Light At The End Of The Tunnel?

More volatility ahead for O&G companies

Malaysia’s biggest O&G player, Sapurakencana Petroleum (“SKPetro”) recently reported its 2nd quarter result (for financial period ending 31 July 2016) on 28 September 2016. The results indicate that there will be more volatility in operating results of operating companies:

We saw a significant drop in revenue. Nevertheless, the operating income was boosted by  a non-recurring operating income recorded for the latest quarter:

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The non-recurring operating income was due to payment received from Petronas for the cessation of its RSC contract, as explained below:

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Prospects remain challenging. However, Management expect the Company to be able to navigate the year satisfactorily.fs_3

Technically speaking, SKPetro appears to be on a bearish mode:

  • The stock does not appear to be able to break its downtrend mode

skpetro28092016_1skpetro28092016_2

  • Other technical indicators e.g RSI and MACD seem to support an overall bearish tone

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  • To be able to successfully break the downtrend, the share price and / or its shorter tenure MAs should breach the 200D-MA line, with a strong volume support.

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Nevertheless, we may see some support at RM1.28 for potential rebound.

Recent weakness may have been attributable to the on-going disposals by major institutional investor such as EPF:

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In terms of analysts’ target price, it is quite wide (ranging from RM1.16 to RM1.71, with Hold / Sell recommendations):

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What is very clear at this juncture is that we are yet to see the light at the end of tunnel for O&G companies. We should brace for more volatility ahead.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR RELATED INSTRUMENTS MENTIONED ABOVE.

A Common Sense View

I keep reminding myself on what should I expect of Malaysia’s FBMKLCI in the near term. It is true that there are multiple external and domestic issues that are affecting Malaysia and its equity market. From a common sense view and a personal perspective, I sum my view as follows:

common

The above diagram sums up the primary factors that are commonly known in the market. I personally hold an overall negative view on Malaysian equities, at least for the next two years. Corporate earnings continue to decline, with no clear ‘light’ at the end of tunnel. Malaysia has too much household debt, consumer sentiment will continue to be bearish. The country relies heavily on China for its trade, and this will create further uncertainty as to the negative impacts resulting from China’s slowing economy as well as its corresponding huge debt overhang problem. Low crude oil price will continue to dampen Malaysia’s fiscal balance.

More importantly is what will be the impact resulting from the flow of ‘hot money’ from the emerging markets upon the rate hike by the US Feds. In addition, is global recession in the making?

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR INSTRUMENTS MENTIONED ABOVE.

Sorry, none as of now….

We apply a similar screening methodology (see link) to the Singaporean equities. Unfortunately, the screening process returns nil result.

SG_Sep16_RateSG_MY_Sep16_Results

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR INSTRUMENTS MENTIONED ABOVE.

Plywood, Anyone?

Simple understandable business

Focus Lumber Berhad (“FLBHD”) was identified as of the fundamentally-screened Malaysian-listed counters (in an earlier post see link).

The company was incorporated in Malaysia on 30 October 1989 as a private limited liability company and was subsequently listed on the Main Board of Bursa Securities on 28 April 2011. Its principal activities are manufacturing and sale of plywood, veneer, Laminated Veneer Lumber (“LVL”), and investment holding. Plywood is the core product, generating the bulk of the Group’s revenue.

Technically, it appears that there may be support at around RM1.25, of which this may offer potential entry for short term trading opportunity.
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Morningstar has pegged a target fair value of RM1.70 per share for this counter (see link):

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The catalyst will be primarily driven by its export business. Assuming (1) MYR continues to weaken; and (2) growing optimism in global economy, we may see potential growth in the Company’s business performance. MYR is expected to weaken against the USD in the near future :

MYR Forecast.png

Nevertheless, the key challenge will lie with the rising price of its raw materials (i.e logs) as well as labour costs:

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As per its latest quarterly result, Management expects the operating environment to remain challenging:

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Despite the sell-out by local prominent investor Mr Koon Yew Yin, the comforting point is that there are recent buy trades by key management / substantial shareholders:

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It is important to note that the above analysis is a simple high-level desktop analysis. This does not substitute for the need to perform further detailed fundamental analysis of the Company.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR INSTRUMENTS MENTIONED ABOVE.

My Investing Framework

My approach toward investing

If things can be further simplified……

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DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR INSTRUMENTS MENTIONED ABOVE.

