Astro because it only manages to penetrate 50% of the households market. There are still remaining 50% to be tapped. Hello...

Other IPOs in Malaysia such as IHH and FGV, they were not real success because we attract good funds. They were successful because Malaysian funds made them a success. Investment is a herd thing until you realise that you are part of the group of bulls that were running aimlessly. (This does not mean I do not believe some of these companies but yet again, expensive is the keyword.)

With more eyeballs to other devices, the momentum swing may be moving towards different players, and it does not mean the incumbents are surely winning. Why take that bet when you are unsure?

Read my article on a more inept view on Astro's IPO.

Sunday, October 21, 2012

Let me show you what's wrong with Asia Media

Asia Media is a company which I was tracking, but I sensed something wrong with the company way before i.e. during the time when it was listed. But I could not determine the wrong. The financials seems attractive, but again it was too good to be true - to me. If there is a tweak in the accounts, it is a job of a pro. But recently, the company's share price dropped ridiculously. No company drops this way except that they want it to be or there are some bad unwanted news. Of course the majority shareholder sold 9% was the reason, but buyers were just waiting for him to pull the trigger. Look at what happened to the share price.

Private placement as well as the trend for the last 10 months
If you look at the P&L, it seems believable. The first section, let me tell you why. The Profit has a good trend. Its business has good revenue growth as well as Profit growth. It has very good margin as well.

The operating cashflow is very good as well. However, if you notice, the company does not generate free cashflow. It is using up all the operating cashflow that it has generated. See below. On the onset, the capital expenditure seems fine, but there are some of the trend which does not seem so fine.

The above looks like there is nothing wrong? Notice the high net cashflow from operatings against net profit. It is higher by RM30 million, if you noticed. It does not seem right. It is unusual. The net cashflow from operations in fact is higher than revenue if you notice. Very weird. Co-incidentally that one huge number is the increase in other payables. What is the RM30 million about? How is the other payables so high? It was not explained. It was not a P&L item either - which means that it does not affect the profit. Big question here...

Let me show something else as below.

PP&E increased substantially
Asia Media invested RM52.8 million into an item mentioned as capital work-in-progress of which it is a huge  73% of its total PPE. My question is if it is a work in progress and such huge number, why the need to sell by the major shareholder so early? I am sure, the owner would want to wait for the investments to bear fruit first. RM52.8 million invested. The business of Asia Media is in putting up broadcasting equipment, computer monitors for sale of media advertising space. How much do we think these equipment will costs? RM52 million? Nothing is explained here.

A RM500 million investment in the ETP

How long will the capital work in progress continue to be non-depreciable?
Capital Work in Progress - non depreciable

Hence, firstly from the much higher cashflow from operations compared to Net profit and even revenue to very high non-depreciable capital investment which is not explained, this numbers does not seem right. And I do not know where it came from.

Friday, October 19, 2012

Can Green Packet do a Sprint ... or at least a Clearwire?

Everyone know that Green Packet has tried very hard - almost everyone that is. But a Telco business is a non apologetic business - either you are there or you are not. Green Packet has raised a lot of funds to do what it has done in this business. But in a telco business, you can't just raise your funds, have a shopping complex type of business - after the completion, sit tight, do the right promotional activities and if you are good with the right tenant, people will frequent, if you are not good, it is almost impossible to turnaround. In the telco space, it is difficult to be a Low Yat Plaza vs KLCC and still do well with a strong niche.

Telco business especially wireless, you will need to continue to reinvest. It does not stop at 2G. 3G is already here, HSDPA, 4G LTE being deployed, Wimax etc. If Green Packet intends to invest half a billion ringgit, Maxis will (and has capacity to) invests RM2 - 3 billion. Digi will do the same, and so will Celcom. So, where is Green Packet's advantage? They can do it, you can't. Even at RM100 million it is a big choke to Packet One's cashflow.

