Sunday, December 12, 2010

Value Momentum Investing and Early X'mas Present

Some may still not grasp the kind of "investing" that my blog preaches. There is value investing which is more the Buffett way, and there is momentum investing which rides on trends, direction and waves. I guess mine is closer to a hybrid, value momentum investing. I am not willing to hold a stock for a long time, more like a trader but only with good catalysts and information flow.

That is why there are more stock highlights when a market is moving and not so much when its flat. This is an early Christmas present or sorts. You can look at this stock 6 months back or a year ago, the conclusion is the same - its damn cheap. A Buffett follower will buy and hold till the cows come home, no worries, 1 or 2 years is ok, something will happen to the stock.

A momentum investor will probably buy on the second or third day after a significant run. Technically, this stock has not moved much at all over the past 2 years. But the perk up over the last 2 days on minimal volume were highly significant. Because the upside of MBM Resources, based on the analysis, is very high indeed with minimal sellers all the way up.

Cheapness is never enough to lure me in. It has to be catalyst, catalyst and catalyst. Then timing, timing, timing. Later I will argue and present the case why the stock is ripe on both departments.

Current year's earnings PER for Proton is 10x, UMW 12.8x, Tan Chong 15.5x ... and the most profitable one MBM Resources is below 6x??!! You can pick up any research report, they will be BUYS or STRONG BUYS, for the longest time.

DBS Group Research, 12 November 2010 (BUY)
• 3Q10 earnings was in line with ours but beat street estimates
• Unit sales rose y-o-y; q-o-q sales fell mainly dragged by festive holidays
• Maintain Buy with TP RM4.80 (58% upside)

MBM recorded strong 3Q10 net profit of RM34.2m (+52% y-o-y), bringing 9M10 net profit to RM112.8m (+158.5% y-o-y). This is in line with our estimate (77% of our full year forecast) but beat consensus. We expect consensus forecast earnings to be raised by c. 12% following its strong set of results. Revenue grew 22.5% to RM388.7m, driven by strong sales of Perodua, Volvo, Volkswagen and Mitsubishi vehicles. Associate earnings (largely sales of Perodua vehicles) also increased strongly by 35.6%. However, on a q-o-q basis, revenue and net profit fell by 4% and 11.4% respectively mainly dragged by lower unit sales in conjunction with shorter working days (Hari Raya festive season). Nevertheless, EBIT margin was relatively stable at 3.9% (vs 3Q09: 3.5%; 2Q10: 4%).

We expect a weaker 4Q10 q-o-q due to seasonality. However, sales momentum is expected to be supported by new model launches, which include a new ViVA variant by Perodua (MBM’s 20%-owned associate) in 4Q10. We maintain our Buy call on MBM with TP of RM4.80, based on 6x FY11F EPS. MBM remains in net cash position with RM142.4m as at end-Sep10.

DBS is expecting a net EPS of 59.5 sen, at RM3.20 thats a current year PER of 5.3x. Net cash of RM142.2m, on 242m shares, that 58 sen per cash per share, or 18% of share price.

Kim Eng Research / Buy, TP RM4.10
We have raised our FY10 EPS forecast by 4% to account for higher vehicle sales and better margins in line with an improving economy and a stronger Ringgit. However, TIV sales are expected to moderate in 2011. With that, MBM is expected to post slower earnings growth of 2% in FY11.

Action & Recommendation: We maintain our BUY recommendation, with a revised price target of RM4.10 based on 7x FY11 EPS of 58.5 sen.

RHB Research / Outperform (TP: RM4.96)
Forecasts: We upgrade our FY10-13 net earnings forecasts by 19.8%, 21.2% and 26.7% respectively as we upgrade our Perodua TIV assumptions to account for the vehicle’s stellar unit sales. This has also resulted in changes to our FY10-13 associate earnings by 8.9%, 16% and 24.8% respectively.
♦ Risks. 1) Lower car sales arising from an economic slowdown; and 2) Weakening of RM against US$ and Yen.
♦ Investment case. Forward earnings should remain positive on the back of: 1) sustained favourable exchange rates; 2) improved consumer sentiment and business conditions; and 3) strong contribution from the new dealerships they have negotiated for.

Despite higher earnings estimates, we lower our PE target as we think our previous PE multiple of 11x was rather high based on historical trend. Based on a revised PE target of 8.5x, which is +1 stdev above the historical PE mean, we derive our new indicative fair value of RM4.96 (down from RM5.30). Maintain Outperform.

Issued Capital (m shares) 242.7
Daily Trading Vol (m shs) 0.17
52wk Price Range (RM) 2.40-3.36
Major Shareholders: Med-Bumikar MARA 54%; EPF 6.9%

Catalyst: There is going to be a very high chance for a merger. Proton is salivating. Perodua is playing very hard to get. The one driving the merger plans is the Government. Proton has failed to find a foreign partner, even the supposed tie up with VW, now has gone to DRB Hicom. The Government has instituted a study, carried out by Frost & Sullivan. It is supposedly completed and will be submitted to the National Economic Council before the Prime Minister calls for a dialogue session with the parties involved and consult all the stakeholders.

The main issues involve pricing, stakeholders’ role post-merger and operational synergies. Size is the matter. The deal has to move forward as size will bring about more opportunities, synergies and ultimalley much higher valuations, especially for MBM Resources.

There could be two ways: a share swap or an outright buy by Proton. Proton at 10x will see limited upside but a share swap will need to swap MBM Resources at 8x-10x PER at the bare minimum to get them to agree - implying and upside of at least 30%-40% from here for MBM Resources.

