Thursday, August 31, 2006

Economy & Equity Market - Malaysia

sopskysalat: wonder if you can post your view on us economy going forward as the current slowdown is lingering in everyone's mind. also, i find the equity market also find itself in an uncertain state.

Economy - Excellent, currency is the main issue, then interest rates. If you line up our ringgit against all major currencies, you will find that the ringgit has the highest correlation with the renminbi over the last 10 months. Bank Negara sees being competitive vis-a-vis the Chinese currency as the most important determinant even though US remains our top trade nation. But as a bloc, Asian countries will be increasingly important as a trade bloc and trade partner. No point benchmarking to the US as the dollar has a lot of things they have to rectify with the underlying US economy. Beijing is loathed to raise rates owing to gthe massive credit binge in their system. Beijing will continue to allow the yuan to appreciate and that means the same thing for the ringgit. In terms of purchasing power, the ringgit can go to 3.4/USD this year without affecting competitive edge too much. For 2007, we can average 3.2. That is an important consideration when in the eyes of investors. Foreign investors were pretty pissed off in 2005 with Malaysia cos they betted for a revalued ringgit but it came way too late, which was why other emerging mart performed so much better than KLSE. A firming ringgit gives investors a good safety margin in equities. Hence interest rates would not be excessive as well. Imported inflation will be subdued.

Equity - If you look at the quarterly earnings of top 20 stocks in 2004 and 2005, most are flat or down year on year basis. The uptick started over the last 2 quarters and corporate earnings seem to have turned a corner. Liquidity is good but not excessive. Khazanah's KPIs are a good start, let's see how that goes. Palm oil has a new bottom threshold underpinned by a substantive new form of demand. Palm oil rally not over, PER ratings for all palm oil stocks can move up another 10% at least over the next 6 months. Look for companies with a bias towards younger plantations coming onto to mature stage in 2007 and 2008 in particular. KLK and PPB stand out. While things look good, they are not exactly the recipe for a major bull run. Its a gradual rise, I see index trying for 1,000 before the year is over and 2007 may see a test of the 1,035 by March/April before subsiding. M&A plays will take centerstage - RHB Capital, EON, DRB Hicom, Proton will take their turns. Trading stocks with corporate exercises - Konsortium.

Wednesday, August 30, 2006

Pantai, Khazanah, Bailouts?
What's Wrong With The Picture?

As reported in The Edge: "Khazanah Nasional Bhd's move to take control of Pantai Holdings Bhd, which holds two government healthcare concessions, will not hurt investor perception of Malaysia, said Second Finance Minister Tan Sri Nor Mohd Yakcop. “This is not a bailout. This is a market-driven solution to a problem where there is a willing buyer, willing seller. Pantai is seen to be in an industry which is viewed as sensitive as it holds two concessionaires. It (Khazanah's taking control) has resolved the issue of this sensitive sector," he told reporters in Putrajaya on Aug 29.

On Aug 28, Khazanah said its wholly owned subsidiary Pantai Irama Ventures Sdn Bhd had bought a 6.6% stake in Pantai and entered into a deal with Parkway to acquire the Singaporean company’s 134.7 million Pantai shares at RM2.65 each. Parkway would in turn acquire a 49% stake in Pantai Irama, which will have a 35% stake in Pantai. Parkway will be the operating partner through a management contract. Meanwhile, Parkway said Pantai Irama would have four directors with two each coming from the Khazanah arm and Parkway. The two Khazanah appointees are its executive director (investment) Ganen Sarvananthan and its senior vice president (investment) Tunku Ali Redhaudin Tunku Muhriz. Parkway's appointees are its chairman Richard Seow and managing director Dr Lim Cheok Peng. Meanwhile, Pantai's share price rose 10 sen to close at the year’s new high of RM2.61 on Aug 29, with a total of 5.56 million shares done. Its warrants also ended 10 sen higher at RM1.48."

Issues To Consider:
1) Not a bailout, yes and no, but the problem with Pantai and Parkway was created when Parkway bought Pantai. Parkway is a foreign entity. The company definitely needed to secure approvals from SC/Bursa and most importantly FIC. What was the FIC doing in approving such a deal without batting an eyelid?? If a company was given a government concession, which materially effected the value of that company, that company is an entity that has "national interest" written all over it. Hence to sell controlling interest in that company is inequitable.
2) That very same issue was what derailed Shin Corp and Temasek's deal early this year - so much so that Thaksin was eventually removed because of the deal. Shin Corp was started based on government concessions, and then to resell the company to a foreign party pissed a whole lot of people.
3) A bailout is ... like TRI and MAS and the government. When the company is bleeding and the owner does not have a clue on how to turn it around. Pantai is not a bailout in that sense, but of a different kind. The Parkway people found themselves in the middle of a storm in a teacup, much like the way temasek found itself embroiled in a stewing pot luck of tom yam goong. The politcal backlash was too much to endure for Parkway, and if Parkway were to maintain its independence, it will have to give up the concessions or sell it cheaply. That would have reduced Pantai's value dramatically. Khazanah stepping in would have been a solution in keeping the value in Pantai and appeasing the backbenchers.
4) This deal mirrors excatly why Malaysia corporate still has some ways to go. We plug holes instead of making sure there are no holes to start with. We do crisis management when better planning and execution would have eliminated much of the need for crisis management. We find second rate solutions to unecessary problems which would not have sprung up with everyone exibiting more professionalism. If FIC did its job, or was allowed to do its job, instead of being railroaded to let the deal pass, such a thing would never needed to happen in the first place. If the authorities in the proper approval stages were allowed to do their jobs, and not being instructed to clear the approval processes, maybe such a thing would not need to happen.
5) Khazanah stepping in needed the a spin from the Second Finance Minister to tell everyone why Khazanah was required to step in. We make life difficult for ourselves. The fact that Khazanah was asked to step in need not happen in the first place, it probably wasn't something they wanted control of. Can you imagine if Khazanah was asked to "step in" once a year to clean up the mess made by other - then after a few years, Khazanah would be holding controlling stakes in companies it did not wanted, and not part of its masterplan. Things like these saps the power and management time from Khazanah to do really fruitful things or maintain its long term investing strategy, without having to deal with unecessray hiccups. Just one of these deals a year can kill the effectiveness of Khaznah. The problem is these type of deals are not that infrequent ... want to go into examples?!!

Please, more professionalism, and no more railroading of certain projects/approval processes because certain people asked for them. Let the people appointed in their respective governing bodies to do their job, instead now they can only shrug their shoulders in exasperation. I love my country, Merdeka ... we have come a long way, no need to do everything the long way ... man!

Monday, August 28, 2006

US Stocks' Dividend Yield & The Hidden Devil

Recently I posted that as of the end of July, the US equity markets (S&P 500) were trading at a PE of 17.6x, Price/Book of 2.8x with a dividend yield of just 1.9%. International stocks trade at a PE of 15.9x, P/BV of 2.3x and a DY of 2.5%. Emerging markets stocks trade at a PE of 14x, P/BV of 2.3x and a more respectable DY of 2.5%. In effect, there is another point which I have failed to account for, which would bring the US markets' valuation closer to the other two. The hidden devil in disguise is stock buybacks. According to S&P, if you add in stock buybacks to dividends, the S&P 500’s yield jumps to 5.34 percent!

S&P says that companies in its 500 index have spent a stunning US$116 billion on stock buybacks in the second quarter, up 43 percent from 2005 levels and a stunning 175 percent from 2004. Thats about US$2 billion a day. Buybacks are similar to dividends - you are in effect returning money to shareholders, only thing is that instead of cheque in the mail, they reduce the float. Of course, as I have argued many times before, share buybacks only works IF you cancel those shares. That's the main reason why the so-many-buybacks in Malaysia does not work. You have to tell investors you are buying them, and then canceling them. If you buy on the pretext of redistributing them later or selling at a profit, that is not share buybacks. It does not work like that. The good thing in the US is that most share buybacks involve share cancellation as well.

