I remember I was reading the below article quite a while ago.
Property Bubble: Fact of fantasy? by Dr Ernest Cheong
Interestingly, he uses an Average Malaysian's take home income as the gauge on affordability. His points I feel are really relevant. Simple, but yet effective. But of course what he did not say is that loans can stretch up to 60 years of age i.e. sometimes allowing 2 generations to pay off for one single property or even eyeing the EPF's savings for part of the repayment. This is how hard for the average man on the street moving forward, with what's left for the savings from EPF.
The points of rebuttal are to counter the article by Dr Jeffrey Cheah (Sunway). If you notice, the more recent houses or apartments built are mainly higher priced units. The argument by Jeffrey Cheah is not going to help to stabilize the housing market in terms of pricing but of course helping the developers.
Another way of looking at is the household loans-deposits ratio. As of recent, the household debts have sort of stabilized while it is still a cause of concern, although some are saying that they are in check. Again, these comparisons are against some of the regional countries. Many a times, comparison against other regional countries are flawed assumptions. Many countries - Hong Kong, Singapore, China inclusive are trying hard to cool down their properties with different types of medicines. Any one affected, it could bring contagion effect to regional countries. The "tomyam effect" did not just limit itself to Thailand in 1997, despite the country being first to get hit. Similarly, with Europe recently.
If you notice housing and consumer loans as a gauge of how well the banks have been doing as well as moving forward, this is the reason why I have stayed away from banks (despite liking bank stocks as a business). I would not call it as a signs of stress but the banks have been continuing to stress test the system far too much as of recent. Yes, Malaysian banks today are much more diversified than before (as in geographical as well as products) but the stress on obtaining deposits due to high loan - deposits ratio, continued low NPLs for while now, high consumption loan (which is bad if too much) worries me. Perceived strong asset quality can suddenly turn to bad at an instant if not kept in check.
At all cost, property and financial sectors have to remain strong and stable as if they are not, the impact to other sectors are just too great.
Thursday, December 20, 2012
Wednesday, December 19, 2012
The curious case of Malayan Flour
It is no easy feat to have a name "Malayan" Flour and still flourish and survive until today. To be able to be in business for 40 years, with its ups and downs, doing very well at times is a good story. Malayan Flour (MFlour) is today the second largest flour milling operations in Malaysia with about 25% market share or more. If you read further, it is looking at the Vietnam market (as well as Indonesia) for expansion. Besides flour milling, it has other businesses as in live stocks poultry and feed milling - however the main bread and butter remains to be flour milling- wheat that is.
Now, the Malaysian wheat flour business has one large challenge - which also allows MFlour to survive and kills off competition - price control. (At the moment it is priced at RM1.35 for general flour)
When the price of wheat is low, all millers will survive - with of course quality of the flour and distribution taken into consideration. When the price of wheat is high, the weak ones which have weaker balance sheet, quality, sourcing strength etc. will be eliminated. Hence, it is no surprise that the performance of MFlour as well as the rest are very dependent on the price of wheat.
If based on the chart above, the flour millers were facing their hardship in 2008 and again today in 2012. These results are pretty much the same for MFlour and Federal Flour (own by PPB). And to top off, with price control, the years 2008 and 2012 are period before election. No government will be brave to allow increase in price for a staple (almost) - as flour is used for bread, noodle, roti canai etc. What the government would normally do is to provide subsidies. That kind of subsidies will of course be dependent on the sentiment of the government itself and the trend nowadays are to reduce subsidies for all kinds of stuffs. This scenario is like between the rock and a hard place for these millers.
If you noticed the performance of MFlour, it's profits is pretty much cushioned due to subsidies while over the last 5 years it has not failed to improve its revenue to the extent that it is currently running on almost full capacities on all its mills in Malaysia. This year 2012 is very tough though as revenue for 9 months increased to RM1.5 billion while Net profit reduces to only RM15 million, hence I am actually seeing the worst results for MFlour for the last 6 years despite record revenue. Why such when 2008 was a worse year in terms of prices for wheat?