Maybank came out with a report on this potential merger last week. The merged entity could have RM7b-RM11b in market value. Based on their estimates, the merged entity would create a market value in the region of RM7-11b if the pricing is based on 1.0-1.5x P/B on the existing entities. This would propel the merged Proton-Perodua to be the largest market capitalised auto stock on KLCI 30, surpassing that of UEM at RM8.3b presently. Total shares trading liquidity could be in the region of RM0.9b-RM3.0b, after considering the respective stakes by Khazanah, UMW, MBM and Daihatsu in the merged entity.

Higher upside via MBM, if it happens. Based on Maybank's scenario analyses, MBM offers a higher upside from the current levels if a merger does happen. This is due to the fact that investors are not ascribing potential values of MBM’s 20% stake at Perodua.

Consolidated earnings impact scenario
Proton / Perodua / Newco
Net profit (RM’m)*
- 2011F
276.1 / 394.7 / 670.8

Shareholding structure: Proton (P1) 41.2% of Newco. Perodua (P2) owns 58.8% of Newco.
Based on consolidated earnings ratio
- UMW Owns 38% of P2
- MBM Owns 20% of P2
- Daihatsu Motor Co Ltd Owns 20% of P2
- PNB Equity Resource Owns 10% of P2
- Daihatsu (M) S/B Owns 5% of P2
- Mitsui & Co Ltd Owns 4.2% of P2
- Mitsui & Co Owns 2.8% of P2
- Khazanah Owns 42.7% of P1
- EPF Owns 12.4% of P1
- PETRONAS Owns 7.9% of P1
- Others Owns 37.0% of P1

Acquired by Newco at 10x PER
Market cap (RM’b) 6,061.0 Based on 10x PER

Share price/ sh (RM) @ 6 Dec / Implied Price / Upside (%)
- Proton 4.82 / 5.03 / +4% (Upside)
- MBM 3.10 / 4.73 / +53% (Upside)

Assuming Proton and Perodua are injected at 10x PER, Newco’s market capitalization will enlarge to RM6-9b. P2 would have a larger equity stake of 59% in Newco versus P1’s 41%. UMW (22%), Khazanah (18%) and MBM and Daihatsu (12% each) would emerge as the Top 3 shareholders. MBM’s shareholders would be the biggest beneficiaries vis-a-vis Proton and UMW’s.

The key is getting MBM Resources shareholders to agree, and judging from above, the much higher valuation will probably swing them over. The upcoming DRB Hicom-VW tie up will only put that much more pressure for the Government to push this through quickly. Remember that the Frost & Sullivan report is completed, and it would have recommended the same thing wil various merger/swap options for both companies. The timing couldn't be better.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.


Choong said...

stricly from the view point of a consumer (not stock investor), I really wish the merger will not materialise

Proton has been taking malaysian car buyers for a ride for the longest time. perodua came and gave us an alternative amd i beleive it is this competition that keeps proton on its toe

I still remember the need to pay toll by opening the door on my previous wira years ago, coz power window if lower will not ascend back. it is this phobia that has kept me away from proton since then. Now my 1st car is a foreign marque, and my second car is a the extent that i even shun away from buying ptoton shares.

Keep perodua away from proton...for pete's sake.

peng01 said...

This post remind me your CIMB+PBB merge posting.

Leremy said...

Good stuff. Once they merge and MBMR can go RM4+... I no need to buy Malaysia car anymore.

Take this chance, make tons of money, and buy a Mazda.

Living Trader said...

Definitely agree with you on the investment style to be a hybrid between Buffet and momentum trading. In these volatile markets, we can't be going super long.

Digital said...

It will be a big mistake for Perodua if the merger take place. Their work culture, quality of their cars and consumer acceptance is so much difference. Best is to close Proton and let Perodua run the shows. Perodua with UMW/Daihatshu/Toyota will be able to come out with a higher cc model easily.

Another related company is EP Manufacturing (EPMB). Every Perodua goes out of the plants had quite a number of parts mfg by EPMB. I dont find any research house doing any report on them. Matter of time, EPMB will be discovered by them.

Loo said...

The comments above on the negativities of the merger are real but this is besides the point. This is the stock market and we are not here to purchase something to keep it for years. May we all profit from this opportunity.

traderszone4u said...

Dali, agree with u.
Value investing coupled with momentum trading will help investors to make money in less than a month / few months.

solomon said...

From yr Marketocracy holding of Ford till now, I see model of portfolio u having. Yr holding is consistent with yr recommendation.

Sadly, the F1 episode did not provide a good synergy....haha....our country Is sponsoring 3 teams? A sponsoring of high tech racing but we are producing 2000 cc and below car? Technology follower?

Thank you for Xmas present, how do I sent u a ticket of Humbug? To the Japanese restaurant......see whether my eyes permit me do so...bad eyesight nowadays....

Joan Doe said...

Dali the oracle of KL

kl said...

Imagine Perodua as CIMB and Proton as Bank Bumiputra and you may find the hypothetical merger more acceptable. Who can ever believe anyone can absorb and then change Bank Bumiputra's loser culture, yet it was done. Kudos to Nazir Razak. What you need is someone competitively smart and good and powerfully connected to drive the merger. Alas, that may be the problem.

asdfghjklas said...

look at carotech!!!

offstonee said...

Pure Buffet method is suitable to use mainly in country with big growing population and the country is in the state of getting richer. In 20 century , this was US and 21 century it is likely China.

It is not for small country with illiquidity like Malaysia, you can earn some money with the method but not getting very rich .

Why needs to become Buffet, when you can buy Buffet: Bill Gates, Ed Thorp bought into his, why not us?

Dali, your posting comes with free tips , specific stock, actual timing with catalyst, correct method for investing in Malaysia. Where else to get this foc?

Let us popularise the VALUE MOMENTUM INVESTING.