Tenaga inches up, tariff worries overblown

Tenaga inches up, tariff worries overblown

Tags: OSK Research | tariffs | Tenaga

Written by Joseph Chin
Friday, 08 January 2010 09:50

KUALA LUMPUR: Shares of TENAGA NASIONAL BHD [] rose in early trade on Friday, Jan 8 after OSK Investment Research said investors' worries about the tariffs were overblown.

At 9.44am, Tenaga was up three sen to RM8.23. There were 165,100 shares done.

On Thursday, Tenaga closed at RM8.20, its lowest since October last year as investors were concerned that it would not be able to get its proposed tariffs approved by the government. It hit an intra-day low of RM8.08.

"While we are maintaining our forecasts with an assumption of there being no tariff hike and coal at US$88 per tonne unchanged, we carried out a sensitivity analysis just to determine whether tariffs or cold weather would have a bigger impact on Tenaga," it said.

OSK Research said tariffs have a far larger impact on Tenaga's core net profits as well as its discounted cashflow-based fair value.

Even if cold weather does bring about a temporary spike in coal prices, the impact to Tenaga was not that significant while the lack of a tariff hike may mean some short-term knee jerk selling but ultimately this would have no impact to our earnings forecast.

"We believe that coal prices are still manageable for now and our forecasts do not include the effects of a tariff hike and therefore, any delay would also not impact on our estimates, our fair value or Buy call. Any selling should be viewed as an opportunity to Buy into weakness," it said.

http://www.theedgemalaysia.com/business-news/157055-tenaga-inches-up-tariff-worries-overblown.html

KNM bags RM143m contract in Thailand

KNM bags RM143m contract in Thailand

Tags: Impress Ethanol Co Ltd | KNM Group Bhd | KNM Process Systems Sdn Bhd | KNM Projects (Thailand) Co Ltd | KNMPS | KNMPT

Written by The Edge Financial Daily
Thursday, 07 January 2010 23:30

KUALA LUMPUR: KNM GROUP BHD [] has secured a RM143 million contract from Impress Ethanol Co Ltd to build a bioethanol plant in Thailand.

The contract involves the engineering, procurement, CONSTRUCTION [] and commissioning of a 200,000 litres per day cassava-based bioethanol plant in Chachaengsao, Thailand.

The new job was secured through its wholly owned subsidiary KNM Process Systems Sdn Bhd (KNMPS) and affiliated company KNM Projects (Thailand) Co Ltd (KNMPT). The project is expected to be completed within 18 months.

The order is expected to contribute positively to KNM's earnings for the financial years ending Dec 31, 2010 and Dec 31, 2011.

http://www.theedgemalaysia.com/business-news/157043-knm-bags-rm143m-contract-in-thailand.html

Latexx to venture into protein-free gloves

Latexx to venture into protein-free gloves

Tags: Budev | Latexx Partners | protein-free gloves

Written by Joseph Chin
Friday, 08 January 2010 19:38

KUALA LUMPUR: LATEXX PARTNERS BHD [] is teaming up with Amsterdam-based Budev BV to set up a joint-venture company to market and distribute protein-free gloves.

Latexx said on Friday, Jan 8 that Budev owns the intellectual property rights related to a TECHNOLOGY [] to reduce proteins causing latex allergy.

The JV company, Total Glove Co Sdn Bhd will have a paid-up of RM9,998 or 9,998 shares of RM1 each. Latexx and Budev will subscribe for 4,999 shares each in the JV company.

Latexx said the JV would treat natural rubber latex examination and surgical gloves using its technology.

The JV company will market and distribute these gloves, which will have "non-detectable level of proteins and allergens" to prevent users from having an allergic reaction. Budev will grant an exclusive licence to the JV company for the use of the technology.

Latexx said the proposed JV would enable it to venture into a new era of technology to treat natural rubber latex examination and surgical gloves with extremely reduced levels of proteins and allergens to non-detectable level to prevent users from having an allergic reaction.

"The proposed JV will augur well for Latexx to produce innovative, value-added with excellent quality glove products in its effort to reinforce its competitive edge in the global market.

