The new RM1 billion company?

In many cases, I would use market capitalisation to value a company's worth. After all, it is best to evaluate how much the market values a company assuming that the market is efficient - hence the efficient market hypothesis.

However, we know that market is not always efficient. In fact, it is not efficient a lot of times, and we take advantage of that.

I have just read that iProperty, the invested company by Catcha has just gone past RM1billion in market cap. Is it worth that much? Now, my question is that is has been a business that has been operating for quite some years, and in fact has been listed since 2007 in ASX. I don't remember it makes money in any particular year and in fact look at its accumulated losses.

The latest 6 months P&L reads as such...

To me, this is not a company that can be worth RM1 billion - in fact very very far unlike Jobstreet and MYEG. Those 2 are really in their own league, but iProperty is not. IProperty has a decent number of competitors whom may be competing very hard such as www.propertyguru.com.my, www.mudah.my. In properties, sellers, agents are posting up units for sale for free - unlike a job website. I really can't see much that to be as valuable as it is mentioned what is provided by the market.

Note: I do like DigitalNewsAsia.com though for its informative website...

Westport: no movement after IPO - what's next?

One of the things which I like to do in investment is to do some comparison among the players and have a feel in the stock. Well, the word "feel" sounds scary as it is more of an art rather than a science. There is no PE or any other valuation methods involved. My "feel" is largely successful in picking DKSH and before this blog was up - Digi. When I said feel, DKSH was not going to be a RM200 million company with what they have done. So was Digi after Telenor took over and we started to see good management (especially the early very successful marketing strategy of the yellow man, if you remember), it was not meant to be a RM3 billion company when Maxis was much larger.

Now, that same comparison is I am going to do with Westport. What do I feel as in comparison against Northport (NCB) and PTP (under MMC Corp). What do I feel about it getting listed after so many years? Just note that the listing is a way for the current shareholders to sell part of their shares - parties such as Li Ka Shing's Hutchison, Gnanalingam's family etc.

On business perspective, I really like Westport as you can see from its financial results. I like it for its focus, maybe older (first generation) management. It has however a second generation whom dwells in the largely failed QPR initiative, selling some of their stocks (after first generation did not) but with a good follow through results. Its financial performance does say something as below:

At its market capitalization of around RM8.5 billion, it is trading at slightly below 24x PE and maybe a forward PE of around 21x.

The question is this - Westport with only port operations is worth RM8.5 billion. Against its competitors, NCB which manages Northport (at RM1.7 billion, while also owning Kontena Nasional) while PTP (among the group of companies under MMC Corp) which is now worth around RM7.8 billion). Just for your information MMC Corp besides owning 70% of PTP, these are what it owns.

With that comparison, should Westport be worth RM8.5 billion? Westport is handling around 7 million TEUs while PTP (around 7.7 million TEUs) and Northport (around 3 million TEUs). This shows that Westport is largely efficient as in managing a similar volume versus PTP and with its parent's other very significant holdings, Westport's value alone overwhelms MMC Corp.

One can argue, we should not look at MMC Corp as it never really bother to price its shares to market anyway. One should not look too far beyond the practice in Tradewinds Plantation where it was later delisted with very good delisted price for the buyer.

But what about Northport? It has been a company which has been largely unexciting in terms of share price although over the last few years, dividends were good. Between the management, I would however vote for Westport but should it be priced that highly against Northport?

The sale by owners

This particular IPO by Westport is quite unique as in they do not raise capital, but it was more of a partial sale by its shareholders. My question is that, why? Pump in more money into QPR? Or is it just that they are able to garner a very good price? If that is the case, then at RM8.5 billion, Westport is very fully valued.

Potential

There is still good growth to come out of port operations, but this business is still very competitive. On top of that, the business is also one which needs large capital expenditure which makes me wonder on the non-capital raising thingy through the IPO.

You know what is the other weird thing, the second gen (young - below 40s) sells more than the first gen...(much older - 70 year old). Or could it be not as simple as that?

Just a note, the last few large IPOs in which case the owners have been largely the ones selling rather than raising capital were underperforming against the ones mainly concentrated on capital raising. In investment, I believe in feeding the hungry rather than the fully fed.

Is taxes such a "taboo" word?

Ever since human being lived in a tribe, that was probably when taxes was initiated. The proposed GST had so many people debating whether it should be implemented in Malaysia whereas there are already 160 countries in the world already doing the same - some countries charging as high as 21%. Now what confuses me is that we hate to be the worst as in one of the most corrupt country in the world (which I love to despise as well), but when comes to implementing GST in which case we are one of the last country to implement it, we lament about it. It is regressive, we say. We like to be the odd one out in this case.