The record US$116 billion in buybacks is the result of over 40% of the S&P 500 companies reducing their share count during the second quarter. The unprecedented expenditure on buybacks and the resulting share count reduction is having a material affect on both earnings-per-share and cash flow. Left unabated, this will eventually impact the supply of open market shares, and therefore the share price itself. With US bank accounts paying just over 4 percent, and bonds yielding not much more than that, the 5.34 percent buyback/dividend yield doesn’t look half bad.

The enormous buybacks also show something that’s been obvious to index watchers for some time: Despite relatively flat returns in the market, corporate America is swimming in cash right now, and they don’t know what to do with it. According to S&P, companies spent as much money on stock buybacks over the past twelve months as they have on capital equipment expenditures. Doing massive share buybacks is also a tendency to boost share prices by senior management as they have enormous options, and stand to gain from that strategy. It also points to the fact that corporate America is cash rich. But it also points to the fact that most companies find few reinvesting ideas.

Now the differentials between US equity, International equity and Emerging Markets equity does not look so bad at all. In fact with a dividend yield of more than 5%, US stocks still has a long way to go up. Look on the bright side, things good for US stocks, will also make other equity markets good.

Friday, August 25, 2006

Zentrader's Question On Analysts

Zentrader asked:
Dear Dali
I think a lot fund managers and analysts are 'visiting' your blog for insider trading idea. BTW, do you think we should trust those analysts employed by firms? As sometimes I think they are writing for the big boys instead of small boys like us.
Zen

First of all, I don't think FMs and ANALs care very much for blogs. Should people trust ANALs. There are those who by virtue of whom they work for, their work will get read and promoted more, e.g. US houses by virtue of their reach and size. Hence they produce market moving reports. But eventually good research has to stand the test of time, so good ANALs do stand out no matter which houses they are from.

Secondly, research is for big boys, fullstop. At times its a two way thing. You look at the top ten volume stocks, everyday, you'd be lucky to find two with research reports on them - this means people are trading blind everyday. How do you expect broking houses to cater to people who do not wish to read too much? Of course, its a growing up process also. The local bourse is probably 60-40 dominated by individual investors against institutional trading wise. Most developed markets have that ratio 80-20 favouring institutional side. So, you can see that we have a very long way to go, its part of a normal exchange development curve. As the capital markets develop further, the amount of individual investing will ease in favour institutionalised investing. There is a caveat though, Asian investor by and large prefer to do individual investing, given the chance. Just look at HK, where the markets are more developed than ours. So, in reality, Malaysia can look forward to a 60-40 trading ratio in favour of institutions ultimately, and not the normal levels exhibited by the Western world.

Can ANALs be trusted? Some just go through the template of coming up with a report, there is no feeling or passion or even obsession with the various numbers, so the buys or holds that come out is reflected in the writing and the justifications are not sufficiently convincing enough. You can tell a good report - intimate knowledge of figures, and able to identify the "determining factors" moving the stock up or down, can identify the probable catalysts, good industry knowledge (following deep industry data and even anectdotal evidence, if you only go to the company for info, you can be misled sometimes) - and the writing is easily persuasive because they themselves are convinced.

Thursday, August 24, 2006

Desperately Seeking Talam
Making Sense & Assessing Risk

When things like Talam happens, what do you do? Talam's shares already at a 52 week low of 17 sen, dropped as low as 10 sen today on huge volumes after both Bursa and the company disclosed that Talam has again delayed finalisation of its annual accounts for year ended 31 Jan 2006. Bursa has warned that failure to submit by 31 August will result in suspension and maybe delisting. The knee jerk sellers would theorise that most companies who delay submission are prime candidates for PN4/PN17, or there is a huge writedown, or need to restate losses for previous years, etc...

The company's part of the announcement said:

Talam wishes to inform that it has failed to issue the Talam Group's Annual Audited Accounts for the financial year ended 31 January 2006 ("Audited Accounts") to Bursa Malaysia Securities Berhad ("Bursa Securities") for public release within the stipulated timeframe pursuant to Paragraph 9.23(b) of Bursa Securities LR which was due on 31 May 2006. The delay was due to the following reasons:-
1) The Company is presently experiencing an acute shortage of personnel in the Accounts Department and it has seriously affected the timely finalization of the Audited Accounts of the Company and its Group of Companies. This is further compounded by the fact that certain key personnel are tasked to special assignments in the Group's debt restructuring and the proposed scheme of arrangement pursuant to Section 176 (10) of the Companies Act, 1965 undertaken by Maxisegar Sdn Bhd, a major wholly-owned subsidiary of the Company.
2) The above has invariably delayed the progress of the audit work presently carried out by the external auditors. The completion of the audit is also pending the confirmations and / or certain valuation reports from external parties.
The Company is currently working very closely with the external auditors towards the finalisation of its Audited Accounts and this will be submitted to Bursa Securities and relevant authorities on or before 30 August 2006.Pursuant to Paragraph 9.26(4) of the Bursa Securities LR, if a listed issuer fails to issue the outstanding financial statements within 3 months from the expiry of timeframes stated in Paragraph 9.22 and 9.23 of the Bursa Securities LR ("Relevant Timeframes") ("the last day of the 3 months period shall hereinafter be referred to as "Suspension Deadline"), in addition to any enforcement action that Bursa Securities may take, the Bursa Securities shall suspend trading in the securities of such listed issuer. The suspension shall be effected on the market day following the expiry of the Suspension Deadline.Pursuant to Paragraph 9.26(6) of the Bursa Securities LR, if a listed issuer fails to issue the outstanding financial statements within 6 months from the expiry of the Relevant Timeframes, in addition to any enforcement action that Bursa Securities may take, de-listing procedures shall be commenced against such listed issuer.

Facts

1) The company has a MOU with major financiers to pare down debts by 70% over a 2 year period. Its current debt is RM864.3m. That makes its current gearing at 1.4x, not that exceptionally high that it is unmanageable.
2) Knowing IJM, it would want Talam to clean up its books before doing anything with Talam/K-Euro.
3) It has a good NTA at RM0.89. It will have impairment losses and losses on land disposals, and late delivery charges. Prudent to whack 75% off NTA = RM0.225.
4) Outstanding shares 629.18m. Market cap at RM0.12 means the company is worth just RM75.5m. Even a Main Board shell is worth RM20m.
5) If it fails to submit by National Day, an automatic suspension will be imposed. Talam knows that and acknowledged that, so what gives??
6) The delay has been invoked since end May 2006, so nothing really new here.

Why the sell-off?? The delay has been known for sometime. Not having enough employees is a stupid excuse, should not even put that in. Valuation and restructuring stuff, plausible excuse. The market is pricing in a lot of potential bad news. The threat of delisting is just a normal announcement of Bursa, so its not a real threat. Look at the existing PN4/PN17 companies, most are trading higher than RM0.10 and they are in a lot more shit than Talam. These are the facts, make your own assessment. Of course, I could be proven terribly wrong... and end up with just eating kuih talam for a very long time...

Oil & Gasoline Back To Reality

Oil prices fell over US$1 yesterday after the US government reported a high level of domestic petroleum supplies and tensions eased with Iran over its nuclear program. U.S. light crude for October delivery slid US$1.20 to US$71.90 a barrel on the New York Mercantile Exchange. In its weekly inventory report, the Energy Information Administration said crude stocks fell by 600,000 barrels last week. Analysts were looking for a drop of 1.2 million barrels. Gasoline supplies posted a surprise gain of 400,000 barrels, while distillates, used to make heating oil and diesel fuel, swelled by 2.3 million barrels. Analysts were looking for a 1.9 million barrel drop in gasoline supplies and a 600,000 barrel build in distillates. EIA said stocks of crude, gasoline and distillates were all above average for this time of year.

