UMW shares trading at rich valuations

UMW shares trading at rich valuations

Tags: Brokers Call | OSK Research | UMW

Written by Financial Daily
Friday, 09 October 2009 10:39

OSK Research Sdn Bhd has raised its fair value for UMW HOLDINGS BHD [] shares by 12% in anticipation of better performance at the diversified firm’s automotive, and oil and gas (O&G) units.

The upward revision in UMW’s share price was despite OSK reiterating its sell call for the stock whose valuations are deemed more expensive compared to its peers. UMW shares are also overvalued compared to its net tangible assets (NTA) or book value, according to the research firm.

“Pending further developments from its oil and gas division, we continue to retain our earnings estimates at this juncture,” OSK wrote in a note.

UMW shares are deemed fairly valued at RM5.27, compared with the earlier forecast of RM4.27.

The higher target price for UMW is derived from a higher price-to-earnings ratio (PER) estimates for the automotive and oil and gas divisions. This is in anticipation of UMW, the franchise holder for Toyota vehicles in Malaysia, selling more cars next year.

Meanwhile, the O&G unit is expected to do better on expectation that its earnings would be helped by incoming contracts from oil majors as crude oil demand recovers.

At a PER of 23 times financial year (FY) 2009 earnings, and 16 times FY10 earnings, UMW’s share valuations are deemed costlier than its peers which are trading at 13 times and 10 times, respectively.

“The counter has consistently traded at a premium of 50% to 80% against the auto sector PER, partly due to the oil and gas play since 2007,” OSK said.

UMW’s O&G arm UMW Oil & Gas Bhd will be closely watched as it is expected to seek listing on the Malaysian bourse soon. Its planned flotation, originally scheduled for the third quarter of last year, was postponed twice due to unfavourable market conditions.

The exercise was expected to raise about RM425 million. Following the expiry of authorities’ approval for the initial listing proposal, UMW is now considering submitting a new flotation plan to the Securities Commission.

The proposal has to be revised because the number of operating units under UMW Oil & Gas is expected to more than double to 30 from 14 entities under the original arrangement.

With more operating units on board, UMW Oil & Gas is expected to seek a better value for its initial public offering (IPO).

UMW was traded unchanged at RM6.40 yesterday.


This article appeared in The Edge Financial Daily, October 9, 2009.

Jim Rogers predicts that commodities boom could last 20 years

Jim Rogers predicts that commodities boom could last 20 years
Jim Rogers, the bullish commodities investor, has predicted that demand for raw materials will outstrip supply for the next two decades, fuelling an extended boom.

By Rowena Mason
Published: 11:07PM BST 08 Oct 2009


Jim Rogers predicts that commodities boom could last 20 years. The chairman of Rogers Holdings, based in Singapore, believes the weakness of the dollar will underpin a flight towards commodities.

"I don't see any adequate supply situation in any commodity market over the next decade or two," he said. "The commodities boom is not over and the bull market has several years to go.


"Commodities are the best place to be, if you ask me, based on supply and demand."

Oil could reach between $150 and $200 per barrel, as known reserves begin to decline.

Mr Rogers believes that "unless something happens", crude oil will run out in 15 to 20 years. Although plenty of large oil discoveries have been made lately, the commodity is increasingly hard to extract from the ground.

"The supply of everything continues to decline," Mr Rogers said.

"If the world economy recovers, commodities will do the best, because supply is being restricted. If the world economy does not recover, commodities will still be the best place to be, because governments are printing huge amounts of money."

Mr Rogers, the author of Adventure Capitalist and Investment Biker, said he has not invested in equities apart from in China for the last two years.

He first staked his reputation on announcing the start of a global commodities rally in 1999. The cost of raw materials has risen around 36pc over the last decade.

His comments came as Alcoa, the US aluminium producer, posted surprise profits, boosting mining stock on both the New York and London exchanges.

The company forecast an 11pc increase in demand during the second half, almost entirely fuelled by China.

Global stockpiles of commodities monitored by the London Metal Exchange have surged this year on lower industrial demand during the recession, but analysts believe the market may now be stabilising.

Oil prices broke the $70 mark in the US, rising $2.12 to $71.69 a barrel, while Brent crude climbed $2.50 to $70.54 in London, supported by the weak dollar.

http://www.telegraph.co.uk/finance/newsbysector/industry/6276453/Jim-Rogers-predicts-that-commodities-boom-could-last-20-years.html

Investors should ignore the economic indicators

Diary of a private investor: investors should ignore the economic indicators
While Enterprise Inns shares have risen mightily from their lows, they are still less than two fifths of the net asset value and, good heavens, the company makes profits.