Tactical Screening (Malaysia)

In search of hidden value

Derivation of key parameters for the tactical screening:

  • The required rate of return (equity) for a particular security will be based on its beta (as per CAPM rule), expected return on market and the risk free rate
  • Justified or “fair” price to earnings ratio (“PER”) is computed based on its required rate of return, return on equity (“ROE”) and earnings growth rate
  • Justified price to book ratio (“PBR”) is derived based on similar parameters as per justified PER

The following table shows that if the beta of a particular security is 1.0, the required rate of return is 7.32%. If the security’s beta is lower than 1.0, the required rate of return will be lower in tandem with a lower risk. To safeguard margin of safety, we have adjusted required rate of return upward to 8.0%.

With minimum ROE of not less than 10.0% and earnings growth rate of not less than 1.5%, we should expect a security with a beta of less than 1.0 to have a justified PER of at least 13.0x and justified PBR of at least 1.30x.

MY_Sep16_Rate.png

To search for potential undervalued securities, we propose the following screening mechanism :

  • Exchange: Bursa
  • Net earnings growth rate of not less than 2.0% for the past 3 years
  • Beta not more than 1 time
  • PER of less than 13.0x (past 2 years)
  • PBR of less than 1.30x (past 2 years)
  • ROE of not less than 10.0% (past 3 years)
  • Current ratio >1.25x (past 5 years)
  • Total Debt / Total assets not more than 50% (for past 5 years)

The search results are shown below:

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It is crucial to remember that valuation is always driven by anticipation of future earnings, risk and growth rate. Screening results are based on historical results, of which we are making a very quintessential assumption that the future will not be far deviated from the historical trend.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR INSTRUMENTS MENTIONED ABOVE.

Selling Pressure Continues

Major shareholder continues to offload shares in Kian Joo

Latest Development

Malaysian’s pension fund, EPF continues to offload its equity position in Bursa-listed packaging company, Kian Joo Can Factory Berhad (“KJ”). Summary of recent Bursa announcements relating to the on-going disposals is shown as follows:

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Technically, KJ continues to remain “bearish” in the short term:

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Price Earnings Ratio (“PER”) as Valuation Metric

Does the fundamental angle support a higher valuation for KJ? The historical trailing price-to-earnings ratios (“PER”) of KJ is between 6.34 times and 14.06 times, with an average of 10.31 times (since Jan 2011):

KJ_PE Grpah.png

So, what is a fair PER? One may possibly consider the following formula:

Fair PER = (ROE – g) / ROE (r-g), whereby ROE = Return of Equity, g = earnings growth rate and r = required rate of return

Financial Highlights

Historically, KJ has a stable financial profile, recording year-on-year revenue growth rate with a 10 year simple average of 9.3% growth rate per annum. Except for the latest financial period ending 30 June 16, KJ records relatively stable year-on-year annual earnings growth rate, with respectable 10-year average return on equity (“ROE”) of 10.2%. The latest financial period of KJ was impacted by volatility in the exchange rate as well as competition in the packaging industry.

KL Financials.pngPER Simulations & Indicative Valuation Range

To derive a fair PER for KJ, we have run numerous simulations of PER based on the following key parameters:

  1. Discount rate 7.0% – 10.0% (as per CAPM rule shown below, we have derived cost of equity of 6.65% for KJ)
  2. Perpetual earnings growth rate: (3.0%) – 3.0% (not unreasonable in view of the actual long term average year-on-year earnings growth rate of KJ )
  3. ROE 5.50% – 12.0% (not unreasonable in view of actual long term average ROE for KJ)

78 discount rate910 discount rateBased on the above simulations, we limit our valuation analysis based on ROE of between 9.50% and 10.50% and perpetual annual earnings growth rate of between 1.5% and 2.0%. Scenario (based on discount rate of 7.0%, ROE:9.50%-10.50%, g=1.5%-2.0%) has been excluded as well, as the derived PER is relatively higher than of the actual trading PER range of KJ of not higher than 14.06 times.

Therefore, based on PER of of between 9.91 times to 13.49 times and forecast FY16 EPS of 23.12 sen, the indicative valuation range of KJ is between RM2.29 and RM3.12 per share.

ValuationRange.pngKindly note that the above analysis is a simple desktop analysis. Detailed analysis is required to ascertain the valuation range of KJ.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR INSTRUMENTS MENTIONED ABOVE.