Market Comment

The current state of market is very difficult to understand, we have some big banks like Maybank, CIMB & Public Bank traded at low teen PE. We also have some consumer related counters traded at very high PE. Are investors too cautious for business cycle related company but seeking for low risk dividend yield company?

Judge from the above, it seem like general investor already priced in any political shake-up might happen. If like this, I am of opinion that the correction after General Election may be very minor only. I hope I am wrong as I ready to capitalize on any correction.

Public Bank and Hartalega posted good financial results for quarter ended Sep 12, both companies will continue to grow for years to come, especially Hartalega. No point taking profit as future is still bright.

Allianz is yet to announced its financial result, another good quarter results will definitely boosted its share prices again.

Jobstreet posted a good set of financial result for quarter ended Sep 12. Based on its latest financial results, the share price seem acceptable, however it is also a tight liquidity counter.

Allianz - Revisit

I blog about Allianz 2 years ago, at that time it was traded below RM4.00, I keep highlighting Allianz after that but it share price only appreciated recently only. I vet through some of the recent analyst's reports on it, amazing to notice that they (so called analyst) still assume that Allianz is a smaller company as compare to LPI and Manulife. What a big mistake they made, indeed Allianz is the biggest general insurer in Malaysia in term of underwriting premium, and now also in term of net profit.

Although LPI is traded at around market capital around 3.0 billion and making around 40 million last financial quarter, by annualize it going to make around 160 million for FY12.

Allianz is making 57million for the last financial quarter, look like it going to make more that 200 million for FY12. And it only traded at market capital around 2.4 billion.

Investor priced LPI using dividend yield model, that is why it fetch a very high PE valuation.

Allianz is set to grow after rationalizing of business previously acquired from CIMB, and put in place better underwriting discipline. It is a matter of time Allianz will start to pay good dividend, then it will be traded at market capital higher that LPI. The logic is simple, end of the day it is the net profit that does matter. Although a friend of mine keep telling me that net asset is a more accurate measurement for insurer, but I choose to follow the net profit method. You can tell me anything, but to me net profit or better still cash flow

Previously I also mentioned that it is a matter time market capital of Hartalega will be higher that LPI, QL ........a bunch of them. Seem I am correct at the moment. The issue is still haunting Allianz is the tight liquidity.

As I had mentioned a couple of time that patience is the only advantage a retail investor possess.

CIMB - Revisit

Over the years, CIMB had transformed from an investment bank to universal bank, then from universal bank to a regional bank. It is a of the good foresighted company in Malaysia. In term of management competence I rank it the best in Bursa Malaysia. Its shareholders have enjoyed good profit for years. It is an ordinary business that well managed. Its success is partly due to political link, and currently overshadow by this link.

As general election is around the corner, investors priced in the potential outcome. After read through an interview appeared on The Star on 4 August 2012, I must say I am impressed by it. It is the most ambitious bank in the Asean region, not even Singapore banks are that ambitious. As guided by Nazir sometimes ago, its Indonesia operation had became the largest profit contributor, over times its oversea profit will outpace local profit contribution.

Its planning to list in Thailand or Indonesia will enhance it valuation in my view. Local investors still not priced in a valuation of Regional Bank.

Questions in my mind, 1st, do investor priced in the political risk? 2nd, do investor priced in regional bank valuation? The worst scenario of buying now or the potential price adjustment of buying after general election?  The bank still will be well managed or ambitious if Nazir is not around?

Common Stock Uncommon Profit

"Common Stock Uncommon Profit" by Philip Fisher. To me, this is the best stock investment book I ever read. I had benefited from this book by applying his philosophy and method in Bursa Malaysia. However, I will not provide any comment on this book here.

What I intend to share here are stock investing strategy and stock selection that in my opinion will result in uncommon profit.

1st is buying growth stock that its profit going to increase substantially for years to come, and hold this stock for years to enjoy the grow of business profit. As business profit jump, share price sooner or later will follow. Then there is the likelihood that investors will value it differently that resulted in change of appraisal. Once change of appraisal is happening this stock will fetch a higher PE valuation. Time is good friend for this type of stock. As time passed, share prices this company will outperform the market as a whole then resulted  above average profit or uncommon profit. I like this approach very much. This is the method suggested by Philip Fisher 80 years ago, as today this method still intact. My favourite, Hartalega, is this kind of stock that I hold for years, and will hold for years to come.