This same predicament has been felt by a company called Clearwire in United States. In fact, Green Packet in Malaysia is what Clearwire is in US. Both originally run on the WIMAX. Now, Green Packet, if you notice is selling fibre broadband as well, taking the pipe from TM. Hence, it has now become a service provider rather than a network owner. Clearwire in US is choking as well, and recently, Softbank via Sprint has taken a controlling position.

Recently, Green Packet's share price had a run, with rumours that it may be selling its Packet One's business. So, the price shot up almost 50% from RM0.42 to RM0.62 within a few days. Traders have (still) a few field days, or could it be the owners? We don't know.

Green packet's one month chart ending 18 Oct 2012
At the same time in US - a real M&A was announced few days ago where Sprint was to be taken over by Softbank in a USD20 billion deal. Sprint, if I may put it is facing what Digi was facing more than 10 years ago. It is losing out in the mobile race where currently US is having a "duopoly" - AT&T and Verizon. Sprint and T-Mobile are distant third and fourth - and these are choking both companies balance sheets and cashflow to the extent that Sprint was in the brink of financial distress. But, the deal from Softbank may probably change the landscape a bit, I hope. The deal is good enough for Sprint to had a good run. And so is Clearwire's, which shares was acquired by Sprint for its control of the former's prized spectrum.

Sprint's last 2 months share price

Back to Malaysia, the old Digi was facing difficulties to expand even with Vincent Tan's billions - Until, the mobile company was taken over by Telenor. Celcom and Maxis, from there lost some market share to Digi, and there voila!, Digi is just right behind these 2 players currently. You see, the difference between Vincent Tan and Telenor are scale, ability, people and focus - not just the money.

Green Packet is probably hoping for the same in Packet One, and it needs a large telco from overseas, in the mould of NTT, SK Telekom etc. Even then, it will be a tough task for any of the acquirers. Additionally, the problem as I see it in Packet One is that it is not Digi or Sprint. Firstly, Packet One is not a mobile company. It was a mobile broadband company. Now, as I said, that line has blurred and it is going for fixed line broadband as well riding on other people's line. Packet One is going to get a LTE spectrum, but as in this business, if your road is quiet, it is going to be eerily quiet. The game is in promotion, deployment and marketing. This is the game where Packet One is going to lose without being deep pockets. In this, Green Packet desperately needs to sell.

Will anyone serious be interested? And to fill that puzzle, that acquirer needs billions of ringgit to start off with and one of the three or four (TM included) dominant telcos to make some mistakes along the way. Probably, a tough one to hope for...

Wednesday, October 17, 2012

Where are the drop in palm oil counters?

Usually, whenever there is a significant drop in oil palm prices, plantation sector in Malaysia will follow. This time around, it's different.

See below for the drop in oil palm prices which has peaked from above RM3,000 per MT to around RM2,400 now.

In USD - 1 USD = 3.05 RM

However, the few plantation stocks which I follow do not really drop as per what I have hoped. See below for IOI, Sime and KLK's pricing. Of course, KLK is more of a pure palm oil company while Sime and IOI have other sectors contributing largely to the performance. Nevertheless, you will note that property prices is stagnating as well, which signals that there should be drop in the overall prices of these counters - it does not happen. As it is, it does not appear that there would be opportunity from a massive drop in these plantation companies other than taking opportunity off from palm oil futures itself.

The movement of the above counters looks more like a minor correction than tracking the prices of palm oil which has dropped more than 20%. Now the question that begs is what causes the prices of these companies to continue to be doing well. It is the hope that oil palm prices will rebound. Will it be rebounding so fast?

I have read of contradictory opinions on the Malaysian palm oil industry. Although the sector continues to be seen positive in the future, Malaysian palm industry is facing competition like never before. I have purposely penned an imaginary a story which of course is not real. These does however indirectly depict the situation faced by Malaysian companies. I personally have met Malaysian companies who faced problems expanding in Indonesia despite having bought land there - from labor to regulators. If not, why would Tabung Haji be selling its land in Indonesia since few years ago?