Analysts had factored in a loss of 200,000 barrels a day from the closure of 200,000 barrels a day from BP's giant Prudhoe Bay oil field in Alaska. BP had originally said 400,000 barrels a day, the entire field's capacity and 8 percent of the country's domestic production, would be shut in for months after severe corrosion was found along sections of pipeline. But the company later said half the field could remain open, easing jittery markets.

Also pushing prices down Wednesday was an apparent cooling of tensions between Iran and the West over the country's nuclear program. The Tehran government offered Monday to resume talks about its nuclear program but gave no public indication on whether it would agree to halt uranium enrichment and reprocessing. It was unclear if the gesture by Iran would avoid United Nations sanctions, threatened if the country doesn't halt uranium enrichment by Aug. 31. Western diplomats are still studying the proposal, but the the fact that it wasn't rejected outright has offered hope of a breakthrough. The threat of sanctions against OPEC-member Iran has rattled traders for months, as the country is the world's fifth largest oil producer and sits astride the narrow Strait of Hormuz, through which 25 percent of the world's oil passes. But the likelihood of sanctions actually passing the security council is far from certain, as veto-wielding China and Russia have been cool to the idea.

There are still some upward pressures such as a continued tight supply and demand situation and other geopolitical standoffs, including trouble in Nigeria. On Wednesday, the president of the Petroleum and Natural Gas Senior Staff Association of Nigeria said oil workers' unions might pull all members from the Niger Delta over safety fears following a spate of abductions by militants and a military crackdown. Over half a million barrels of Nigeria's high quality crude remains shut in as militants from poor but oil producing sections of the country fight for a larger share of the nation's oil wealth.

For equity investors, you do not want oil prices to drop dramatically, it would be much better if prices atyed around the US$70 level for another 3-4 months before easing to US$65. Too sharp a drop will create irrational exuberance - pockets of economy and capital spending will arise and create unecessary inflationary spikes, which will lead to the Fed having to raise rates further. Higher rates is a much more potentially damaging thing than oil prices hitting US$90. The firm oil prices have forced consumers to rein in spending, which is largely responsible for the lower housing stats, which in turn allows Fed to pause the rate hike cycle. The underlying US and global economy strong enough already, plus corporate earnings growth are at a good level. Its a balancing act which is tricky in a bullish market.

Wednesday, August 23, 2006

WHY ... Scomi ... WHY???
Silence From Bursa, SC, EPU, FIC - This Is Where You Should Yell Out NO

Oil and gas support services company, Scomi Group Bhd is a company the Malays should be proud of because of its foray in the world market, said Science, Technology and Innovation Minister Datuk Seri Dr Jamaludin Jarjis. He said Scomi was one of the three local companies which had the expertise in offshore oil exploration. "Scomi's expertise is acknowledged by foreign oil companies operating in the country. We have to be proud of the achievement of Malays who have made their marks in the world market," he added.

The proposed listing of Oiltools in Singapore could see proceeds being used to fund more acquisitions, give higher dividends, or even take the group private. Scomi has proposed to list its oilfield services division (OSD) on theSingapore Exchange by the first quarter of next year. It could raise RM400 million to RM600 million. Scomi would also receive RM130 million as settlement for inter-company loan. The proceeds could be used for many things, including to offset the 30 per cent dilution effect from the initial public offering. After excluding borrowings at holding company level, the Scomi group would have more than RM100 million cash that could be used for capital repayment. Scomi could also afford a dividend payout of 50 per cent of its earnings in the immediate term, it said. At holding company level, Scomi will be in a net cash position after the OSD listing, with the post-consolidation net gearing reduced to 0.6 times from 1.5 times as at March 2006. Another option is for the major shareholders to take the group private. All the operational entities will be listed and there is no point inmaintaining a holding company that will be subjected to a holding company discount. Scomi will form a new group structure of the OSD in which the entity for the proposed listing is an investment holding company that owns 100 per cent of the restructured KMC Oiltools Bermuda Ltd - the world's fourth largest player in the drilling fluids and drilling waste management businesses.

My question is why Singapore and not Malaysia? Better valuation in Singapore? Scomi as a group was assembled together as a few local oil & gas related companies, and grew from that - why the spin off to Singapore? Arguably, KMC Oiltools is the most attractive asset of the group, and now that trading vehicle will be in Singapore. Why the silence from the authorities? I though there would be gentle persuasion from Bursa, SC, EPU, FIC, ...etc.. blah, blah... but nothing.

Not that this is a nationalistic thing or being protective, its just common sense. What defines a stock exchange? Its the companies listed on it. If 99% of companies listed on each and every exchange is the same, then there is no reason to venture out of your local exchange. An exchange's value is in the unique type of companies available for investing, allowing global and local investors to participate in that unique growth. It is fair to say ... without plantations, oil and gas, timber, rubber, gaming ... the KLSE basically looks very dull to everyone.

This is a chance for Scomi to keep the best asset in KLSE but... no, they choose Singapore, where is the loyalty, did the company even care how they got started? You just end up favouring a competing exchange, and at the same time giving the local governing bodies a slap in the face as the move probably indirectly hints at many things inherently unattractive about the local governing institutions.

If it was a chain-listing issue, surely a chat or a plea to the right authorities would get around the problem, so that is no excuse.

What is even more amazing is that with Oiltools, it would just push Singapore's listed market cap of Oil & Gas companies to be bigger than Malaysia's, ... and Singapore has zilch oil & gas in the first place??!! Yes, Datuk Jarjis, Scomi is an exemplary bumiputra company!

Tuesday, August 22, 2006

Stock-Take Of Malaysian Counters

Weathered the May/June storm pretty well, did not drop as much but rebounded better than most emerging markets. The Securities Commission and KLSE were hell-bent on removing the arms and legs of Coper Aul's team, stocks linked to his group include Iris, Mobif, Satang Jaya, MTD Infra (for a short period, but apparently Coper Aul opted out later), Farm Best, etc... People ask me if the recent huge dumping in Iris and Mobif will affect Coper's fortunes. I think not, in most of the syndicates' strategy, you get in without putting much of your capital, especially with Coper Aul's reputation. Blocks of shares are usually signed off from owners to be pledged for margin facility for financial engineering. More funds are usually obtained via speculative investing groups, highly leveraged hedge funds or funds that do not know what "risk" is. At the end of the day when there is the dump, chances are they would have made a bundle already, if there's any baggage, shares will be given back to owners, margin facility in owners' names, or broking houses will end up with shares and margin facility unpaid.

Strong syndicates will make money all along the way, not just at final distribution phase. Accounts would have been set up in HK, Singapore, Thailand, etc... to place "contra-buy orders" at the right time, allowing the main accounts/funds to take them out at the appropriate time. Hence despite seeing the huge falls in Iris and Mobif, you can be assured that there are a smattering of accounts throughout the region and even globally with millions in contra profits sitting nicely. The fact that SC/Bursa are more determined to lop the heads off the main culprit should not be ignored, and will be picked up by other syndicates - SC/Bursa will make life very tough on those financial engineers. At the end of the day, the main accounts for Iris and Mobif probably did not make money after all the hoo-hah as the average carrying cost is quite high, as their operations was somewhat thwarted towards the end. "Main accounts" refers to the supposedly banker account with profits to be shared between owners and syndicate. Like I said, owners may not make, but betcha Coper Aul did.

Despite all that, Malaysian first and second liner stocks and the relevant indices largely ignored the calamity. This is good as institutions stayed largely away from bad stocks. The palm oil play has picked up momentum. Very interesting to see CIMB having the iron balls to come up with an IOI Corp covered warrant, but why is the delay in listing it... scared?? Assuming the conversion px is RM16.20, the company stands to lose buckets if they do not hedge properly. Particularly since there are already some top foreign broking research looking at IOI Corp possibly hitting RM25.00 within the next 12 months. On balance, there is momentum in palm oil rally, and does not appear to be overdone. The impact of biodiesel as a new consumer category has not been fully imputed.