We call it taxing the poor, we do not mind more of the government's revenue to be from petroleum tax (does anyone know that 40% of the government's revenue is dependent on one way or another on petroleum?). This is surely a cause for concern, but yet we are all for a more regressive way for government to tax i.e. corporate tax, taxing the rich whereas we know the rich are the ones that have more avenue to move abroad ANYTIME, petroleum tax, a corporatised government etc. (yes, Malaysian government are in business in a large manner - CIMB, Maybank, Sime Darby, IHH - to name a few)

We want to compare with Singapore (especially) and Hong Kong but we can't accept GST and calling it a way for the government to tax the poor. Singapore has GST. Singapore has low corporation tax, low rich people tax. Why is it that Eduardo Saverin (one of the founders of Facebook) moved to Singapore just about before Facebook was about to be listed - to avoid the US tax structure. What is US loss is Singapore's gain. Similarly, there are potentially many more cases of what is Malaysia's loss is Singapore's gain - brain drain!

If you are working class middle income, living in Singapore and Hong Kong (due to many factors such as real estate, transport etc) is stressful, but yet these people are willing to move to Singapore because of its currency strength, low taxes, government efficiencies. But yet have you heard of the saying that, in every other area, besides being a tax haven for many corporations and rich individuals "the Singapore government will tax you back everywhere else, even if you drive to the city, you will get taxed. That's where they are smart and we are not."

Singapore government understands that by taxing 15% off your USD1 billion profit is USD150 million for them whereas 25% tax by the Malaysian government on zero profit is zero revenue for the government, but at the same time we are subsidizing on petrol, rice, sugar (now no more), amenities through attracting low value-added jobs. We like to hire foreigners whom work in the palm oil plantation, construction, some labour intensive manufacturing sector but less-likely to hire individuals who are earning high enough to pay large taxes.

Every low value added job and less-profitable company that we attract is actually a loss to the country, but we have not been thinking that far, aren't we? We do not want companies that are attracted to Malaysia due to its ability to hire foreigners whom are lowly skilled as by doing this, we are subsidizing these companies and people through the subsidies on transportation system, food, schools, hospitals and many other areas. Imagine we already have some 2 million of these people, who are contributing very little tax revenue and that comprised to about 7% to 8% of the total population we are subsidizing.

The more the country is in subsidy mode, the more I am thinking we are benefiting the low income foreigners than the general Malaysian ourselves. Low income foreigners do not buy car (highly taxed), they seldom go to restaurants, watch movies. But yet they eat rice, take buses, LRTs which are largely subsidized.

GST is a system which is addressing that leakages and it is a more sustainable revenue even when our wells dry up, corporations have their ups and downs, individuals comes and go. Regressive we call it? Then why are we lamenting? Think hard on that!

The untold stories on GST

At long last GST is really being introduced. I remember it was put under study during the Daim days as Finance Minister, put to thought few years ago and only now due to budget pressure, GST is finally here to come.

We know that government cannot operate without taxes, hence a tax structure needs to be efficient. GST is regarded as consumption tax, which means the more a person consumes, the higher the tax the person is paying indirectly.

Now comes the argument that it is taxing the poor and the lower middle income. It is but this is where we face problems as over 80% of the nation's population are not paying any direct taxes in the form of income tax. How is that? While I see lots of people in the middle income group who I know are paying taxes, I am also seeing people whom are rich which I am seeing may not be paying high taxes as well. They are not employees of a company. They may be working on their own and may be underdeclaring their income or the nature of the tax structure does not require them to pay much taxes.

Put that in the context of stocks investment. If a person has say RM5 million in shares and on average he gets return of 10% per year. He gets RM500,000 per year in return or about RM40,000 a month. Besides the stamp duty through transactions, that person is barely paying any taxes. Compare that to a person whom gets salaries of RM40k per month, I am sure the monthly income tax he pays is around RM8k - RM9k a month. In the eyes of the government, the person under employment is contributing to the government's revenue but not so much to the other person whom is not working but yet could be reaping income just as high as the other who is working. GST is a way which will tax the other non-working individual who is probably enjoying the ride. Hence, the current tax structure (before GST) is friendly to a person who has rich parents whom can provide an initial endowment of RM5 million for him to invest as opposed to the other who has been working hard by getting employed. In this sense, which tax structure is helping the rich and which is helping the hard working individual.