"The adoption of such new technology will be beneficial for the short and long term goals of Latexx. It is consistent with Latexx's intention to seek strategic alliances and joint ventures for synergistic benefits to enable Latexx to be competitive with innovative production methods to produce high quality gloves for its customers," it said.

http://www.theedgemalaysia.com/business-news/157118-latexx-to-venture-into-protein-free-gloves.html

Why may Quek wants EONCap

How high a price Quek is willing to pay for EONCap will depend on how badly he wants to merge the two banking groups.

The biggest attraction for Quek is that a merger between HLBB and EONCap will enable the merged group to compete in an environment where competition is heating up very fast as libersailisation gathers pace.

There is, however, a view that Quek could be bulking up his banking operations domestically for bigger things in time to come.  The merger will immediately raise HLBB to a higher platform, perhaps putting it in a strong position to acquire Public Bank should the opportunity arises, an industry observer notes. 

Be that as it may, banking analysts say Quek has been making some really aggressive moves of late to propel both the Hong Leong Financial Group and Guoco Group to a higher platform regionally.  HLBB has been making inroads into China and Vietnam, and there are rumours it is trying to get into Thailand as well.  HLBB is the only Malaysian bank with a licence to operate a bank in Vietnam.

Quesk's strategy, according to an industry observer, is that for HLBB to become a significant player in the region, it has to be a bigger and stronger domestic player first.  This is more so when under the new Basel 2 framework, financial strength is key.  "This is why he wants scale for HLBB - it will give him the financial muscle to expand regionally... the move to buy EONCap and merge it with HLBB is all part of this bigger picture," he says.

How will Quek pay?

At RM8 a share, HLBB would have to fork out RM5.5 billion for a 100% stake in EONCap, says OSK Research.  The purchase, though, may not be entirely in cash, and could be in the form of equity and cash.

The New Year's No. 1 Investing Tip

The New Year's No. 1 Investing Tip
By Tim Hanson
December 31, 2009

Take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond. If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance.

What I'm about to tell you could be the most important investing tip you get this year -- even better than if I gave you the name of some race-car growth stock that might double in 2010. But for you to appreciate its importance, I need to tell you two true stories.

True story No. 1
2007 had been a flat year for the market, but we started getting signs at the end of the year that all was not well with the housing market. The S&P took a sharp 10% dive from October to December and newspapers were reporting more and more about a looming "subprime" crisis. Yes, Ben Bernanke cut interest rates, but by the end of 2007, though the scale of the eventual crisis was not yet clear, it was obvious that there were at least a few weak links in the financial sector.

It was at this time that I took a look at my portfolio and realized that I was more than 25% weighted in the financial sector stocks such as Berkshire Hathaway (NYSE: BRK-A), optionsXpress (Nasdaq: OXPS), and International Assets Holding (Nasdaq: IAAC).

Before you call me daft, let me explain how such a thing could happen. First, financial sector stocks were coming out of a period of healthy growth, and my holdings had grown in size from their original positions. Second, financial stocks generally look like attractive buys because of their asset-light business models and high returns on capital. And third, I hadn't paid attention to my overweighting in real-time because these companies weren't operating in the same parts of the financial sector.

Yet overweight position across financials scared me when I saw it at the end of 2007 since my outlook for financials in 2008 wasn't all that rosy.

What happened? I rebalanced my portfolio by selling some of my financial stocks and saved myself a lot of pain as a result.

True story No. 2
Fast-forward to the end of 2008. The entire stock market had dropped nearly 50% and stocks with higher risk profiles -- such emerging markets names -- were down even more than that.

As a consequence, when I looked at my portfolio, I realized I now had less than 10% of my money invested in emerging markets even though I believed countries such as China, India, and Brazil were going to lead the world into recovery in 2009. After all, these countries were still posting positive GDP growth and had attributes -- such as a higher savings rate in China, a younger population in India, and a wealth of natural resources in Brazil -- that seemed like they could better help them survive and perhaps even thrive through the downturn.