Besides probably reduced subsidies, now comes my speculation. What is surprising is that there are certain trends which we see is not going according to what the trend should be. If you notice on the revenue for MFlour, its revenue growth does not follow industry average which is around 4% - 7%. Its revenue exceeded that by far (almost doubled in 5 years) probably due to price increases and its other segments of its business (feeds and poultry as well as overseas) but I doubt it is entirely from there. It shows that MFlour is gaining market share in wheat flour. With price control, by right the more you sell, the higher the profit margin as economies of scale kicks in. For MFlour, it is not really that. It is hence dealing in price competition.
The bad news. MFluor's biggest competitor in this business is Federal Flour, a subsidiary of PPB - ultimately Robert Kuok. As already all know, Robert Kuok is the largest by far in these area of business - flour, edible oil, sugar etc. FFM has a market share of more than 40% in Malaysia. Being the largest by far in edible commodities comes together with the power of negotiation and sourcing - as well as ability to throw prices. Why do I say that?
Prices of wheat flour is controlled but not for those used for industrial purposes - which means the ones sold to bakeries and noodles maker are not controlled. Hence prices of bread by right should have increased when wheat prices increases. (White bread which uses wheat flour as well is sometimes subsidised though). This has always been the saving grace for the flour millers as through non-price control in their sales to other industrial buyers, pricing is more inelastic. The higher the price of wheat, products that directly rely on wheat will increase price naturally. Another thing, with so few players and the top two (FFM and MFluor) in Malaysia already in control of almost 70% of the supplies, it could have led to a cartel situation - but it is not recently. Additionally, MFlour based on its quarterly report is claiming squeezed margin including lower selling price as the reason for lower profits. Why?
Could be- Very recently, PPB has gone downstream i.e. into bread making - Massimo. Some say it is due to Gardenia not relying on its FFM flour anymore and has moved on to MFlour, hence PPB is doing this, or could be due to PPB started bread making and Gardenia moved on to another supplier, I am not sure. But never mess with one as big as Robert Kuok especially when comes to food commodities.
I am sure I do not know what actually happened, but prices of bread remains unexpectedly this time around. the Massimo bread I sometimes eat - its price definitely remains and I am sure Gardenia's price (which I eat as well) stays the same or probably it even lowered its pricing for some of its range to compete against Massimo, which is priced more attractively. If you notice as well this time around, Gardenia stopped lobbying for price increase as it is fighting a different war.
With the artificial lowering of retail bread prices, we probably see MFlour's pricing being the supplier being squeezed as well. Both FFM and MFlour suffer in terms of profits in the wheat flour business - that's for sure. But MFlour is a single entity when comes to the business of flour milling as its profits from poultry and feed are paltry. PPB, Wilmar are not. Its flour business in Malaysia is just one of the few places it supplies this product. Hence, FFM can afford to make less in Malaysia while not suffering as much elsewhere. MFlour has less of that luxury.
So, sometimes being second may not mean good enough especially when times are a bit more challenging.
I think this is going to be a temporary setback though as MFlour remains to be resilient and a well managed company. I am not able to speculate on the volatility prices of wheat though. Once prices of wheat returns to normalcy, MFlour will be attractive once more, and I think another reason why it diversifies to other regional countries is due to flour is not a price controlled item in these countries.
Another thing which I do not understand on MFlour is that, this year it raised RM200 million from rights issue while at the same time issued a massive taxable (25%) dividends totalling RM100 million. Both of them happened first half of this year. As a company, rights issue are normally used for business expansion or paying down debt. However, a huge sum of dividends paid about the same time I think is a little bit careless on the part of planning of the company. See below.
Now, the Malaysian wheat flour business has one large challenge - which also allows MFlour to survive and kills off competition - price control. (At the moment it is priced at RM1.35 for general flour)
When the price of wheat is low, all millers will survive - with of course quality of the flour and distribution taken into consideration. When the price of wheat is high, the weak ones which have weaker balance sheet, quality, sourcing strength etc. will be eliminated. Hence, it is no surprise that the performance of MFlour as well as the rest are very dependent on the price of wheat.