By James Bartholomew
Published: 12:19PM BST 07 Oct 2009

How do the words of that old Brenda Lee song go? Something like, "Here comes that feeling again, and it ain't right!" That was certainly my experience at the end of last week if you take "ain't right" to mean "ain't pleasant".

Markets around the world started falling in a manner horribly reminiscent of a year ago. It is amazing, incidentally, how world markets move together these days. They are like synchronised swimmers diving together, rising up in unison and twiddling their feet in the air all together.

Anyway my shares went down. I lost money – lots of it. I say this with emphasis for a friend who – to my surprise – turns out to be a reader of this column. I asked him, "which Diaries do you like best then, the ones when I tell of my successes or my flops?" He unhesitatingly opted for the latter. So this is for you, David.

Enterprise Inns fell from 135p to 123p between the opening on that Tuesday and the close on Thursday. A different friend emailed me a gloomy broker's report on the company's bonds. This downer written by a close relation of Eeyore may have played a part in the fall of the stock. Enterprise Inns, by the way, was up at 180p at the beginning of September.

So the shares have fallen 32 per cent since then. I had a quite a fair amount of cash invested in it, too. So that is plenty of money that has vanished. I am afraid though, David, that I am still just about in profit overall but my purchase this summer at a price of 167p looks pretty silly.

The report of doom was by JPMorgan. It dwelt on the pubs that had been closed, the ones that had been sold at prices which the broker thought discouraging and the review by the Office for Fair Trading which will come out later this month concerning whether or not it is fair that the pub tenants of Enterprise Inns have to buy beer supplied by the company.

As if that were not enough, he went on about the still weighty overhang of debt and the possibility of a rights issue. After reading that lot, I felt I might as well write the whole investment off and cancel my next holiday.

But something in me – probably the fact of being long of the stock – revolted. I wrote back to my friend who kindly supplied the research: "Hang on a minute. Aren't we in danger of forgetting the main point?" The main point is that Enterprise Inns is not going bust.

Whether it has a rights issue or not, Enterprise Inns is not a dead parrot. It is not extinct. It still moves and squawks. It may not be pretty but it is going to survive. For some nervous weeks earlier this year the shares were valued as though it had no future. Now it has.

And while the shares have risen mightily from their lows, they are still less than two fifths of the net asset value and, good heavens, the company makes profits. In fact it is valued at a mere four times the consensus forecast earnings. The shares still have great potential. The day after I wrote this robust case, the shares fell 6p. Incidentally, I have also lost money recently in Barratt Developments and Harvey Nash.

What about the market as a whole? It is October – a nerve-racking time and everyone remembers how bad it was last year. Perhaps precisely because investors are nervous of this month they might have held back from purchases in September and the market might survive without too much damage.

But frankly there is not much point in trying to guess stock market movements over a few weeks.

The recent falls have been ascribed by some commentators to disappointment with some figures coming from the real economy. I don't believe that.

Those of us with experience going back to Brenda Lee's glory days have learned that the stock market does not swim synchronously with the real economy. Real activity is down in the depths struggling for air but that will not stop the stock market breaching the surface. A bull market started in 1974 when the economy had quite a few more years of misery to endure.

The key things to watch, I believe are low interest rates and quantitative easing. As long as these continue, so will the bull market.

http://www.telegraph.co.uk/finance/personalfinance/investing/6267833/Diary-of-a-private-investor-Investors-should-ignore-the-economic-indicators.html

Would you put your pension on a politician's promise?

Would you put your pension on a politician's promise?
Britain’s state pensions are Ponzi schemes on a scale to make the fraudster Bernard Madoff blush.

By Ian Cowie
Published: 12:17PM BST 09 Oct 2009

Comments 1 | Comment on this article

"Told you so. Sorry to start so smugly, but there really is no other way to put it. This column has often warned about the risks of savers putting their faith in politicians’ promises. Now this week’s Pensions White Paper demonstrates just how dangerous that can be in cash terms.”

