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Sunday, June 19, 2016

IPO: It's Probably Overpriced

Today while reading the book "The Intelligent Investor", it reminded me of the core of investing and the need to filter the noises. 

But I think the story regarding IPO just struck me more than the rest today. For those who have no idea what IPO is, it means "initial public offering", or the first sales of a company's stocks to the public.

Looking at one of my favourite company, Microsoft, one could find great reasons to invest in IPO.....because if you'd bought 100 shares of Microsoft when it went on public on March 13, 1986, your $2,100 investment would have grown to $720,000 by early 2003. 

According to the book, finance professors Jay Ritter and William Schwert have shown that if one had a spread a total of only $1,000 across every IPO in January 1960, at its offering price, sold out at the end of the month, then invested anew in each successive month's crop of IPOs, the portfolio would have been worth more than $533 decillion by year end 2001. If I were to write it here's the number: 533,000,000,000,000,000,000,000,000,000,000,000. Yup. I even have trouble writing the number. That sounds like a too good to be true deal and the sad truth is that it is. 

Because for every IPO like Microsoft, there are thousands of losers. 

I think the book best sums it in this particular paragraph:

We all want to buy "the next Microsoft" - precisely because we know we missed buying the first Microsoft. But we conveniently overlook the fact that most other IPOs were terrible investments. You have could have earned that $533 decillion gain only if you never missed a single one of the IPO market's rare winners, a practical impossibility.

Of course, another disadvantage with IPO is that it's normally captured by the exclusive private group, the big boys, the big investment banks and fund houses that get shares at the initial price. (underwriting price) before the stock begins public trading. Most small time investors like you and I are likely not to get any shares, there just aren't enough to go around. And if an individual were to obtain the IPOs only after their shares have rocketed above the exclusive initial price, chances are that the return will be quite terrible. 

From 1980 through 2001, if you had bought the average IPO at its first public closing price and held on for three years, you would have underperformed the market by more than 23% points annually. 

VA LINUX, "the next Microsoft" myth

The story of VA Linux best summarize the IPO's experience. On December 9, 1999, the stock was placed at an initial public offering price of $30. 

Guess what, none of the initial owners of VA Linux would let go of any shares until the price hit $299. The stock peacked at $320 and closed at $239.25, a gain of 697.5% in a single day. But most likely, those who make the gains are the handful of institutional traders. 

After going up like a bottle rocket on the first day of trading, VA Linux came down like a buttered brick. By December 9, 2002, VA Linux closed at $1.19 per share. 

I took a photo from the chart in the book.

In no ways am I saying that all IPOs will lead to losses but I guess it all goes back to one of Graham's most fundamental rules: No matter how many other people want to buy a stock, you should buy only if the stock is a cheap way to own a desirable business.

Back to the story of VA Linux:

At the peak price of day one, investors were valuing VA Linux's shares at $12.7 billion while the company had sold a cumulative total of $44 million worth of its software and services, but had lost $25 million in the process in less than five years. 

In the company's most recent fiscal quarter, VA Linux had generated $15 million in sales but had lost $10 million on them. This business, then, was losing almost 70 cents on every dollar it took in. VA Linux's accumulative deficit was $30 million. (amount by which its total expenses had exceeded its income). 

Now, imagine, if VA Linux were a private company owned by your neighbor and he asked you how much you would pay to take his business that was losing almost 70 cents on every dollar it took in. The accumulative deficit was $30 million and in less than five years, the company had sold $44 million worth of software and services but had lost $25 million in the process. 

Will your answer be, "Oh, $12.7 billion sounds about right to me?" or perhaps you would smile politely and gently declined the offer, wondering what on Earth your neighbor had been smoking. 

Because relying exclusively on our own judgement, it's impossible for us to pay $12.7 billion for a company that's making such a big loss. It just doesn't make sense. but when we're in investing in shares, the entire ball game and perspective changes. Because a lot of people (myself included) look at valuation as if it's a popularity contest. The price of a stock seems more important than the value of the business it represents. As long as someone else will pay even more than you did for a stock, why does it matter what the business is worth?

