SERIOUS Investing

Running an airport is easy but...

2013-06-18T02:40:00.001+01:00

To directly quote the COO of Philippines Airline and President of San Miguel Corp, Ramon Ang on CNBC, "Even my high school son can run an airport. It's easy. You just have to hire the right people."

Is it that easy? It is easy now it seems as the competition internally among the airports are almost non-existence. It is easy when the rates are fixed by the government. Hence, whenever the airlines are pushing hard for your dollars, the airport makes money. The hard selling part are not by the airports but the airlines. It is easy when you have Airasia, Malindo, not MAS though. It is easy when there are more people whom are looking forward to travelling when flying is made cheaper.

Now, when it is easy, one cannot help thinking it is even easier to negotiate a good contract especially for Malaysia Airport. I am reading an old article where it says the LAD (Liquidated and Ascertained Damages) could be as high as RM4 to RM million a month for the delays. RM4 - RM6 million is hardly a decent LAD sum.

I am aware that with the KLIA2, Malaysia Airport will be the main beneficiary out of this as the low costs airlines are already delaying their plans where the current LCCT is already choked. I have yet to see how the KLIA2 will be different from the main airport terminal in Sepang, but the grand plan and size will definitely be positive for its earnings.

I know it can be easy as what Ramon Ang says, but one can for sure negotiate for a better contract...

So the LAD as announced below of RM199,445.40 comes to about RM6 million a month. My feel is this is way too small for both UEM and MAHB.

Buying Bonia

2013-06-14T08:40:00.003+01:00

It took me a while to make this decision. I have been monitoring this company for more than 8 years but yet could not make a decision to do anything. For people who do not know, Bonia is a local brand - yes it is, fully local.

I have put forward my views on this company before. The founder / owner is a brilliant guy, smarter than many of us who have been to universities, getting our degrees, masters and maybe even PHDs and having worked in all places. Why do I say this? Besides his ability to grow the company, his acquisition of Jeco Ltd was a masterstroke. It was priced at around 5 - 6x PE, and through the acquisition he has sort of eliminated a strong competitor in the same space, Braun Buffel. While Braun Buffel is a nobody in Europe, in Malaysia and Singapore, the brand value is worth something. And it is in the same space as Bonia's leather products - low to mid range. There aren't many mid range leather products in the region if you notice. In fact, I would think there are probably more high range such as LV, Burberry, Coach etc. The growing middle class in this region would be fantastic for Bonia, if it executes its strategies well.

Another right move that he has made, see my article here. This shows that he is not buying anything above the price which he deems to be not fair to him. In other words, he only wants to buy cheap. While doing that, he has managed to increase his holdings of the company. Note that at one point of time, PNB was holding almost the same amount as him (the controlling shareholder), which could be deemed to be dangerous. I would think knowing that they (PNB) were not able to make a break into the holding, the decision was to reduce their stake (purely my speculation). Otherwise, why would PNB buy up to more than 30% at one point of time and later sold?

People, may laugh at him (ya, over the radio, I have heard), but he had never wanted to make a General Offer for Bonia. All he had wanted was to reinforce his control of the company, while at the same time, snap up some shares at a price which he was comfortable at.

Hence, during the period of the offer, Bonia was not buy-able as the controlling shareholder was never willing to buy up the shares if it trades above certain price (more than RM2 - RM2.10). I would think that period is over. Yes, Bonia fell to below RM2.00, but at the same time many other stocks have moved up between 15% to 30%. Bonia was not really moving.

Now on its performance. No point talking about how smart the owner is, if the company is not worthy of buying. We know that he can be aggressive, hence the purchase of Jeco. With the purchase, under Bonia, there are quite a list of brands - Bonia, Sembonia, Carlo Rino, Braun Buffel, Pierre Cardin (Singapore), Renoma etc.

Having done well in Malaysia, Bonia is seeking expansion to Indonesia and Vietnam. Hence do not expect great dividends as this is a company which is expanding - pretty much Parkson like. We are hence seeing growth in revenue as well as decent growth in profits. Its ROE is maintainable at 16% - 18%. These few years, judging by what they have said in their announcements, it is aggressively expanding. I would hence be betting for future growth outlook on this company over the next few years rather than great profit and dividend numbers, now.

Bonia is a company with its own list of brands. It is trading at around 10x PE, if we annualise the results. Market cap is around RM430 million. It has a decent cashflow as well as business reach and importantly a very decent mid-level brand for a fashion retailer.

I have hence bought 3,500 units of this Malaysian company.

Update on Airasia X's IPO

2013-06-12T04:24:00.001+01:00

My previous article on the Airasia X's IPO was 6 months ago and it was based on its draft prospectus. I felt that it is injustice to the company if I do not update some of the details. The pricing is in fact even more bullish now than when I wrote the paper. It is now pricing the IPO at RM1.45, hence valuing the company at RM3.437 billion post IPO.

The amount to be raised is RM1.146 billion with RM286 million going to the selling shareholders.

Airasia X will now use 33.3% of its proceeds for repayment of bank borrowings. Others are for capital expenditure, working capital and listing expenses.

Now straight to the valuation. Obviously, after the December numbers, Airasia X has its financials updated. For FY2012, it registered a PBT of RM38 million. After stripping out the forex gain though, it was still registering losses. First quarter 2013, it registered a PBT of RM34.8 million. Assuming a full year 2013 annualised numbers, that may exceed RM150 million (assuming it reduces its financing costs and growth).

With the profitability, the valuation seems to be lower although it could still be at a high twenties PE or even 30x. Do note that I used PBT because the add back on deferred taxation is misleading .

Now the thing about this IPO is that it is a company which attracts global attention. The high valuation has been the same on IHH and it does not seem to deter these international guys to take a stake in the company. The original thought that retail portion is going to be bigger is not true - that actually surprised me when I heard it. Institutional portion is still 22.7% as compared to retail portion of 10.6%.

I do not invest in a company with such valuation, but again Airasia X is a growth company. It will be using up more cash as it is a capex heavy business, but one should not fight the attractiveness part of the brand and guys who are selling the IPO.

The growth of residential properties and housing loans

2013-06-09T10:18:00.001+01:00

Properties cannot grow without its twin brother's help - the banks. Over the years, we have witnessed the growth of the residential property sector, both in terms of prices as well as total houses sold. I have not been comfortable with the property sector for quite a while, especially since 2010. There are very little being talked about the danger of the loan exposure to the property sector as well as the financial sector - mainly banks because the lesser we talk about this, it is hoped that nothing will happen.