For the rest of the year, we can expect good upside for big palm oil stocks, in particular KLK and PPB. Other potential favs for institutional investors will include AirAsia, Maybank, UEM World, Tenaga, Resorts World and B-Toto. On the shorter term trading front, new developments should attract trading activity in Konsortium and DRB Hicom.

Important Quotations

In India, corruption is under the table. In China, it is over the table, while in Indonesia corruption includes the table.

I do not know with what weapons World War III will be fought, but World War IV will be fought with sticks and stones - Albert Einstein

A consultant is someone who takes the watch off your wrist and tells you the time.

I'm desperately trying to figure out why kamikaze pilots wore helmets - Dave Edison

I have a degree in liberal arts. Do you want fries with that?

If we knew what we were doing it wouldn't be called research.

One of the symptoms of an approaching nervous breakdown is the belief that one's work is terribly important - Bertrand Russell

If work is so terrific, why do they have to pay you to do it?


The main difference for the history of the world if I had been shot rather than Kennedy is that Onassis probably wouldn't have married Mrs Khrushchev - Nikita Khrushchev

A cubicle is just a padded cell without a door.

Not only is life a bitch, it has puppies - Adrienne Gusoff

China is a big country, inhabited by many Chinese - Former French President Charles de Gaulle

Traditionally most of Australia's imports come from overseas - Former Australian cabinet minister Keppel Enderbery

I didn't fight my way to the top of the food chain to be a vegetarian.

"I want a one-armed economist so that the guy could never make a statement and then say 'on the other hand…' " - Harry Truman

Monday, August 21, 2006

A Rebalance Soon
Btw US Stocks vs International & Emerging Mkt Stocks

After the sell down in May and June, and the uncertainty over oil prices and interest rate direction, the markets have regathered itself and moved on. Let's look at where the broad equity markets are at the moment. As of the end of July, the US equity markets (S&P 500) are trading at a PE of 17.6x, Price/Book of 2.8x with a dividend yield of 1.9%. International stocks trade at a PE of 15.9x, P/BV of 2.3x and a DY of 2.5%. Emerging markets stocks trade at a PE of 14x, P/BV of 2.3x and a more respectable DY of 2.5%.

Generally, there is some premium attached to US equity but should not be by that large a quantum. What the comparison shows is that there is more value in International and Emerging markets' equity. This does not mean that US stocks will correct to the other two groups' levels, but rather that the other two groups should move higher to match closer to US levels. Emerging markets with a DY of 2.5% and an undemanding PE should find favours with more fund managers.

Microsoft - Private Equity's Biggest Whale

Private equity firms have no problems gobbling huge companies nowadays. One company which is very ripe for a 100% private equity buyout is none other then Microsoft. The crux is whether Gates wants to sell, or better still gates should just sell down till he holds just 5% of the company, because the way the stock is trading, it will just be eroding in value as investors are unconvinced of Microsoft's future. The value is Microsoft is based on its past and legacy, which is reaping beautiful cash flow, cash flows, the most important accounting terminology to private equity people - the next probably be discount to break up value. Microsoft is sitting on US$34 billion cash. The only problem is its current market cap is US$250 billion. To be successful, private equity firms will have to raise around US$300 billion. Assuming Gates would still want to hold onto 5% and you can have a share scheme allowing another 5% to be sold to employees via discounted shares tied to employment contracts. Say, they can gear up 10x, private equity firms would still have to pony up US$30 billion - which is still doable with an aggregation of 3 or 4 really big private equity buyout firms.

The opportunity cost of US$30 billion is say at 5% = US$1.5 billion a year. Microsoft should make around US$20 billion a year before tax, still lots of meat to go around. After taking it 100% private, there is no need to satisfy the investors' expectations that Microsoft needs to reinvent or spend heavily on R&D anymore in order to come up with new and brilliant ideas. The fact is Microsoft has grown way too big, and for any new ideas to make a decent impact on the company would have to be as big and revolutionising as "the Excel spreadsheet" or at least "YouTube" level. Hence fergetaboutddit already. Microsft spend US$6 billion a year on R&D, save that amount immediately, and cut at least 40% of staff off its roster immediately with that move.

At the end of its all, investors will be holding onto the stock for dividends, which will be in the region of 20% at least per year.

Thursday, August 17, 2006

Things Are-A-Changing At Bursa/SC
Finally, A Query That Brings Consequences

It used to be whenever KLSE or Sc queries a company's erratic share price movements, nothing would ever happen. The company will usually come back with the usual reply "not aware of any reasons why there is abnormal activity in their share price".. or something to that effect, and continue on its merry ways. After flogging Iris the horse till it caved, investors are now more sensitive to any queries or reprimands by the SC pr Bursa. Good thing!

Mobif Bhd, in reply to a Bursa Malaysia query yesterday, said it was not aware of any rumour or report on its business or affairs that could have contributed to the unusual market activity on its securities. In an update to its Aug 3 announcement, Mobif said subsidiary Mobif Wireless Broadband Sdn Bhd targeted to launch trial runs for its wireless broadband technology, iBurst Solution, in Kuala Lumpur next Tuesday. .... Ta-dah... Mobif share price fell nearly 30% this morning on huge volume and although regained some ground, still lost 20% in value.

Will this spell the end of speculation?
Answer: No. I don't believe the SC or the Bursa would want to kill it. What they do not want to see is excessive speculation or activity that mirrors cornering of a stock. Syndicates would just have to be more careful when doing financial engineering. Try not to go 5 days of straight gains, do the cha-cha .. three steps forward two small steps back ... and do not go more than 10% a day, it arouses suspicion already.

What are Bursa/SC motives and objectives?
Answer: Not to be regarded as a very cowboy market anymore. To kill off speculation especially pertaining to MESDAQ counters. If you are Second Board or Main Board, I think they will give you more leeway. If you are MESDAQ, I'd be very careful as Zarinah has the cane in her hand and she is willing to use it ... very swiftly. Which is also why the SC has been especially stringent in rejecting new IPO applications, in particular those for Mesdaq counters... heck, even Main Board and Second Board companies are finding it hard with issues such as usage of funds from rights issues - but the SC is right again here, the minority shareholders has to be protected and the integrity of corporate governance has to be maintained. Fining directors is another very good move, now old foggies cannot just show up and collect biscuit money.

Wednesday, August 16, 2006

Even The Best Fund Managers Get Clobbered
Fidelity Got Carried Away

Having risen to the top of the fund management business, you could very well be calling the shots at Fidelity. Even when you have recorded numerous milestones, big boo-boos will make the news to shame you. Many are waiting for them to trip up, sad but true. Just ask Peter Saperstone, Stephen DuFour and other fund managers at Fidelity. Since the start of this year they have made Fidelity the biggest outside investor in United Airlines. And they woke up last Thursday morning, following news of the foiled bomb plots in London, to more red ink. Losses on their shares, in just three days of trading: US$24 million. And that wasn’t the start of the bad news.

Since the end of the first quarter, Fidelity investors have lost around US$200 million as UAL Corp. stock has slumped 43 percent. The Fidelity managers were buying aggressively in February, as soon as the company rolled out of the bankruptcy hangar. Saperstone, who runs Fidelity Advisor Mid Cap, and DuFour, at Fidelity Equity Income II, took the biggest stakes. Companies that have just come out of Chapter 11 often make good bets. They’ve had a lot of debt wiped out, and the stocks are often going cheap because most fund managers are too scared to touch them. And the airline industry was finally looking forward to a few years of fat yields and rising prices, after years of post-9/11 misery.


