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Tuesday, December 26, 2006

Investssmart ceases blogging

After 17 months, I have decided to stop blogging. The reason is because I will be setting up and managing a private investment fund in the near future. Since I will be charging a performance fee for the fund, it would be unfair to shareholders of the fund for me to offer my comments for free on the blog. Although I wont be posting anymore, I hope that the chatbox can be a useful place for discussions among investors. It has been a pleasure blogging for the last 17 months and I look forward to continue participating in the chatbox. Thank you for your support and happy investing!

Monday, December 25, 2006

Portfolio Update 18/10/06-22/12/06

The Investssmart portfolio rose by 0.68% for the week, outperforming the KLCI that lost 0.88%. The outperformance was largely due to the sharp contra gains from MAXIS-CB during the week. During the panic sale on Wednesday which is due to the sharp decline in Thai stocks, I managed to purchase some MAXIS-CB at 57c. At that price, it was trading at just about 2% premium based on MAXIS share price of $9.75. As I believe that the decline in Thai stocks will not affect the fundamentals of MAXIS, it is likely to experience a rebound very soon. There is no doubt that MAXIS-CB was a punt but I believe that it involves calculated risk. Over the week, 4 counters in the portfolio advanced, 7 declined and 1 was unchanged.

I disposed UTDPLT, DIGI and YTLPOWR during the week. The fundamentals of the company has not changed but I am streamlining my portfolio to make it more concentrated. Another reason is because MAYBULK, MAXIS, LITRAK and TANJONG look like more attractive investments. I increased my stake in MAYBULK and purchased some shares in KFC during the week. With that, there will be only 12 stocks in my portfolio.

The top gainer for the week was TANJONG. This is largely due to its sterling quarterly result as earnings from its NFO segment returned to normal after two disappointing quarters. Most analysts believe that TANJONG is worth $15-$16 and I concur with that. PPB was the worst performer and this seem quite strange to me. Wilmar's share price has held firm in Singapore and I would expect PPB to do likewise since most of its value will be derived from its shares in Wilmar. Perhaps, some investors do not like the fact that PPB will end up as a holding company.

Disclaimer: This report is brought to you by Investssmart, an unlicensed investment adviser. Please exercise your own judgment or seek professional advice from your remisiers. By law, they are the experts. I am not responsible for your investment decisions.

Saturday, December 23, 2006

Eagle Eyes: KFC

KFC is the franchise holder of Kentucky Fried Chicken restaurant chain in Malaysia, Singapore and Brunei. With over 350 outlets, it is the largest fast food restaurant chain in Malaysia. It is almost a fully integrated player with its poultry division involved in breeding and hatching operations, poultry processing as well as feed milling operations. It also owns the Ayamas retail outlets and Rasa Ayamas restaurants. KFC also sells processed chicken products under the Ayamas brand.

KFC's ancillary division produces buns, coleslaw and salad to KFC and Pizza Hut restaurants. The Life sauces used in its restaurants, which are also sold to the public, is another of its operation. Although it may seem to be involved in a whole range of operations, it is the KFC restaurant operations that contribute a major chunk of its profits at about 80%.

KFC restaurants can be regarded as a fast growing yet resilient business. The rising standard of living means that more and more can afford meals at KFC. In developed countries, fast food restaurants like KFC offer food for almost the cheapest price compared to other restaurants as labour cost increases. In Malaysia, this holds true for tourist destinations such as Genting Highland, where KFC is one of the cheapest food outlets and hence, is often fully packed with customers.

Despite its strong growth potential, KFC is also expected to be a resilient business given the fact that it operates in the food sector. Demand for essentials such as consumer products in the low to medium range are unlikely to be affected badly in the event of an economic downturn. This is the reason why consumer stocks with strong brands like NESTLE and YHS are afforded a high PE of 15-20x.

KFC was at the centre of a shareholding tussle in the past 1-2 years but it has since been resolved. KULIM, through QSR, seems to have gained control of the company. In fact, it has tried to increase its stake in KFC by making an offer for the remaining shares in KFC for $4.94. This has proved to be unsuccessful as few accepted the offer. With KFC trading above $4.94 for quite some time, the offer is destined to fail.

Although KFC has performed well in the last 2 years, it seems that the shareholding tussle and MGO by QSR has dampened investors' interest in the company. Earnings have been growing at a steady pace over the year and with an expected strong fourth quarter, EPS for the year would be estimated to be about 50c. Based on its share price of $5, KFC is trading at a PE of 10x. Does it reflect the true value of the company?