Well, VA Linux is just one of the many examples out there. 

Looking at the historical examples objectively, like the book said, IPO sometimes doesn't stand only for "initial public offering". More accurately, it's a shorthand for It's Probably Overpriced

Warren Buffett once said that IPOs are almost always bad investments. He says there is so much hype involved that IPOs won't be the most-attractive value.

Recently, he made another remark regarding IPO.

“You don’t have to really worry about what’s really going on in IPOs. People win lotteries every day but there's no reason to let that affect [your investing strategy] at all,” Buffett said.

“You have to find what makes sense and follow your own course.”

And like Benjamin Graham's Intelligent Investor, Buffett gave a singular piece of advice for investors deciding where to invest.

“When you buy a stock you get yourself in the mental frame of mind that you're buying a business,” he said.

Wednesday, June 15, 2016

IPIC vs 1MDB, round 2, in court

Abu Dhabi’s sovereign wealth fund International Petroleum Investment Co (IPIC) will continue the publicly scrutinized dispute against 1Malaysia Development Bhd (1MDB)...I would call it a round 2, in court. 

IPIC vs 1MDB (round 2), in court

IPIC is seeking $6.5 billion from the troubled Malaysian state investment company as it moves the spat into arbitration.

The request for arbitration (RFA) is in regard to IPIC's claim that 1MDB and the Ministry of Finance (MoF Inc) have failed to perform their contractual obligations under the binding term sheet (BTS). 

The Malaysian investment fund and IPIC are locked in a tussle that spilled over to repayments on bonds issued by 1MDB. That led to a default in April, adding to the financial scandals for the Malaysian company that’s already a target of global probes into alleged money laundering and embezzlement. 1MDB has denied wrongdoing.

The dispute between IPIC and 1MDB arose after the Abu Dhabi sovereign wealth fund said that it never received a US$3.5 billion payment from 1MDB. It revealed that the British Virgins Island-registered Aabar Investment PJS Ltd, to whom 1MDB said it had paid the sum, is not related to the group.

Subsequently, 1MDB defaulted on two interest payments of US$3.5 billion for two 1MDB bonds due in April and May, and IPIC has assumed the US$3.5 billion payment for the two interest payments as a co-guarantor of the bonds.

Despite 1MDB defaulting on the interest payments, the strategic investment fund has repeatedly said that it has sufficient liquidity to meet its financial obligation.

"The failure of 1MDB and MOF to perform their obligations, cure their defaults or put forward acceptable proposals has left IPIC in the position where it must pursue its claims in arbitration," IPIC said in a filing with the London Stock Exchange yesterday. 

It added that the claim will be determined by an arbitral tribunal that will comprise three arbitrators in accordance with the BTS and the LCIA rules.

In response, 1MDB issued a statement saying that the fund and its legal counsel will review the RFA once it has been served with a copy.

According to a report by Bloomberg, a report by a Malaysian parliamentary committee in April identified at least $4.2 billion of questionable transactions by 1MDB, including those involving the Abu Dhabi companies. The bipartisan group said it couldn’t verify a $2.1 billion payment to Aabar Investments PJS Ltd.

IPIC has denied ownership of the company that received the funds known as Aabar Investments PJS Limited, or Aabar BVI. IPIC’s unit has a slightly different name to the one that 1MDB transferred money to. 1MDB has said it negotiated "various legal agreements" with the previous heads of IPIC and Aabar, and called it a "surprising claim" that neither Gulf company knew of payments to Aabar BVI.

Sunday, June 12, 2016

Brexit looms as D-day approaches....

The D Day is approaching on whether the U.K votes to leave the European Union on June 23. 

While to a lot of people, it is something that has to do with the U.K, the impact could hurt the global economy, at least according to U.S. Treasury Secretary Jacob J. Lew.

According to a report by Bloomberg, Lew said “It’s in the best interest of Europe, the U.K. and the global economy and for geopolitical stability for the U.K. to stay in.

 “I only see negative economic outcomes if the vote goes the other way.”