That’s what I said in this space on May 27 2006, the last time millions of people’s retirement plans took a knock when politicians moved the goalposts. Back then, it was the announcement that Labour planned to scrap the earnings-related benefits of the State Second Pension, just four years after S2P had replaced the State Earnings Related Pension Scheme (Serps). This week it was the Conservative proposal to make 5.4m people work longer before they can claim state pensions of any description.


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Millions to work a year longer under Tories So this would be a good moment to set out some sad but important facts. Britain’s state pensions are Ponzi schemes on a scale that would make the fraudster Bernard Madoff blush. This week’s National Insurance Contributions (NICs), deducted from workers’ salaries, are used to pay next week’s state pensions. That kind of accounting is called fraud in the private sector – as Mr Madoff can attest – and no insurance company would be allowed to carry on in this way.

The reason is that all Ponzi schemes collapse, sooner or later, when the inflow of money from new mugs proves insufficient to honour promises issued earlier and too many people ask to be paid. That is what is happening now with Britain’s state pensions.

Nobody should be surprised. As regular readers will know, this is the point in the article where I like to quote Nye Bevan – a founder of the welfare state – who disclosed more than 50 years ago: “The great secret about the National Insurance fund is that there ain’t no fund.”

To be fair to politicians of all parties, the chart on this page shows why state pension ages must rise – even if the scheme had been properly funded. Figures from the Office for National Statistics (ONS) demonstrate that men and women are living for more than a decade longer than they did when the current retirement ages came into effect with the National Insurance Act 1946.

Looking even further back, you can see that average life expectancy has nearly doubled since Edward VII was born and the ONS stats series started in 1841. Only in the wacky world of life assurance and pensions could this remarkable improvement be regarded as a problem.

From a historical perspective, this week’s Tory proposal could even be seen as “going back to the future” because, when the Basic State Pension was introduced in 1908, the retirement age was set at 70.

Here and now, I would suggest that anybody aged under 30 today would be rash to expect to receive any state pension before they reach 70 years of age. Certainly, the proposed increase to 66 will not be the last time this carrot is shifted a little further away from the donkey’s nose.

Nor do we have to look too far into the future to see this happening. For example, from next April the NICs deducted from our salaries will cease to buy increased S2P benefits, as flagged up in this space three years ago. Thank heavens about 600,000 people contracted out of Serps and S2P to have their NICs paid into private pensions, ignoring all the actuaries’ warnings since then that we should opt back into the state scheme.

Any of us aged over 50 now can take a quarter of these contracted out pensions as tax-free cash any time we please – but it is important to beware that this threshold will be raised to 55 next April.

When I opted out of Serps more than 20 years ago, I did so on the basis that I would rather build up a pot of private property than rely on an ill-defined share of an unfunded scheme. That remains as true now as it was then.

Put another way, which would you rather have: a tax-free lump sum today or a politician’s promise tomorrow?

Pensions are not the only way
More than 2m people are thought to be older than 50 now but younger than 55 next April. We face a ticklish question that affects all our pension savings, whether they are in private sector plans, Serps or S2P. If we fail to draw tax-free cash before April 6, 2010, these funds will be locked up until we reach 55 years age – always assuming the politicians don’t move the goalposts again.

That postponement could prove very awkward if, for example, you lost your job in the meantime. And, let’s face it, there can’t be many people who are absolutely certain what they will be doing three or four years hence. So it is tantalising to know that a substantial sum of tax-free cash is available now, when you might not need it, but won’t be available in future, when you might.

The good news is that this week’s increase in individual savings account (Isa) allowances for people aged over 50 has the unintended consequence of helping us to avoid this potential cash flow crisis. The maximum was raised on October 6 to £10,200 per tax year, per person – strictly speaking, anyone who will be aged over 50 in April next year.

So a married couple who are both the right age and have not used their current Isa allowance could place up to £40,800 in the Isa tax shelter between now and April 6 2010, when the next fiscal year starts.

This provides some valuable wriggle room for people who might want to draw benefits from their pension savings while they still can, even if they have no immediate need of the cash. The improved Isa limits mean they can continue to keep the money invested in real assets – such as shares, bonds and unit or investment trusts – in the hope of preserving its purchasing power for when they actually need it.

Better still, unlike pensions, there is no need to pay tax on income received from Isas; nor any need to declare Isas in your tax returns. It also goes to show that pensions are not the only way to provide for retirement.

http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6274049/Would-you-put-your-pension-on-a-politicians-promise.html

Buffett Selling Means You Shouldn’t Be Buying

Buffett Selling Means You Shouldn’t Be Buying


Commentary by Jonathan Weil



Oct. 8 (Bloomberg) -- It’s not often that Warren Buffett gives the investing public a reason to believe he’s not on their side.

