Last year, I gave my opinion on Petron over Hengyuan as well as the potential for the stock from a defensive investment perspective or even if we are to look at mid-growth stock. When I was about to collect the stock, there was a craze over an almost similar stock - Hengyuan. Hengyuan had a run until a huge (enough) stock investment community became well-verse about crack spread even though we have never visited any kind of refinery before.
As in all spikes up or down, it will always come to normalcy, this is what happens to a refining business - and it was pretty shortlived. This is also the usual trend of any economic concern especially for the more traditional business. Petrol is now a traditional business with a threat towards its existence - electric vehicle - but not in the next short decade.
In a normal situation, a B2C business is more often a better bet and provide better stability. Petron and Petronas Dagangan (PDB) are the only 2 traded stocks that has that exposure for investors in Malaysian stocks. PDB is trading at around 23x PE while Petron is trading at less than 7x PE.
What causes the difference in valuation? My theory for that is the wealth of our government controlled funds - Khazanah, EPF, KWAP, PNB and few more. They have less options to invest with the continuing strength in their deposit taking. PDB moreover is a Composite stock whereas Petron is not hence making it more reason for government related funds to buy more.
As a value investor, these are what I try to take opportunity of. To me Petron has built its business to be just as good as PDB albeit the size. In fact, I like it more as a private company as opposed to PDB being a government owned business.
The approval for Petron to be a provider to government fuel provider for its fleet of vehicles has also probably allow us to see the change in attitudes towards private businesses as we have been exposed to preference for GLICs and GLCs in the past decades.
As it is Petron has been growing at around 5% to 7% over the last few years, above its peers and from this new business opportunity, I see a spike in its business in the short term.
Last quarter (April to June 2018), we see Petron making around RM92 million net profits and I see this is a number where it is pretty much an average for the company with continuous growth of around 7% to 8%. This is a period where fuel price was fixed at RM2.20 (RON95) for most period of the quarter. This action taken by the new government will also allow petrol station operators to lose less than when they allowed it to float. This is positive for company such as Petron.
Crack margins was also weak for the period in review, hence the allowance for upside is also there.
At its normalcy, Petron should have been a strong defensive stock but in its price as I reiterated, has not shown anything of that. Hopefully yet!
Monday, September 3, 2018
Sunday, September 2, 2018
How should we see Ekovest?
The change in government is going to see changes in Ekovest from a company perspective which is from largely construction based (from government related contracts) to more of its dependence on its long term assets - toll and land. I know many would be concerned on the toll assets as the new government is looking at ways to eliminate toll but lets face it, this is going to be difficult as the country juggles with our finances and continuous development. Toll over the period like it or not it is still an asset which is generating very good cashflow.
For the next 3 years the consistent revenue that is to be generated is going to come are mainly from construction (SPE highway) and toll (DUKE 1 and 2).
Property business as one know is going to be sporadic until it manages to obtain consistent revenue from its property investment - which potentially will come from EkoCheras mall.
The below is a pick from its latest 4Q18 quarter results, and as we see there is new revenue from DUKE 2 (which increases the contribution from toll) since December 2017. However, in accounting for concession assets, this is also the start where it is starting to recognise the interest expense from the toll assets (see Figure 2).
Hence, profitability from toll concession will not be good, but that is a different story when concerning cashflow. Its cashflow will be good and when the third highway is completed - i.e. the SPE it is all full throttle for the company. Again, I am not worried when it comes to abolition of tolls, it is very hard for the government to do that. Otherwise, they would have contacted the concessionaires and discuss. So far, the only concession that they have contacted is their own - PLUS which is owned Khazanah and EPF. The way I see it is that the current government is trying to avoid the topic until when they are ready to discuss about this.
The concern over the losses for 4Q18. As mentioned in Figure 3 below, part of the losses is due to costs of the failed acquisition of IWCITY - turns out to be a blessing in disguise and its provisioning for LAD - Ekocheras and highwe interest expense as mentioned earlier.
How I see Ekovest
As in many of my investments, I see Ekovest as a good long term investment with solid assets. It is moving into a territory where it will be less dependent on new projects while focusing on what they have built in the last one decade.