There is no doubt that KFC is a cash cow as its business involves cash over the counter. Over the last 7 quarters, KFC has used its strong cash flow to pare down its debt impressively. Net debt has declined from $230m in the first quarter of 2005 to just $57m by the third quarter of 2006. KFC could possibly increase its profits by about 5% next year simply by paring down its debt as the lower finance cost will be reflected in its profits.

Barring any unforeseen circumstances, KFC should grow by about 10% next year. Rating it at a conservative PE of 13x based on 2007 EPS of 55c will give it a target price of $7.15, which is an upside of about 40%. Downside would be limited by the $4.94 offer by QSR. In other words, there should be only one direction for KFC's share price. Its strong brand, exceptional cash flow and improving balance sheet should ensure its sustainable growth for many years to come. BUY

Disclaimer: This report is brought to you by Investssmart, an unlicensed investment adviser. Please exercise your own judgment or seek professional advice from your remisiers. By law, they are the experts. I am not responsible for your investment decisions.

Monday, December 18, 2006

Portfolio Update 11/10/06-15/12/06

The Investssmart portfolio decline by 0.32% for the week but still outperformed the KLCI which lost 0.84% and the Second Board Index that dropped even more. Despite rising at a lower rate compared to the KLCI, the Second Board Index somehow managed to drop almost 3x as fast as the KLCI during the week. Judging from the latest quarterly results, I can assure you that the Malaysian economy is showing no signs of recovery. While earnings of large caps have improved, the same cannot be said for the majority of small caps. Over the week, 5 counters in the portfolio rose and 9 declined.

During the week, two transactions took place. I sold have of my stake in DIGI at $15.60 and used the funds to purchase MAXIS at $10. At $15.60, I believe that DIGI is fairly valued based on 13x PE and EPS of $1.20. Valuation is still not excessive and there is still room for share price appreciation as earnings continue to grow. However, I believe that the growth prospect of MAXIS is brighter due to the unrealised potential of its Indian operations, Aircel. In the long term, Aircel's earnings contribution could even eclipse MAXIS' Malaysian operations.

Aircel currently contributes just under 7% to MAXIS' profit before tax. However, with its phenomenal growth rate, its contribution will increase sharply as its Malaysian mobile phone industry becomes saturated. Aircel's revenue and EPS grew by 17% and 28% over the quarter. If it continues to grow at that rate, annual revenue and EPS growth rate will be an incredible 87% and 168%, respectively! With a good dividend yield, strong balance sheet and cash flow, I believe that MAXIS is an attractive yet defensive investment at just 11.8x 2007 PE.

PPB gained sharply during the week as Wilmar announced takeover bids for its palm oil plantation, PPBOIL and its stakes in PGEO Group and Kuok Oils and Grain Pte Ltd. Since the bid, Wilmar has gained 23% whereas PPB has increased by just about 10% despite the fact that PPB's stake in Wilmar will account for almost 85% of PPB's market capitalisation. Hence, I believe there is still some upside left in PPB.

TANJONG was the top loser for the week, declining by about 9%. However, I believe that the downtrend will be short lived. TANJONG posted an impressive quarterly result on Friday. Earnings from all its major segments showed improvement. Its gaming segment, which had underperformed in the last two quarters, finally delivered. Its power generation operations, which are governed by concessions, performed up to mark whereas Tropical Islands posted lower losses due to government grants received. At $13, TANJONG appears undervalued and I believe it should easily be worth $15-$16 in a year's time.

Disclaimer: This report is brought to you by Investssmart, an unlicensed investment adviser. Please exercise your own judgment or seek professional advice from your remisiers. By law, they are the experts. I am not responsible for your investment decisions.

Sunday, December 17, 2006

Market Talk: PPB

DJ MARKET TALK:PPB,Wilmar Will Form 'Compelling Union'-Citi - 2006-12-15 02:39:00.0
0240 GMT [Dow Jones] STOCK CALL: Planned merger of PPB Oil Palms (6823.KU) and Wilmar (F34.SG) will form "a compelling union", says Citigroup; says enlarged entity will be an integrated agribusiness group with operations in most major markets, and will be a leading processor of edible oils in China and one of top 15 listed companies in Singapore by market cap. "Investors of PPB Oil would gain exposure to a new global integrated agribusiness group with larger market capital and better trading liquidity.... (It) could rival Synergy Drive in terms of plantation land". Keeps Buy on PPB Oil. Stock +18.4% at MYR10.60.(SMG)