The financial reorganization more than halved UAL's net debt to US$17 billion. Free cash flow in the June quarter: US$461 million, or nearly enough to buy back a quarter of all the shares. And that was before the peak season. So far, so good ... But that’s only half the story. Airlines are highly sensitive to any economic slowdown, let alone a terror threat. And so economic fears were bringing UAL Corp. stock in for a bumpy landing even before last Thursday’s news. The stock, nearly US$40 when the Fidelity guys started buying them a few months back, is already down to US$22.78. Now some analysts think that the stock could go even lower towards the US$15 level before rebounding.

Even within Fidelity, there are smart guys who stand out. Andrew Hatem, the manager of Fidelity’s Select Air Transportation Fund has largely avoided investing in air transportation. Instead, his biggest holdings are in air freight companies, and defense and aerospace contractors. He’s beating the market hands-down so far this year.

Bypassing The London Stock Exchange
IBs Ganging Up To Bully LSE

The top investment banks are co-operating on plans to build a new system for reporting equity trades that would bypass the London Stock Exchange and other European bourses. Ten banks, including Merrill Lynch, Citigroup, Deutsche Bank and UBS, are working together on the cryptically code-named Project Boat. They are looking to take advantage of changes to the rules governing the reporting of trades due to come into force next year under the EU market in financial instruments directive. At present, all trades must be reported to a recognised exchange whether or not its system was used for the transaction. The LSE and other exchanges charge brokers for this service and also for access to the trading data they then provide.

Under the new directive, brokers will be able to report trades to any registered entity, opening up this area of business to competition. The 10 banks, which between them dominate European equity trading, are equal partners in the plan and are working on a letter of intent. They deal with all European bourses, and believe Project Boat would be simpler, and deliver them greater control at lower cost. IT companies were invited last month to pitch to build and support the new system. Apparently the contract had been won by the Swiss-owned exchange, Virt-x. Project Boat is understood to be at a very early stage and unlikely to come to fruition before next year. Two banks that have not signed up to it are Lehman Brothers and JP Morgan, the LSE's corporate brokers.

Revenues from the LSE's broker services division, which were £125m last year, constituted some 43 per cent of overall sales. They would be sure to suffer should Project Boat deliver. Last month, the LSE revealed that record trading volumes in the first three months of its financial year contributed to revenues of £84.3m, 25 per cent higher than at the same time last year.

Tuesday, August 15, 2006

Snippets, Snipes & Snides
11-15 August 2006

Energy Earnings Pushing Indices Higher
A 44% boost in the energy sector has pumped up operating earnings in the Standard & Poor’s 500 to a record US$199.4 billion, up 13.4% from a year earlier, making it the 17th consecutive quarter of double-digit growth. The percentage could have been even higher were it not for the information technology sector, in which nearly two-thirds of issues were negative. The strong second-quarter results, coupled with projected full-year growth projections are likely to help the S&P 500 finish the year up 5%-8%. The surprising energy sector performance is thanks to near- record oil prices and the closing of BP’s Alaska oil field for repair. It had originally projected a 5.7% rise in the third quarter and a decline in the fourth, but is now predicting a 16.8% boost in the current quarter and an increase at the end of the year.


Short Term Jobs In Korea
Fund managers in South Korea tend to focus on short-term goals because most of them don’t stay in their jobs long enough to project for the long term. The firms registered with the Asset Management Association of Korea showed that the average Korean fund manager stayed in the job for 2.5 years, while 28.2% of the total leave within one year and 46% move on within two years. The turnover rate is creating excessive turnover, which in the past year was 1800% at Hyundai Wise Asset Management’s Value Finder Stock Type Fund (somebody's getting some kind of kickback here obviously). Such turnover is bad news for investors, who are encouraged to look at the long term. In addition, for the ongoing search for greener pastures, fund managers may leave when a new management team comes in and is eager to hire managers who share their values.

Bad Air Irks Hedge Funds In HK
A main topic of conversation among hedge funds in Hong Kong has nothing to do with raising funds or volatility; it has to do with air quality that is so bad that it could ultimately have a negative impact on the clogged city’s claim to financial supremacy in the region. A number of HFs are turning their noses up at the city because of the horrible pollution and turning their eyes toward the fresher air of Singapore as a quality-of-life decision. There are hedge fund partnerships where there is an element of strife over air pollution. One partner wants to stay in Hong Kong, while the other partner wants to move to Singapore for the sake of the family. The exodus apparently had already begun. U.S.-based hedge funds Stark Investments and Concordia reportedly are already making the move, and Deutsche Asset Management’s Asian head, Ed Peter, has set up house in Singapore, where Deutsche manages most of its US$28 billion in Asian assets anyway. This all plays in the hands of Singapore, which recently eased legislation and has embarked on an aggressive marketing campaign to attract more financial business and vie for the Asian sector crown. Meanwhile, Hong Kong is making a serious effort to stem the tide of departing pollution-sensitive investment types by improving local emission levels, 70% of which are said to be wafting in from across the China border.

Remember BCCI - The Guy Is Still Not Caught
The FBI is in hot pursuit of Gaith Rashad Pharaon, 65, a Saudi millionaire fugitive wanted in connection with the Bank of Credit and Commerce International (BCCI) financial fraud scandal. He's evaded the feds for nearly 15 years. His yacht was recently spotted off one of the Greek islands, but he wasn't aboard. It's captain claims he was headed for Algeria. There's a large reward for information regarding his whereabouts. Gaith Rashad Pharaon, 65, was once a familiar figure in London business circles. But he is now wanted in Washington for a series of federal and international crimes ranging from fraud to financing terrorism. The collapse of BCCI took almost US$13bn in depositors' money and left 250,000 international creditors unpaid. Many in HK would remember BCCI.

Saturday, August 12, 2006

Jesus Is A Democrat
Disillusionment With Christianity

Allow me to indulge in something religious for a while. The alignment of evangelical Christianity in the US with the Republican party irks me no end. For interested Christians, there is a very good book on politics and religion - by an evangelical Christian Randall Balmer. The book is "In Thy Kingdom Come: How the Religious Right Distorts the Faith and Threatens America". Balmer, professor of American religious history at Barnard College in New York, argues that evangelicals have strayed from the teachings of Jesus Christ and their own historical support of progressive causes by aligning themselves so completely with the Republican party.

Back in 1925 in Dayton, Tennessee. William Jennings Bryan was assisting in the prosecution of John Thomas Scopes for teaching evolution in the public schools. That forced the issue out in the open and a taking of party sides came into being. Then there was also the Cold War and the very public friendship between Billy Graham and Richard Nixon that begins in the 1950s when both were anti-communist crusaders. Inadvertently, it reinforced the Republican image with Christians.

Then there was President Carter, an evangelical Christian - and a Democrat. But Carter was elected when there was a big sway by Christians from registering to vote, its the disillusionment effect from what happened a few years before Carter was elected. One of the ironies of recent American history is that in the course of the Carter administration, these same evangelicals turned against Carter and embraced instead Ronald Reagan as their political savior.

The problemas starts to arise when it comes to abortion and gay rights, both the Republicans uses carefully to court Christian votes. But these are just 2 issues, voters should concern themselves with an array of issues such as education, poverty, social justice, anti-war, capital punishment, global responsibility, etc...

It is too easy to cite abortion and gay rights and lump everything Republican as good. I don't know about you, but when I read the New Testament, there is very little about either abortion or homosexuality. Jesus said nothing about either one. Christianity is about after one's heart, mind and soul... not issues driven, why the need to draw lines and boundaries when Jesus came to eradicate the very lines and boundaries in our hearts. Where is the compassion, empathy ... that, I come across a lot more in the scriptures.

Friday, August 11, 2006

UBS Study On Price & Earnings Of Cities
Should I Be Thankful?

Having gone through the UBS study on price and earnings of global cities, I am quite convinced on the validity of the assumptions, methodology and conclusions. Firstly, they weighted according to how much it would cost to buy a basket of goods in each city, the breakdown are as follow:
Food/groceries 18%; Beverages/tobacco 5%; Hygiene & healthcare 7%; Clothing 6%; Household and electronic devices 7%; Home/house 18%; Heating/lighting 5%; Transportation 14%; Miscellaneous 20%.