So what did I do? I rebalanced my portfolio by selling some U.S. stocks and buying more shares of promising emerging markets names such as America Movil (NYSE: AMX), Mercadolibre (Nasdaq: MELI), China Fire & Security (Nasdaq: CFSG), and Yongye International (Nasdaq: YONG).

As you can see from the returns below, my emerging markets thesis played out as expected and my decision to buy more of those stocks helped make my returns dramatically better than they would have been otherwise.

Stock
2009 Return

America Movil
55%

Mercadolibre
217%

China Fire & Security
103%

Yongye International
425%


The New Year's No. 1 investing tip
Now that you know those two true stories, I hope you can appreciate the importance of taking time at the end of each calendar year to take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond.

If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance. Not only could rebalancing save you a lot of pain (as it did me in 2008), but it can also help you make a lot more money (as it did me in 2009).

http://www.fool.com/investing/international/2009/12/31/the-new-years-no-1-investing-tip.aspx

Warren Buffett's Priceless Investment Advice

Warren Buffett's Priceless Investment Advice
By John Reeves
December 9, 2009


"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett's approach is both easy to follow and demonstrably successful over more than 50 years. Why try anything else?


http://www.fool.com/investing/value/2009/12/09/warren-buffetts-priceless-investment-advice.aspx


Read the rest of the article below...

Two words for the efficient market hypothesis: Warren Buffett
An interesting academic study illustrates Buffett's amazing investment genius. From 1980 to 2003, the stock portfolio of Berkshire Hathaway (NYSE: BRK-A) beat the S&P 500 index in 20 out of 24 years. During that period, Berkshire's average annual return from its stock portfolio outperformed the index by 12 percentage points. The efficient market theory predicts that this is impossible. In this case, the theory is clearly wrong.

Buffett has delivered these outstanding returns by buying undervalued shares in great companies such as Gillette, now owned by Procter & Gamble. Over the years, Berkshire has owned household names such as Walt Disney (NYSE: DIS), Office Depot (NYSE: ODP), and SunTrust Banks (NYSE: STI).

Although not every pick worked out, for the most part Buffett and Berkshire have made a mint. Indeed, Buffett's investment in Gillette increased threefold during the 1990s. Who'd have guessed you could get such stratospheric returns from razors?

The devil is in the details
Buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies -- and determining what constitutes a reasonable price.

Buffett recommends that investors look for companies that deliver outstanding returns on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors. You can identify companies with moats by looking for strong brands that stand alongside consistent or improving profit margins and returns on capital.

How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values -- as calculated by taking the present value of all future cash flows. Ultimately, he believes that "value will in time always be reflected in market price." When the market finally recognizes the true worth of your undervalued shares, you begin to earn solid returns.

Do-it-yourself outperformance
Before they can capture Buffett-like returns, beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values. In the meantime, consider looking for stock ideas among Berkshire's own holdings.

The financial media made a big fuss over Berkshire's $44 billion acquisition of Burlington Northern Santa Fe, which has caused some of his recent stock selections to fly under the radar. For instance, Buffett just opened a position in ExxonMobil (NYSE: XOM), which joins ConocoPhillips (NYSE: COP) to comprise Berkshire's oil and gas exposure.

It's easy to see why Berkshire likes this efficient operator. ExxonMobil boasts a rock solid balance sheet and broad geographic diversification. Furthermore, Exxon should only benefit if commodity prices increase -- a theme consistent with Buffett's recent railroad purchase. And if Buffett's buying history is any guide, you can be confident that Exxon shares are trading at a discount to their intrinsic value.

So what will Buffett buy next? Unfortunately, we'll have to wait until Berkshire files its next Form 13-F to know for sure.

Of course, that's the problem with following Buffett's stock picks -- we'll never know what he's buying today until long after the fact. In the meantime, another place to find great value-stock ideas is Motley Fool Inside Value. Philip Durell, the advisor for the service, follows an investment strategy very similar to Buffett's.

He looks for undervalued companies that also have strong financials and competitive positions. Philip is outperforming the market with this approach, used since Inside Value's inception in 2004. In fact, Philip's recommendation for December is a pick that Buffett would love -- an electric utility with stable free cash flow, strong competitive advantages, and a 4.3% dividend yield. To read more about this stock pick, as well as the entire archive of past selections, sign up for a free 30-day trial today.

