Buy Insas and Sell Parkson

It is a huge mistake by me as I am behind the curve in terms of retailing. The next wave of retailing seems to be is for companies like Alibaba and Amazon. I am currently reading the book on Amazon (The Everything Store) and I came out quite impressed on the level of technology investments as well as how much changes have been made by Jeff Bezos. Similarly, I have seen interviews made to Jack Ma and I must say that these two guys will be changing the face (or already are) of retailing or how people will be buying things in the future.

This of course does not mean companies like Parkson or Aeon or even Tesco will be dead but they definitely are affected. I must say I am behind like 5 years in this as sitting in Malaysia, we are definitely not seeing the full force of the changing face of retailing. This year alone, Walmart, Tesco are affected and they are not seeing growth. Their competition are not just Sainzbury, Target but the new wave of online commerce. Obviously, Parkson which have significant businesses in China is affected and they seem to change the way they do business as rental rates seems to be tougher for these companies.

Parkson has gone towards the AEON Malaysia model, where they have started to look at owning real estates, however it seems to me they are 10 years late. I hope for Parkson, it is a case of better late than never.

Anyway, I think this is time for me to reposition my holdings and I have decided to sell Parkson taking a huge loss (percentage wise) - do not want to calculate as it is a case of me taking too much time to realise my mistake. I am just glad I did not put too much money into this.

Buy Insas

I have written a piece on this company before - in fact two as the second one is more about its holdings on Inari. The thing I wrote is still very relevant but just that fundamentally Insas has improved over the 1+ years. Inari seems to me is getting more solid by the years and I have done a careful look at Insas past and it seems to me their concentration is more on the technology sector (largely Inari's contribution) nowadays. I had the opportunity to meet one of the directors before and I must say that these are very careful and thinking people - so much so that they are really strategizing every steps they make. While they do seem to plan a lot, you hardly can go wrong with this kind of management.

In the past Insas seems to me were more dependent on its other businesses such as M&A Securities which to me is not too interesting although they do manage the business well I must say. It also had made good money in several investments such as a London property, Gleneagles KL etc. These goes to show that they are very solid investors who know what they are doing. The most recent success as mentioned was definitely Inari.

Insas is trading well below its registered book value (RM1.80/share) and for me this kind of companies they should be trading close to their book value. An investment company especially with large holdings in a securities firm will see huge swings in their profits but to me it is allright as long as they are good assets. Its current price of around RM0.80 is significantly below its book or revised book value which I can easily see at beyond RM2.00 per share. This is because it does not recognize the full market value of Inari which in terms of the holding value for Insas should be more than RM500 million. Note that Insas is now trading at around RM560 million market value - i.e. almost similar to its holding in Inari alone. Only thing is why they do not do share repurchases really beats me...

I am buying this also due to I can see there is a level of confident on Inari's future with the company calling for Redeemable Preference Shares to subscribe for the rights call by Inari. I personally feel that it must be due to there is a good mid term prospect for Inari for it to continue to expand.

As such I am buying a good 10,000 units of Insas.

Note that Insas is issuing a Redeemable Preference Shares at 1 for 5 shares held and they are also providing free warrants at 2 for 5 shares.

Parkson's sale of KL Festival Mall

The sale of KL Festival Mall does seem weird as it is to my understanding that one of strategy of Parkson sealing its future moves of reducing the risk of increasing costs of rental rates is to own those malls directly. However, it seems that its sale of the Mall is like taking the other direction. However, based on the rationale for the sale, it seems that it does make sense.

With a smaller mall, it is probably harder to be part of the town planning. If one look at how Aeon Malaysia does it, they do it very well. Usually, the township planning comes with a medium to larger sized mall and brands like Parkson, Aeon or even Giant or Tesco will provide added value to the township. The KL Festival Mall is on already a matured township and it is harder for Parkson to grow from there. Developers would want to work with shopping mall operators to build the township and I think Parkson's move may still be a step towards the right direction.

In searching for Parkson's strategy moving forward, I have added the article here.

Should one relook at Parkson now?