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| Prices of Wheat over 10 years |
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| 5 year track record for Malayan Flour - not too bad but its 2012 performance is going to be challenging |
If you noticed the performance of MFlour, it's profits is pretty much cushioned due to subsidies while over the last 5 years it has not failed to improve its revenue to the extent that it is currently running on almost full capacities on all its mills in Malaysia. This year 2012 is very tough though as revenue for 9 months increased to RM1.5 billion while Net profit reduces to only RM15 million, hence I am actually seeing the worst results for MFlour for the last 6 years despite record revenue. Why such when 2008 was a worse year in terms of prices for wheat?
Besides probably reduced subsidies, now comes my speculation. What is surprising is that there are certain trends which we see is not going according to what the trend should be. If you notice on the revenue for MFlour, its revenue growth does not follow industry average which is around 4% - 7%. Its revenue exceeded that by far (almost doubled in 5 years) probably due to price increases and its other segments of its business (feeds and poultry as well as overseas) but I doubt it is entirely from there. It shows that MFlour is gaining market share in wheat flour. With price control, by right the more you sell, the higher the profit margin as economies of scale kicks in. For MFlour, it is not really that. It is hence dealing in price competition.
The bad news. MFluor's biggest competitor in this business is Federal Flour, a subsidiary of PPB - ultimately Robert Kuok. As already all know, Robert Kuok is the largest by far in these area of business - flour, edible oil, sugar etc. FFM has a market share of more than 40% in Malaysia. Being the largest by far in edible commodities comes together with the power of negotiation and sourcing - as well as ability to throw prices. Why do I say that?
Prices of wheat flour is controlled but not for those used for industrial purposes - which means the ones sold to bakeries and noodles maker are not controlled. Hence prices of bread by right should have increased when wheat prices increases. (White bread which uses wheat flour as well is sometimes subsidised though). This has always been the saving grace for the flour millers as through non-price control in their sales to other industrial buyers, pricing is more inelastic. The higher the price of wheat, products that directly rely on wheat will increase price naturally. Another thing, with so few players and the top two (FFM and MFluor) in Malaysia already in control of almost 70% of the supplies, it could have led to a cartel situation - but it is not recently. Additionally, MFlour based on its quarterly report is claiming squeezed margin including lower selling price as the reason for lower profits. Why?
 |
| Poorer margins due to lower selling price is being used as the reason for lower profits in 3 quarters 2012 by MFlour. It cannot be lower selling price if it is price controlled item |
Could be- Very recently, PPB has gone downstream i.e. into bread making - Massimo. Some say it is due to Gardenia not relying on its FFM flour anymore and has moved on to MFlour, hence PPB is doing this, or could be due to PPB started bread making and Gardenia moved on to another supplier, I am not sure. But never mess with one as big as Robert Kuok especially when comes to food commodities.
I am sure I do not know what actually happened, but prices of bread remains unexpectedly this time around. the Massimo bread I sometimes eat - its price definitely remains and I am sure Gardenia's price (which I eat as well) stays the same or probably it even lowered its pricing for some of its range to compete against Massimo, which is priced more attractively. If you notice as well this time around, Gardenia stopped lobbying for price increase as it is fighting a different war.
With the artificial lowering of retail bread prices, we probably see MFlour's pricing being the supplier being squeezed as well. Both FFM and MFlour suffer in terms of profits in the wheat flour business - that's for sure. But MFlour is a single entity when comes to the business of flour milling as its profits from poultry and feed are paltry. PPB, Wilmar are not. Its flour business in Malaysia is just one of the few places it supplies this product. Hence, FFM can afford to make less in Malaysia while not suffering as much elsewhere. MFlour has less of that luxury.
So, sometimes being second may not mean good enough especially when times are a bit more challenging.
I think this is going to be a temporary setback though as MFlour remains to be resilient and a well managed company. I am not able to speculate on the volatility prices of wheat though. Once prices of wheat returns to normalcy, MFlour will be attractive once more, and I think another reason why it diversifies to other regional countries is due to flour is not a price controlled item in these countries.