I could not see or project for sure how the sector will pan out in the near of medium future, but as I said I have not been comfortable. Let me show some numbers as below.

The above chart shows the loans to personal consumption market. I have taken out the commercial sector loan. The total loan is the total for all purposes - inclusive of housing, credit cards, commercial purposed, cars etc. As it is based on above, the Compounded Average Growth Rate (CAGR) of Total Loans between 1997 and 2012, is already very high at 9.03% (above average GDP) but the CAGR for loans to the residential property sector grew even faster - at a whopping 15.34%.

Another clearer table is shown below. The percentage of residential property loan to total loan size grew from 11.07% in 1997 to 27.24% in 2012. (highlighted in yellow)

On the other hand, the loans for purchases of securities to total loans dropped from 11.85% in 1997 to 4.54% in 2012. As at 2012, loans to residential consists of more than a quarter of the total loans. Is it worrying enough?

To soothe the worry, % residential loans to total loans exceeded 20% since 2001. Total loans however has started to register double digit growth since 2004 (except for 2007 and 2009). The question now is whether keeping residential loans to total loans of 25% to 30% is a new normal.

We have heard of the sector being still bullish-ly projected by research houses still in the future. Frankly, I am not too sure but we know the housing sector is much too dependent on financial sector. And I am sure that the loans growth cannot continue to grow more than 10% all the time. Sometime, it has to slow down.

We see what happened to the US housing market and the collapse of it. The aftermath, what happened to the banking sector - i.e. to Bank of America, Citigroup and many others. The Malaysian housing loan profile is a lot different to the US crisis, as the collapse were quickly done by subprime in US while in Malaysia, that part is not a thing to worry about. But still these numbers does not seem good.

Is MYEG worth it?

2013-06-08T05:25:00.000+01:00

I have liked and been very critical of MYEG. You can read through some of my articles which I have written here. This is one company which have always been on my radar. Why? I know that this company will do well as it is now the undisputed e-government provider in Malaysia. There are no competitors that can go near the company. Hence, the limit is the type of services that they can offer as well as the market itself. As you look below, the company's growth is fantastic. In fact, for FY2013 it continues to grow further with its PAT expected to exceed RM35 million this coming closing financial year.

The performance is reflected in its share price as well. However post General Election, the company has in fact had a field run - registering 100% growth over a period of less than 1-1/2 month. There is no doubt that MYEG will continue to perform with the company continuing to get more jobs as long as it can successfully lobby for the services from the government.

However, the biggest mystery for the company is the payment of dividends, where it only paid 1.1 sen and 1.4 sen for its FY2011 and FY2012. This is supposed to be a company with very good cashflow. Its business is very similar to Jobstreet, very much scalable business with one of the main costs being advertisements. Revenue earned is almost going to be profit earned as the costs are all sunk costs.

I have tried looking at its free cash flow (FCF). See below:

Its FCF is not something to shout about, which is now I realise why it is not paying that high a dividend. Anyone that is trying to pitch EBITDA, I would say look at FCF as over here you can see the vast difference. I do not know when the company will slow down on its purchases of capex, as I thought it should have done that years ago as servers, storage etc. are supposed to be cheap. This is a company where the FCF is supposed to be higher than its Net Profit, but it is not - yet.

Again, I am not going to dispute the company's growth potential. Currently it is however trading at RM940 million market capitalisation. PE is close to 30x. P/FCF is still higher. Is it worth it? Or rather should I term it, is it worth it now?

Selling Wing Tai

2013-06-07T05:05:00.001+01:00

Over the months, market has been doing well. I have hence taken the opportunity to sell some of my stocks. Earlier I have sold Airasia, now I have decided to sell Wing Tai Malaysia.

The stock has gained more than 30% over such a short period of time, obviously with the help of the pushing post GE. At the moment, am holding slightly more cash, and do not have a specific plan on what to do yet.

Dissecting a P&L

2013-06-05T14:08:00.001+01:00

Very often we look at much simpler companies with a few lines of businesses and they are owned almost 100% entirely. I like to analyse these kind of companies as they are easier to understand. Investment need not be complex.

However we still need to learn. There are few conglomerates, and most of the time we relied on Bloomberg, websites for the financial data. I would think few people do their financial calculation as many companies reported the more relevant data in their report. However, sometimes companies may not want to highlight what's important and what's not. Often times, I see press release which are meant for the press. They do not do analysis. Press releases are being taken from the companies which provided the write-up, numbers and I most of the times do not see changes made by reporters. Let me highlight a complex company (I do not want to name here - perhaps you can check out yourself) and see where are the flaws.

The below is a Malaysian conglomerate with lots of line of business. It has RM13.1 billion revenue. On paper, it looks like it does decent, which based on its bottomline is true. However, in a financial statement, there are more than just topline and bottomline.

Now, as above there are a lot of numbers, but which one do we focus on. I have circled several with different colors.

Certainly not the revenue as revenue can grow 90%, but if you look properly, the company is not that profitable. In fact, for this company, the reporting is minimal reporting. If you look at the revenue vs the cost of sales, the gross profit is RM465 million (RM13.134 billion - RM12.665 billion). Where is the other income from? Most probably profit from sale of assets, businesses etc., it is not revealed. But more often that not, these are one-off item. Without the other income and other expenses, the business itself is much less profitable.

Next is the profit line. Which one to take? There is a Net Profit for the Year. Then there is comprehensive income, then Net profit attributable to the owners of the company.

Net profit for the financial year, represents the profit for the company before taking into account of the minority stake. What is minority stake? It basically means that for some of the business that the company has consolidated, it does not own 100%. A business can be owned say 40% but yet it is consolidated. How? Because the principle says that as long as the company has a controlling stake of the subject, it can be consolidated. For a company that is consolidated, they will take in the topline right down to the profit is are consolidated. Only after the profit for the financial year line, you will see that the non-controlling interest are deducted - hence the net profit attributable to the owners of the company.

If you are the shareholder of the company as reported above, the profit line for the company that you own partially is the one circled with red. And EPS is calculated using that profit line.

What is comprehensive income then? These are not that important as the numbers are inclusive of the changes in items (like securities owned) that are marked to market, foreign exchange gain or losses etc. Again, these lines are not so reflective of the actual business.