It comes at a time when stocks are getting more and more expensive, but Parkson is moving the opposite direction. I once used to hold AEON Malaysia and at that point of time it was way cheaper than Parkson - perhaps half the size in terms of market cap i.e. AEON to Parkson. Surprisingly, slightly more than 1 year later, AEON's market cap is now larger than Parkson.

Share price of Parkson over the last 1 year

Of course, one may say that AEON is performing well - no doubt. While Parkson is sort of having a drop in terms of its performance. I however would be asked that if given the choice, which company would I own. AEON is only with its Malaysia's operations. Parkson is the holding company that holds the group's China's and South East Asia's operations. No doubt in terms of profitability AEON is slightly ahead of Parkson today. But Parkson vs AEON Malaysia is a different ballgame.

I like AEON's business in Malaysia. I like Parkson as well. But if you invest into Parkson, it is the one that holds the brand. AEON Malaysia is the licensee to the AEON's brand in Japan. If any wants to buy AEON Malaysia, they would only be buying the Malaysian outlets, not the brand - pretty much like when AEON Japan bought Carrefour's outlets in Malaysia. It currently has the rights to the brand in Malaysia. That's all.

If one is to own Parkson - they are not just buying the outlets and its location. They are buying the business. Given the choice, a business would definitely gain more value if the earnings are at par.

Now, what makes Parkson's share price trading sluggishly? Its performance over the last 12 months. The poorer performance are due to 2 main factors - competition and expansion.

The retail segment is a very competitive business. Besides competing against each other - AEON, Parkson, Tesco, Giant - company like Parkson is competing against individual brand retailers which have their own stores such as Gap, TopShop, Uniqlo, H&M to name a few. But a brand and retailer like Parkson has its own strength. Imagine a mall without the like of Parkson or Isetan. The malls would call them anchor tenants. Malls need to work with anchor tenants to bring the crowd. Hence, malls need companies like Parkson and Isetan and as such these players normally will provide a better terms as against for example you want to open your own Bally shoes store. The rental per sq ft would be different.

AEON, nowadays prefer to open their own stores, buy their own land and build it, be the mall itself. So are Tesco and Giant. Parkson it seems has started to own its first mall in Setapak, Kuala Lumpur. I believe that it may be looking at this model much more in future. But at the moment, malls still need them.

On expansion, Parkson is now aggressively expanding in South East Asia besides having the largest part of its business in China. This Chinese operations is of value - believe me. The expansion in South East Asia would have caused some cashflow to be used for capital expansion sake, but if one if to buy such a business, I think it may be worth it as if it manages to do well in Indonesia and Vietnam, Parkson may be up for a re-rating despite it being a Malaysian owned and branded supermarket chain.

Due to this, I am taking a plunge by buying 2200 units for the portfolio.

Purchased at RM4.22 per share

Letting go of iCap

I have decided to let go iCap. As mentioned before, while I think that iCap has a good manager, the investment ideas may not suit me. Anyway, I am selling to be able to buy some other stocks in future. The reason I bought iCap was due to it was really cheap. Now it is still cheap but not as cheap when I bought it at RM2.17. I have sold it at RM2.36 despite iCap hovering around RM2.4+ last week. Have to admit I am not a good seller.

Actual amount made over 4 months

Whatever it is, I think that the fight for board positions may not be over with today's large volume traded. Although, City of London Investment Fund has sold some stocks over the last few days, Laxey Partners may buy more. However, it remains my speculation for now.

ICap is now trading at a discount of 19.5% from its last week's NAV. Its major holdings remain to be PetDag, Padini, Parkson, F&N and Boustead.

Among the holdings, these are how I see it.

Petronas Dagangan

I like PetDag despite we seeing more and more oil and gas companies moving into the upstream side of the market. We saw BP letting go of the retail business many years ago and if I am not mistaken I am seeing many of Exxon-Mobil's branded stations changed to a brand called Petron. The letting go of the retail side of business could be good for PetDag in the longer run.

Padini

I have mentioned of my liking for Padini before, hence not repeating.