We have problem expanding our planted acreage, while continue to be facing smart strategic decisions from Indonesia who continues to put downward pressure on Malaysian exports. Indonesia, no doubt is providing incentives to promoting its refined palm oil to the extent that we are facing a overstocking situation. Indonesia's  No 1 position as an exporter is continuing to widen against Malaysia.

Although we are seeing a huge gap between prices of other types of seeds oil like soy and rapeseeds as compared to palm, the prices of palm oil is yet to rebound. Why? Indonesia will continue to have more acreage planted. I have read of the challenge for the world in feeding the booming middle class in future. These will definitely be positive for any edible oil.

Now, the question that begs is with just a slight drop in these plantation counters, is it time to buy or are investors being too bullish that oil palm prices will stage a fast immediate rebound?

Monday, October 15, 2012

Just what I meant!


Anyway, as I was flipping through see what I found.


Sunday, October 14, 2012

Stocks Investment is NOT a ZERO sum game

I have heard of stocks as a zero sum game. Trading stocks is. Investing in stocks isn't. In trading stocks, players are wary of the owners, management, syndicates, investment bankers etc. In investments, one should not fret these people. Owners, management are friends, not foes. If stocks are zero sum, how do we explain investing in BAT 30 years ago. How do we explain putting your money into Nestle 20 years ago, Digi 10 years ago, Public Bank 15 years ago, Dutch Lady 10 years ago, IJM 15 years ago, Top Glove 10 years ago etc. etc. Are these zero sum? Can these stories be replicated? Yes, of course.

In investing, you do not treat your fellow investors as an enemy. In trading, you may have to treat your fellow traders as your enemy. Why? Because in a zero sum game, one wins while another has to lose. In trading, the "fools theory" applies, as you would hope for another fool to pick up the stock that you intend to sell. As a trader, you would want to make the first move, in investments it does not matter who has found a better stock earlier. A great company will continue to do well. Among the Nestle, the Digi, the Public Bank, the Dutch Lady, the BAT, the Top Glove who dare to bet that these companies would not continue to be a winner in the next 10 years or more? As for some trading stocks, I would not bet past next month, the next 6 months or 1 year.

In investing you can sleep, in trading you probably can't if the game is still on. In trading, you fret that the owner majority shareholder has and will continue to cheat you. Rightly so, they can and probably will. They have the upperhand.

Now, from investment, I have a good story to tell of a very average family. May not be the best story but it is a good story nevertheless. Back about 20 years ago, just before I was to take my STPM, my parents had just RM25,000 in the bank account. We were not poor but the savings was barely enough for much more. The housing loan was already paid off, but not the little Proton Saga. Hence, for a tertiary education my only choice if any after my STPM during then was only a local university or probably TAR College. I had no choice, but I was lucky enough to get into a local U as anything beyond the local university would probably costs my parents much more than RM30,000.

I had of course heard of parents who borrowed more, re-mortgaged their house or sell one of their houses, if they have more than one just to send their kids to do tertiary overseas or some local twinning programmes. Hence, we were considered lucky as my brother later was admitted into a local U as well. However, if I were in my mum's position during then - with RM25,000 at 50, I would be worried for my old age. Mind you, both my parents do not have EPF.

During then was also the time when I gained interest into stocks - probably from seeing the gains that people (mainly colleagues during my part time job) were making during the 1992 - 1993 run. As I had already gained a place in the local uni and my study loan / scholarship taken care of, I asked my mum to put some of her money into the stock market. She and I probably went in at the time when KLCI was around 900 points. Gains were quick as it was a crazy run during then, but guess what we were putting our money into? Bank Islam was (considered) the good one. The bad ones, plenty - Kemayan, Idris, FACB, Ancom, AP Land, Menang to name a few as I cannot even remember some of them (these companies are no longer around).