Another thing which I do not understand on MFlour is that, this year it raised RM200 million from rights issue while at the same time issued a massive taxable (25%) dividends totalling RM100 million. Both of them happened first half of this year. As a company, rights issue are normally used for business expansion or paying down debt. However, a huge sum of dividends paid about the same time I think is a little bit careless on the part of planning of the company. See below.
Tuesday, December 18, 2012
Jobstreet: Share buyback is the name of the game
What do you do when you have funds that you do not know what to do with. Either dividend or buyback. I like buyback especially when the shares are cheap presumably.
Well, this is what Jobstreet did. 2 major buybacks in less than a month. 3 million shares was bought in late November. I much like this than when they bought Innity.
And another 2.6 million stocks today, making a total 1.75% of Jobstreet's shares being bought back in these 2 transactions.
All in all Jobstreet has spent RM12.8 million on this. The thing is that, I believe in the two transactions, the selling are just done by 2 shareholders who hold large blocks. Otherwise, it would not be done in such manner.
The difference between dividend and share buyback is that while dividends provides returns to the shareholders immediately, a share buyback done right would provide the impetus for creation of better value per share in the long term.
Coincidentally, on a larger scale, Berkshire Hathaway did the same by buying back USD1.2 billion worth of stocks in a single transaction just last week.
Well, this is what Jobstreet did. 2 major buybacks in less than a month. 3 million shares was bought in late November. I much like this than when they bought Innity.
And another 2.6 million stocks today, making a total 1.75% of Jobstreet's shares being bought back in these 2 transactions.
All in all Jobstreet has spent RM12.8 million on this. The thing is that, I believe in the two transactions, the selling are just done by 2 shareholders who hold large blocks. Otherwise, it would not be done in such manner.
The difference between dividend and share buyback is that while dividends provides returns to the shareholders immediately, a share buyback done right would provide the impetus for creation of better value per share in the long term.
Coincidentally, on a larger scale, Berkshire Hathaway did the same by buying back USD1.2 billion worth of stocks in a single transaction just last week.
EPF: The way it announces numbers has to change
No wonder MTUC asks for higher dividend because he is reading the headlines. See the report below. The guy is probably being mis-informed
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KUALA LUMPUR: The Malaysian Trades Union Congress (MTUC) has called on the Employees Provident Fund (EPF) to declare a higher dividend this year because of its increased investment income.
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KUALA LUMPUR: The Malaysian Trades Union Congress (MTUC) has called on the Employees Provident Fund (EPF) to declare a higher dividend this year because of its increased investment income.
The EPF recently announced that its investment income soared to RM7.02bil in the third quarter of this year ending Sept 30.
MTUC vice-president A. Balasubramaniam told Bernama on Tuesday that in view of this, it was only appropriate for the fund to declare a higher dividend.
EPF declared a six percent dividend for 2011.
Balasubramaniam said the majority of the 10 milllion private sector workers were looking forward to a better dividend from the fund as it was the only source of savings for them. - Bernama
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The thing is if we use absolute numbers to announce the performance of the fund, chances are it will increase. This is because the fund size increased as well. Over time, EPF's fund size would probably increase (by quite a lot) rather than decrease. This is because total number of contributors increase as well as its amount each contributor gives increase as well. What EPF actually needs to report is Return on Investments or Return on Assets - not the absolute number in terms of performance. EPF's fund size is having net increase of RM1 to RM1.5 billion a month! Its absolute return should increase as well...What's more important is the performance per ringgit of fund contributed.
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See the announcement below (can you track what's wrong):
EPF earns RM7.02bil in investment income in third quarter ending Sept 30
KUALA LUMPUR: The Employees Provident Fund (EPF) Thursday announced a 66% year-on-year income growth for its loans and bonds portfolio to RM3.06bil for the third quarter ended Sept 30, 2012 vis-a-vis RM1.85bil in the same period in 2011.
EPF said it earned RM7.02bil in investment income for the quarter under review, up 3.24% over RM6.8bil last year.