If investing in wonderful companies at fair prices is good enough for Warren Buffett -- arguably the finest investor on the planet -- it should be good enough for the rest of us.

3 Signs of a Terrible Investment

3 Signs of a Terrible Investment
By Matt Koppenheffer
January 4, 2010 |

There's nothing wrong with fixing your focus on trying to find the next Wal-Mart (NYSE: WMT). After all, isn't that what we're here for in the first place?

But before you go diving in after that hot new small cap you found, let's take a moment to remember some of Warren Buffett's priceless investment advice: "Rule number one: Never lose money. Rule number two: Never forget rule number one."

Maybe we should rename Warren "Captain Obvious."

But as obvious as Buffett's advice may seem, it's an important and often overlooked aspect of investing. So how do we avoid losing money? I've found a few great lessons from some of the past decade's worst investments.

1. Poor business model
In Buffett's 2007 letter to Berkshire Hathaway (NYSE: BRK-A) shareholders, he described three types of businesses: the great, the good, and the gruesome. He described the "gruesome" type as a business that "grows rapidly, requires significant capital to engender the growth, and then earns little or no money."

Buffett's prime example of a gruesome business? Airlines. And he's not alone in thinking this. Robert Crandall, the former chairman of American Airlines, once said:

I've never invested in any airline. I'm an airline manager. I don't invest in airlines. And I always said to the employees of American, 'This is not an appropriate investment. It's a great place to work and it's a great company that does important work. But airlines are not an investment.'

So then it shouldn't be much of a surprise that AMR (NYSE: AMR), American Airlines' parent, would come up as a stock that has massively underperformed the market. Though American is the only legacy airline not to have declared bankruptcy, the business has performed only marginally over the years, and its voracious appetite for capital has gobbled up all of the company's cash and then some.

Investing large amounts of capital into a business isn't a bad thing in itself. However, investors need to be sure that there's a good chance that capital investments will actually translate into healthy shareholder returns.

2. Sky-high valuation
We can take our pick of overvalued stocks when looking back 10 years, but Yahoo! (Nasdaq: YHOO) seems to stick out as a prime example.

Yahoo! had a lot going for it back in 1999 -- it was a pioneer and leader in the Internet search arena, it was growing like a weed, and by the end of 1999 was actually profitable. And, in fact, Yahoo! continued to get even more profitable and managed to expand its revenue 12-fold by the end of 2008.

However, the 259 price-to-revenue multiple that investors awarded the stock at the end of 1999 was absolutely ludicrous. Even if Google (Nasdaq: GOOG) had never come along and pushed Yahoo! aside as the industry leader, it would have been nearly impossible for the company to live up to the expectations that Yahoo!'s 1999 valuation implied.

As Buffett has said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." And it's never a good idea to own even a great company at an absurd price.

3. Loss of focus
What exactly was it that made E*TRADE (Nasdaq: ETFC) so successful for so many years? That's simple: It was a leader in the online brokerage market, making it easier for Fools like us to buy and sell stocks, bonds, mutual funds, and options.

However, the need for speed on the growth front, along with the pre-crash excitement in the housing and credit markets, led E*TRADE to rapidly bulk up its lending activities and investment portfolio, including feasting on food-poisoning-inducing asset-backed securities. As it turns out, E*TRADE wasn't especially good at managing these areas, and when all hell broke loose in 2008, the company found itself on the brink of extinction.

E*TRADE competitors like optionsXpress and Charles Schwab (Nasdaq: SCHW) have either stuck to their knitting or never let their noncore operations get out of control. As a result, their stocks have held up much better through the market turmoil.

Successful companies tend to be successful because they're good at their core business -- online brokerage services in E*TRADE's case. Is it possible for a company to branch out in a related area and be successful? Absolutely, but investors should always be on high alert when a company charges full throttle into uncharted waters.