My mum's RM25,000 probably reached RM100,000 within a year i.e. end of 1993. Early 1994, that was when, the market collapsed and it came back down. Her savings probably was reduced by half from its peak. Still a gain but it woke me up as I had my personal gains and later losses as well.

It was the time when I started to learn about finance, accounts, management and the school library was the place to go as it has tonnes of books about investments which very few students borrow. Books by Peter Lynch, Benjamin Graham, on Warren Buffett of course and our own local investment book by Neoh Soon Kean was read. Read that, its still very relevant and good.

It was the time when fundamentals was learned but not fully appreciated. Why was it not appreciated? I could not apprehend the (additional) value of great companies. Companies to me was valued via PE, ROE, PEG etc. - i.e. your usual investment ratios. The more attractive the better. EV and EBITDA was not even that popular yet. Stocks during then, was also about macro economic strength of the country. It should not necessarily be so.

Now, after the 1994, of course there was the 1998. It was when, some losses were felt from the stocks she held, but it was also an opportune time. Post 1998, there were few other rounds of market's downturn - 2001, 2008 were probably the bigger ones. We nevertheless, continued to look for good stocks with good management with some sporadic stupidity in listening to rumours about some trading stocks. It may sound believable, but most of the time, it was never about buying a good company - just a so-so one with lots of hopes and all kinds of stories. Mind you, when we were trading, we were trading with available money (unlike some, who traded on contra) and even then we were losing most of the time.

Fast forward from 1993 to 2010, with little help from me and my brother, my mum is very much in the money and even from the dividends from the stocks she holds, it is enough for her and immediate members under her support to live through. That income is enough to support 3 elderly people - with mostly passive income from stocks and dividends from some government bonds. The same house is still lived in, the car has since been changed to a better car twice.

With that, tell me how is stocks investment a zero sum game for someone who is not within the circle of influence when comes to knowing the people behind the companies. She does not need to second guess what the management of the companies were going to do. In many cases, she does not even know who are behind the companies. As long as the companies are strong, believable and continue to be strong in the foreseeable future.

Which are the stocks she gained much from? Digi, Genting, Public Bank, IJM, Maxis (before the delisting), Axiata, KFC, UMW, Jobstreet, AEON, BJToto, Petdag. Which were the ones she does not gain from? Very Few, and probably the ones that we thought we knew well, but it was too complicated. Today, I gladly say none. Mind you, these are easy to comprehend and picked stocks - for any person. No PE, Moving Average, Candle Stick or any of that technical jargon!

Saturday, October 13, 2012

Gloves industry: Still attractive?

After Top Glove's expectedly good performance, I had wanted to update on position as to where some of these companies stand. As I have mentioned before, the gloves industry is one which we should look at if we are investing in Malaysian market, largely because we are doing so well in this area of business globally. Most of the companies are doing well, however as I have repeated before, the industry is definitely consolidating.

My rationale for its consolidation is due to as the industry matures, the number of players that are still around would definitely reduce. This is a typical consolidating, maturing profile of any industry be it in the B2C or B2B. Now, I have taken out 5 gloves companies from Bursa and did some comparisons. Companies that I have pulled out are the obvious - Top Glove, Hartalega, Supermax, Kossan and Latexx Partners.

Click on the picture to enlarge
I wanted to have a view on where these companies stand. 