Chief Executive Officer Tan Sri Azlan Zainol said loans and bonds generated exceptional one-off returns due to a number of tactical capital market transactions, thus outperforming other portfolios in the same period. - Bernama
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Not asking much. EPF is representing almost everyone in the labor force (except for public servants and self-employed) - I think we deserve a bit more in terms of reporting.
Friday, December 14, 2012
My problem with property stocks
What is fundamental stocks investments? To identify a company which can continue to provide value either in the manner of capital appreciation or in the form of dividend or BOTH.
With that objectives, it is much easier for us to choose and pick the type of stocks we would like to own and hopefully for the foreseeable future, be it medium to long term so that we are able to get ABOVE AVERAGE return with manageable and controllable risk management.
Assuming we invest in a company that is not traded publicly. If we are depending on dividend alone and assuming that stock consistently provides 7.14% dividend yield, we will get back our invested money in 14 years if there are no capital appreciation in the stock and we do not sell the stock.
On the other hand, another stock that is publicly traded and assuming it appreciates 7% every year (and does not pay dividend), we will be getting 100% return from that investment in 10 years.
Take that methodology into our investment, we have to either find that investment which provides consistent return of 7.14% over 14 years or hope for another company which is able to provide capital appreciation of 7% every year so that our return will double in 10 years. It is above average return, but that is a long period of time to hope for that consistency but still we must lookout for that.
So, taking that into consideration, we have to look for companies that can provide that consistency (be it the market condition is bad or good). Trust me, there are times when market can be really undervalued as well as way overvalued for a long period of time. It is always very hard to time market. There are times when we feel that the market is already very cheap and it continues to drop even further for a period.
Now, back to the topic - what are property stocks? Where do they belong in our investment mindframe. A property stock is one which owns tracts of land or landbanks which it can use and will use to build commercial, residential or industrial properties for sale or rent. Usually its assets are long term assets, which it uses to build houses, offices, factories etc. Minus the landbanks, it will no longer be attractive as a property company. Names such as Sunrise, SP Setia, Mah Sing, Sime Properties obviously have other forms of intangible assets in its expertise, quality, landscaping, concepts, brand names etc. But still the core asset is land. A great property company such as SP Setia can turn a piece of land in Klang (tens of kilometres away from prime area) to be worth as much as those much nearer to KL. After that piece of land be it to be built over a short period or longer if it is a big piece is fully built, the developer will need to find a new piece.
Big names will continue to build premium housing with premium pricing. But for how long? Land is finite. Plantation companies, consumer food or rather FMCG, fashion, manufacturing, retailers, money managers as in banks, insurance companies, utilities, rubber gloves etc. can continue to generate and regenerate the same thing / product over and over again. Property companies will face it much harder to consistently do that - which is why SP Setia, Sunrise are already being bought over and there are rumours that Mah Sing is becoming an attractive target.
Why? Reproduction is a problem but they are good developers with strong brand names. They themselves are up (or feel like wanting to be up) for sale after certain very successful projects are over and these players may find it hard to regurgitate the same formula. Look at Sunrise! After Sri Hartamas and Mont Kiara, where? Look at See Hoy Chan. Yes, the See Hoy Chan owner which has kept the company private all these while is very rich but the one which probably continues to print and reprint money for them is One Utama. I do not see them having large projects anymore after Damansara. Remember, we shareholders (most) are minorities. We are not the owners generally speaking.
Seldom a property company can continue to consistently and sustainably be able to produce strong results after strong results. I have yet to come across a strong property company in the 70s or even 80s and they still have very strong sets of results today. The only one I can think of is Sime Property. Sime is still there because of its parent which has unlimited supply of agricultural land (and also help from government). That by itself, defeats the term "continue" in the first paragraph of this article. Most of these property companies like to morph to a IGB (Mid Valley) or See Hoy Chan (One Utama) where income can be more consistent.