The best of both worlds
Keeping these lessons in mind when evaluating an investment will help you avoid some of the next decade's worst investments, but they may also help you achieve the goal that we started with -- finding the next Wal-Mart. After all, Wal-Mart is a company with a great business model and a laser-like focus on its core low-priced-retail strategy, and it's been a fantastic investment for those who bought at a fair price.



http://www.fool.com/investing/small-cap/2010/01/04/3-signs-of-a-terrible-investment.aspx

Talk about laying your reputation on the line!

Nouriel Roubini's Worst Call Ever
http://www.fool.com/investing/general/2010/01/04/nouriel-roubinis-worst-call-ever.aspx

This article has a good discussion on investing in gold. There are people arguing for and others arguing against.  Investing opinions are always so interesting.  Depending on your frame of thinking, you are either a bull or a bear.  It is difficult to predict the market.  Economists have a tough job to make the call.  It is a tougher job to expect them to be right all the time!

Here is a comment by a reader:

"Gold is an obsession. It can never be 'fairly' valued as demand cannot be measured in terms of physical need. The demand for gold has much more to do with the level of fear investors are feeling than with any concievable fundamentals.

I can look a company's balance sheet, listen to its conference calls, chat with fellow Fools and decide on the basis of facts whether its current stock price is fair or not.

Compare that to trying to project inflation, US government policy changes, and the reserve needs of opaque central banks in Asia. All of those things will affect the future price of gold.

Those of us who bought healthy companies in the spring of 2009 at bargain prices are already reaping the gains. Buying gold now is betting on the future $2k price which in turn is betting on future economic conditions and future investor sentiment. That's a lot of "ifs"."

Enjoy the rest of the article.

Understanding Sales Growth

In general, sales growth stems from one of four areas:

 

1. Selling more goods and services

The easiest way to grow is to do whatever you're doing better than your competitors, sell more products than they do, and steal market share from them.

2. Raising prices

 

Raising prices can also be a great way for companies to boost their top lines, although it takes a strong brand or a captive market to be able to do it successfully for very long. 

 

3. Selling new goods or services

If there's not much more market share to be taken or your customers are very price-sensitive, you can expand your market by selling products that you hadn't sold before.  Investigate new markets.

 

4. Buying another company

 

The fourth source of sales growth - acquisitions - deserves special attention.  Unfortunately, the historical track record for acquisitions is mixed.  Most acquisitions fail to produce positive gains for shareholders of the acquiring firm, and one study showed that even acquisitions of small, related businesses - which you'd think would have a good chance of working out well - succeeded only about half the time.

 

 

For the investor, the goal of this type of analysis is simply to know why a company is growing. 

For example, in a beer company, you would want to know

• how much growth is coming from price increases (more expensive beer),
• how much is coming from volume increase (more beer drinkers), and
• how much is coming from market share growth (more company's brand drinkers). 

Once you're able to segment a firm's growth rate into its components, you'll have a much better handle on where that growth is likely to come from in the future - and when it may tap out.

The 4 Sources of Growth

In the long run, sales growth drives earnings growth. 

In general, sales growth stems from one of four areas:

1.  Selling more goods and services
2.  Raising prices
3.  Selling new goods or services
4.  Buying another company

Although profit growths can outpace sales growth for a while if a company is able to do an excellent job cutting costs or fiddling with the financial statements, this kind of situation simply isn't sustainable over the long haul - there's a limit to how much costs can be cut, and there are only so many financial tricks that companies can use to boost the bottom line.

Source and Quality of a company's growth

In search of high growth, we cannot just look at a series of past growth rates and assume that they will predict the future - if only investing were that easy!

It is critical to investigate the SOURCE of a company's growth rate and assess the QUALITY of the growth. 

HIGH QUALITY GROWTH that comes from selling more goods and entering new markets is more sustainable than LOW QUALITY GROWTH that's generated by cost-cutting or accounting tricks.

High growth rates are heady stuff and not very persistent over a series of years

The allure of strong growth has probably led more investors into temptation than anything else. 

High growth rates are heady stuff - a company that manages to increase its earnings at 15% for 5 years will double its profits, and who wouldn't want to do that?