These are the conclusions:
  1. Among the 5, the one that definitely stand out is Hartalega - due mainly to its position in the nitrile gloves business which enjoy much higher margin. These margin is certainly reducing however due to more and more players starting to introduce and promote their lines of nitrile gloves.
  2. The margin for the industry is thinning. Why is it so? - I feel that firstly between 2009 to 2010, the industry was enjoying a good run due to higher demand caused by some global epidemic as well as the growth in the healthcare demand due to awareness. As demand increases, the increase in supply will definitely follow later on. The current margin scenario of 10% - 12%, is probably a typical margin which we will see more over time.
  3. Industry is still growing at 9% while the number of players are reducing - which is good for any of the larger players.
  4. Chart on Net Margin of gloves companies
  5. For the manufacturers, gloves is more or less a homogeneous product as long as the quality is up to mark. There is no 1 brand that is domineering the rest. Net margin is pretty much between 10% to 22%. This scenario will continue.
  6. Top Glove continues to be the dominant player in terms of revenue. I have the tendency to think that part of Top Glove's strategy is to increase its market share in the industry and to do that, it has no qualms over reducing its margin to compete. It, in fact can and has the balance sheet strength to do that. Top Glove in fact is the prime mover into consolidating the industry. In "Three Kingdom's" term, Top Glove is the Cao Cao during the time when he was expanding his empire in Northern China. Look below, among the listed few, Top Glove's revenue is twice the size of the 2nd largest - Kossan.
  7. As for Hartalega, it continues to build on its strength which is margin and nitrile gloves.
Revenue numbers in RM'000
With the above comparison, I still prefer the 2 companies i.e. Top Glove and Hartalega over the rest. The former due to its balance sheet strength and size while the latter is due to the higher profitability margin it is able to sustain compared to the rest. And of course, I still continue to like the industry due to the growth prospects and Malaysian companies dominance in the sector.

Net Profit chart (in RM'000)
Frankly, I would like to see EPF putting more money into this industry. Why is it not doing so?

Wednesday, October 10, 2012

The purchase of Latexx Partners shows the big boys are winning

Glove makers are consolidating, that's for sure. This is especially so when the sector is decently large and when the existing winners are doing well. While the article on TheEdge says that it will cause a rerating on the sector, I do not think it will affect the prices of the smaller players much. This is because with the industry consolidating, price and size pressure will cause the smaller players to sell. Latexx is not that small, but it is considerably smaller than both Top Glove and Hartalega or even Kossan and Supermax.

Latexx Partner's owner selling at 29% premium from the current traded price shows that there may not be much more from the value it is trading at now. The price offered by Semperit is slightly more than RM500 million for a company which made RM40 million last year.

According to the Malaysian Rubber Export Promotion Council, a total 40 gloves maker are controlling 63% of the global gloves market in 2012 - up from 65 players with 40% market share in 2000. This consolidation is definitely going to be increased further.

The Balance Sheet of a company which Semperit is acquiring
From there, I like the larger players better - Top Glove, Hartalega. If the strategy is to buy candidates which are to be acquired, make sure these are candidates suitable enough to be taken over - not too strong and not too weak. I however do not think Supermax or Kossan will be candidates for takeover unless the offers that are provided are very attractive.

Saturday, October 6, 2012

Scomi's investment by IJM: Stopping the rot?

Usually I am not very interested in construction companies. This is because I am not able to evaluate how effective these companies are especially when they are evaluated by the total work order at hand. Even work order may not often be translated into substantial profits as who knows what the margins are for the work that these construction companies have secured. One of the few that however gained my interest is IJM. It is a very well managed construction firm with little direct connection to the government - who is the main awarder of contracts in Malaysia for many years. IJM is very well managed that it survived the 1997 - 1998 financial crisis and during then, it was much smaller than Gamuda, Renong, UEM etc.

Some of those names, if you notice did not survive past the crisis. Since then, IJM continued to grow and now, it is no longer just a construction company but a conglomerate with diverse interests. Seeing below, IJM is now a company which is into plantation, property development, construction etc. Its strength,  expertise and brand makes land owners and smaller companies want to work with them. A case in point is now Trinity (previously Talam) which rode on IJM to complete some of the projects it had not managed to complete.

Today, IJM is not even owned by a single controlling shareholder. The largest shareholder is EPF (16%) with KWAP and PNB together form the 3 substantial shareholders. In fact, all the 30 top shareholders - not one of them is an individual. The fact is, the management and owners do not really connect in terms of who is in control. Management works for the shareholders, while funds such as PNB, EPF, KWAP are just investors. This kind of structure is very often seen in the US and West Europe countries, but seldom seen in Malaysia.