Then again, it’s not every day that Buffett’s Berkshire Hathaway Inc. shows up on the list of selling shareholders in another company’s initial public offering.

This brings us to today’s question: If Buffett is a seller, should you be a buyer? Probably not. This is the same fellow, after all, who is famous for saying that the best time to sell a stock is never.

The possible IPO comes from Symetra Financial Corp., a life-insurance carrier based in Bellevue, Washington. Berkshire began accumulating its 26 percent stake in Symetra in 2004, when a group led by Berkshire and White Mountains Insurance Group Ltd. bought the business for $1.4 billion from the insurance company Safeco Corp.

Symetra filed this week to raise as much as $575 million from new shareholders and said it intends to use its portion of the proceeds for general purposes, which may include fresh capital for its insurance subsidiaries. Naturally, if this is such a good investment opportunity, you might think Buffett would be increasing Berkshire’s stake in the company. He’s not.

Symetra didn’t disclose how many shares Berkshire and White Mountains may sell, though it did say they would continue to own some after the IPO, assuming it goes through. It’s also possible they could decide not to sell any, even though the company’s prospectus identifies them as “selling stockholders.”

Slick Math

When I looked through Symetra’s registration statement -- which is 1,000 pages long, including exhibits -- what struck me was the slickness of its numbers. The first financial metric Symetra touted on the opening page of its prospectus was something it called adjusted book value, which was $1.4 billion as of June 30. That figure turns out to be a lot of hot air.

Symetra’s actual book value, or shareholder equity, was $763.7 million. The company arrived at the $1.4 billion by adding back $642.9 million of pent-up losses, mainly from investments, and acting as if they don’t matter. That’s no small detail. Symetra’s equity looks thin at 3.6 percent of the company’s $21.1 billion of assets. Berkshire’s equity, by comparison, is equivalent to 43 percent of assets.

Additionally, Symetra’s prospectus said the company’s “internal control over financial reporting does not currently meet the standards” required by federal law for publicly traded companies. That’s quite a disclosure, considering Symetra was a unit of a large public company as recently as 2004. It tells you there’s a chance that Symetra’s financial statements might not be reliable.

Mining for Fees

As for the business itself, Symetra’s owners have operated a lot like private-equity deal whizzes, extracting large sums of cash through dividends and fees.

For 2006, Symetra reported net income of $159.5 million and paid $100 million of dividends. In 2007, when net income was $167.3 million, Symetra paid its shareholders $200 million of dividends -- which it financed in part by issuing $150 million of new debt. Perhaps if Symetra hadn’t paid such large dividends before, it wouldn’t need money from the public markets now.

The company hasn’t paid dividends since 2007. Net income fell to $22.1 million in 2008, driven by investment losses, before rebounding to $52.1 million during the first six months of 2009. This year’s earnings come with a caveat, though.

Help From FASB

Symetra’s pretax profit would have been 92 percent less were it not for rule changes by the Financial Accounting Standards Board last spring. That’s when the FASB caved to pressure by Congress and rushed to expand the range of investment losses that banks and insurance companies can exclude from their reported earnings, even when they conclude the losses aren’t temporary.

Additionally, White Mountains collects fees for managing Symetra’s investments -- $57 million in all since the start of 2006. For example, when White Mountains invests Symetra’s money in a hedge fund or in corporate equities, it gets an annual fee equivalent to 1 percent of the investment’s value.

White Mountains’ $14.6 million of fees last year exceeded Symetra’s $13 million of pretax income. Nice work if you can get it. (Symetra’s net income was greater than pretax profit because of a large deferred-tax benefit.) Like Berkshire, White Mountains has a 26 percent stake in Symetra. Berkshire also had been White Mountains’ second-biggest shareholder until it sold its stake back to the company last year.

We can’t blame Buffett for wanting to sell some of his company’s Symetra shares, which amount to a tiny fraction of Berkshire’s $275 billion of assets. Berkshire’s shareholders should be pleased if he can. Symetra also filed to go public in 2007, only to cancel the offering when the IPO market dried up.