DJ MARKET TALK: GS Ups Wilmar To Buy; Positive On Merger - 2006-12-15 03:03:00.0
0304 GMT [Dow Jones] STOCK CALL: Goldman Sachs ups Wilmar (F34.SG) to Buy from Neutral; raises target price to S$2.12 from S$1.80, ups FY07 EPS forecast by 9% to S$0.08. Brokerage positive on Wilmar's proposed merger plans involving PPB Oil Palms (6823.KU); "there should be strong synergies in the combined group as it is the largest palm oil refiner in the world (about 25% market share), the largest producer of edible oil consumer packs in China and one of the largest upstream plantations in the world." Stock up 22.8% at S$2.10 on heavy volume.(JEM)

Investssmart: With the merger, current shareholders of PPBOIL will own shares in Wilmar, which is listed on the SGX. Bursa Malaysia will end up losing a well run company and if they as well as the Malaysian government do not buck up, it will be just a matter of time before others do the same. By listing in Singapore, Wilmar will not be subjected to the ridiculous 30% Bumiputera shareholdings rule. It is also common knowledge that companies in Singapore are often afforded a higher valuation compared to those in Malaysia.

One PPBOIL share will be exchanged for 2.3 Wilmar shares. With Wilmar trading at S$2.05, PPBOIL should be worth about $10.85. With PPBOIL currently trading at $10.50, there is a minor arbitrage opportunity of about 3%, which is not compelling enough for investors. Further upside will depend on the share price of Wilmar. As for PPB, it will end up being a holding company with about 18% stake in Wilmar. PPB will own approximately 1150m Wilmar shares in exchange for its stakes in PPBOIL, PGEO Group and Kuok Oils and Grain Pte Ltd.

Based on share prices of Wilmar and PPB of S$2.05 and $5.45 respectively, PPB's 1150m shares in Wilmar will be worth about $5.4b, which is about 84% of its market capitalisation. It practically values its sugar refining and other businesses at just $1b when they contribute about $200m in profits annually. Valuing these businesses at 10x PE will give them a value of about $2b. Adding this to its $5.4b stake in Wilmar will give it a value of about $7.4b or $6.24 per share.

It remains to be seen how investors will value PPB. Some may start seeing it as a holding company since most of its value will be derived from its shares in Wilmar. The 11% rise in PPB compared to the 20% rise in Wilmar on Friday could be a sign that there is much more interest in Wilmar at the expense of PPB. In my opinion, PPB would be worth about $6. Being a holding company is not glamorous as proven by BKAWAN. Investors would often rate it at a 20% discount to RNAV. Although I do not mind owning shares in a holding company if valuation is attractive, I am not all that keen on Wilmar as it is valued as a growth company with a higher PE of about 16-20x. Hence, I am keen to sell out of PPB at about $6.

Disclaimer: This report is brought to you by Investssmart, an unlicensed investment adviser. Please exercise your own judgment or seek professional advice from your remisiers. By law, they are the experts. I am not responsible for your investment decisions.

Monday, December 11, 2006

Portfolio Update 04/10/06-08/12/06

The Investssmart portfolio rose 1.14% for the week, underperforming the KLCI which gained 1.71%. However, it was still better than the 2nd Board Index that gained just 0.71%. The number of losers often outnumber that of gainers despite the rise in the KLCI as it continues to outperform the Emas and 2nd Board Index. In a bullish environment, this is not supposed to happen. Small caps in Malaysia are lagging badly and this can only indicate that the economy is not performing all that great. Over the week, 9 counters in the portfolio rose, 3 went down and 2 were unchanged.

During the week, the portfolio was left unchanged. Most of the counters experienced small gains with TANJONG and ORIENT being the best and poorest performers. TANJONG's rise is probably due to its undervaluation as well as news reports that it is bidding for power generation assets in The Philippines. However, latest news showed that TANJONG has pulled out its bid due to the lack of certain essential information. In my opinion, TANJONG is a good counter to hold. Despite lacking a strong upside potential, it makes up with its defensive businesses and attractive dividend yield of 5-6%.

ORIENT has risen about 10-15% in the last few weeks but I still believe that it is hugely undervalued. At its current price, ORIENT is trading at a PE of just 7-8x PE despite its huge cash pile. The buoyant economic conditions in Singapore could possibly mean that its automotive retailing business there may improve further. It should be noted that its recent earnings have been impressive despite the sharp slowdown in the Malaysian automotive industry. Should it pick up, it will further boost ORIENT's earnings. I have rarely seen research reports on ORIENT so there is a chance that it will rise sharply once it is gets covered.

Defensive counters with quality earnings dont get much attention from retail investors on Bursa Malaysia as most now scramble to get some call warrants due to its volatile movement. I would like to take this opportunity to warn everyone that most of the call warrants are currently overvalued. There is no doubt that upside potential is good since call warrants are leveraged instruments but the recent run has already priced in almost all the potential upside.