By the way, I do not do insurance or unit trusts. And if you have articles that you want to share and you think are of quality, do send to me.

Things to Consider for First Time Investors

2013-06-05T08:08:00.001+01:00

This article is brought to you by iMoney.my – the service that gathers information from different banks across Malaysia to make life easier for you.

Every human being is unique. We differ in our opinions, points of views, and beliefs. In investing, ideas of every individual also vary.

If you are a novice in the world of investment, you’ll definitely need to ask yourself, “What kind of investor am I?” before you carry out actual investment activities.

To know what category of investor you fall under, consider these two points:

● Which Age Group Do You Belong To?

Younger investors, especially those who are under 30 years old, are usually very versatile in dealing with the risks that come with investments. Even in the worst case scenario, they’d be much more ready to handle any losses because they are not nearing retirement age and have ample time on their side.

Investors aged 50 and above, on the other hand, are usually advised to be more cautious in their investments. Unlike younger investors, folks nearing retirement age have limited years to replace any potential losses should their investments fail. Hence, a more prudent stance is definitely in order.

● How Much Money Do You Have? How Did You Earn Them?

To make an investment, you’ll need money. And the more funds you have, the more tolerance you’ll usually have when it comes to dealing with the volatile nature of investments, simply because you have the additional resources to spare.

But sometimes, it’s more than just about the money. Your background comes into the picture too.

Commonly, individuals who have a strong background in business and entrepreneurship are more aggressive in taking risks. The reason behind this is that, the nature of their financial background involves making gambles (i.e. starting a business is arguably a leap into the unknown).

On the other hand, individuals who have struggled for the longest time to earn and save money are understandably more fearful in facing risks. Hence, you’ll be more inclined to spend on low risk investments if you fall under this group.

Know What Kind of Investor You Are, then Take Action

Prior to making investments, it is vital that you spend some time thinking about the kind of investor you are, so you know exactly what kinds of investments you should be researching on and placing your money into.

Ultimately, understand that whilst investments promise big gain, the potential of suffering losses is very real too. If you have barely enough to survive, jumping into an investment could yield unnecessary stress and emotional distress that you really shouldn’t be subjecting yourself to. Hence, always make sure your everyday commitments and personal needs come first. After all, investments can always wait until you’re financially ready to commit.

This article is brought to you by iMoney.my – the service that gathers information from different banks across Malaysia to make life easier for you. Check out its website to compare rates and find the best deal for deposits, mortgages, loans, and credit cards.

When a FBM KLCI company has its shares cornered?

2013-06-04T15:08:00.002+01:00

At last, the list of the Top 30 shareholders are out after the much fanfare about the stocks being placed out to mainly cornerstone investors. For IHH's IPO, we know why most of the stocks are left for the institutionals. Just look below after 9 months from its listing, Top 30 consist of a whopping 92.83% of the total shares held.

Frankly, this is not good for the exchange which is supposed to promote its vitality to the world. Already EPF owns more than 10% of the Malaysian market, which is bad. We do not want a company which has RM30 billion market capitalization but almost 93% of its shares are held by the Top 30.

The tightly held shares is bad as it would allow the misperception that Malaysian shares can be controlled. It is allright that they are held by the large funds like Blackrock, JP Morgan, Tiger Funds but not like this. On one hand we try to keep a minimum free float but on the other hand a KLCI company has such a large number of its holdings by so few hands. Yes, it has lots of shares but this is still not right.

For those whom would like to know as a comparison, UMW has its Top 30 holding less than 80%.

Telekom Malaysia has around 80% as below.

Letting go of Airasia

2013-06-03T14:45:00.002+01:00

I have got to sell something. While I must admit, this is one of the company which I admire the most, I looked though my portfolio and I decided to let go Airasia. It is a company which will do well. It will dominate the Asian air space. It will beat Malindo or Lion Air. It is the fastest growing and the leanest.

However, having said that, Airasia will be a company which will use lots of cash. It will buy into lots of capex in the form of planes. The business of airline is a tough one. Singapore Airlines made losses last quarter. MAS will not be able to get into long term consistent profitability - that's my prediction, despite the government will not like to hear this. There will be more rescue going on for MAS in the future.

Because of that, many government will be very protective of their own airlines. Despite that, Airasia will be the model to go for Asia despite it being a privately run company and against all the government coffers can assist.

This is also why I am selling as I want more stability in the investment portfolio that I own.

The update for the portfolio is here.

The last of the consumer stocks

2013-06-01T08:12:00.001+01:00

Kenanga called it a hidden gem and put a target price of RM1.50. I do not put a target price in my blog (as I do not think of my purchases and sale this way). I however would not go so far to call it a hidden gem. A hidden gem is a precious stone which nobody have yet to find.

Yee Lee is a very old consumer stock which have been rather consistent i.e. in being profitable. The bulk of its business is in the trading and manufacturing of edible oil in Malaysia. If it is a gem, what are the products that it does. So here it is as below. Which one you think is the Star among the list of products? Helang. Vesawit and maybe the other edible oil products. I do not think the Sabah Tea and Morning Kiss are much of a value. Besides the below, it also owns an associate stake in Spritzer - a very decent drinking water brand.

Now, what makes me feel like wanting to write about this stock. It is again probably a boring stock. It is hidden among many investors but is it a hidden gem? Currently at RM1.20, it is trading at RM212 million market cap. Given that the company has been around for so many years, I would say it has come a long way. The business that it is in is rather competitive, but Yee Lee has proven to be able to be equal among the others. It may not have the brand strength as Knife (Lam Soon) or perhaps the balance sheet strength of Neptune (under Robert Kuok's PPB), but it has survived and well alive.

How?

If you look at the above 5 year financial highlights and inclusive of its better performance in FY2012, it has done pretty well for the last 5 years from 2008 to 2012. The first quarter results for FY2013 is even better achieving PAT of somewhere around RM8 million for the quarter.

Now, I want to highlight another segment which is in the second red boxed. Not the ROE though. Do not expect the ROE to be good for a business with refinery like Yee Lee. Margin is not expected to be good and we cannot expect business like this to have a ROE of 15%. If ROE is the main indicator, walk away as Yee Lee will never provide this figure as long as it is selling edible oil.

