Granted the equity markets have been in the doldrums for sometime now, hence as a collective group PER valuations would move down. It has to do with what we call "earnings visibility".
Privatisation is seemingly easy to suggests but the reality for most listed companies, even when their PER or PB are low, they needed the access to capital markets via their listing vehicle. Hence to take them private be it the owners themselves or PE funds, they probably have to tag another extra 30% as capital needs as each privatisation will need to wait it out maybe 3-5 years before relisting.
PER SECTION
a) PER refers to the earnings ratio. Hence there are a few assumptions, PER is only a valid reading if its a "going concern". PER has to do with earnings predictability. How low is deemed as low? Well it varies according to the industry they are in.
Product life - Easy to explain if its steel products or oil palm earnings, the paradigm rarely shifts much. Even when its cyclical one can argue that it is predictable as the four seasons. However, some products, esp technology based, require reinvention and R&D spending cause products can be obsolete within a shorter cycle (3-5 years). Which is why every new I Phone will hit share price of Apple up or down every 2-4 years.
Predictable Margins - This should be the most important factor for high/low PER. If you are capital intensive (steel) your margins are going to be low, which partly explains a lower PER range. Same for tech companies which should command higher margins and as such higher range of PER.
Thus we cannot say just shoot for the 5 lowest PER stocks for investing purposes or prvatisation.
b) The Banks - The banks are quite attractively priced in terms of PER now compared to historical range. Earnings is clouded becaus enothing much is moving. Equity markets very slow, investment banking very slow, property loans even slower. But thats the present and the immediate future (1-2 years out). If you are considering as a long term investment, banks look good, if you want a proxy on a recovery in 2-3 years, banks would be excellent. Its not like any of the top few are losing money.
Should you privatise then? It takes a hefty sum to privatise plus tack in another 2% in fees. Then most probably you need to relist, which might take 3-4 years out in this scenario to get a better valuation. Plus the valuation then must be lucrative enough (e.g. maybe in the 30-40% range). Can we relist CIMB in 3 years at 15x, maybe.
But the biggest obstacle in the period when it is privatised, as banks are capital hungry vehicles. Can the funder also fund the capital requirements. Which is why banks are usually out of the question when it comes to privatisation opportunities.
c) Genting Malaysia - Hit very hard by higher duties and taxes in the recent Budget, and got hit again by the Disney/Fox legal issue. Investors must be very careful to use historical prices and PER for Genting Malaysia to base their investing decisions. The whole earnings structure, in particular margins, have shifted substantively. The previous high will be insurmountable in today's rules.
GM will earn a lot less for every ringgit. The upside is that now GM is highly uncompetitive in the region - in that the government would have very little room to further raise taxes and duties on GM in the future. Now that it second in the region in terms of duties and taxes.
So, another no-go candidate for privatisaton. Share price will have to hit RM2.50 before the Lim family should do any serious privatisation considerations.
The rest in the first table still have exceedingly high PER valuations, e.g. Maxis, Westport, DIGI.
d) Hengyuan Refinery - Two to three x PER, where to find??? When something is so cheap, there must be a catch. The catch would be that the previous earnings which the PER is based on is not sustainable, or in fact is likely to dip substantially in the future. You need to do a lot of research first for this stock, not as plain as it looks.
e) Air Asia Group - This 4x PER is pretty ridiculous. It is very much a going concern, and even if it stops operations, P/B is at 1.0x which means you should be able to sell most assets and get back your money. I give you RM5bn and you try and build another AirAsia. This could be a good stock to look at for short or long term.
f) Stocks like Mulpha or TA Global, nobody really knows what they want to do or are doing. They might not do much over the next 10 years. No point looking at them. You get charkuayteow at 20 sen a plate also no use as the horfun is made of plastic.
g) Politically Out Of Favour - Without needing to name names, they should be forgotten in the new era, earnings visibility ZERO.
h) Paramount Corp - At 10x, looking very interesting but I think it needs to get to 7x before they will act.
P/B SECTION
P/B is a low confort investment factor. P/B is only relevant IF the company is bundled up and sold in pieces or as a whole. Too many vehicles have too many local funds and government interest involved that they won't be sold even if Blackrock makes an attractive offer.
a) KLCCP Stapled - PB at 1.07x. This one is interesting because we are talking about the creme de la creme of property REIT. Highly desirable if it drop to 0.95x.
b) Owner Driven - Many of these owner driven counters have shocking low PB. Well, if the owner also don't want to privatise at 0.3x, why would you want them? The exception maybe is Tropicana Corp, which has astutely offloaded a lot of Johor land last couple of years. Tropicana with a PB 0.37 has reached a level that makes it highly attractive to privatise.
Some of the property companies has a low Pb ratio too but you have to assess how "realisable the bulk of the assets (land bank) are".
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