Tax structure has to change as over time the person who is working would be feeling that he has to do something about it. Worse still in a lot of cases, the working person could be regarded as a highly skilled employee and the opportunity to work elsewhere could be available, and that could possibly happen where he moves abroad to a country which is more friendly to his taxes - Singapore, Hong Kong?

GST is not a regressive structure but rather a progressive structure. How is it that another 300,000 between monthly income of RM3,000 to RM4,000 will not be paying income tax if it is regressive. They are being taxed elsewhere through consumption rather than through working. A regressive tax is when one is working but taxed highly whereas the one who is not working (but yet rich enough not to) and not taxed. That deters people from working hard.

A progressive tax is also where it will also cause the small and medium businesses whom may have been underdeclaring their revenue to keep up to speed in their declaration as only through correct declaration, they can claim back the GST paid. If you under declare, you will not be able to clear back your GST paid,

Efficiency - GST is much more efficient in terms of income for the government.

Let me provide a scenario. For now with GST, it now replaces sales and services tax. But over time, I would like to even see it grow and replaces (not entirely) excise and import duties. These 2 duties are highly confusing as even in the example of a PC, it is not taxable. But another example, media devices is taxed (around 25% - 30%). In today's world, PC and media devices are greyed to the extent that it may be difficult to put a distinction to what is a media device and PC and in a PC one can pretty much turn it into a media player. Manufacturers are taking advantage of this loophole.

Another example is import prices. Goods are taxed on the price of the item paid by the importer, but these invoices can be distorted by working together with the suppliers. Say a BMW car can actually be priced at USD20,000 but in the invoice it is declared at USD15,000, hence the importer is only paying at taxes for USD15,000. But in GST system, it will not happen as the importer which is actually paying USD20,000 plus the GST will charge more than the actual price he paid for importation of the car. The final taxes which is to the final consumer will be the determinant of how much the government gets - not the import duty.

There are many reasons where GST will also reduce corruption (especially through the customs) etc as in the above cases, we have heard of customs working together with the importers, distributors on the actual duties for the items imported. These monies which does not go to the government but rather individuals and companies who cheat is revenue lost to the government.

Now, which are you supporting? A tax structure to help the rich to continue getting richer and could be through cheating or a tax structure to help the government's improving its revenue? If you pick the second, there is no doubt GST has to hold.

1000 days and counting

Never in my mind would a 1000 days fund of RM50k (despite its size) be gaining 225%. Convert that into average return per year, it is gaining about 82.5% per year. Again as a reminder, it is a long term fund. I have never been thinking of it of being short term in my purchases and most (in fact all) of the holdings are testament of that. 2 are in apparel, 1 in retailing, 1 distribution, 1 job search company, 1 manufacture and sells toilet paper, 1 airport management company and the other is in tolled highway in which case the road is yet to be built and ready in probably 5 years time.

Those portfolio does not sound sexy at all. None are in the high growth sector such as biotech, oil and gas exploration or services, banks etc. I have never really tried IPOs. In fact, except for Oldtown, all the companies that I have bought into have already been in the market for a long time - at least more than 5 years. These are companies which we can track. IPOs are harder to track as we seldom get to know the management and businesses in detail as more often than not, we need to know how companies and its management behave.

The performance of 225% return would not be replicated, over the next 1000 days. In fact, the way I am thinking of it is a 4 year old kid going to college by the time she is 18, how much would she need. Would a RM50k investment be turned into a RM300k today's equivalent in tomorrows dollars? If that is the case, I am halfway there. Some people when their kids were born, they bought into insurance which would have costs substantial. Insurance is a kind of hedge (or rather protection) in case they are not around to provide for the education.

The fund is pretty much the same. The portfolio is consisting of companies which in the case I am not managing it, anyone who takes over do not really need to do much, but just let it be around. One of the performance which I like to highlight is the dividend's return. It has easily beaten the return (by more than 100%) in case I put in the funds into a fixed deposit which returned 3.2%. Who says dividend typed of funds would not provide a good capital appreciation.

The fund is also somehow a success for the short to medium term for me to proof that if we put our thinking cap into investments, i.e. looking at the logic and not being too greedy, there is money to be made from the market. What we need is to apply our knowledge, observe, learn from experience and be a little bit brave, which is investing and not just saving.

Anyway, tomorrow is the first time, the CEO of the country is presenting a budget post election (his own carriage) and I think what is needed is for Malaysia to be brave. And I am in full support of GST. Be brave!