It Is All About ROE

Malaysian banks have recently announced their latest financials for the quarter. It is important to consider the impact of return on equity (“ROE”) on the valuation multiple (e.g price-to-book) of listed Malaysian banks.

What do we see?

ROE is generally on a downward trend for the Malaysian banking sector

IndividualBanksROE2015.png

IndividualBanksROE2015 2.png

Why is ROE declining?

If compared to matured markets, Asian banks (e.g Malaysian banks) are involved for a large part in economies that have shown good growth, higher margins and new opportunities brought about by advancing demographics. This should continue over the medium term but pressures from increasing competition, capital requirements and growing cost base will mean it is difficult to maintain the same growth. As banks are becoming more capital intensive, it would be increasingly tougher for Malaysian banks to sustain the current high returns future ROE.

European banks have been reporting single-digit ROE over the last few years.

ROE & Valuation

There is a statistical relationship between the price-t0-book (“PBR”) valuation multiple of banks against its ROE:

PBR vs ROE_ Banks

As shown above, with a relatively higher ROE, Public Bank is trading at a premium to its banking peers whilst Affin is trading at the lowest PBR due to its low ROE.

The above statistical relationship is defined as follows:

PBR (x) = 11.2089*FY15 Roe + -0.026807, r-squared of 0.767 and p-value of 0.0019597

Based on the defined formula, the predicted value may be derived for each listed Malaysian bank and be compared to its current share price:

Banks vs ROE table.png

From the above analysis (including a sensitised ROE scenario), it appears that only RHB Capital is trading lower than its predicted value of RM6.87 (base) and RM5.81 (sensitised).

Key Implications

This is a simple desktop statistical analysis. This shall not substitute the need for a detailed fundamental analysis for each of the banking stocks. Nevertheless, the defined formula based on the use of ROE enables us to form a broad range of predicted values for the banking stocks.

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.

The Magic Number 18

Some major cap constituents of FBMKLCI  have been reporting lower earnings such as Hong Leong Bank, Sime Darby and Telekom Malaysia. The rest of constituents will be reporting their results before end Feb 2016. The declining earnings of FBMKLCI constituents may push  FBMKLCI’s price earnings ratio (P/E) towards the 18.0 times mark, which will be the highest P/E in the past 10 years (excluding the 2008-2009 financial crisis period)

As of 24 Feb 2016, FBMKLCI is trading at P/E of 17.37x which is relatively higher than its historical median P/E of 16.3x . It has never breached P/E of 18.0x in 10 years (excluding 2008-2009). If FBMKLCI ever breaches the 18.0 times mark, FBMKLCI’s P/E may potentially revert to its median of 16.3x (equivalent to a potential downside reversal of approximately 10.4%)

img_3568

It would be interesting to see how large cap FBMKLCI constituents such as Maybank, RHB Cap, CIMB, AmBank as well as Tenaga Nasional would fare when they report their latest quarterly results.

Extract of some recent news affecting FBMKLCI constituents:

CIMB Indonesia – FY15 operating income grew 3.6% underpinned by a 6.5% year-on-year (“Y-o-Y”) improvement in Net Interest Income (“NII”) premised upon a sound pricing structure, but partially offset by a 8.6% Yo-Y decline in non-interest income in line with the weaker treasury market activity. FY15 net profit was lower due to a 54.7% Y-o-Y increase in provision expenses. CIMB Niaga’s Loan Loss Coverage (“LLC”) increased to 111.53% as at 31 December 2015 from 88.78% a year before.

Malaysia’s Sime Darby Hit by Commodity Prices; 2nd-Quarter Profit Down 37.5%

24 Feb 2016 13:25

DJ Malaysia’s Sime Darby Hit by Commodity Prices; 2nd-Quarter Profit Down 37.5%

 
   By Yantoultra Ngui 
 

KUALA LUMPUR, Malaysia–Malaysia’s Sime Darby Bhd. (4197.KU), the world’s largest palm oil planter by land size, said Wednesday net profit for its second-quarter ended December dropped 37.5%, hit by lower crude-palm-oil prices and a downturn in the mining sector.

The conglomerate, which also sells cars and runs hospitals, said lower fresh fruit bunch production has also weighed on its plantation business. Slowing growth in China has continued to affect its industrial division, it said.

“We are halfway through the earnings reporting period and the numbers reflect the challenging business environment that the group operates in,” said Chief Executive Mohd Bakke Salleh in a statement.

Headwinds notwithstanding, Sime Darby’s motor and property divisions performed better during the quarter on higher luxury-car sales and an increased contribution from the development of a university hub in the southern state of Johor.

Net profit declined to 273.29 million ringgit ($65 million) from 437.39 million ringgit in the year-ago period. Revenue inched up to 11.8 billion ringgit versus 10.7 billion ringgit.

Sime Darby has been exploring ways to shore up its balance sheet and reduce financial leverage after it took on debt to purchase New Britain Palm Oil Ltd., which owns plantations in Papua New Guinea, for around six billion ringgit last year. The conglomerate’s earlier plans to raise funds, including by listing its automotive business, were put on hold because of weak market conditions.