Seems to me, after this few years, it hopefully can become a good dividend stock if the controlling shareholder is fair.
For the next 3 years the consistent revenue that is to be generated is going to come are mainly from construction (SPE highway) and toll (DUKE 1 and 2).
Property business as one know is going to be sporadic until it manages to obtain consistent revenue from its property investment - which potentially will come from EkoCheras mall.
The below is a pick from its latest 4Q18 quarter results, and as we see there is new revenue from DUKE 2 (which increases the contribution from toll) since December 2017. However, in accounting for concession assets, this is also the start where it is starting to recognise the interest expense from the toll assets (see Figure 2).
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| Figure 1 |
 |
| Figure 2 |
 |
| Figure 3 |
How I see Ekovest
As in many of my investments, I see Ekovest as a good long term investment with solid assets. It is moving into a territory where it will be less dependent on new projects while focusing on what they have built in the last one decade.
Seems to me, after this few years, it hopefully can become a good dividend stock if the controlling shareholder is fair.
Thursday, August 30, 2018
TA's verdict - How should we act?
Tony Tiah, the controlling shareholder of TA Enterprise has made an offer to buy all the remaining shares of TA at RM0.66. That exercise is to allow him to get across the 33% General Offer threshold.
In my opinion, it is to allow himself to buy more. Since the offer announcement, he has been accumulating some 3+% of TA's shares that he is now owning 36.369%.
Why? Because he just wants to own more. The way to do it is to control the share price at low and as he buys to trigger the 33% threshold, he is forced to purchase at highest price transacted which was 66sen.
Is it fair? Well this is the independent report from BDO, which is one of the better more willing to take a fairer and neutral job. Others such as an independent advisor whose name starts with an "M......", we can be more careful. In this exercise, it says TA's share price is between RM2.59 to RM2.60, a whopping 74.5% discount from the offer price. See below.
One can also read the full report by BDO, which is also one of the few chance to allow us to see the good assets that TA Enterprise owns - where a large portion of it is also owned through TA Global.
Since the price is so low, it is obvious that Tony is offering to purchase more of it. It appears that he is in fact prepared to buy more.
BUT - a big one, will the share price go up?
Hard to say, the exercise does allow Tony Tiah to wrangle himself out from the 33% General Offer trap. From now on, he can take his time to purchase more of his shares, and as sometimes the saying goes, "He has time." He may be taking his own sweet time to accumulate and not be trapped by the regulation until he reaches another threshold which is 50%. He is like the same when building properties i.e. the TA 3 and 4 next to KLCC, that has been postponed for uncountable times. He is just waiting for the right time to make his move.
On my opinion, whether the shares is undervalued? IT IS. BUT...not all undervalued shares will move as it should be...
In my opinion, it is to allow himself to buy more. Since the offer announcement, he has been accumulating some 3+% of TA's shares that he is now owning 36.369%.
Why? Because he just wants to own more. The way to do it is to control the share price at low and as he buys to trigger the 33% threshold, he is forced to purchase at highest price transacted which was 66sen.
Is it fair? Well this is the independent report from BDO, which is one of the better more willing to take a fairer and neutral job. Others such as an independent advisor whose name starts with an "M......", we can be more careful. In this exercise, it says TA's share price is between RM2.59 to RM2.60, a whopping 74.5% discount from the offer price. See below.
One can also read the full report by BDO, which is also one of the few chance to allow us to see the good assets that TA Enterprise owns - where a large portion of it is also owned through TA Global.
Since the price is so low, it is obvious that Tony is offering to purchase more of it. It appears that he is in fact prepared to buy more.
BUT - a big one, will the share price go up?
Hard to say, the exercise does allow Tony Tiah to wrangle himself out from the 33% General Offer trap. From now on, he can take his time to purchase more of his shares, and as sometimes the saying goes, "He has time." He may be taking his own sweet time to accumulate and not be trapped by the regulation until he reaches another threshold which is 50%. He is like the same when building properties i.e. the TA 3 and 4 next to KLCC, that has been postponed for uncountable times. He is just waiting for the right time to make his move.