Unfortunately, a slew of academic research shows that strong earnings growth is NOT VERY PERSISTENT over a series of years; in other words, a track record of high earnings growth does not necessarily lead to high earnings growth in the future. 

Why is this?

• Because the total economic pie is growing only so fast - after all, the long-run aggregate growth of corporate earnings has historically been slightly slower than the growth of the economy - strong and rapidly growing profits attract intense competition. 
• Companies that are growing fast and piling up profits soon find other companies trying to get a piece of the action for themselves.

Value of Equity Offerings in Malaysia in 2009

Malaysia equity offerings

Year RM mil (No. of issue) % chg

2009 15,234 (26) 857.51%
2008 1,591 (24) -81.22%
2007 8,472 (48) 130.84%
2006 3,670 (45) -8.14%
2005 3,995 (86) -19.71%
2004 4,976 (72) 62.67%
2003 3,059 (49)

Source: Bloomberg

Malaysia's equity market expanded more than eight times to RM 15.23 billion year-on-year in 2009, helped by Maxis Bhd's mega initial public offering (IPO) as well as the liberalisation of bumiputera equity rules. This came after a 81.2% year-on-year slump in activity to RM 1.59 billion in 2008 from the pre-Lehman collapse heydays of 2007 that saw RM 8.47 billion raised from 48 issuances.

"The sharp increase in equity market activity could be attributed to the easing of listing regulations on Bursa Malaysia. This encourages more foreign companies to list on Bursa Malaysia, which saw three Chinese companies listed in 2009," Bloomberg said in its latest annual review of Malaysia's capital market.

The number of equity offerings was only up marginally to 26 in 2009 from 24 in 2008.

CIMB topped 2009's list of investment banks that sold and underwrote a company's securities in Malaysia.

• CIMB topped the 2009 Malaysian Ringgit Bonds table, having arranged issuances worth RM 18.63 billion in proceeds.
• CIMB also topped the 2009 Malaysian Ringgit Islamic Bonds table with RM 12.61 billion in proceeds arranged, cornering 39.2% market share, according to data from Bloomberg's Malaysia Capital Markets Review.

Malaysian corporate bond

Total Malaysian corporate bond issuances:
2009 RM 52.46 billion (+8.25% from last year)
2008 RM 48.63 billion

Malaysian Islamic Bond Issuances (component of Total Malaysian corporate bond issuances)
2009 RM 32.17 billion (+42.5% from last year)

The 42.5% jump in Malaysian Islamic bond issuances last year made up for the 21.42% slide in corporate bond issuances in 2009.

Syndicated Loans Market

The volume of syndicated loans market in Malaysia, meanwhile, slumped.
2009 US$4.55 billion ( -53.44% from last year)
2008 US$9.77 billion

The Edge Financial Daily

Upward trend intact, stock picking is key

KLCI Valuation

Support from strong growth outlook and positive market drivers

Longer term uptrend intact. The KLCI is now trading at 15 times 2010 earnings (above its post-crisis average of 14 times) and 1.8 times book value (above its post-crisis average of 1.7 times).

Following strong GDP growth in the last two quarters, we upgraded our projected GDP growth to 5% for 2010, a turnaround from -2.4% in 2009.  Corporate earnings in the last two quarters have been upgraded by 6.7% for 2009 and 11.9% for 2010.

With that, we expect 2010 earnings to exceed pre-crisis levels.  On the back of strong growth outlook and positive market drivers, the longer-term upward trend is intact.  And riding on strong liquidity, multiples could be higher over the longer term.

Our end-2010 KLCI target of 1,448 is based on higher 16 times 2011 earnings, achieved in the 2007 upswing.  KLCI's valuations remain higher compared to regional markets.  This could result in Malaysia lagging regional markets.  This could result in Malaysia lagging regional markets in an upswing.

That said, the stellar 50% gain from the March low is likely to result in intermittent profit-taking.  In 1998 and 2001, the market rebounded by 26% - 136% over five months.

After the initial rebound, the KLCI corrected 15% - 20% over two months in both cases.  In this recovery, the KLCI is up 50% from March, and the sharpest correction since was only a 6% drop.  In 1998 and 2001, the market went on to reach new record highs, post-correction.