On another note, Scomi was that well connected, (probably) poorly run company which could not have survived pass a once powerful leader (I think many would know who this company is connected to). These kind of stories have been recycled time and time again. Renong, UEM, Gamuda, Ho Hup are some of the few large construction companies which were giant in Malaysia once but are either no longer around or lost their shines. Yes, Gamuda has lost its shine.

While Scomi is not into construction, but it is a similar kind of company with business nature where IJM thrives - i.e. relying on contract awards. Companies as such - when it is well connected, it may get preference in terms of getting contracts. But the biggest problem is what if the connection thingy subsides? IJM like company into the rescue.

Just look at this trend. It failed pass 2009 when Malaysia had a change in Prime Minister - even if the person who took over the premiership is from the same party, things can change so quickly - SEE.

Now, just recently IJM seemed to be putting a small little rescue package for Scomi by injecting RM150 million (RM39.3 million cash + RM110 in convertible bonds) for a 25% stake. Is this an opportunistic move by IJM or is it purely throwing money for nothing? However, just look at it this way. At that price, don't you think is a small fee to pay to be in the oil and gas industry?

I am not surprise by IJM's selldown though as by the debt that Scomi has, it seems like a bad investment.

Scomi's debt

However, as I see it, (for which many may not agree), IJM will look at it as an opportunity to move into the (could be) lucrative but very competitive oil and gas industry instantaneously. As I see it, Scomi has lost its way as it was never meant to be well managed and with the lost of revenue and contracts, it needs one who was less dependent on connections (but with substance) to survive. If you look properly, Scomi already has the ingredient to be a decent sized oil and gas contractor in where it is strong at. It has operations in as many as 27 countries - and to instantly grow that is not easy. But the management side is probably lacking. In an industry where quality and costs control are very very important, IJM is probably the guy.

The biggest challenge here if the intention is noble - which I think it is - is the right mindset for turnaround. And it would definitely be positive for both companies, unlike what the current perception is where Scomi is the beneficiary while IJM is being negatively viewed by this move.

Thursday, October 4, 2012

Is Digi pricier than Maxis: A look at EBITDA

One of the most amazing stocks which I owned was Digi, although I have sold the stock much earlier. I remember Digi used to be 4 times smaller then Maxis in terms of market cap when I bought the company - of course it was a larger Maxis then. However, Digi continued to grow at a very fast pace - and now Digi is the 7th largest company in Bursa. The thing about stock is that - as proven in Digi's stock price movement - the more confident the stock provide to its investors the higher the PE becomes. There is no doubt that Digi is getting on the pricier side now but this article is to evaluate whether Digi is much more expensive in comparison to its competitor - Maxis. To find the answer, let's look at EBITDA.

Based on the table below, on the onset, looking at Net Profit numbers, it looks like Maxis is 2x more profitable than Digi. Add back the taxes, it shows Maxis's PBT is 193% larger than Digi's - hence the size of profitability for Maxis against Digi shrank. After adding interests, depreciation and amortisation, it shows that Maxis's EBITDA is only 158% larger than Digi.

As you can see, the percentage of EBITDA over Net Profit for Maxis is 173% while Digi's EBITDA to Net Profit is 220%. This shows that despite Digi has a whopping 33.84x PE Ratio based on historical 2011 numbers as against Maxis's 20.86x, EBITDA would have narrowed the perception over Digi is way more expensive.

The "Market Capitalisation to EBITDA" for Digi is 15.35x while Maxis's is 12.05x. This shows that Digi, when looked at EBITDA may not be that expensive against Maxis.

The question is now, would EBITDA be relevant here as the right measurement? Yes. Digi has depreciated and amortised more than Maxis and these are non-cashflow items. In fact, Digi's interest expense was way smaller than Maxis due to the latter's balance sheet is with higher debt whereas Digi's balance sheet is stronger.