On my opinion, whether the shares is undervalued? IT IS. BUT...not all undervalued shares will move as it should be...
Sunday, August 26, 2018
Reduce focus on controlling prices. Focus on developing the country's talent
When Dr Mahathir visited China, I presume he must be sad as his vision of turning Malaysia into a highly developed nation and exporting technologies to the world seems far from fruition. He was introduced to Alibaba, DJI - the drones company, Geely - companies that were not even around when we mooted MSC. What was envisioned through the Multimedia Super Corridor back in 1996, has remained a vision. Cyberjaya is now a place where outsource services is more prevalent than companies developing solutions that are used by people from all over the world.
We now invite Alibaba, a company which was created by Jack Ma and his partners after MSC was mooted - i.e. 1997. What rubs salt into the wound is that when Jack Ma visited Dr Mahathir, he told our PM his vision of Alibaba was partly inspired from Mahathir's vision of MSC.
I know of friends who work in Alibaba's Malaysia's office, Lazada which is 80+% controlled by Alibaba. Jack is not interested in developing or help Malaysia. He is interested in developing Malaysia as a trading hub - which is an import and export base. He is much more interested in bringing Chinese goods into Malaysia and the region. In short, Jack Ma is economically colonising us in Mahathir's words and we do not have any other options.
Alibaba and Lazada means reducing opportunities for local entrepreneurs, but we are happy because we are buying cheaper goods through Taobao - an Alibaba equivalent of Amazon. Yes, someone may say there is little choice as we are not opening up, other countries will - such as Thailand and Vietnam.
But do check Alibaba out. Are they hiring any Malaysian developers? Their developers are from China, India and even Vietnam. Malaysia is not a place for them where they think about hiring and training knowledge people - or if this is what we called. In short, we are not a place where they look at our people, but more of a geo location for trade.
Alibaba's vision for Malaysia is no better than Ikea's vision of making this place a distribution centre. Why? Because we are geographically strategic in Asia and South East Asia and our labor costs is right for them. They can't go to Singapore as it is too expensive, but still Lazada is based off Singapore. Why? We must ask ourselves although Singapore's costs is easily 300% to 400% more.
When companies like Lazada, Alibaba, Grab sets up its regional centers in Singapore, what does this mean? We, Malaysia lacks the opportunity to train people who are able to develop strategies, plan, manage. We are only a nation whom develops middle managers for these multinationals. They deploy, but when comes to making decisions, we are not given opportunities, hence not trained well.
I meet a lot of people from big multinationals - Intel, Motorola, HP, Agilent, Flex. Most of the people they hire in Malaysia are just to deliver - little questions ask. Hence, for many years we have the opportunity to develop a team who delivers the small projects, solving non-critical problems but creative and strategic thinking skills is lacking.
Ask any senior employees who have worked in the technology sectors through 1980s, 1990s to today, they are not as optimistic.
Here, I am also questioning the message on trying to reduce prices of goods. Are we serious? We are a country that do lots of imports and exports. For decades, we have been a trading nation. The fishes, meat, fruits, vegetables that we eat, the building materials used to build houses - many of them are imported. Even the labor used to serve us at certain restaurants, build our houses are from foreign countries. How are we to control prices. It is a task which will most probably fail. I have this opportunity to meet a non-politically aligned senior government servant. He was telling me the reason for the country to reduce subsidies is because subsidies more often than not goes to the poor and who are the poor in Malaysia? The B40 or Bottom 40? Not quite so.
Actually, they are the foreign workers. They are the ones that consume the most subsidized goods. Flour, rice, free or subsidized transport. Foreign workers comprise as much as 25% of Malaysian workforce. And we often missed them out in our policy making. Not so much to support them but whatever we subsidise, it goes more often to them than the average Malaysians.
Today the country is promoting Industry 4.0 - a buzzword which means using technologies that are available today and integrate them to bring advantage to manufacturers. In the process, reducing dependence on low skillled workers. It is about using cloud, big data, analytics, AI, robots.