Shares of Sime Darby ended the day’s early session 2.89% lower before the earnings announcement, underperforming the local stock benchmark index’s 0.57% drop.

KUALA LUMPUR (NewsRise) — Hong Leong Financial Group, the financial business enterprise of Malaysian tycoon Quek Leng Chan, said Wednesday its net profit plunged nearly 38% in the fiscal second quarter due to one-off expense arising from employment severance payments.

   Net profit for the three months ended December 31 totalled 263.4 million ringgit ($62.7 million) compared with 423.8 million ringgit during the same quarter last year, the company said in an exchange filing. For its first six months, net profit declined 20% to 650.3 million ringgit from 816.0 million ringgit during the same period last year.

4Q profit falls 12% on year, loss-making wireless unit drags

KUALA LUMPUR (NewsRise) — Malaysia’s state-owned fixed-line operator Telekom Malaysia said Wednesday net profit fell 12% from a year earlier in the final quarter of 2015 due to losses at its wireless unit and guided for higher capital expenditure this year.
Net profit for the three months ended December 31 totalled 192.4 million ringgit ($45.5 million) compared with 218.3 million ringgit during the same quarter last year, Telekom Malaysia said in an exchange filing. Quarterly revenue however rose 0.6% to 3.18 billion ringgit from 3.16 billion ringgit.

 

 

 

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.

 

Finding Bottom For Plantation Stocks

We look at 6 plantation stocks that are currently trading on Bursa: IOI, KLK, Genting Plantation, Hap Seng Plantation, TSH Resources and CBIP. In this analysis, we will try to explore how movements in CPO prices affect the share prices of these stocks using a simple regression analysis. We use data since Jan 2015 till date.

The results are as follows:

palm oil

Key Observations:

  1. The statistical relationships appear significant for IOI, KLK and Genting Plantation. Based on the derived formula, these counters are currently trading close to their predicted values.
  2. For TSH, Hap Seng Plantation and CBIP, the relationships appear weak, suggesting non-reliable statistical properties. These three counters exhibit negative marginal correlation with the movement of CPO
  3. We also set the 95% upper bound and lower bound for these stocks, setting projected resistance and support price range.
  4. Nothing substitutes for a detailed fundamental analysis, this is only a quick-and-easy analysis.
  5. Further analysis is required – including a longer time frame of data

 

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION.  SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.

Export Stocks: Jumping On The Bandwagon

The Ringgit is weakening. Buy export stocks. Hang on, do we just jump on the bandwagon and chase after the export stocks?

For year 2016, research reports as well as investment websites / news / magazines have been advocating the common theme “Ringgit is falling, buy export counters”. Seriously, is Ringgit or MYR going to collapse? What about the imminent global recession, wouldn’t that affect the demand for our exports (i.e cheap Ringgit doesn’t mean everything)? To some extent, a falling currency would help the export market but the equation is not as simple as it is. In this simple desktop analysis, we would like to examine 5 popular Malaysian export stocks, namely: Top Glove (gloves), Kossan Rubber (gloves), Karex (condom), Inari Amertron (technology) and Latitud Tree (furniture). We hope to shed some light on the following questions:

  1. In light of a depreciating Ringgit, how have these stocks performed thus far?
  2. What is the statistical relationship / formula that can be analysed between the share price of these stocks and Ringgit?
  3. What are market’s expectations about the Ringgit?
  4. Are these stocks over or undervalued if compared to their predicted value as per the derived statistical formula?

What has happened since Jan 2015?

Export stocks 1

Using a common base of 100.0 (since 1 Jan 2015), Top Glove has outperformed the other 4 export stocks. Latitud Tree came in for the second spot. In a nutshell, it does show that the depreciating MYR/USD had created positive momentum for these stocks. Beginning early 2016, these stocks are  ‘correcting’ due to strengthening of the Ringgit.

Statistical Analysis

Regression analysis is performed between the share price of these 5 export stocks and the MYR/USD (since 1 Jan 2015):

Export stocks 2

Export stocks 3

Each stock has its own derived statistical formula which may predict the target price of the stock based on MYR/USD.  The statistical results are summarised as follows:

  1. The gloves counters appear to have stronger relationship with the movement of MYR/USD as Top Glove’s r-squared is at 0.73 whilst Kossan Rubber is at 0.81
  2. The other three export counters have r-squared of more than 0.5, which is more than 50% of the movements can be predicted.
  3. Based on actual MYR/USD exchange rate of RM4.165, it appears that all selected export stocks (except for Kossan Rubber and Latitud Tree) are trading relatively higher than the predicted values as per their derived statistical formulas.
  4. Based on the statistical formula, we can back out the implied MYR/USD from the current trading price of the stocks.  The implied MYR/USD range is  between RM3.87 – RM4.415, with an average of RM4.176.