A very important trend is the Net debt to equity ratio. If we look way to the right, it was not doing so well there in terms of its health of its balance sheet. A business like Yee Lee is where it buys crude palm oil or Fresh Fruit Bunch, crush them and turn them into refined oil, brand them and sell. To do that, it needs to use some financing to purchase the raw bunch (it also use the financing for terms provided to retailers). This is where mainly the net debt is from, not overly worrying but if its balance sheet is not strong, it will need to finance it longer or even at a higher rate.

Walk through the left, that indicator which is the net debt to equity has gotten much stronger. Partly to do with the shareholders funds getting bigger as well as a much controlled short term financing. This is also to do with better collection, which could be internal as well as a healthier overall industry - AEON, Giant, Tesco probably pay earlier. Another indicator which is my favorite is cashflow.

If you look above where I have included 2012 numbers for Net cash from operating activities. You can look at the record from 2008 onward from the above chart. It shows a huge improvement. A better cashflow despite the consistency of profitability is very important. Better collection means, lesser bank borrowings as compared to turnover. It hence means lower interest costs. Why did I highlight the depreciation? This is because in a operating cashflow, the depreciation following accounting principle where the earlier or continuous investment will need to be depreciated over a period of time. It is not a cashflow item.

What makes me excited? The better cashflow although I doubt it will achieve another RM64 million of net operating cashflow for FY2013 would probably mean better balance sheet (again), hence better profits as financing costs will be lower and hopefully better dividend as well. As usual I do not know where it stands in terms of wanting to pay and its strategy moving forward, but the much better balance sheet is something which we can appreciate.

Yee Lee has gone up to RM1.20. Frankly, at one point of time few years ago, around RM0.70 I took a look and deemed its balance sheet as not attractive but with the trend of its cashflow and strengthened balance sheet, I am relooking at the business and where it stands.

The business is rather consistent, the lower the crude palm oil price, it probably would be better for Yee Lee, as in current situation. But even if the price of palm oil gets higher, the subsidy from government would have allowed companies like Yee Lee to still be profitable. And, I do not think the subsidy for palm based edible oil would be taken away as by doing so, it would be negative to the country and probably allow other types of edible oil to be more competitive against palm oil based edible oil. It would be inflationary as well. Another thing with this industry in Malaysia is that there seems to be a quota for each of the palm based edible oil producer. Hence, there is always some small margin to be made, but it will remain to be small. For these companies to get out of that trap, they would need to sell some other things. This strategy has been used by Lam Soon pretty well. As for Yee Lee, it does try as it has other businesses in can packaging and corrugated carton packaging. These businesses are always competitive but given where Yee Lee is at, they I would say have done decent, but not fantastic.

The gist of it, Yee Lee is a smallish consumer stock, with a rather steady business, decent balance sheet, positioning in terms of its brand and at its current valuation of around 8x PE, I definitely do not think it is expensive.

Are there drop in car prices or not?

2013-05-30T14:26:00.001+01:00

The promise (just mere promise so far that is) of reducing car price 20% to 30% is not going to help the industry at all. It is akin to your boss telling you, maybe I will give you a pay rise if you help to improve the sales of the company say by end of the year. It definitely is not going to help. The statement is rather open ended and we do not know what to expect, as a car buyer, investor and business owner.

What happens when we do not know what to expect...potential car buyers may delay their purchases - me included. Second hand car dealers will be more careful when building to their inventories. Investors will be careful as I do not see anything concrete that is to happen to the automotive industry. The car parts manufacturer will be very afraid. If this statement is not backed up, probably car sales will suffer the next few years.

Already, we are suffering due to this feet dragging on the automotive policies. I am yet to see Volkswagen being committed to the Malaysia market when comes to CKD (Completely Knock Down).

Investors are not giving a good valuation on car parts manufacturers. I was doing some numbers and the average PEs for the automotive parts manufacturers / suppliers are somewhere around 7x - 8x. Against Thailand, where it is around 15x, we know where we are. This is why, partly the reason APM (owned by Tan Chong), although doing pretty well, with good growth is not being valued highly - below 10x PE. I just am not able to know the strength of APM. If opened up to compete, I am not able to know where is will be able to stand. Let's not talk about Proton and Perodua as we probably would know what will happen.

Investors in the parts sector are not interested in the Malaysian market. This is because we are already lagging behind both in terms of know-how as well as competitiveness. We do not have the scale, that's what I know.

There are no interests in automotive companies except for one or two like UMW and Tan Chong.

This mere statement of, will reduce car prices but without concrete follow up plans is just to make matters worse.

Anyway, I am still hoping for the car prices to reduce as I see this is the highest ticket item I may spend for the rest of my life and it is already and going to be a huge impact to my expenditure.

Guidance on supporting sector to the US property market

2013-05-28T15:04:00.001+01:00

The news that just came in where US March's home prices rose in the 12 months through March 2013 is the highest since 2006, just would provide positive signs for the furniture companies that supply to US.

You can read the news from here as well as on any main pages of the financial sites in US. When homes are selling, people may want to furnish their houses with new furniture. For those whom do not follow the US housing sector, despite the house of cards (which means poor structure that collapsed the housing sector) few years ago, the demand has outstripped supplies and in some places the developers are struggling to meet the sudden surge in demand.

During the financial crisis, in fact the percentage of Americans who do not own a home has increased and it is imperative that the data would reverse once situation becomes more stable. Currently, that situation is stabilizing, interest rates are extremely low, banks are still finding hard to lend out their excess money (due to the printing money policy by Bernanke) and young Americans are starting to shop for homes again. Yes, America is still a young population.

I have mentioned of some furniture companies which are supplying to the US market here, and these are probably missed out by investors due to the difficulties in connecting the link between US housing market and some of these furniture companies in Malaysia. Not many analysts or even the financial news would cover these companies due to their sizes, where most of them are sub-RM100 million market capitalization. I do foresee these cyclical sector especially the ones that supply to US to do well, and although it is cyclical, it could be still on the uptrend stage. It may not be a long term play, but for cyclicals, you do not need to play long term.

The 10% Target

2013-05-28T03:34:00.004+01:00

Many people started investing with an ambitious mind. They wanted to make 5% to 10% within the week. Many of these people ended up disappointed. I realised that among the many whom have started investing about during the same period as I did, around 1992, quite a few of them have left the scene.