Again, are we serious? If we are serious, as a country we have to seriously do things differently. Often it is about biting some bullets then only we see sunshine. If we are still dependent on low costs foreign labors, the Industry 4.0 will not happen, no matter how much is the incentives. It is about bringing foreign workers - but the ones with talent. It is about not afraid of sending away industries which is dependent on huge low costs labors. Perhaps the rubber gloves industry in Malaysia is not going to be as big as we have today as some are still complaining about the minimum wages which we implemented few years ago. I respect the rubber gloves industry as this is one industry which we have successfully dominate globally but not the low costs labor they continue to use and continually ask for government support for that.
When I invest in some of the stocks in Malaysia, there is a strategy. I invest in companies such as Airasia, Power Root, IJM. Some of these are simple business, but they are the ones that create their own expertise, brands, marketing channels. I like those that, so called "Create their own destinies." especially Airasia - and often I also complain as a country we try to suppress these companies who are building their expertise from within the country.
Seriously, as a country we have to think of supporting companies that directly and indirectly think of Malaysia as a home - which in the past 2 decades we have not. That's how we really develop the needed talent for the country.
We now invite Alibaba, a company which was created by Jack Ma and his partners after MSC was mooted - i.e. 1997. What rubs salt into the wound is that when Jack Ma visited Dr Mahathir, he told our PM his vision of Alibaba was partly inspired from Mahathir's vision of MSC.
I know of friends who work in Alibaba's Malaysia's office, Lazada which is 80+% controlled by Alibaba. Jack is not interested in developing or help Malaysia. He is interested in developing Malaysia as a trading hub - which is an import and export base. He is much more interested in bringing Chinese goods into Malaysia and the region. In short, Jack Ma is economically colonising us in Mahathir's words and we do not have any other options.
Alibaba and Lazada means reducing opportunities for local entrepreneurs, but we are happy because we are buying cheaper goods through Taobao - an Alibaba equivalent of Amazon. Yes, someone may say there is little choice as we are not opening up, other countries will - such as Thailand and Vietnam.
But do check Alibaba out. Are they hiring any Malaysian developers? Their developers are from China, India and even Vietnam. Malaysia is not a place for them where they think about hiring and training knowledge people - or if this is what we called. In short, we are not a place where they look at our people, but more of a geo location for trade.
Alibaba's vision for Malaysia is no better than Ikea's vision of making this place a distribution centre. Why? Because we are geographically strategic in Asia and South East Asia and our labor costs is right for them. They can't go to Singapore as it is too expensive, but still Lazada is based off Singapore. Why? We must ask ourselves although Singapore's costs is easily 300% to 400% more.
When companies like Lazada, Alibaba, Grab sets up its regional centers in Singapore, what does this mean? We, Malaysia lacks the opportunity to train people who are able to develop strategies, plan, manage. We are only a nation whom develops middle managers for these multinationals. They deploy, but when comes to making decisions, we are not given opportunities, hence not trained well.
I meet a lot of people from big multinationals - Intel, Motorola, HP, Agilent, Flex. Most of the people they hire in Malaysia are just to deliver - little questions ask. Hence, for many years we have the opportunity to develop a team who delivers the small projects, solving non-critical problems but creative and strategic thinking skills is lacking.
Ask any senior employees who have worked in the technology sectors through 1980s, 1990s to today, they are not as optimistic.
Here, I am also questioning the message on trying to reduce prices of goods. Are we serious? We are a country that do lots of imports and exports. For decades, we have been a trading nation. The fishes, meat, fruits, vegetables that we eat, the building materials used to build houses - many of them are imported. Even the labor used to serve us at certain restaurants, build our houses are from foreign countries. How are we to control prices. It is a task which will most probably fail. I have this opportunity to meet a non-politically aligned senior government servant. He was telling me the reason for the country to reduce subsidies is because subsidies more often than not goes to the poor and who are the poor in Malaysia? The B40 or Bottom 40? Not quite so.
Actually, they are the foreign workers. They are the ones that consume the most subsidized goods. Flour, rice, free or subsidized transport. Foreign workers comprise as much as 25% of Malaysian workforce. And we often missed them out in our policy making. Not so much to support them but whatever we subsidise, it goes more often to them than the average Malaysians.