Ref:  HwangDBS Vickers Research

Effect of possible Ringgit appreciation

By end-2010, we expect the ringgit to appreciate about 5% against the US dollar (to RM 3.24/USD). 

Beneficiaries will include:

• aviation (MAS, Air Asia) and
• the steel sector (Southern Steel, Kinsteel),

where there is a high proportion of USD-denominated costs.

Losers will include:

• exporters (Evergreen Fibreboard) and
• MISC.

Rubber glove manufacturers (Top Glove, Kossan) price their products in USD.  However, we understand glove players usually adjust prices to factor in currency movements. 

The prospect of an appreciating ringgit could further boost returns for foreign investors.


Ref:  HwangDBS Vickers Research

Low Foreign Ownership in Malaysian Stock Market

Foreign investors were conspicuosly absent from the scene whenthe Malaysian stock market jumped 50% between mid-March 2009 and now.

This was evident in the insignificant level of trading activity by foreign investors (just 25% of trading value in Jan-Sept 2009) and the persistent net portfolio investment quarterly outflows (since 3Q07) with foreign ownership standing at a five-year low.

That may soon change.  Among the speculated reasons are:

• Coming off from a depleted base, foreign funds could trickle back into Malaysia, especially if global equities turn increasingly volatile ahead. 
• As the risk-reward profile tilts in the opposite direction because of stretched valuations, strategiests may be tempted to make a gradual tactical switch to more defensive low-beta markets like Malaysia.
• The prospect of an appreciating rinngit is an added appeal for investors in search of incremental investmen returns.

 Some under-owned stocks - with foreign shareholdings far below their recent peaks - that could increasingly come under the investment radar of foreign investors again are:

• CIMB (33% foreign shareholding in June 09),
• IJM Corp (34%),
• MRCB (19%),
• SP Setia (28%) and
• Tenaga (11%)

Ref:  HwangDBS Vickers Research

Best Performers in the KLCI

From March 09 low (%)

Genting 122
AMMB 111
CIMB Group 107
Axiata Group 86
Maybank 86
Astro 84
MMC Corp 79
PPB Group 70
Public Bank 58
KL Kepong 57
Hong Leong Bank 56
Parkson Holdings 53
IOI Corp 50
RHB Capital 48
KLCI 50


From 4Q09 (%)

Hong Leong Bank 24
AMMB 16
CIMB Group 15
KL Kepong 13
Tanjong 10
Public Bank 7
Sime Darby 7
IOI Corp 4
Tenaga Nasional 4
PPB Group 4
RHB Capital 3
Genting 3
Digi.com 3
MAS 2
Parkson Holdings 2
KLCI 5


Biggest contributors to the KLCI's gain from March 2009 low


39% Banks
25% Plantation
10% Gaming
8% Telco
7% Power
7% Others

Source: DBS Vickers, Bloomberg

More gloves shipped at higher average selling prices

Supermax says glove demand strong, profit up
Written by Reuters
Thursday, 07 January 2010 20:34

KUALA LUMPUR: Malaysia's No 2 rubber glove maker Supermax expects another year of strong profit growth as fears about a resurgence of the H1N1 flu fuel demand for its products, a top executive told Reuters today.

Supermax may upgrade its earnings target for 2010 when it announces its full-year earnings for 2009 in February, managing director Datuk Seri Stanley Thai said.

The glove maker had previously guided for a net profit of RM133 million for 2010.

"2010 will continue to be a good year for the glove industry. We expect handsome profits," Thai said in a telephone interview.

Supermax has already received glove orders that will keep its factories busy for the next four to five months, he said.

Thai also said fourth-quarter net profit will be better than the third-quarter.

"We shipped more gloves at higher average selling prices in the fourth-quarter than the third-quarter," he said. — Reuters

Focus on the companies with Economic Moats

Economic moats are long-term competitive advantages that allow companies to earn oversized profits over time.  These are the companies you should focus your attention on.