Key Implications

This is a simple analysis. A detailed fundamental analysis is required on each stock. The derived formula is not perfect, as further fine-tuning of the statistical relationship is required. More importantly, even if the Ringgit is depreciating, it does not mean that the export market will increase as global demand will be affected if global economy faces recession. Further, prevailing negative yields around the globe may lead to the strengthening of the Ringgit.

 

 

 

 

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.

 

Investing is not a rocket science

I am not an expert in investing. I am not a fund manager. Whatever I say doesn’t hold any weight. However, I would like to share my 2 cent thought on investing. You may not care, but I do not care whether you care.

It does not require a rocket scientist to know how to invest. It is all about going back to the basics, fundamentals and foundations (whatever you want to call it).

  

Earnings, earnings and earnings. Be it you want to term it as cash flow (if there is a high risk of accounting manipulation), ebitda, ROE or equivalent, only earnings growth can support a sustainable upward trend in the share price of a company. There could be short term “noises” in the share price which may be due to changes in market sentiment or emergence of a macro event. Always ask yourself these questions:

  • Is the company’s business model sustainable?
  • What are the recurring core earnings as well as sustainable earnings growth?
  • Is revenue growing?
  • Business cycle – growing or maturing?
  • Any other positive catalysts?
  • How are macro events impacting on the company?

My second emphasis is margin of safety. Have you accounted appropriately for the risks? You probably have done a detailed assessment / valuation before you buy into a company. There is always a chance that you may be wrong or imprecise in your assessment. Have a sufficient margin of safety.

My last point is improbable events or black swans. These events do happen and will happen again. They will rewrite the fundamentals that you may have known all these while. Examples of these events: wars, technology breakthrough, global disasters, epidemics, etc. Know how to plan for them, as well as to capitalise on them.

Always analyze the numbers, financials, data, stats and news to uncover your truth about investing.


DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.

Are O&G companies undervalued?

Most O&G companies have seen their prices battered by the fallout in global oil prices. Every investor has the same curiosity in his or her mind – when is the right time to invest in O&G stocks again…

It is reasonable to believe that significant correlation exists between the shares prices of O&G stocks and global oil prices. We have chosen to perform a quick statistical test on the relationship of ICE Brent Crude Oil against the share prices (since Jan 2014) of three (3) selected Malaysian listed O&G companies, namely Coastal Contracts, Favelle Favco and Sapurakencana Petroleum.

O&G Corr 1

O&G Corr 2

Key observations:

  • Significant relationship is established between crude oil prices and shares prices of these three (3) selected MY O&G companies (with r-squared of 0.74 for Favelle Favco, 0.89 for Coastal and 0.94 for SK Petro). The lower the r-squared, the less precise the formula in forecasting the target price for the counter.
  • Certain formulas can be derived to forecast the target price of these 3 stocks based on crude oil price
  • It appears that Coastal is fairly valued, as the formula forecasts a target price of RM1.63 (based on current crude price of USD31.46/bbl) if compared to its actual share price of RM1.53
  • For Favelle Favco and SK Petro, these two counters appear to be trading higher than its respective target prices as predicted by the derived formulas
  • It is important to understand that this analysis is a simple desktop analysis and requires further fine-tuning. As to when it is the right time to invest in O&G sector, we must first satisfy our self what is the expected floor price for the global oil price, thereafter, to dwell into detailed fundamental analysis about selected counters.

 

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.

Real Interest Rate & Hot Money

Central banks have been cutting interest rates, with the latest moves by Japan and Sweden. The deliberate moves result in planned devaluation of their currencies. So, where is “hot money” going?

How will real interest rate affect currency?

Higher real interest rates tend to lead to an appreciation in the currency. This is because high interest rates means saving in that country gives a better return. Therefore investors often move funds to countries with higher interest rates. (this is known as hot money flowshttp://www.economicshelp.org/blog/5394/interest-rates/interest-rates-and-exchange-rate/

The following graph depicts current position of real interest rate for respective countries:

RIR

Hot money going into Brazil?

With the highest relative real interest rate (at this point in time), the Brazilian real should be able to appreciate. Nevertheless, there are many economic issues with the country as well as falling  crude oil prices have impacted on Brazil.

ASEAN Countries

Indonesia appears attractive in terms of real interest rate (highest among the ASEAN countries). However, Indonesia has now run both current-account and fiscal deficits for three years in a row, a gnawing problem that is undermining its currency and could upset a high-spirited stock market.

http://asia.nikkei.com/Politics-Economy/Economy/Indonesia-s-twin-deficits-becoming-chronic

Second on the list – Philippines looks like a promising destination to attract hot money

Developed Nations

Singapore is the developed country with the highest real interest rate, not because it has a high nominal interest rate but due to its current deflationary trend. Will it be the next Japan, suffering long term deflation?

 

Key implications : 

  • Foreign exchange movements are subject to numerous macro factors. Nevertheless, differential real interest rate may provide guidance as to the direction of hot money and carry trade pairs
  • Will we see a reversal of capital flows back to emerging markets (due to higher real interest rates)?
  • However, when there is economic turmoil, capital will flow into “safe haven” assets

 

 

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.