You have to wonder, though, why anyone would want to be on the other side of this trade.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

Last Updated: October 7, 2009 21:00 EDT

http://www.bloomberg.com/apps/news?pid=20601039&sid=ah5Yse3JbqFI

No Penny Stock Trading For Me

"The reason that the stock market can be dangerous (or perceived dangerous) for the average investor is because we’re not really dealing with tangible assets here. To look at our supermarket analogy again, if you went to the bread isle and there was a loaf of bread for one dollar and a moldy loaf of bread for 50 cents, which would you buy? Surely, you would pay a little extra money to buy the good loaf!"

http://www.thedigeratilife.com/blog/penny-stock-trading/

Padini expects slower sales growth in fiscal 2010

Padini expects slower sales growth in fiscal 2010


Published: 2009/09/10

Malaysian fashion retailer Padini expects annual sales growth in fiscal 2010 to slow from a year ago as it expands at a slower pace.

The pace at which the company will add retail space will fall by more than half, Padini executive director Chan Kwai Heng said.
Sales for the year to June 2009 jumped 24 per cent to RM477 million from a year ago and net profit was up 19 per cent at RM49.5 million, company data showed.

"That kind of growth could be a bit hard pressed to sustain, because for FY2010 we are not adding a lot more space," Chan said in an interview yesterday.

Padini will add about 40,000 square feet of retail space in fiscal 2010, versus 90,000 sq ft in 2009 and 140,000 sq ft in 2008, said Chan.

Malaysia, Asia's third most trade-dependent economy after Singapore and Hong Kong, shrank 3.9 per cent in the second quarter after a 6.2 per cent drop in the first quarter from a year ago.

Padini's business is growing despite the downturn and the company is rolling out new product lines and opening more outlets.

"The increase in sales is mainly generated from (new retail space)," said Chan.

A company that began as a garment manufacturer for bigger brands in 1971, Padini moved to building its own brands in the late 80's and early 90's when a booming economy boosted domestic consumption in the Southeast Asian country.

The company now sells nine brands of fashion goods ranging from garments to women's shoes and accessories in 12 countries in Southeast Asia and the Middle East.

Foreign retail brands such as Top Shop, Zara and MNG have flooded the local retail market in recent years to tap into the growing consumer market.

Chan said the company has no intention of beefing up its exports in spite of rising competition at home. Currently, overseas sales account for about 10 per cent of the total.

"We do not have a concerted plan or strategy as to what we shall do to go for the export market," said Chan.

"For us, the retail market at home is still so lucrative and it is still doing so well for us, because of that we will really pay attention to this part," he said.

Padini shares have outperformed that of its rivals so far this year but lagged the performance of the wider market.

The stock has risen 14.63 per cent so far this year, compared to the benchmark stock index's 37 per cent gain while competitor Voir is down 10.56 per cent and Bonia has fallen 12.28 per cent. - Reuters

http://www.btimes.com.my/Current_News/BTIMES/articles/padini9/Article/

Futile exercise to chase after bonus issues.

Summary:

Most of the time, such an action will lead one to make losses relatively and during bear markets it will lead you to make absolute losses.  But the most galling aspect of chasing after bonuses is that some of the time, one is being led blindly into traps prepared by crafty insiders or their friends.  In such instances, you are like innocent lambs led to the slaughter.  The chances of you losing a great deal of money is very real.

Since it is very difficult for you to know which bonuses are of the innocent variety and which are not, is it not better to ignore all of them?

The best approach to take is the fundamentalist one; only buy those stocks which provide you with a reasonable return and which have the prospect of providing a constant long-term growth in earnings and dividend irrespective of whether they give bonus or not. 

Heavy selling after Bonus Announcements have been made

The Peril of Chasing Bonuses:  There is strong evidence of heavy selling after bonus announcements have been made

The residual movement is strongly downward soon after a bonus announcement has been made.  This strongly suggests that there is heavy selling by some of the investors.

Who are those doing all the selling? 

The sellers certainly do not come from the general investment public since they all think that bonuses are such good deals that "they would be fools to sell out now".  It seems that the sellers can only be those who know that bonuses are not what they are made out to be and / or those who have managed to pick up shares cheaply. 

The sellers are likely to come from amongst the fundamental investors who understand the meaning of bonus and also the insiders who, knowing more than the public, must have bought shares on the cheap just before the announcement. 

As the decline is the greatest among shares which subsequently do not increase their dividend, a lot of the sellers must be insiders who know that the future of these stocks is none too bright.