Cost of living index is calculated on the basket of goods containing 154 items (products and services) - that is then reweighted according to the Consumer price index relevant for that specific country. As for earnings, the wages are calculated across 14 selected industries/job types and only takes data from local people and also the prevailing tax rates.

The following are the rankings of PRICES using data but NOT including rentals. The study is based on 71 business cities surveyed. New York city is pegged at 100, meaning if your city is at 95, your city is technically 5% cheaper than New York, etc...
1) Oslo 121.5
2) London 110.6
3) Copenhagen 109.2
5) Tokyo 106.8
7) New York 100
11) Paris 95.6
15) Los Angeles 91.6
19) Amsterdam 87.7
24) Seoul 85.8
27) HK 82.1
30) Sydney 80.4
32) Singapore 76.6
36) Dubai 74
40) Taipei 68.9
51) Jo'burg 59.7
54) Bangkok 55.3
57) Jakarta 51.8
60) Shanghai 50.3
62) Beijing 49.6
67) Manila 46.7
70) Mumbai 38.5
71) Kuala Lumpur 36.8

The PRICES ranking changes substantially if rents were included, and they should be, and especially in major Asia cities: London would become the costliest city with 105.5 with New York being pegged at 100 still. Other cities which moved up the rankings when rent was included were Chicago, Los Angeles, Tokyo, Sydney and HK. But Kuala Lumpur remained the cheapest place at 71st position.

So for WAGES, as long as Kuala Lumpur does not finish at 71st also, Malaysians should be pretty well off, ... right?!! Again using New York as 100:
1) Copenhagen 118.2
2) Oslo 117
3) Zurich 115
5) New York 100
6) London 89.2
8) Dublin 88.3
18) Tokyo 78
20) Sydney 74.6
32) Seoul 44.2
36) Taipei 35.5
38) Singapore 32.3
40) HK 27.4
53) Kuala Lumpur 15.7
59) Shanghai 11.5
66) Bangkok 8.2
67) Mumbai 7
68) Jakarta 6.3
69) Manila 6.3

Most of the Asian cities would move up by another 10 spaces roughly if we were to take net wages instead of gross. On balance, Kuala Lumpur looks great, cheapest but gets paid by a significantly higher relative quantum, mainly we don't have to worry about excessive property prices/rentals. Fuel is still subsidised as are a number of necessities - thanks to super normal revenue from our resources (oil and gas, plantations, timber, etc...). When you put PRICES and EARNINGS side by side, you get purchasing power. Here is the more important ranking, which is Purchasing Power, based on net wages, again with New York pegged at 100:

1) Zurich 115.6
2) Geneva 112
3) Dublin 106.5
7) New York 100
9) Sydney 99
10) Auckland 98.7
15) Oslo 91.2
20) London 86.8
24) Tokyo 81.8
31) Paris 72
35) Seoul 56.2
37) Kuala Lumpur 50.9
38) Singapore 50.8
43) Hong Kong
56) Shanghai 22.9
62) Mumbai 18
65) Bangkok 14.6
67) Manila 13.5
68) Jakarta 12.2

Guess, we should be happy.... now, if we can only get our car prices to be the global average (presently the cost of buying a car in Malaysia and Singapore is about 80%-100% more expensive than the global average).

Thursday, August 10, 2006

CCB Wants To Buy Bank of America (Asia)
Bank of America Briefly The World's Biggest

China Construction Bank (CCB), China's third largest commercial bank, is interested in buying Bank of America (Asia), after failing to buy out Asia Commercial Bank in February. CCB is apparently reviewing the financials of Bank of America (Asia), an affiliate of the US-based bank, and an offer has yet to be made. A detailed plan is still under negotiation between CCB's newly-established investment banking department and Bank of America. Bank of America, the parent company, is a strategic investor in CCB, with a 9% stake. Early this year, CCB was linked to a possible buyout of 20% of New York brokerage and investment house Bear Stearns. Bank of America (Asia) has 17 branches in Hong Kong and Macau offering a wide range of consumer and commercial banking products and services. This news comes at a time when Bank of America briefly became the world's biggest bank, surpassing Citigroup yesterday in market cap. Though by the end of the day Citigroup had reclaimed its crown for the time being.

This reflects investors' preference for a growth story, which is giving kudos to Bank of America. Bank of America seems to be hitting on all cylinders domestically. In contrast, Citigroup has run into growth bumps that are taking longer to fix than many investors would like - Chuck Prince's strategy to invest in branches and people comes at a time when othe rbanks are more interested to put in great numbers. Prince's strategy was called into question by substantial shareholder Alaweed - I tend to side with Chuck, I think he is doing the right thing. When you are number one but not by a large margin - you need to distance yourself by getting the better people, as you already have the leverage in almost all other areas (cost of funds, branches, network reach, economies of scales, etc... ).

Being bypassed is not a definitive gauge of Citigroup's long-term prospects, but might be a blow for a bank that prides itself on its size and reach in more than 100 countries.

Tuesday, August 08, 2006

Conversations About Landmarks
Between Myself & Doraidd

Doraidd: hi dali, this is from landmarks ann. to bursa:2.2. Pricing of the Placement Shares - The issue price for the Placement Shares will be at a discount of not more than 10% from the five (5) day volume-weighted average market price of Landmarks Share prior to the date on which the issue price of the Proposed Placement will be determined by the Directors of Landmarks. as i understand it, the issue date is not determined yet and it's determined by the directors and will only be determined after all approvals have been obtained. so wouldnt a lower share price, especially if its a hit-down price, actually benefit NS? lower financial outlay to take up the placements? ie. Incumbents'll set issue date after 5 days of low pricing? (assume all approvals obtained) and if the hit-down is done by the four-seasons, wouldnt that play into north's hands? i'm on hols so my mind may not be up to speed. correct me if i'm wrong.
8:15 PM


doraiddd said...
sorry, when i say issue date, i mean issue price. My blurness - even Issue is starting to not look like an english word at all.
8:20 PM


Salvatore_Dali said...
yes, lower price would benefit NS, but I think if you want to see real upside, you want Syed's camp to control Landmarks. NS lacks the firepower, and while their unlocking of value strategy is ok, I do not like their Bintan island project injection. For Syed's camp, there are numerous things that can take place, the ne Four Seasons in Kl or Concorde can be injected or packaged with the 30% stake in Shangril for a very nice REIT.
10:44 AM


doraiddd said...
...it's been a while since my last hostile.. i'm becoming more of a peace-loving hippie in my old age... BUT if syed and his other 3-seasons want control, then maintain price as high as possible (while still accumulating) and then spike it closer to announcement of issue price (not allowed to be more than 10% lower) then only hit the price down below the placement price after ann, continue to suppress it, then only make GO at a higher than market price (which of cors is still suppressed) make sense? and btw when the southern bank money coming back? i agree - bintan angle suxs big time, and have you seen the size and scale of the unlicensed gambling dens there? who even needs licenses?
11:49 AM


Salvatore_Dali said...
lets look at it his options: 1) call a G.O. now at RM1.75 or RM1.80 - danger as he does not have a controlling stake, the entry price for NS is supposedly btw 1.80-1.90, so they won't sell to him at G.O. level. Neither would the minority holder as they will be holding out for me in anticipation of a catfight. It would also allow the successful placement of the new shares at RM1.54. Plus, Syed will end up having to buy from the mkt at prices higher than 1.80 or 1.90 as chances are very slim that minority will sell to anyone at G.O. level unless its above 2.00.