2nd is buying good or above average business or stock during bad time or market correction. This method will caused you buy at lower entry price for good stocks. As, Benjamin Graham taught us the stock market is higher volatile and fluctuated, we must mentally and financially prepared to face it. Instead of ride through the up and down, which we are impossible to avoid, why not we are prepared to capitalize on it. Stock market tend to have a correction every 3-5 years and major correction or crisis every 8-10 years. I can not fight the market force, however I am prepared to capitalize on it. To be greedy when other is fearful. I don't mind other call me speculator, to me it is the uncommon profit that count. I practised philosophy of Benjamin Graham.

3rd is buying good new business or new product that will increase profit of a company substantially. The risk of this method is on the high side, but the reward can be very very high. Bursa Malaysia is short of this kind of company not like other countries. The best example I can think of locally is Jobstreet. If you vested since it listed, you are sitting on good return. Off course in US we have this Apple or Google.

4th is buying above average old economy industries. But you have to be quite sure that this type of company still able to achieve above average profit for years to come. Or this particular stock is undervalue or overlook by investors.

Market Comments

It had been quite sometimes I did not update my blog due to heavy load on my work and personal investment. Stock market, Bursa Malaysia, reached its all times high as above 1600. Hartalega, Public Bank and Allianz close to their all time high as well. Although I see no bubble on these counter, but I also realized that the whole stock market actually supported by "feel good" environment created by our Government. It is so unhealthy that the whole index is supported by these GLC or GLIC, further affected by the listing of heavy weight GLCs. My take is this situation would be "disappear" immediate after the election, it is better to reduce exposure and get ready for next wave of volatility. 

 Secondly, in my more than 10 years investing experience, I never seen investors priced the so called "dividend yield counters", consumer counters, defensive counters, telco or cellco so....so..... aggresive. It is hard to believe that general investors can accept dividend yield of 3-5%, and further more PE is more that 20. Look at PPB, BAT, F&N, Nestle, Carlsberg, GAB, TM, Digi, Axiata, Pavillion Reit, CMMT Reit......blah blah blah. Is it because of low interest rate? I dont think so, we had been in this low interest time since 2008. Instead joining the party, it is always better to leave the party early and get prepared for the aftermath. Stock market is a place where only minority can survive in long run. To be fearful when other is greedy. 

 I also opine that this is the correct time to offload the 2nd, 3rd grade or penny stocks. If as today these stocks still below your purchased prices or under perform the stock market as a whole, forget about it. They will not perform neither better in near future, under this environment it still not going up, there are slim changes it going to go up in future.

Capital required to grow

Normally a company able to achieve growth in its business/ profit via a few type of capital models.

1st, this type of companies possess pricing power, it able to generate more revenue by increase selling price, thus increase its profit. This type of companies do not required additional capital to grow its business. All the profits are able to return to shareholder. This is a fanta-bulous business.

2nd, this type of companies using its or part of its profit to grow its capacity. Some are able to grow by only retain less than half of its profit, excess cash will return to shareholder. Some are required by regulator to retain part of profit as business grow bigger, like bank. However there are some need to retain most of its cash flow just to expand business.

3rd, this type of companies using cash generated by its operation to buy other business. To them it is merely a capital game.

4th, this type of companies have to take debt or using using debt to grow their business. To them doing business, it is better to use other people money instead of own money. However excessive debt is showing more trouble ahead. The bigger a company grow, debt will escalating higher.

These are the reason how a company paying out dividend. Some investors are very happy because they are able to buy a growth company, however they are without consider the above. They told others that how their company able to grow year after year, especially when its share prices rally.

To me what is a big deal that a company that able to grow by taking debt and more debt.