Either way, the pititable smaller investors have to pay dearly for their ignorance and fascination with bonuses. 

Local investors/speculators do chase after bonuses

The Perils of Chasing Bonuses:  Local Investors/Speculators do chase after bonuses

It is very surprising to note that the stock price on an average does not reach a peak until several weeks after the announcement.  This is a situation that is peculiar to the local market since in all other markets, the announcement of bonus or split does not attract any buying or upward price movement at all. 

This sharp rise after the announcement can only mean that a large number of local investors still believe that bonuses are of value and they go in to buy the stocks following the announcement with the hope of making further gains.  But sadly, they are likely to be disillusioned because at that point, the price can only move downward. 

Why do they keep on doing this?  Here are the reasons for the chasing of bonuses blindly.

1.  Firstly, there is a deeply ingrained local belief that bonuses are of value.  This is continuously being reinforced by articles in local newspapers which praise companies which give bonuses.  At the same time, insiders with an axe to grind have a strong interest to keep this belief alive.  They, undoubtedly, use all their power with the press to keep the rumour mills working at full speed so as to churn up interst in their stocks.

2.  Second, the concept of *residual movement is totally new to almost all local investors.  Although the residual movement may be negative, the actual price movement may be upward, reflecting the bullish overall market condition.  Typical nvestor who chase after bonuses are precisely the ones who neither understand the finer points of investment nor are they particularly conscious of how the other stocks are doing.  So long as they make some gains from their purchase price, they are happy, not realising that better opportunities exist elsewhere.  This is of course not true for all times.  For those poor investors who buy into bonus-giving stocks just before the market peaks, they are likely to suffer horrible losses.  As usual, those who lose a lot of money tend to keep quiet while those who make some would announce it to the whole world.  As a result, the sad experience of some of those who have chased after bonuses are never revealed and the general public is thus never the wiser.

(*Residual movement is the price movement after the market effect is taken out.)

Insider Trading or Insider Inspired Trading prior to Bonus Announcement

The Perils of Chasing Bonuses:  There is strong evidence for the existence of either insider trading or insider inspired trading prior to bonus announcement

There is clear evidence that the price tends to move strongly upward from between 15 - 20 weeks before a bonus announcement.  This is the approximate point at which most boards of directors make a decision regarding a future bonus issue. 

If the news of a forthcoming bonus is kept watertight, there should be no movement at all until the announcement is made.  The fact that on average, stock experience a residual movement of between 10 - 12 percent in the last three to four months before an announcement means that there must be either some insider trading or insider-inspired trading taking place. 

The amount of movement is not that large on an average but this average conceals the fact that many stocks experience considerably larger movement than this and these are the stocks in which insiders or their "friends" stand to make a lot of money.

A large number of bonuses are not made for financial reasons.

The Perils of Chasing Bonuses:  A large number of bonuses are not made for financial reasons. 

In the US, stock splits are made after a long period of rapid rise in the price of the stock.  This is done largely to reduce the price of the stock to make it more marketable (or so the management believes).  However, the same reason does not seem to apply locally. 

• First, on the whole, there is little upward price movement before the decision to declare a bonus issue is made.
• Second, a very high proportion (about one-third) of the companies fail to increase (on an adjusted basis) its dividend payout after the bonus issue has been made. 

If there is very little upward price movement in the first place and if so many of the companies cannot increase its post-bonus dividend payout, why then do these companies bother to declare a bonus at all? 

The implication must be that a large number of b onus issues are not made for the usual financial reasons (i.e. to lower the price, to reflect higher earnings capacity etc).

It is more than possible that a large number of bonus issues are made for the purpose of giving a temporary boost to the price of the stock.  As to why any company should desire to achieve a temporary boost in the price of stocks, the inevitable conclusion is that a large number of bonuses are made for the purpose of benefiting insiders and their friends.  This is an extremely serious indictment made only after the most careful reflections.

Why some insiders should want to give the price a temporary boost? 

A sharp rise in price provides insiders with the opportunity to sell shares which they had picked up on the cheap before the price was artificially boosted.  This is only the average picture and the average picture is not representative of all the firms which give bonuses.  It does not mean that all local companies which declare bonuses are doing so to benefit from a temporary boost in price.

It is likely that local companies are made up of at least two types.

• The first are those in which the insiders do not have an interest in seeing the price being temporarily boosted, and
• The second are those in which the insiders do have this desire. 