Today the country is promoting Industry 4.0 - a buzzword which means using technologies that are available today and integrate them to bring advantage to manufacturers. In the process, reducing dependence on low skillled workers. It is about using cloud, big data, analytics, AI, robots.
Again, are we serious? If we are serious, as a country we have to seriously do things differently. Often it is about biting some bullets then only we see sunshine. If we are still dependent on low costs foreign labors, the Industry 4.0 will not happen, no matter how much is the incentives. It is about bringing foreign workers - but the ones with talent. It is about not afraid of sending away industries which is dependent on huge low costs labors. Perhaps the rubber gloves industry in Malaysia is not going to be as big as we have today as some are still complaining about the minimum wages which we implemented few years ago. I respect the rubber gloves industry as this is one industry which we have successfully dominate globally but not the low costs labor they continue to use and continually ask for government support for that.
When I invest in some of the stocks in Malaysia, there is a strategy. I invest in companies such as Airasia, Power Root, IJM. Some of these are simple business, but they are the ones that create their own expertise, brands, marketing channels. I like those that, so called "Create their own destinies." especially Airasia - and often I also complain as a country we try to suppress these companies who are building their expertise from within the country.
Seriously, as a country we have to think of supporting companies that directly and indirectly think of Malaysia as a home - which in the past 2 decades we have not. That's how we really develop the needed talent for the country.
Monday, August 13, 2018
3 BIG themes in the long short and medium term - Corporatisation Malaysia, Trade War, SST
The past 3 - 6 months have seen huge movement in the policies and changes locally as well as internationally which should change how we are investing in the market here in Malaysia.
Short to Medium Term - no SST on construction materials will benefit construction companies
The exemption of Sales and Services Tax on some of the construction materials will benefit the construction sector immediately. Although the new Pakatan Harapan government has terminated or postponed several mega projects, construction is still a big contributor to the country's economy. Construction is not sexy at all, but is needed to oil the economy - pretty much in most countries. Many projects have continued and some of these projects such as the MRT2, highways which was awarded last few years are still continuing. The exemption on SST towards construction materials will definitely benefit the construction companies whom have secured large contracts immediately.
I see the larger construction companies such as Gamuda, IJM, Gadang, MRCB, Kerjaya Prospek to benefit from here.
The new government is also looking at opening up tender for projects. With this, I would think the companies that have capabilities but all this while have remained second tier will probably get more jobs due to their inherent capabilities rather than connections.
As for the property companies, although it will allow their cost of building to ease, to me the overhang will still see some challenges for this sector. Some of these property companies however has been cheap and their valuation has been much below book value. To decide to invest into this sector however, will need patience.
As for toll highways, the idea for its abolishment is postponed as answered by YB Baru Bian, the Works Minister in this video. Apparently, the RM400 billion total to buyback all the toll highways is quite consistent is almost all the figures which have been shared.
The US - China Trade War
As one know, Malaysia is a huge trading nation in comparative to our size of economy. The Trade War between China and US, if prolonged will have impact to Malaysia and it is not easy to figure out how it works for Malaysian companies. I would think, in the shorter term, as long as Malaysian manufacturers can accommodate some of the demand shifts from Chinese to Malaysian companies, those companies will immediately benefited.
Some of these companies that would have benefited are the electronics manufacturers especially the Electronic Manufacturing Services and Precision Engineering companies. Examples of these are companies like Globetronics, KESM, Salutica.
Whether the Trade War will cause a global inflation and recession, it remains to be seen.
In the longer run, the continuous reduction on dependence on foreign labor will impact some of these manufacturers.
Tun Dr Mahathir as I can see is also a supporter of the technology based companies. Overall, this sector will see some revival, and for me the best way to invest in this sector is to diversify as it is quite hard to pick particular winners. Do be particularly careful though on the ones which are overdependent on certain company as well as those that have been overvalued.