There are 4 main types of economic moats:

• Low-cost producer or Economies of Scale
• High switching costs
• Network effect
• Intangible assets

The more types of economic moats a company has, the better.

The longer a firm can sustain its competitive advantage, the wider its economic moat.


The Bottom Line

• While having these four types of of moats, or competitive advantages, as guidelines is helpful, there is still a lot of art to determining whether a firm has a moat. 
• At the heart of it, the harder it is for a firm's advantage to be imitated, the more likely it is to have a barrier to entry in its industry and a defensible source of profit.

Looking for the firm with an economic moat (Evaluating Profitability)

The first thing we need to do is look for hard evidence that a firm has an economic moat by examining its financial results. (Figuring out whether a company might have a moat in the FUTURE is much tougher.)

What we are looking for are firms that can earn profits (ROIC) in excess of their cost of capital (WACC) - companies that can generate substantial cash relative to the amount of investments they make.

Use the metrics in the following questions to evaluate profitability:

1. Does the firm generate free cash flow? If so, how much?
Firms that generate free cash flow essentially have money left over after reinvesting whatever they need to keep their businesses humming along. In a sense, free cash flow is money that could be extracted from the firm every year without damaging the core business.

FCF Margin:  Divide FCF by sales (or revenues). This tells what proportion of each dollar in revenue the firm is able to convert into excess profits.

If a firm's FCF/Sales is around 5% or better, you've found a cash machine.

Strong FCF is an excellent sign that a firm has an economic moat.

(FCF/Total Capital Employed or FCF/Enterprice Value are some measures.)


2. What are the firm's net margins?
Net margins look at probability from another angle.

Net margin = net income/ Sales

It tells how much profits the firm generates per dollar of sales.

In general, firms that can post net margins above 15% are doing something right.

3. What are the returns on equity?
ROE = net income/shareholders' equity
It measures profits per dollar of the capital shareholders have invested in a company.

Although ROE does have some flaws -it still works well as one tool for assessing overall profitability.

As a rule of thumb, firms that are able to consistently post ROEs above 15% are generating solid returns on shareholders' money, which means they're likely to have economic moats.

4. What are returns on assets?
ROA = (net income + Aftertax Interest Expense )/ firm's average assets
It measures how efficient a firm is at translating its assets into profits.

Use 6% to 7% as a rough benchmark - if a firm is able to consistently post ROAs above these rates, it may have some competitive advantage over its peers.

The company's aftertax interest expense is added back to net income in the calculation.  Why is that?  ROA measures the profitability a company achieves on all of its assets, regardless if they are financed by equity holders or debtholders; therefore, we add back in what the debtholders are charging the company to borrow money.


Study these metrics over 5 or 10 years

When looking at all four of these metrics, look at more than just one year.

A firm that has consistently cranked out solid ROEs, ROA, good FCF, and decent net margins over a number of years is much more likely to truly have an economic moat than a firm with more erratic results.

Five years is the absolute minimum time period for evaluation, 10 years is even better, if you can.


Consistency is Important

Consistency is important when evaluating companies, because it's the ability to keep competitors at bay for an extended period of time - not just for a year or two - that really makes a firm valuable.



These benchmarks are rules of thumb, not hard-and-fast cut-offs.

Comparing firms with industry averages is always a good idea, as is examining the trend in profitability metrics - are they getting higher or lower?

There is a more sophisticated way of measuring a firm's profitability that involves calculating return on invested capital (ROIC), estimating a weighted average cost of capital (WACC), and then looking at the difference between the two.

Using a combination of FCF, ROE, ROE and net margins will steer you in the right direction.


Additional notes:

DuPont Equation

ROA = Net Profits / Average Assets
ROA = Asset Turnover x Net Profit Margin

ROA
= (Sales/Average Assets) x (Net Profits/Sales)
= Net Profits/Average Assets

ROE = Net Profits / Average Shareholder's Equity
ROE = Asset Turnover x Net Profit Margin x Asset/Equity Ratio*

ROE
= (Sales/Average Assets) x (Net Profits/Sales) x (Average Assets/Average Equity)
= Net Profits./ Average Equity

*Asset/Equity Ratio = Leverage