It is likely that the former would not experience much price movement prior to the announcement while the latter would.  This would be the primary way by which we can separate the two classes of companies. 

Are there evidence to suggest a great deal of insider trading prior to some bonus announcements?

4 important conclusions about the local market regarding bonus issues

There are possibly four important conclusions about the local market regarding bonus issues.

1.  A large number of bonuses are not made for financial reasons.
2.  There is strong evidence for the existence of either insider trading or insider inspired trading prior to bonus announcement.
3.  Local investors/speculators do chase after bonuses.
4.  There is strong evidence of heavy selling after bonus announcements have been made. 

What this means in plain terms is that the typical investor who buys the stocks of a company undergoing bonus issue either just before (by basing his purchase on rumours) or just after the announcement of a bonus almost certainly ends up losing money on a relative basis.  That is, had he bought other shares, he certainly would have done better. 

This is totally unlike the US situation where buying the stocks after their splits would result in the investors being even with the market.

The only way to make money from bonuses locally is to be able to buy well before the bonus announcement (about 20 weeks before) and sell almost immediately after the announcement.  In that way, you would stand to make a lot of money.  But to do so consistently, you would need inside information on when a bonus issue is about to be announced. 

Ref:  Stock Market Investment by Neoh Soon Kean

Type : Announcement

Subject : KPJ HEALTHCARE BERHAD (“KPJ” or “COMPANY”)

- PROPOSALS

Contents : This announcement is dated 1 October 2009.

On behalf of the Board of Directors of KPJ (“Board”), AmInvestment Bank Berhad (a member of AmInvestment Bank Group) (“AmInvestment Bank”) wishes to announce that the Company proposes to undertake the following proposals:-

Proposed share split involving the subdivision of every existing one (1) ordinary share of RM1.00 each in KPJ into two (2) ordinary shares of RM0.50 each (“Shares”) in KPJ held by the entitled shareholders of the Company on an entitlement date to be determined and announced later (“Proposed Share Split”);

Proposed bonus issue of up to 105,525,308 new Shares (“Bonus Shares”), to be credited as fully-paid up by the Company, on the basis of one (1) Bonus Share for every four (4) Shares held by the entitled shareholders of the Company after the Proposed Share Split on an entitlement date to be determined and announced later (“Proposed Bonus Issue”); and

Proposed issue of up to 131,906,635 free warrants in KPJ (“Free Warrants”) on the basis of one (1) Free Warrant for every four (4) Shares held by the entitled shareholders of the Company after the Proposed Share Split and Proposed Bonus Issue on an entitlement date to be determined and announced later (“Proposed Free Warrants Issue”).

The Proposed Share Split, Proposed Bonus Issue and Proposed Free Warrants Issue shall collectively be referred to as “Proposals”. The Proposals are inter-conditional.

Kindly refer to the attachment for further details.

Futile to chase up price of shares based on Rumours of bonus issues

It can be very difficult for a layman to know how the reserves of a company come into being.  Very often such reserves are created at a stroke of a pen. 

Unless you can separate the "good" reserves from the "bad" reserves, you should not be excited by the prospect of a bonus issue as a result of an increase in Reserves.

It is futile to chase up the price of shares based on rumours that a particular company is about to make a bonus issue.  The really wise investors or the truly cunning insiders would have got in when the price was a lot lower.  Rumours of bonus issues are usually spread to provide opportunity for people other than the small timers to make money. 

Warren Buffett said:  "The stock market is like God in that it helps those who help themselves, but unlike God, it does not forgive those who know not what they are doing."  You can best "help yourselves" by learning more about the stock market as a whole and finding out more about the companies you are interested in.  If you go in blindly, "not knowing what you are doing", basing your actions on rumours, you will have nobody to blame but yourselves if you lose money.

The Reserves of a company is purely a paper entry.

In order to provide a bonus issue, the company must have this thing called "RESERVES" which can be turned into new paid-up capital to be used for the creation of new shares for paying out as bonus. 

Surely this "Reserves" thing must be something of value?

This term "Reserves" is very confusing to people who are not familiar with accounting concepts.

The "Reserves: of a company is purely a paper entry, purely an accounting convention.  There is absolutely nothing solid behind the term "Reserves".  The "Reserves" you see in the balance sheet of a company belongs in the realm of an accountant's imagination; this is something which exists purely as a written line on the company's accounts books. 