No, they have not made enough, but many of these people have suffered enough. How? It is the different objectives that caused these people to have suffered. When the objective continues to change, the picking of stocks have also changed. As I said before, there are probably less than 1,000 listed companies in Malaysia, and out of that probably 10% of them are investible. And for me out of that 10%, probably I can understand about half of them. Oil and gas, some manufacturing and few more are probably out of my league.

For one to be able to know all, it is probably impossible. But stocks investment is not about knowing all. It is about knowing and be comfortable with what we know. Overtime, as we get invested, we will know more. But still we will not be able to know all. If we have a moderate target, we can probably think clearer. We have a different objective when we have a clear mind especially when comes to investment. We are not afraid of having sleepless nights when market drops.

I would say, over the long run, it is advisable for one to have just a 10% target. How is that 10% target going to be achievable and be significant. I just wrote something about power of compounding. It is significant, considering the interest rate condition and what we can get from elsewhere. While 10% is a very achievable target, one should know that it is extremely hard for one to achieve that in the long run. Today, or rather over the last few months, market have been very friendly to many investors. You and I can make more than 20% to 30% say over 6 months. But that is not going to last over a long time or consistently, that can't be achieved. Almost impossible!

So what is the 10% target. The 10% target is to achieve what we try to achieve on average in the long run. The 10% target is also, trying to understand 10% of the stocks that are in the market. While the more we know the better we become, sometimes it can become overwhelming.

The 10% target is also sticking to one's plan. And more often than not that plan is about value investing. Nothing else, as continuously chasing all kinds of stocks is going to make one getting stressed and lose focus.

What's with the furniture business?

2013-05-26T10:37:00.001+01:00

Over the last few days, I have looked (and looked again) at several companies, namely Latitude Tree, Lii Hen, Classic Scenic and Homeritz. Each and every one of the above has its own uniqueness and differences. Latitude's main customers are in United States with about 93% of its business derives from there. Lii Hen's customer base is very much US as well, but its main manufacturing is still in Malaysia. Latitude has very much moved to Vietnam taking opportunity of the low costs.

Classic Scenic on the other hand is a picture frame manufacturer, doing very well to maintain its margin as well as growth. Homeritz, which was the latest to get listed in much more in the upholstery business. It has been on the profit track record over the last 5 years, but the trend was not that consistent.

Among the four, Classic Scenic is probably the most consistent, but in terms of revenue it is probably the smallest. Market capitalisation though it is the highest - about RM131 million. The consistency as well as the dividend payment probably reward the company much more than its other peers. It is now trading around 10x its trailing 12 months income.

Now, what is pretty surprising is that besides Classic Scenic, the rest are trading at their low single digit PEs. Both Latitude Tree and Lii Hen are around 4x, while Homeritz at around 5x. See all below.

Homeritz stock details

Latitude Tree as I have previously written about and invested myself, is still trading at around market capitalisation of RM83.6 million while its book value is higher than RM200 million. The Price / Book is 0.4x.

Latitude Tree's stock details

These are companies which provides dividends, and all of them provides dividend yield of more than 4%. All of them have pretty good cashflows, they have low receivables to turnover. Debt are very manageable. Despite the competitiveness, the business cannot go much lower anymore as both US and Europe are picking themselves up. The exchange rate is not to the favour of the export led furniture industry. If you notice though, the business is seeing pick up especially for both Latitude and Lii Hen where their market are very much United States. You can read all kinds of report on the US housing market, they are making a return, slowly but surely. It will definitely be positive for companies which have direct and indirect exposure to the industry.

Stock details of Lii Hen

All in all, we can have our apprehensiveness, but what is with the low valuation? The business is pretty cyclical within the year (due to seasonality where close to Christmas period is usually better) as well as over the years (due to costs, demand and fluctuations of exchange rates). But I am hoping to take opportunity by catching the lows. Seldom do I time the market, but in this case, I am just looking at the valuation and hoping for the pick up in sales and margins.

If one has fear as what happened to companies like Kimble and Kenmark, I think the balance sheet as well as their cashflows would have buried that fear. And they are audited by renown auditors - Latitude by EY, Classic by KPMG, Homeritz by Crowe Horwath, while maybe the auditor - John Lim and Associates - which I am not too comfortable is the one hired by Lii Hen.

If one has fear over timber industry, I can understand as it is susceptible to boycotts over Malaysian timber once a while, but for furniture, I do not see that.

I do not want to expose myself too much with this industry but their valuations are way too ridiculous for me to stay away from.

Power of Compounding and Rule 72

2013-05-25T08:19:00.000+01:00

I guess many would have known the power of compounding but some would not know the significance and how much impact it can do to one's portfolio. I have mentioned so much about investing and the earlier one knows the strength of savings and investing (and know how to invest comfortably), the better it is for a person. A person's work life can only stretch to as long as 60 years of age in Malaysia. That means a total of say 37 years of work life. Man is known to live longer now, as an example, my grandma is now 92 and healthy.

Hence, over here I am going to reiterate the power of compounding although many would already know about this. Some however don't.

If I make 10% every year from my investment (and reinvest), how many years would I double up my value of investment? It is not 10 years. That is why the Rule of 72 is being used. (Note that the exact period may not be that accurate, but it is a guide nonetheless)

For a person to manage to get a consistent return of 10% every year, it will take roughly 7.2 years for the investment to be doubled. How Rule 72 applies is through, say you want to double your principal, and you want to know how many years your principal can be doubled assuming the interest or return you are getting is on a consistent basis. You do that by dividing 72 from the consistent return you are going to get. From below table, assuming one gets a consistent return of 8%, he / she would double his principal from investment in 9 years.

The significance of it

To our daily life, the significance is quite drastic. If we put our money into the bank and get 3% (that is what we are getting for many years now), it would take a long 24 years to double up our savings.

If EPF consistently pays 6% every year, it would take 12 years for the person to double up his savings there. Hence, if you have savings of RM500,000 in EPF today, and if the managers have done well to return you 6% every year, you will double your money to RM1 million by 2025, assuming there is no fresh savings.

Say I am targeting a 10% return on average from my investment, I would need to take 7.2 years to get my investment doubled. What if I am a better investor, and I get say 18%, that's only 4 years to see my investment doubled.

On another note, for a company which has a consistent Dividend Yield of 6%, your investment would probably see it doubled in 12 years.

The flip side of it, for those whom have credit cards debt of say RM20,000, you will double your debt owed to the bank in 4 years, because they are charging 18% on your credit.

See the significance!

Where is the bullishness on IHH coming from?