I know that there are several readers who asked my opinions on companies such as Hua Yang, MKH (Metro Kajang), Asas Dunia, Hunza, Ivory etc. To be frank, they look attractive to me but I just could not foresee where their directions are in the middle term future - in case either the stock or property market turns to the worse. I however can pretty much foresee where Nestle, DKSH, Amway or Malaysia Airport are sort of heading. Bear in mind, property prices have had an extended run for a period.
With that objectives, it is much easier for us to choose and pick the type of stocks we would like to own and hopefully for the foreseeable future, be it medium to long term so that we are able to get ABOVE AVERAGE return with manageable and controllable risk management.
Assuming we invest in a company that is not traded publicly. If we are depending on dividend alone and assuming that stock consistently provides 7.14% dividend yield, we will get back our invested money in 14 years if there are no capital appreciation in the stock and we do not sell the stock.
On the other hand, another stock that is publicly traded and assuming it appreciates 7% every year (and does not pay dividend), we will be getting 100% return from that investment in 10 years.
Take that methodology into our investment, we have to either find that investment which provides consistent return of 7.14% over 14 years or hope for another company which is able to provide capital appreciation of 7% every year so that our return will double in 10 years. It is above average return, but that is a long period of time to hope for that consistency but still we must lookout for that.
So, taking that into consideration, we have to look for companies that can provide that consistency (be it the market condition is bad or good). Trust me, there are times when market can be really undervalued as well as way overvalued for a long period of time. It is always very hard to time market. There are times when we feel that the market is already very cheap and it continues to drop even further for a period.
Now, back to the topic - what are property stocks? Where do they belong in our investment mindframe. A property stock is one which owns tracts of land or landbanks which it can use and will use to build commercial, residential or industrial properties for sale or rent. Usually its assets are long term assets, which it uses to build houses, offices, factories etc. Minus the landbanks, it will no longer be attractive as a property company. Names such as Sunrise, SP Setia, Mah Sing, Sime Properties obviously have other forms of intangible assets in its expertise, quality, landscaping, concepts, brand names etc. But still the core asset is land. A great property company such as SP Setia can turn a piece of land in Klang (tens of kilometres away from prime area) to be worth as much as those much nearer to KL. After that piece of land be it to be built over a short period or longer if it is a big piece is fully built, the developer will need to find a new piece.
Big names will continue to build premium housing with premium pricing. But for how long? Land is finite. Plantation companies, consumer food or rather FMCG, fashion, manufacturing, retailers, money managers as in banks, insurance companies, utilities, rubber gloves etc. can continue to generate and regenerate the same thing / product over and over again. Property companies will face it much harder to consistently do that - which is why SP Setia, Sunrise are already being bought over and there are rumours that Mah Sing is becoming an attractive target.
Why? Reproduction is a problem but they are good developers with strong brand names. They themselves are up (or feel like wanting to be up) for sale after certain very successful projects are over and these players may find it hard to regurgitate the same formula. Look at Sunrise! After Sri Hartamas and Mont Kiara, where? Look at See Hoy Chan. Yes, the See Hoy Chan owner which has kept the company private all these while is very rich but the one which probably continues to print and reprint money for them is One Utama. I do not see them having large projects anymore after Damansara. Remember, we shareholders (most) are minorities. We are not the owners generally speaking.
Seldom a property company can continue to consistently and sustainably be able to produce strong results after strong results. I have yet to come across a strong property company in the 70s or even 80s and they still have very strong sets of results today. The only one I can think of is Sime Property. Sime is still there because of its parent which has unlimited supply of agricultural land (and also help from government). That by itself, defeats the term "continue" in the first paragraph of this article. Most of these property companies like to morph to a IGB (Mid Valley) or See Hoy Chan (One Utama) where income can be more consistent.
I know that there are several readers who asked my opinions on companies such as Hua Yang, MKH (Metro Kajang), Asas Dunia, Hunza, Ivory etc. To be frank, they look attractive to me but I just could not foresee where their directions are in the middle term future - in case either the stock or property market turns to the worse. I however can pretty much foresee where Nestle, DKSH, Amway or Malaysia Airport are sort of heading. Bear in mind, property prices have had an extended run for a period.
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