Portfolio Update 13/10/06-17/11/06

The Investssmart portfolio rose another 3.07% for the week, outperforming the KLCI which gained 1.81%. The KLCI is now at 1040.79 and some people are already calling it a bull run. During bull runs, small caps tend to run faster. However, 2nd Board Index only gained 0.91% during the week. In fact, it has underperformed the KLCI for quite some time and I doubt it will change as the economic condition in Malaysia is poor unlike other countries such as Singapore and Australia. Over the week, 13 of the counters in the portfolio rose, 3 went down and 2 were unchanged.

During the week, I sold BKAWAN in exchange for UTDPLT for the reason I explained in the portfolio update last week. Other than that, there were no other transactions. Among the top gainers in the portfolio for the week were IJM-WB and ICP. Despite the steep rise, I still believe that there is more to come. I have commented on both counters in seperate posts in the last few days so feel free to check it out.

DIGI was also among the top gainers, rising by 9% to $13.20 and it is highly likely that the rise was due to EPF puchasing its shares. EPF is normally managed by fund managers and if you remember correctly, many were pessimistic on DIGI. Why is EPF buying now? Do they know something we dont? In my opinion, this is probably a good sign. Having a government fund on your shareholders list will often sway the government's decision in your way. In DIGI's case, it is the Wimax spectrum.

The entry of EPF could also signal that it may be willing to take up Telenor's 12% stake that has to be disposed. Nevertheless, we should not purchase DIGI just because EPF bought some of its shares. Valuation would still come first. DIGI is expected to earn about $1.10-$1.20 per share in 2007. Affording it a PE of 13x, which I believe is warranted for a steadily growing company with strong cash flow and balance sheet, DIGI will be valued at $14.30-$15.60. With little upside from its current price of $13.30 and some uncertainties such as 30% bumiputera equity, Wimax license and Telenor's 61% stake surrounding it, I would rate DIGI a HOLD.

MAXIS' share price also performed well during the week, rising by 6%. Based on its share price of $9.45 and 2007 EPS of 80c, MAXIS is trading at a PE of 11.8x, which I believe is still too low. As a well-managed blue chip with good prospects, MAXIS should be rated at about 13x PE, thus, valuing it at about $10.40. DIGI may be the star in the telco industry at the moment but MAXIS is not doing that bad either. I am sure you can guess who the big loser is.

TELEKOM is in trouble. Its mobile phone operations (Celcom) is caught in the big war with DIGI and MAXIS. While DIGI is positioning itself as a value player and MAXIS as the operator with best coverage with the 'cool' element among youngsters, Celcom is not doing anything. It has no proper strategy to defend itself. For instance, its current advertisements utilising soccer players like Robert Pires, Ryan Giggs and Steven Gerrard make it look so dumb. What is the relevance of these advertisements?

Majority of new users either go for DIGI or MAXIS. Rarely do anyone go for Celcom these days. Those using Celcom are the older generation who have been with them for ages and are stuck with the number. Once these older generation phase out, Celcom will have a hard time. Even its foreign operations cannot make up for it. For those who still hold TELEKOM, I would advise you to switch to DIGI or MAXIS. Even though TELEKOM may rise, I am quite sure that both DIGI and MAXIS will easily outperform it. Besides, have you checked TELEKOM's PE ratio? At least 15x compared to DIGI's 11-12x and MAXIS' 12x.

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.