And the U.S Treasury Secretary wasn't the only who feel that way.

Financial markets have been whipsawed in recent days as investors grapple with the possibility of a British exit from the European Union. Sterling fell for a second week in a row as opinion polls suggested the vote is too close to call; the latest Opinium poll conducted for the Observer newspaper and released Saturday had 44 percent of respondents wanting to remain in the EU and 42 percent wanting to leave.

Pensions at risk if Brexit becomes reality

David Cameron has warned that pledges to raise state pensions every year and ringfence spending for the NHS may have to be ditched in a brutal new phase of austerity if the country votes for Brexit. 

In an exclusive interview with the Observer, with only 12 days to go until the crucial referendum vote, Cameron insists he is not trying to scare people but is focusing on the reality of what life would be like outside the EU and the world’s largest trading market.

Has Brexit taken the lead?

It is getting nearer and reading the news surrounding us suggest that the world leaders preferred U.K to stay within the E.U to avoid the negative impact as they believe but according to an exclusive survey by Independent, the campaign to take Britain out of the E.U has opened up a remarkable 10-point lead over the Remain camp. 

The survey of 2,000 people by ORB found that 55 per cent believe the UK should leave the EU (up four points since our last poll in April), while 45 per cent want it to remain (down four points). These figures are weighted to take account of people’s likelihood to vote. It is by far the biggest lead the Leave camp has enjoyed since ORB began polling the EU issue for The Independent a year ago, when it was Remain who enjoyed a 10-point lead. Now the tables have turned.

Even when the findings are not weighted for turnout, Leave is on 53 per cent (up three points since April) and Remain on 47 per cent (down three). The online poll, taken on Wednesday and Thursday, suggests the Out camp has achieved momentum at the critical time ahead of the 23 June referendum.


Wednesday, June 8, 2016

The FBM KLCI index lost 2.77 points or 0.17% on Wednesday.

The FBM KLCI index lost 2.77 points or 0.17% on Wednesday. 

The Finance Index fell 0.33% to 14330.23 points, the Properties Index dropped 0.06% to 1157.41 points and the Plantation Index down 0.48% to 7604.82 points. 

The market traded within a range of 8.92 points between an intra-day high of 1662.17 and a low of 1653.25 during the session.

Top gainers were led by Nestle (M) Bhd today, while the biggest loser was British American Tobacco (M) Bhd.

M3 Technologies (Asia) Bhd, which received an unusual market activity (UMA) query from the local exchange, was the most actively-traded counter, with 94.58 million shares done.

The KLCI extended its midday losses and closed lower at 1657.85 points amid overnight mixed performance in Wall Street. Investors were taking profit following the gains in our local bourse in the past few days.

Reuters reported Southeast Asian stocks were trading cautiously on Wednesday, in line with Asian markets, with Indonesia snapping three consecutive days of gains on profit-taking, while the Philippine index and Vietnam extended gains from the previous session.

Asian peers were flat as weak Chinese export data offset a brightening energy sector outlook, alongside an expected delay in interest rate hikes by the US Federal Reserve.

China had announced its May exports fell by a more-than-expected, i.e. 4.1% from a year earlier.

Today, Japan’s Nikkei rose 0.93%, along with South Korea’s Kospi, which increased 0.77%. Hong Kong’s Hang Seng Index, however, settled 0.14% lower.

Monday, June 6, 2016

LBS BINA GROUP BERHAD - Surprise Payment

The Group announced the early receipt of HKD200m from Zhuhai Holdings, being the final of 4 deferred payments from 2014 to 2017 pursuant to its sale of Lamdeal Consolidated and Lamdeal Golf and Country Club Limited to the latter in a HKD1.65bn (RM681m) cash and share deal. This comes as a pleasant surprise given that the amount is not due till end-2017, though very much welcomed toward the strengthening of its balance sheet, while also according shareholders a special dividend. We see the Group primed for sustained growth in the coming few financial years, underpinned by the on-going launches of its affordably-priced properties. We maintain our Outperform call with an unchanged target price ofRM2.08 based on a 30% discount to its fully-diluted RNAV, the lower discount justifiable in our view given the ability of the Group to easily monetize its land bank in the current market environment, relative to its peers.