The real strength of a company is not shown by how much it has under the item "Reserves" but under the "Cash" and/or "Short term Investments" items as well as its undisclosed borrowing capacity.  Many a company have gone bankrupt with lots of "Reserves" still on its balance sheet.

What then does this term "Reserves" mean?  The reason why there is an item of "Resreves" in the balance sheet of most companies is due to the nature of our accounting system. 

Assets = Liabilities + Shareholders' Equity*

(*defined as Paid up Capital + Reserves)

Under this system of accounting, whenever, there is an increase in the total assets of the firm which is caused by either the purchase of a new asset or an increase in the book value of an asset (the "book value" of an asset is the value which is recorded in the accounting books of the company, it is not necessarily the same as its real value or its purchase price), a similar entry has to be placed on the opposite side of the balance sheet to keep it in balance.

Let us assume that the left hand side of the Balance Sheet goes up beause the company has purchased an asset.  We know that whenever there is an increase in the left hand side of the Balance Sheet, there must be a corresponding increase on the right hand side.  The right hand side would go up in accordance with how the company has financed this particular purchase.  There are three ways by which it can finance the purchase:

(1)  It can borrow the money;
(2)  It can obtain the money from its shareholders; and
(3)  It can earn the money.

If the firm borrows the money, its Liabilities would go up by an equal amount as the cost of the asset.  Hence both sides are still in balance.  If it obtains money from its shareholders, its Paid-up Capital would increase.  Using these two ways of financing an increase in asset results in no nett change in the value of the company in the hands of the shareholders.

If however, the company has earned enough profit to pay for the purchase, the balancing entry will be put under "Reserves".  Such an increase in the asset of the company will result in an increase in the nett worth of the company.  As the asset purchased will earn more profit for the company which can pay more dividend to the shareholders, the increased dividend payment will increase the price of the share.  Under normal circumstances, the value of a company would increase if it earns money to buy new assets.  But this is a "difficult" way of increasing one's assets for the company must make some money in the first place; there are other easier methods.

The easiest way by which the assets of a company can be increased in its book value is by revaluation.  When the assets of a company are revalued, an imbalance is created in the balance sheet because there is no corresponding increase on the other side.  In order to keep the balance sheet in balance, a similar amount is therefore added to the Reserves item. 

Whenever this happens, Malaysian speculators usually become very excited because they feel sure that a bonus issue is forthcoming since the company now has reserves which can be converted to bonus shares for distribution.  The price of such shares therfore tends to go up.  But why should the price of a company's share go up just because it has undergone a revaluation of its assets?  Is it not true to say that even after the revaluation, the true value of the assets of the company remains unchanged?  What is changed is the value shown in the accounting books of the company.  Surefly, we should price the shares of a company according to its true value rather than the value after a revaluation. 

Furthermore, how can we be sure that the revaluation has been properly carried out?  The experience of many local companies in this respect does not give one cause to have confidence in their ability to value their assets correctly.  In past years, many companies had to reduce the book value of their assets by a huge amount after having previously written them up to an unrealistic level.  Many of them suffer diminution in their assets of $50 million or more.  Valuation is an extremely subjective exercise and no two persons can agree exactly on the value of a piece of asset.

Another method of increasing the reserves of a company which was commonly practised in the past but which is more difficult (because of changes to regulations) to practise nowadays is by the overvaluation of assets to be swapped into the company by an exchange of shares.  We may define a share swap as when a company issues new shares to an outsider in exchange for a piece of asset.  In many of the share swaps carried otu, the assets to be swapped were valued very highly.  As a result, a lot of new shares had to be created to "pay" for the assets.  In some cases, instead of issuing the new shares at its par value or at the nett asset value of the shares, the shares were issued at a highly inflated value, say, $10 per share.  This means that for every share issued, $9.00 can be added to the Reserves of the company.  The company therefore had a lot of reserves for the issue of bonus shares. 

Thus, it can be seen that the reserves of a company can be created out of almost thin air.   Such reserves can then be used for the creation of bonus shares which in turn must be regarded as being virtually wothless as well.  Thus we can see that it is very difficult for a layman to known how the reserves of a company come into being.  Very often such reserves are created at the stroke of a pen.  Unless you can separate the "good" reserves from the "bad", you should not be excited by the prospect of a bonus issue as a result of an increase in Reserves.

Ref:  Stock Market Investment by Neoh Soon Kean