2013-05-24T11:37:00.001+01:00

I was wrong to think that IHH would probably be too expensive when this stock was listed last year. It actually is expensive and getting more expensive. Today, its market capitalisation is RM32.1 billion. Amazing!

IHH's last year's IPO price was around RM2.85. Today, less than a year it is priced at RM3.95. But with the much fanfare, is it really that attractive?

Just yesterday, it announced its first quarter result. This result would perhaps be closer to the more real result, we expect to see in future, after the opening of the Mount Elizabeth Novena in Singapore, apparently a 6 star like hospital. This 1Q13 quarter's results is where you would not see extraordinary income from the locking in of profits from just accounting entry.

For the 1Q13, it registered a Profit Attributable to Shareholders of around RM127 million. See below. Hospital's business is hardly a cyclical business. If any, in fact the lowest period would be the fourth quarter where people are moving away for holidays. Hence the first quarter results is expected to be a better one. So, from here, what can we expect looking forward for the full year? It would only register a full year real results with profits of somewhere around RM500 million.

With this number, I in fact was too bullish. I was thinking of somewhere more than that - between RM600 to RM700 million profits attributable to shareholders, at the top end, last year. Remember, this year is supposed to be the performing year. In the 1Q13, where is the performance?

If it is going to be performing somewhere along the line of RM500 million to RM600 million, that is about 64 times PE we are talking about. Many people would like to use EBITDA, especially when they are finding it hard to explain the slower growth.

EBITDA is great but it is greater for companies that have spent a huge sum of money previously to expand because of the huge depreciation or amortisation. An example of a good company to look at EBITDA would be Malaysia Airport, post the KLIA2. However, IHH is a company which would need to continuously invest. It is promising or rather telling about the China (or Hong Kong) and South East Asia stories. That means what? It needs to invest.

Another thing about hospital is also about investment for equipment. Look below, for the 1Q13, where is the free cash flow? Somewhere along the line of RM148 million for one quarter. It is not good enough for the valuation one pays.

From the latest numbers, IHH still has around RM3.6 billion debt against cash of RM1.7 billion. That is not worrisome, but it is not fantastic either. The company is talking about expansion. We already see the free cash flow to be not too exciting, hence the reinvestment has to be much controlled. The balance sheet is not too strong, hence good dividends will be tough in near future, although it will pay some. So where is the bullishness coming from?

Talking about STAR

2013-05-24T03:15:00.001+01:00

I am actually sad that a once Penang based newspaper is now at its position today, No, it is not in trouble but it has gone the wrong way. It has lost its middle ground as a newspaper, but more to serve its political masters. Already the newspaper business is so tough nowadays, where we see demise after demise of many all over the world.

I guess Malaysia they are a little bit lucky where printing license is limited and is probably only opened to one side of the political divide.

However, on the business side, Star is not entirely dead. It is a very decent company, but just that I do not know where it is heading.

The internet and Malaysian demography does disservice to Star as well. Why? People whom want to read Chinese for example, may go for Sin Chew or any others. However, if I want to read English, I do not go to Star. I go to all sorts of sites from New York Times, Washington Post to Bloomberg to Malaysiakini to TheMalaysianInsider. I will just go everywhere else except probably buying the Star newspaper.

The young demography of Malaysia, is not going to help. Star has to reinvent as what the earlier comment says on Jobstreet, needing to continue reinvent. But the main product for Star - which is the paper - is already wrong. Then it went to buy 5% of Catcha, who did the buying decision I wonder. It is now building by going strong on RedFM etc, but yet again I listen to BFM more than RedFM. Many more would like RedFM but the point here is options and choices.

The survival for Star now is because there are no strong competitors in the shrinking segment it serves. It is lucky that I do not even want to talk about New Straits Times.

Jobstreet continues to amaze (Updated)

2013-05-23T08:17:00.000+01:00

I am not saying this because I own this stock. In fact I am upset cause I did not buy more. Sometimes when there are doubters, I tend to pull back (not blaming anyone but myself). The business of Jobstreet continues to do well, now perhaps not in one country but 3 countries - Malaysia, Singapore and Philippines. It is not a "jaguh kampung" anymore.

See below:

Each of the 3 countries I mentioned exceeded RM10 million in revenue for the first quarter 2013. The business is easy but hard to quantify. As I have said before, and those whom have read my blog in this company would probably be tired (sorry) of me continuing to comment on Jobstreet (nope, I am not paid, in fact I am only a small shareholder), but it is not easy to comprehend. Me myself had doubts before. Just see the previous blog and its comment.

We have doubts because of the competition at hand. There is again Star (as I see it going nowhere yet), LinkedIN and perhaps many more. I have invested into Monster, it is a different "Monster", I can tell you that - don't know why. LinkedIN? I doubt so as LinkedIN itself would not be able to get so much market share. Perhaps the soft job market still in US and Europe.

Now, based on the above segmental, look at below for the previous corresponding quarter comparison:

Almost every ringgit earned is a ringgit gained. As long as it grows its revenue, it will perform amazingly.

I do not know how much the company spends on marketing costs, but the main strength now is the database which in the balance sheet you do not see. What do you see in the balance sheet? Besides to tell us that it has a strong balance sheet, nothing much...

Currently, as the company continues to be on the uptrend, its Price to Book Value will get widened. The cash that it holds will cover its expenses for slightly more than a year, I think. And that's it, nothing much to analyse.

Until now, Jobstreet has its policy of distributing 50% of its profits as dividends. It has just upped that to 75%. It has made some mistakes of using the additional cash that it had by investing into some companies. While some of the made sense, i.e. investing into the dotcom job search companies like in Taiwan, there are others which are not bringing much returns. The monies that Jobstreet invested into are the ones boxed in red above. I am just glad that they are preparing to share more of its profits in the form of dividends.

The beauty is in the cashflow, hence dividends (be prepared for more) as well as the P&L. I should have bought more...

YSP: You Shall Pass?

2013-05-22T08:44:00.000+01:00

With the recent market hike, it is really getting more and more difficult to find good deals or something which we can digest. While globally, market is on the uptrend, Malaysia included, I have just noticed Malaysia in fact is lagging behind markets like Singapore, Hong Kong, Thailand - in fact almost everywhere else now.

I would not call the market as expensive but I am surprise of its strength. What provides that impetus for the bullishness. I do not know actually. Lesser people with pessimism the last few months?