And with Digi having the strongest growth over the last few years, it seems that Digi may not be that expensive after all.

Wednesday, October 3, 2012

EBITDA: Its relevance

Ever wonder why a lot of times analysts or even executives of companies quoted EBITDA to provide measurement on a company. Some of them may even say, things like this, "From next year onwards, we will have positive EBITDA." What does that represent? Is EBITDA really that important and significant?

If I want to think negatively, companies that quoted EBITDA basically are telling us they are not making that much profit or any, hence the term EBITDA rather than Net Profit. I am actually not entirely correct in this remark, but sometimes this is true.

What is EBITDA actually? In simple terms, we just have to take the Net Profit - add back the "ITD & A" which represents Interest, Taxes, Depreciation and Amortisation. "ITDA" are all supposed to be non cashflow items, except for "I and T". Lets look at each and every one:

Interests - Costs of business or financing. If the Interests are high, it means that the business is on high financing. If the interests are low, then the "I" in EBITDA is not that relevant. If interests is the costs of financing, then the company still has to pay them off. In some cases, why the "I" is mentioned is that the company is trying to raise equity funding which does not have a hurdle rate (interest). By including the "I", they are basically telling the potential investors that the investment will have reduced the "I" element. Hence, in this case EBITDA is relevant.

Tax - Higher Profit, higher taxes. Hence, this is the least important alphabet in the EBITDA equation. I rather look at EBIDA. Taxes is a cashflow item, unless they are deferred taxes. Taxes are taxes, and the company has to pay means it has to pay.

Depreciation and amortisation - Now, these are the more important elements in the EBITDA. Where do the depreciation and amortisation come from? Investments. In most cases, unlike cashflow, companies do not take a charge on the expenses immediately. They depreciated them. As a result, companies or executives, incurred the massive investments normally would want to look at Earnings Before Depreciation and Amortisation. This is because, subsequent to the investments where the D & A are significant, it is time to look at what the company makes. Hence, EBITDA.

Now, when is EBITDA not important? If they are saying the EBITDA is way better than the Net Profit, however future investments in the business is still substantial, then EBITDA is not the right measurement. Let me give an example - if Green Packet says the EBITDA is improving but the Net Profit does not seem to be so, and if the company is still investing into 4G(LTE) - then where is the relevance in EBITDA? If say, IGB REIT (which for example only has one mall, and they are not reinvesting after the completion of the mall), then the company would be good for EBITDA calculation. This is because the D & A affects the Net Profit while the free cashflow is actually higher.

Remember, EBITDA is not free cashflow though.

I would be showing a relevant example through looking at EBITDA as comparison in my next article.

For an almost similar type of article, please read, 
Maxis vs Digi: Numbers your friendly analysts don't tell you

Tuesday, October 2, 2012

Airasia's trade: What could we have expected from EPF

The Malindo announcement caused Airasia's shares to be highly traded over the last few weeks. While some has deemed it as a downside for Airasia's future, this to others have become a buying opportunity. We know that knee-jerk typed of reaction like this could be an opportunity as sometimes a sudden drop could have caused some trades to be force sold.

Some may take this to reduce its ownership in a company due to the uncertainty for the stocks. Now, let's see what EPF has done during this period. As mentioned, EPF is a very large fund - its trades could move the market. As a result, there are lesser opportunities for EPF to take opportunity from large short term movement.

However, for this time I found that due to Airasia was a larger counter and due to the high volume traded during these period, EPF (to me) had taken some positive moves. Look at the chart below, the blue line shows that transactions which EPF has taken over the last 1 month, while the maroon line shows the trend of Airasia's share price.

I feel that the fund had taken a smart step as it has been buying from the extremely high volume opportunities. On a another table which is shown below, you can see that as the price trend turns red, the fund has been accumulating.

While I have been critical of some of EPF's purchases, this action shows that when EPF is not under stress to provide stability to the market, it has traded smartly - as I see it.