2) No G.O. yet, need to create problems for the special placement as it is obvious the shares won't be going to NS but to friendly parties. The closer the mkt px is to the placement px, less chance of being a success. NS is treading on hot stones here as they rely on friendly parties to control the company. There are no friendly parties that last a lifetime, just as long as the present value of future cashflows is positive, you are my friend. You can always get a better friend if the present value of future cash flows is a bigger positive figure than your previous friend. I mean, election candidates change parties all the time, especially after the results are known .... unbelievable.Hence I expected the price to drift towards the placement px, but the silly speculative article in NST on a potential G.O. killed a few people today. If there is any G.O., it would be much better to do that after the special placement. Looking at the free float and trading patterns, it is much better to collect from open market than G.O. as there are obviously a lot of willing sellers in an open mart.
2:08 PM

Chinese Yuan To Rise Faster Soon
Malaysian Ringgit To Keep In Step

There are heavy indications that Beijing will allow the yuan on a more rapid appreciation very soon. It also means the ringgit will keep rising in tandem. If we were to plot the ringgit movements over the past 9 months against other Asian regional currencies, and including the USD, British pound and Euro, it correlates closes with the Chinese yuan. That is no surprise as it is pretty obvious to keen observers that Bank Negara governor Zeti knows that you have to compete with China in the race to globalisation. Though the ringgit could have, should have, appreciated more over the last 6 months, Zeti is keener to keep it in check with the yuan to maintain competitiveness, even if that means creeping inflationary pressures into Malaysian economy.

One may wonder why is Beijing so slow to allow the yuan to appreciate despite pressures and protestations from other major trading partners. China has just again recorded a record trade surplus again for the more recent month, and property prices in major cities are still quite firm. If we look at Beijing, they have actually engineered a gradual increase in the quantum allowed for the yuan vis-a-vis the USD. When the yuan was allowed to rise, the period from July 2005 till end December 2005, the annualised rate of increase was 1%. For the first quarter of 2006, the annualised increase came to 2.2%. The second quarter saw the annualised increase being hiked to 5%. So, although the actual quantum of increase does seem slow, we have to look at the annualised increments because Beijing knows that the appreciation of the yuan is not a 1, 2, 3 thats it, complete ... they know that it will be a very long term appreciation trend, and every quarter, they will be allowing possibly higher annualised increments for at least next 4 quarters at least. Looking at that trend, we should see the third quarter annualised increment to reach the 6%-7% mark.

The strategy with that is that Beijing wants the economy to be comfortable with the currency appreciation and not be jolted by it. China now has too much USD in their reserves, and they also dop not want to see a drastic devaluation in the USD, but it is obvious the central bank has US$941 billion reserves. Even the reserves in USD for South Korea is a tad much at US$200 billion, while Japan has US$250 billion. Hence, for a proper currency strategy mix, China has more reasons to throw some more USD onto the market to raise the yuan and at the same time rebalance the currency mix holdings. When you start to hold too much of one asset, it becomes a liability in managing it, and you be vulnerable to the risks inherent to that asset.

The fact that the gradual increments allowed for the yuan has done nothing to curb the trade surplus would give Beijing more confidence to move the quantum of allowed increase higher for the 3rd quarter of 2006. The more plausible reason why yuan is staying put in China, and at the same time attracting more hot money into yuan, is the perception that the yuan is far from being fairly valued, it is still perceived as very much undervalued. These creates pools of surplus liquidity swishing in the Chinese economy, thus propelling the property markets and secondary financing or mezzanine financing schemes supporting the easy money economy. Beijing certainly knows that, and to solve that problem faster, they would have little choice but to increase the quantum of increase of the yuan. Now it seems, pressures from the US or EU are not necessary, Beijing needs to revalue the yuan rapidly to stop the hot money from creating pockets of bubbles in the economy. Only when the hot money thinks that the yuan is near fair value, will they leave the country. Beijing knows the yuan has to reach that level as fast as possible but at the same time without jeopardising the entire export economy, domestic economy and foreign investment.

Monday, August 07, 2006

Landmarks Special Placement

On Aug 4, the company proposed to place out up to 29.53 million new shares to potential institutional investors to raise funds expeditiously to reduce the debt level. Assuming the issue price per placement share is RM1.54, or a discount of about 10% from the five day volume-weighted average market price up to and including Aug 3, of RM1.71, gross proceeds would be RM45.48 million. It is not the amount of money raised, but rather the tactic which will anger the other camp. There are now two camps, one is the North Symphony also controlling the board. The other camp involves Syed, possibly Ong Beng Seng, and possibly CMY. There was a listing of ESOS last week which saw NS buying most of the shares from employees. The strategy to do a special placement stems from another route taken to maintain control by either placing to parties close to North Symphony.


The Syed camp can either continue to mop up shares but is at a disadvantage really, as that would make the placement highly successful, and Syed may not be able to garner sufficient shares to get board seats or control, but will be left holding substantial shares at highish prices. Syed's camp can let shares go down, like they did today, to hopefully scupper the placements. Since the placement is at RM1.54 or thereabouts, further dips towards that level may make the placement unfeasible. Looking at the equation, the fact that NS has to resort to these tactics to maintain control shows that they lack financial firepower, as making a simple G.O. even at RM1.85 or RM2.00 would be justifiable financially.

Chances for the two camps to come to an agreement is unlikely as their corporate strategy to unlock value from Landmarks are also divergent. I suspect Landmarks will continue to be whacked lower by Syed's camp to scupper the placement. If that fails, Syed's camp would probably have to come in with a G.O., which the NS group will not have the financial resources to match. Syed's camp still does not have more shares than NS at the time of writing, judging from the available information. So, thats the gist of the matter, even when you are on a good thing, bad things can still happen. Price will tumble towards RM1.50 but for medium term view investors, that would be a good entry level as the story is far from over and the fat lady hasn't even hail her cab to the Petronas Philharmonik opera house yet.

"Oil" Is The Matter With You?

Oil touched US$76 a barrel on Aug 7 after producer BP shut down the biggest oilfield in the United States indefinitely, while anxiety about Middle East supply continued to run high. US light, sweet crude oil was up US$1.24 at US$76.00. London's Brent was up 98 cents at US$77.15 a barrel. Although I have reiterated that the underlying sentiment for equities is bullish, there will be obstacles and road humps along the way - the biggest being oil.

a) BP Plc shutting down indefinitely the Prudhoe Bay oil field in Alaska woll cut production by 400,000 barrels per day (bpd), or 8% of US domestic oil output. The closure was due to the discovery of severe corrosion and a tiny spill from a Prudhoe Bay oil transit line.

b) Tropical Storm Chris, which at one point appeared set to become the season's first hurricane, has failed to regain strength after being downgraded to a tropical depression late last week. One more obstacle down.

c) Tensions in the Middle East rose after Iran again invoked its oil exports for political leverage and Lebanon rejected a draft UN resolution meant to end the war between Israel and Hizbollah. A further spike in oil prices resulting from a broader Middle East conflict would drag an already slowing US economy into recession more easily now than a year ago. Logically, Iran would kill itself if it does anything extreme, but they have to use the oil card to force the ceasefire.

The worst case scenario would be Iran closing the Strait of Hormuz, a bottleneck in the Gulf region between Iran and Oman by which tankers from Kuwait, Saudi Arabia and the United Arab Emirates transit. This can easily propel oil price to above US$150. However, that situation is unlikely to happen as major powers would step in immediately as the oil price would affect everyone. In conclusion, while there are things to be concerned if we extrapolate our fears and dwell on worst-case scenarios, they are unlikely to pan out. The global economy (and bullish equity sentiment) should be able to withstand oil prices up to the US$90-95 before turning bearish.

Iran, the fourth-largest oil exporter, vowed on Aug 7 to expand its atomic fuel work and warned of a harsh response if the United Nations imposed sanctions aimed at halting enrichment. Hopes to move forward on Aug 7 with a draft UN resolution to end the war were dashed after Lebanon asked the Security Council to call for a quick withdrawal of Israeli troops, dividing council members and pushing a likely vote back until Aug 8. Israel views the UN draft favourably as it allows Israel to respond to Hizbollah attacks and did not order it to withdraw its troops from southern Lebanon. As a business blog, we have to monitor the situation as any more escalation, particularly involving Iran, would have to be reviewed judiciously.