Anyway, as I was looking at some companies, one did really get me to hmmm... wanted to know more. Most companies that announced to Bursa are either doing well, I have sort of covered, but there is one which started with "Y".

Once Warren Buffett used to joke to his audience, "do read through the Annual Reports of all the listed stocks in the exchange." The other person asked, "But, Mr Buffett, there are more than 10,000 companies listed". Buffett, replied, "Start from A". I sort of did that. And now reaching "Y" although Malaysia is far from having 10,000 companies. And anyway, along the way I did jump quite a few alphabets.

YSP SAH is a pharma company, something I can digest, have a decently good growth prospect. Small (around RM150 - RM160 million market capitalisation), I can digest as well as long as it is doing consistently decent or good. It is controlled by Taiwanese. Well, if I have invested into Wellcall and Latitude Tree, previously put some money into Uchitec, did decently well, I may want to try on this. More importantly, is it consistent and is it providing good enough return previously and perhaps for the future. If you look below, there is a sense of consistencies although not too bullish.

Yes, its Return of Equity is deteriorating but this is one company which is a growing. It does reinvest. I have done some checking as well among the hospitals, well this one is pretty small, no doubt but it has been supplying to hospitals for quite a while. Started its business since the 90s, its growth is far from amazing but consistent. Importantly, the dividend is above 5% yield, which in Bursa, not many now you can find. If you are getting some 3% from FD, I would say check out this one. The PE is slightly more than 10x.

Pharma in future is probably going to be a much more recession proof and more and more generic drugs companies are doing better due to many patents are expiring or already expired. It is a competitive business but yet there are monies to be made for many companies. YSP is not a fantastic company, there aren't any with regards to pharma in Malaysia. Why? Pretty much dominated by the big brands globally. With the current price though, it is still a buyable company, pretty much like Wellcall. You would have noticed that a small portion of my portfolio is meant for dividends stocks. Wellcall is one, so is Jobstreet but with the rise, it's Dividend Yield is moving further from the 4% to 5% threshold. For a small portfolio like this I couldn't be bothered with holding cash like what most fund managers are doing i.e. holding some 20% to 30% cash. This is unless the market is grossly overvalued and I am not good at timing the market, so why bother?

Anyway, I am not going to be taking too much of a risk but I am spreading my risk a bit as Wellcall seems to be tapering off in terms of performance, although still providing good dividends. Hence, I am selling half of my Wellcall and move to another which similarly provides good dividend - proposed to be 6.5% this year.

Any wonder why Taiwanese companies some of them provide good dividends? This is your food for thought.

Now that you think you have the formula for Bursa, what about NYSE and Nasdaq?

2013-05-19T11:04:00.002+01:00

There was a time where some of the readers were asking about whether to diversify their investments overseas. I said yes. But, let me say this as well. Be prepared to lose some money as overseas market may not be the same as Malaysia.

There was once I attended a talk by OSK on investment in Hong Kong in one hotel in KL. I remember seeing thousands of potential investors. At that time, the HKSE was on the run (uptrend). Hot Chinese stocks like Bank of China, China Life, China Construction Bank were the order of the day. I did not know how many signed up to invest in Hong Kong through OSK Hong Kong. The people whom had attended were probably trying to park their money overseas legally. I was thinking of the same as well. If I can remember, at the point of time the Hang Seng index was almost touching 30,000. It has since came crashing down to about 22,000 despite China did not see any hard landing between then and now. I can see some guys were losing their pants.

Now, why do I say this. I can guess that on that talk, OSK probably did some good business signing up lots of people to trade in their brokerage house in Hong Kong. At around the same time, Public Mutual and CIMB introduced the East Asian fund if I can remember. Today, it is below the issue price.

This happened to me as well. I thought that I could do well by parking my money in US this time. The NYSE and Nasdaq were very attractive for me having dropped due to the crash post-Lehman. I remember Ford went to around USD2. So was Bank of America. I thought it was opportunity time. It was opportunity time for real. But if this is the first time you are into a new market, be prepared to lose some money or not doing well. New market means new trading patterns. As well as new companies to look at. That's not easy.

Remember me always talking about company, company rather than market, market. In US, I was looking at market market - which is proven wrong. Why was I looking at market (i.e. macro level). I do not have that good a feel on the micro level. I thought that I could have known what Wal Mart is doing, or Bank of America, or Citi or GE or Visa. I am partly right. I am not in US trading US stocks. I am doing it from Malaysia. I thought I can know how Gap is doing by looking at Gap Malaysia. So is Starbucks by looking at Starbucks in Malaysia. Not quite right.

The feel can be totally wrong. I invested into a company called Monster. It is the equivalent of Jobstreet or Seek - or so I thought. I thought it could have done well (later), despite the bad job market in US. It is not doing well. I invested into Corning whom is the largest glass (screen) supplier for the LCD or the smart phones market like Iphones, Galaxy. It is doing decently well but the stock is not doing that well.

Over the last few months, the US market was on the run and now on its all time high. So is my portfolio of stocks in US, but it is not performing very well. It is doing probably just as well as the Dow Jones Industrial Index (Bursa CI equivalent) or the S&P 500 (Emas index equivalent), which is not I wanted. If I would have taken the same amount of cash and put them in Malaysia, there is a high chance would have done much better despite DJIA's trend being better than Bursa over the last 3 years.

Why?

My strategy in US is different. I would invest into companies that are large being the Fortune 500 because these are the companies that would have presence in Asia or at least I can read much about. In Malaysia, I take a different approach by looking a mid-sized companies most of the time.

In investment there is no doubt to me (at least) that looking at the companies would be the answer. Timing the market is a strategy but still you have to know the companies. As an arm chair investor sometimes it may not be enough. Even if we visit the place, I have come across when you do a site visit, obviously the management would do their best to paint a good scenario of the company - who wouldn't? You see even analysts no matter how smart they are can get cheated. Hence, sometimes by relying on what you read may not be enough. That's how hard investment can be - but can be interesting though. Think about it.

Now you know why so many funds that have done decently well here (like Pubic Mutual, I think) but failed overseas. I cannot be using me as a benchmark, but market is not just knowing the index, or we thought we know the market situation. Market is knowing your backyard, and the more you know the better it is despite the internet bridging the knowledge divide.

Is DKSH still worth it?