Let us take ASTRO-CA and SCOMI-CA as examples. Both call warrants will expire on 29th January 2007 which is just 1.5 months away. ASTRO-CA has an exercise price $4.65 with exercise ratio of two call warrants for one share. With ASTRO at $5.60 and ASTRO-CA at 69c, ASTRO-CA is trading at a premium of 7.7% while offering a leverage of just 4x. ASTRO will have to rise to $6.03 in 1.5 months for ASTRO-CA to just breakeven at its current price. For a large cap which is already rated at a premium valuation to the market, it is highly unlikely for it to rise much further than $6.03 in the near future.

As for SCOMI-CA, its exercise price of $1.15 and SCOMI share price of $1.05 mean that it is still out of money. With just 1.5 months away from expiry, it is extremely risky to hold SCOMI-CA as there is a good chance that warrantholders to lose everything. Even if SCOMI rises to $1.15 in 1.5 months time, which is already a rise of 9.5%, the warrants will still have no value at expiry. Currently at 20c, SCOMI-CA is trading at a huge premium of 28%! Unless some people know that something will happen by 29th January, SCOMI-CA has no such value.

Retail investors used to be very wary of warrants before this but the current strong run has changed everything. Greed is creeping in and that has pushed up the prices of call warrants. Things may seem rosy for now but I doubt it will last. Call warrants can bring huge gains in bullish market conditions but call warrant investors will make huge losses even if the market stagnates due to the huge premium it is paying for the leverage. The value of warrants depreciate by the day and the fact that call warrants expire so quickly mean that the huge premium in the market today may not justify the high depreciation rate.

Disclaimer: This report is brought to you by Investssmart, an unlicensed investment adviser. Please exercise your own judgment or seek professional advice from your remisiers. By law, they are the experts. I am not responsible for your investment decisions.

Friday, December 08, 2006

Market Talk: MAYBULK

DJ MARKET TALK: S&P Ups Maybulk To Strong Buy From Sell - 2006-12-08 00:28:00.0
0028 GMT [Dow Jones] STOCK CALL: S&P Equity Research ups Malaysian Bulk Carriers (5077.KU) to Strong Buy from Sell, ups target to MYR3.70 vs MYR2.34 after 3Q06 net profit came in 30% above expectations; ups FY06 forecast by 13% to MYR273.1 million, FY07 forecast by 24% to MYR282.7 million on stronger-than-expected dry bulk rates, lower expenses. S&P says Maybulk's MYR268 million net cash, projected operating cashflow of more than MYR200 million can easily sustain DPS of 12 sen, which should support share price. Stock ended up 0.8% at MYR2.67 yesterday.(ECH)

Investssmart: What a turnaround. From a SELL with target price of $2.34, MAYBULK was upgraded to a STRONG BUY with target price of $3.70, which S&P attributed to stronger-than-expected dry bulk rates, lower expenses and 3Q06 net profit which is 30% above expectations. How accurate are they? We can see from the figure below that the BDI actually started rising since June 2006 and has been steady at about 4000 points since September. Isnt it a bit too late to recognise the 'stronger-than-expected dry bulk rates' only now?

If you see MAYBULK's operating expenses, you will notice that the analyst is talking crap. The figures below were extracted from the last three quarterly reports by MAYBULK and we can see that operating expenses actually rose from $40m to $44m to $51m in the last three quarter. Compared to the previous year, operating expenses for the first nine months rose from $96m to $136m. How did the analyst come to a conclusion that cost is now lower?

MAYBULK's EPS were 8.43c, 8.79c and 8.75c in the first, second and third quarter respectively. S&P must be very poor at forecasting EPS if they think that EPS of 8.75c is 30% above their expectations. It is so obvious that MAYBULK will at least post similar results to the previous quarter as the BDI picked up sharply during the 3rd quarter. 30% above expectation means that they actually expect MAYBULK's profits to drop 30% over the quarter.

It is disgusting how much bullshit they can insert into one report. Nevertheless, S&P got away with it this time. They are lucky that there is a huge seller in the market holding down the share price for quite some time, which I believe is none other than EPF. Once this selling subsides, I believe MAYBULK can only go up. In a more efficient market, such selling would have been easily absorbed but in Malaysia, where most local fund managers are more interested in supporting the GLCs, there is no reason for anyone to quickly buy up the shares. Once EPF starts selling, just let EPF throw the shares at dirt cheap prices and get them at a bargain. At $2.67, MAYBULK is a steal.

Disclaimer: This report is brought to you by Investssmart, an unlicensed investment adviser. Please exercise your own judgment or seek professional advice from your remisiers. By law, they are the experts. I am not responsible for your investment decisions.