Corporate Malaysia
There could be a major shift when comes to what type of companies to buy - GLICs or privately controlled. In the last 20 years, Malaysian GLICs has outgrown private companies, and I see that is going to be reversed. Firstly, there is a smaller room for these companies to grow further as whatever that can be monopolised or oligopolised would already be done. There is a very few new sectors for these companies to monopolised anymore and where the previous government's policies would not have done so.
In the next 10 or more years, many of these policies is to reverse this. And it started with Telekom Malaysia and Bernas (not listed). I foresee companies like MAHB, TNB to be affected as well. A large part of investments in Malaysian is done by EPF. They probably now have between 15% to 20% of Malaysian stocks in market capitalisation. The only way for them to continue to perform in the past was to continue to buy the large GLICs, and these companies are not cheap. For many years, they have been expensive.
The way forward to buy Malaysian stocks is to look for well run smaller to mid-sized companies and it is more so in the coming years as we try to disentangle ourselves from having large GLICs.
Short to Medium Term - no SST on construction materials will benefit construction companies
The exemption of Sales and Services Tax on some of the construction materials will benefit the construction sector immediately. Although the new Pakatan Harapan government has terminated or postponed several mega projects, construction is still a big contributor to the country's economy. Construction is not sexy at all, but is needed to oil the economy - pretty much in most countries. Many projects have continued and some of these projects such as the MRT2, highways which was awarded last few years are still continuing. The exemption on SST towards construction materials will definitely benefit the construction companies whom have secured large contracts immediately.
I see the larger construction companies such as Gamuda, IJM, Gadang, MRCB, Kerjaya Prospek to benefit from here.
The new government is also looking at opening up tender for projects. With this, I would think the companies that have capabilities but all this while have remained second tier will probably get more jobs due to their inherent capabilities rather than connections.
As for the property companies, although it will allow their cost of building to ease, to me the overhang will still see some challenges for this sector. Some of these property companies however has been cheap and their valuation has been much below book value. To decide to invest into this sector however, will need patience.
As for toll highways, the idea for its abolishment is postponed as answered by YB Baru Bian, the Works Minister in this video. Apparently, the RM400 billion total to buyback all the toll highways is quite consistent is almost all the figures which have been shared.
The US - China Trade War
As one know, Malaysia is a huge trading nation in comparative to our size of economy. The Trade War between China and US, if prolonged will have impact to Malaysia and it is not easy to figure out how it works for Malaysian companies. I would think, in the shorter term, as long as Malaysian manufacturers can accommodate some of the demand shifts from Chinese to Malaysian companies, those companies will immediately benefited.
Some of these companies that would have benefited are the electronics manufacturers especially the Electronic Manufacturing Services and Precision Engineering companies. Examples of these are companies like Globetronics, KESM, Salutica.
Whether the Trade War will cause a global inflation and recession, it remains to be seen.
In the longer run, the continuous reduction on dependence on foreign labor will impact some of these manufacturers.
Tun Dr Mahathir as I can see is also a supporter of the technology based companies. Overall, this sector will see some revival, and for me the best way to invest in this sector is to diversify as it is quite hard to pick particular winners. Do be particularly careful though on the ones which are overdependent on certain company as well as those that have been overvalued.
Corporate Malaysia
There could be a major shift when comes to what type of companies to buy - GLICs or privately controlled. In the last 20 years, Malaysian GLICs has outgrown private companies, and I see that is going to be reversed. Firstly, there is a smaller room for these companies to grow further as whatever that can be monopolised or oligopolised would already be done. There is a very few new sectors for these companies to monopolised anymore and where the previous government's policies would not have done so.
In the next 10 or more years, many of these policies is to reverse this. And it started with Telekom Malaysia and Bernas (not listed). I foresee companies like MAHB, TNB to be affected as well. A large part of investments in Malaysian is done by EPF. They probably now have between 15% to 20% of Malaysian stocks in market capitalisation. The only way for them to continue to perform in the past was to continue to buy the large GLICs, and these companies are not cheap. For many years, they have been expensive.
The way forward to buy Malaysian stocks is to look for well run smaller to mid-sized companies and it is more so in the coming years as we try to disentangle ourselves from having large GLICs.
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