2013-05-17T18:17:00.001+01:00

Blankly, I do not know actually. People who read my blog would know that I actually look at the business and company first before looking at the stock. When I first discovered DKSH, I knew the company as its office was just quite near where I hang out usually, at that time. Now no more. There are a lot of brands which uses DKSH to distribute its products. Hence, if a person is observant, they would not miss the company. Usually the brand is the brand, say Enfagrow, the distributor can be DKSH. It does the distribution or market expansion thing for companies like Mead Johnson. People whom have kids will know the brand.

In fact, DKSH does extensive distribution for a lot of pharma brands, and of course people who are in the medical field would know DKSH as well. DKSH is into distribution of many products for many overseas brands in Malaysia as well as the region. In fact, if I call them a distributor, one day I may get a call and ask me not to term the company as a distributor but a "Market Expansion Company", which is precisely what they do.

Over the last few years, especially since the crisis, many Europe and US companies are looking for expansion. You can see it from Heineken's bid for the beer distribution and bottling business in F&N. Many of these companies are willing to pay a good price for prized Asian assets as long as they are good, strong and decently well managed. Why? Because when you want to expand, the best thing to have is a good well managed company so that you can hit the road running from Day 1.

Turning around sounds good, because usually it is cheap, but turning around are for turnaround experts. Look at Dell, Micheal Dell is now doing a turnaround but he is still doubting himself by not paying more for privatising Dell at its current stage. Hence turnaround is not easy.

As a CEO, if I want to say build my market presence in South East Asia, I would want to buy a good company not a bad one. And as said before, many of these companies are looking for good companies in Asia.

The next best thing to look for if you do not want to look for acquisition is to look for a market expansion company. Say, you have a decent brand in Europe (Germany). You do not have a presence in Asia, strong that is. To build that network, you cannot do it your own. It will take years. As I see it, DKSH is a good candidate. It has the billing, collection and distribution system and it is the best in Malaysia.

The beautiful thing is that many companies now could possibly be looking at expanding in Malaysia with this country being part of Asia. DKSH seems like a good fit in assisting.

When I looked at DKSH, it was trading at around RM0.70 - ridiculously cheap by today's standard. But DKSH was not a hit with investors then. It was most of the time untraded, just had a turnaround (remember the turnaround thing I said). But in this case, the company had all the things in place. It was a good company which probably needed better management of its system and finances. It was good but not excellent. I guess today it is moving towards excellence with the financial performance.

At RM0.70, though it was trading at some RM120 million market cap. Ridiculous. Remember I was putting a wild guess in my very early article of the company could be worth at least RM500 million. Now, at RM5.00++, it is trading at around RM800 million valuation. Can you think whether it is worth that amount?

Now, let's not think of PE, or profits or anything else in terms of the usual valuation. Would a business that wants to build a network like DKSH, be buying DKSH Malaysia at RM800 million? Coca-cola is spending billions to build a factory and getting the distribution network ready after the split from F&N. Even then it is not yet ready today, as I can see it. There are still issues with the system.

A company needs refining especially when you are into a new country, and if you can get some help, you will need all the help you can get. We have talked about Parkson facing challenges in the countries it is exploring into - like Vietnam, Indonesia. But there are things you need to do and you need to do. To build a business takes time and this is where I see the value is in for DKSH i.e. to help to speed up the building process.

Freight-WA may be interesting if its risk you are seeking

2013-05-17T03:16:00.001+01:00

I have looked at Freight Management's results for the 1Q 2013. It seems that the company is on track despite the reducing gross profit margin. You can see that the company is still trying to grow with controlled investment into some of the areas. I have liked the company for its asset light business as compared to some of the other logistics companies.

However, another play which can be possible is the Freight-WA. Its exercise price is RM0.97 and expiry is sometime around 2017. Current parent price is around RM1.35. With the warrant around RM0.39, it is close to in the money with about 4 years of holding.

Warrant would be good if you have a good feel of the company moving forward. If the company trends the other way however, you can potentially lose all your money. Its higher risk, for those who like that.

What's wrong with DCF?

2013-05-15T14:27:00.002+01:00

DCF or Discounted Cash Flow if you do your research, has been said to be one of the most preferred valuation model. It is preferred due to its assumed accuracy in terms of projecting what the valuation of a business based on what is projected down the road.

I like cashflow, it is one of the most important measurement on how well a company or business is doing. But DCF is all bullshit. Why?

I have done tonnes of them (DCF) and everytime I feel that I am bullshitting. Most of the time, the DCF that I do is for the company I work for or to make someone happy that the company is worth so much. From a DCF, one can just make a major change to a valuation based on a slight change in the assumption.

Before we go further, what is a DCF? DCF is a method of projecting a company's worth using mainly the future cashflow of a business and a discount value. Both are equally important. But both are equally difficult to project.

A future cashflow - imagine for a business, can some company project its cashflow say 5 years down the road? Or perhaps 10 years down the road? If that person being the CFO, CEO can project that close to accuracy, then he / she is almost superhuman. Future numbers are amazingly hard to predict. It is like someone (a super analyst) projecting what is the Bursa KL Composite say in 31 December 2018. People change, situation changes, management move around. And are you telling me management is not important in a business? Well DCF is saying that, isn't it. DCF can be assuming a scenario 20 years down the road and we are supposed to be taking the number say 2034 as correct for the valuation to be accurate.

In a DCF, the projection is not only for one year, but for a period. If it is for 10 years, then it is for 2014 to 2023 or even in perpetuity. And it has to be almost accurately provided. Can a business be consistent? Some yes, mostly no. In fact, very few yes. Then how are we to provide a DCF accurately?

Then comes the discount value! A 1% difference, in a lot of times cause significant changes to the valuation. So which number to use 10%? 11%? 12%?

Why the hell then someone still wants to use DCF. Most probably, the current valuation is not good enough. And most of the time that current value is not good enough, some guy has the indigenious thought of why don't they come out with a projection over a long stretch of years and project the value backward, considering time value of money.

Well, if someone wants to bullshit another, you can contact me to do the future cashflow for you and discount them to today's value, cause I am pretty good at that!

For investment though, go for the tried and tested, based on historical track record and what you feel the business is heading in the future.

There are only some businesses which a DCF can probably be used - mostly concessions. Even then other factors are so important.

Where's the RM60 million?

2013-05-14T14:17:00.000+01:00

I have been reading through the announcement. I can't find anywhere that is worth RM60 million in the merger. Can you?