Parkson

As I like AEON and Tesco, I do like Parkson as well but the Malaysian operations only. Parkson is however heavily dependent on its China's income. For its China's operations, I am not able to reckon the position it is in. My guess is that the competition is getting really stiffer with Wal-Mart, Carrefour, Tesco fighting really hard in the hypermart business. Parkson's positioning is different but it is bound to affect Parkson no matter what. The 3 players are the largest retailers in the world ranking 1, 2 and 3. Where is Parkson? That could have affected the Malaysian owned retailer.

As for Parkson's venture in Indonesia and Vietnam, it is too early to tell the impact it is going to have onto the retailer.

F&N

Good company but its competitors are better brands and much bigger. I see its price as expensive although it does try hard diversifying into properties the next few years to cushion the negative impact.

Boustead

Great assets but I always have doubts on armed forces running companies. If you happened to be in Damansara, just compare One Utama (private owner, See Hoy Chan) against The Curve (Boustead). They are not far from each other. Which one you think has more potential or already is on the home run? This reflects management capabilities, in the eyes of an investor.

I always have the feeling that since most plantation, banks, properties stocks were doing well, Boustead will of course do well. Warren Buffett used to say, "Only when the tides are down, we will know who has been swimming naked."

Out of the largest 5 holdings, I like 2-1/2, hence may not suit my taste for now.

AEON: Using other people's money

Someone was saying, perhaps I should not be overly critical on some issues. Perhaps he / she is right. Investments, we should be looking for winners. However, we should also be able to identify "question mark" ones. If we are not sure, we can opt not to invest.

As I was highlighting in my earlier article, there are companies with bad assets as well as there are companies which has good liabilities. There are quite a few of these companies. Strong deposit banks for one. Insurance companies who has strong premium based. Retailers. Not all of them though.

Let's see what AEON has.

Basically, what do we see?

1. Strong customer base with consistent growth in revenue and profit. AEON - quite decent and strong brand.
2. Strong management of cash and receivables - AEON - very. Their business basically is cash business, so why not. Now as we look at the above balance sheet, what do we see? Cash assets which will last 2 months of purchase. Inventories which will last for 2 months. Not overly stocked.
3. Liabilities - When we go to financial or accounting school, usually when this number is high, it is a trigger point. AEON's payables and accruals is RM1.1 billion - basically 40% of its revenue. Liquidity ratio - 0.68 : 1. Some system may trigger the company as possibly insolvent. For AEON, it is far from it. Their business is using supplier to finance them. From the ability to use supplier's financing, they are acquiring land assets and build buildings so that more and more suppliers can finance them, in future. Are they bad paymasters? Well, you can ask around.
4. Why is supplier financing good if you manage it well? Zero financing costs. Way better terms than banks. In getting financing from banks, even a company the size of AEON will have to sign pages of contracts. Supplier financing - several less pages and usually these terms are much looser.
5. At this point of writing, AEON has 11 properties throughout Malaysia. For AEON, having strong properties in good locations is an asset. Developers with large landbanks would want to attract AEON to participate or build properties in their area (very much like Wal-Mart being attracted by smaller townships in US to open their superstores). It will increase the value of their development and townships. With the improvement in the property value, what is the impact to the balance sheet? Just to show you the property in Setapak, Kuala Lumpur below. Do you think the build up area of 667,000 sq ft is worth RM79 million for this semi-prime location? RM118 per sq ft. Parkson (another not bad retailer) just bought another similar sized property around the area at over RM200 million 3 years ago and it is a yet to complete piece.
6. I can also tell you with the properties, AEON can have opportunities for REITs depending on whether they want to or not.

Now, do you see the difference between AEON and the company which I was to "trigger" warning signs on its balance sheet?


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Note: Thanks to a reader for highlighting the land size for AEON in Setapak may not be the same as Parkson's land as I was using the built-up area metrics. The land area is actually almost the same size as the one owned by AEON. Parkson's land: 34,103 sq mtr= 367,082 sq ft. AEON's land size is 368,516 sq ft.