Comment - My Portfolio

To me the reporting season is over. Public Bank reported satisfactory results, EPS growing at mid teen as expected. Dividend payout as per guidance given by the its Management. The immediate future of banking industry is not rosy, this can be observed by PE fetch by Maybank, CIMB and also Public Bank. To my surprise all the banks are traded at low teen level, this is not usual, unlike the situation of bearish market every is cheap. Investor always priced the immediate future into share prices, i don't want to talk about world economy, it is the booming of property price and stringent credit control do matter. Sales of newly launched properties are not snapped immediate like previous, secondary market is slowing down, all these mean loan growth will likely to slow also. Now we also heard about hire purchase is more stringent also. Based on the above, how investor willing to pay premium for banking stocks? CIMB is the stock to be avoided by most investors due to GE13 is not far from now. Experience of 2008 where the index plunged almost 100 point within 2 days and this counter is hammered down by the market. However it do survive and perform satisfactory there after is something to think about. Is the market already priced in this event?

Hartalega reported results within expectation, and corporate proposal of 1 for 1 bonus issue and 1 for 5 free warrant is something the market like the most. No wonder its share price had appreciate more than 40% from beginning of the year. Construction of Plant 6 already started, and expected to commission 2 new lines by Sep 2012. Finally it is not undervalue any more. One of my friend called me saying that we should sell it as it is traded at PE 15, when i ask more the answer is only it is PE 15. Plenty of stock traded at PE more that 20 like DIGI, Maxis, Axiata, Nestle and blah blah...., and seem like he is not interested to ask. It is true that Hartalega never traded at PE 15, not like Topglove anytime investor willing to pay PE 18 and above. Some said margin is dropping due to new capacity from its competitors, this is valid. However eventually it is the low cost producer will win the game. Profit margin of bank is going down for years, but Public Bank still survive and making record profit year after year, this is because the market is still growing . Similar to nitrile glove, the market is growing and will grow further from developed countries. No point you going to sell the best nitrile glove producer which going to grow for years to come just because it is traded at PE 15. Name me a stock in Bursa Malaysia is possess superior quality than Hartalega, which happen to be in grow industry.

Financial results of Allianz is below my expectation, 15 mil out of court settlement and 10 mil losses for insurance pool, which affect its profit significantly. Dividend payout also at lower end. Its share price going to be side line as investor have nothing to shout about.

Comment and opinion

Happy CNY and Huat ar....

Look like Hartalega finally goes up, I had been holding this counter for 3 years. The return is not bad at all. Like what i had said previously sometime is purely luck and sometime you need a marathon to obtain satisfactory results.

Allianz is another counter I plan to increase my position for this year. Currently i only hold a little of it only, my concern is the liquidity problem of this counter. Therefore I must be sure that I need to hold it for very long in order to get good return, and selling it may be a issue since lack of liquidity. Allianz is not appeal to investors currently is due to dividend issue as compared to other insurers like LPI, once Allianz start paying good dividend its share price will reflect that. GAB, DIGI and LPI are traded at very high PE because of their dividend payout. Investor will priced their using dividend yield model instead of PE valuation. Allianz posses that potential as the mother company may want to recoup their investment. This was happen to Digi previously, it never pay dividend, its share price hardly move. However since it start paying good dividend and exercise capital management to return excess capital its share price shoot up for years.

It is very interesting to watch how Maxis perform from now, will investor priced it using dividend model and will it fetch a comparable PE or dividend yield to Digi.

Some ask me about plantation counter, however i did not follow any plantation stock currently.

Adding Position to Hartalega

My first purchase of year 2012 is Hartalega....again. Can't find better bet, still opine that Hartalega is attractively priced. Yes, latex price is low compared to months back, however this nothing new to Hartalega. If i not mistaken the current latex price, price of latex glove is almost on par with Hartalega's nitrile glove price. Therefore customer still can choose a better product at similar price. The foundamental of Hartalega is not affected.

My portfolio beat Index for year 2011, however is still below 15% of what i targeted. As i said previously, some times i need a marathon to get satisfactory results. I still stick to what i know better in term of stocks and strategy.

Since every week, paper is publishing stock pick for year 2012 or dragon year, do I have some? Yes, my pick will be Hartalega and Allianz. I also see Jobstreet is attractive at current price although it may be affected if the economy turn bad. No matter how it still a cyclical stock. I also think that celco is able to grow further since there are so many smart phones in the market. Few years back i thought that celco is a mature and saturated industry that purely for dividend play but i think the situation is changing.

I also think that Cypark is in a good industry, landfill management and solar energy however i don't know how reliable of their management. Further more, political issue may affect the company business.