Friday, August 04, 2006

Enough Already, Stop Bilking The People, Liberalise the KUL-SIN Sector

Both budget carriers, AirAsia and Tiger Airways have been lobbying on their respective authorities to open up the lucrative Kuala Lumpur-Singapore air route, possible one of the top 5 busiest air route in the world. Tiget Airways pleaded to the Civil Aviation Authority of Singapore to once again express its desire to fly to KL. The sector means more to Tiger than AirAsia as Tiger needs the scetor more in order to stop from bleeding red ink, while AirAsia is already profitable without the route. The stupid thing is that even governments cannot automatically dismantle the monopoly, the presigned agreement prevents any changes being made unless they are approved by SIA and MAS. As both are government controlled, the government can easily exert influence to have the monopoly dissolved. The silly return airfare now stands at S$300/RM700.

Back in the middle of 2005, Malaysia said that it will NOT allow more Kuala Lumpur-Singapore shuttle flights ahead of the Asean "open skies" policy which will come into effect in 2008. As reported in The New Straits Times (6/12/05). Malaysia is not in favour because the benefits accruing to MAS from liberalising the route will be limited, according to the authorities. MAS operates 14 flights a day, and SIA, which operates 12 flights, will sustain the virtual joint monopoly to account for 182 of the 213 weekly flights. That's 85% of the market share for the KL-Singapore route.

This monopoly has been going on for way too long. Even toll bridges have an expiry date for collecting tolls. Nowadays, fares for flying from Singapore/KL to Bangkok, Bali, Phuket and sometimes HK are even cheaper than flying between the two countries. Where is the justification?? Already Malaysia and Singapore are among the two places on earth that prices cars most expensively (I'm sure we are both in global top 5). Both airlines operate a total of 26 flights a day. The pricing is dampening real demand. If we were to liberalise the market, we could see return fares plummeting to RM250 return fare at least - the drop would be more than compensated by the jump in traffic. At RM250 return, I think the daily traffic should easily triple on conservative estimates (just have a look at the number of buses travelling to-and-fro between the two countries on a daily basis).

Singapore and Malaysia cannot keep operating this monopoly when there is an economic globalisation and free trade movement. You can still keep the monopoly, but just agree to price it cheaper, say RM350 return - its more than a fair price as the load factors for the KUL-SIN almost surpasss 90% for every flight anyway!!! Certainly we cannot save the red ink for MAS just from the subsidy of this KUL-SIN sector!!?? If you want MAS or SIA to grow up, liberalise the sector, if you cannot fight AirAsia or Tiger Airways on that sector, MAS and SIA should rethink their strategy and costing models, not harp on their governments to allow then to keep milking the people for the company's benefit.

Look at it this way, the people of Malaysia and Singapore are basically subsidising the profits for MAS and SIA, meaning we are basically paying disproportionately to profits and share price profits - isn't it galling when when foreigners holding SIA shares get a slice of our silly subsidy!!?? (I am leaving out comments on foreign shareholders of MAS for obvious reasons... ahem).

Corporate / Government Bonds Yield Spread As An Astute Indicator For Equities
A Most Important Indicator

Corporate bonds has to offer higher yields than government bonds as the latter is deemed as the risk-free rate. The bigger the spread, the higher the cost of capital for companies. It is also a reflection on the returns demanded by corporate bond holders. If investors perceive a higher default risk, they will demand higher rates and yields on corporate bonds. The US bond market is deep enough as solid indicators, and study of the spreads will tell us a lot about whether the market is in a bullish or bearish phase.

The differentials since 2000 has been between 1.5% to a high of 4% (e.g. say US Treasuries is now yielding 4.8% and corporate bonds is yielding 6.5%, the spread would then be 1.7% - as a rule do not look at A/AA rated corporate bonds as they do not budge much, look at those corporate bonds rated BB/BBB). Generally 2.5% is a normal spread in a neutral market phase, as a general rule of thumb. The spread jumped from 2.5% in early 2002 to reach a peak of 3.8% by end 2003, and that period coincided with a bearish phase for equities. Since then, from early 2003 till the present days, the spread has been on a downtrend. The spread has stayed between 1.6% to 2.0% for the last few quarters. I believe the market is in for a continuance for a bullish phase for at least another year as I would not get edgy or want to quit equities until the spread rises above 2.5%. Once it starts rising, the trend is likely to continue speedily in that direction.

This rule of thumb is worth years of investment losses, a great big picture tool. If we stay true to this rule, you might miss out on the last 10% rally of a bull run but you will save yourself the 30%-40% in correction. The rule also works for spotting end of a bear market. Generally, the spread rising above 3.5% would signal an end of a bear market phase - though at a spread of 3.5% or higher, nothing much will look good, that is why it is so difficult to spot trends turning. Have a nice weekend. Oh, btw, the current spread is around 1.65% and does not look to be trending higher at all. Hence, despite all the worries over oil, inflation, fed funds rate hike, commodities prices, Middle East situation, China's excessive growth and surpluses, the unstable US dollar, etc... the prognosis is for a pretty good bullish phase for sometime still for global equities, just have to ride out the inevitable minor turbulances of over-exuberance of a bull market. We are in a bull market already for the past 16 months, in case some of you have not noticed it!!

Wednesday, August 02, 2006

KLSE Trading Notes
Palm Oil & Market Themes

Following on my comments that the Federal Reserve seems to have finished with its rate hikes, markets have yet to move ahead. While I am positive on the fundamentals, the timing effect is not there yet. July/August tend to be dull months as many investment pros will be on hols. As explained before, most will gather like a pack of wolves for a push in the final quarter. The setting looks good, we just need oil prices to behave till then, it needs to stay below US$80 pb for the last quarter bull to emerge.

As for KLSE trading activity, the palm oil rally has already been a bit overdone. Its a rally based on palm oil futures, and not a rally based on the biodiesel theme. Investors should be aware that bio diesel is not magic, and is not an avenue that allows for huge margins. Its just one additional sub-sector in the palm oil supply chain. You'd be just as profitable to be in oleochemicals, or producing specialty fats for cosmetics out of palm oil, etc. Of course, Malaysia and Indonesia have agreed to set aside a huge amount for biodiesel. It will create a substantive increase in real demand. The 12 mn MT CPO allocation will be a tad too much for biodiesel to stomach. 12mn MT equals to about 40% of each country's annual production. In all likelihood, only 5 mn MT will be taken up in 2007, this effectively translates to 16.6% of each country's annual CPO production. Now the figure does not look so threathening.

Having said that, organic growth from edible side will provide about 5% annual growth in demand. Add that, you get around 21% real consumption demand growth a year. IOI Corp has already gained more than 45% over the last 12 months. Golden Hope recorded a sluggish 30% over the same period, while KL Kepong notched nearly 60% gain over the last 12 months. Best performer was PPB Oil Palms with a better than 75% gain over the last 12 months. Compare that to the KLCI over the same period, you will have wonderful outperformance. Not that I am saying the sector's rally is finished but rather that the upside is limited. But also the sector won't collapse at all as the fundamentals governing the sector are pretty solid. Strong buys on any kind of dips due to external market shocks.

The shift to smaller and second tier palm oil plays look more exciting as these are solid companies also but just smaller and they have not been re-rated as highly as the big caps, now they are playing a bit of catch up. Probably another 15%-20% upside in store for them, I am referring to trading counters such as Kretam and TH Group. Forget the rest, too small.

As for the other theme play in cables and new Bakun revamped proposal - forget about it already. Its cumbersome and should not be allowed to proceed. Hate Leader, Eden, etc... trade at your own peril.