Recall that the transaction entered into in 2013 was to have been satisfied by 1) HKD500m in cash, 2) HKD300m for 225.5m shares in Zhuhai Holdings at HKD1.33 per share (LBS has since sold some 1/3 of its shares at prices ranging between HKD1.40 and KHD1.75 each) and 3) HKD850m of promissory notes, with the following settlement schedules:-

2016200Received 16 March, 2016
Total850Received 3 June, 2016

A bulk of the proceeds will be utilized to pare borrowings (HKD123.8m of RM66.3m) while about 30% (as planned) will be paid out as a special dividend (HKD65m or RM34.8m (6.2sen per share)).

Big plans in China. Local government approvals are being procured to upgrade and transform the racing circuit land it still owns into an integrated tourist attraction. On it will be a commercial mall, an exhibition hall, a sports center and a hotel, all built in the vicinity of the racing circuit which will be maintained. The upgrade will also include a Melaka cultural museum, a one-stop tourist center and exhibition hall.

LBS does have various options with regard to the land. Offers are already on the table, partnership with a China-based developer to jointly develop the land parcels amongst one of them. An outright sale has not been entertained as yet, though is not ruled out either. Conservatively ascribing the similar selling price which was transacted in 2013, the 264-acre parcel is worth some RM411m to shareholders of LBS, close to half its current market capitalization.

Source: PublicInvest Research, 06 June 2016

SP SETIA - Rights Issue To Raise Up To RM1.07bn

SP Setia surprised us with a proposed renounceable rights issue of up to 1,069,686,243 new Islamic redeemable convertible preference shares (“RCPS-i”) on the basis of two RCPS-i for every five existing ordinary shares. The cash call is expected to raise a minimum of RM536.6m to as much as RM1.07bn. We understand that the proceeds will be used for projects and working capital requirements, though some are also earmarked for future property development and expansion plans. With net gearing of 0.2x and unbilled sales of RM8.6bn, this came as a negative surprise for the Group to tap the equity market currently. All told, this cash deal will be dilutive to our RNAV, and hence adjusted our TP to RM3.70 (from RM3.85 previously) to account for the rights issue with c.20% discount to RNAV. Our Outperform call is retained.

To raise up to RM1.067bn. The rights issue via the issuance of 1,069,686,243 new ICPS-i shares in SP Setia is priced at RM1.00 each and expected to be completed by 4Q2016. Correspondingly, SP Setia has also proposed an increase in the authorised share capital from RM2.25bn comprising 3.00bn SP Setia shares to RM2.64bn comprising 3.5bn SP Setia shares and 1.1bn RCPS-i by the creation of 500m new SP Setia shares and 1.1bn RCPS-i. SP Setia’s largest shareholder, PNB which owns 51.04% currently has already undertaken to subscribe in full for its entitlement, which is the minimum subscription level basis of c.RM536.6m of the proposed rights issue. The maximum scenario whereby all ESOS and share grants are exercised and all the entitled shareholders subscribe in full, the cash raised is estimated at c.RM1.067bn. The RCPS-i has annual expected preferential dividend rate of 6.49%, with an additional stepped-up dividend rate of 1.0% but capped at total rate of 20%.

Use of proceeds. SP Setia will utilise the proceeds (c.RM300m) for projects and working capital requirements which among others include Setia Ecohill2, Setia Eco Templer, Setia Sky Seputeh, Setia Trio, Setia Sky Vista and Setia Sky Ville. We believe marketing costs and the Setia 10:90 home financing scheme will also need some capital. The remaining proceeds (up to RM768m) are earmarked for future property development and expansion plans but nothing has been identified as yet.

A negative surprise. With net gearing of 0.2x and healthy unbilled sales of RM8.6bn, we did not expect the Group to raise capital via a rights issue. Also, current debt cost for the Group is ranging from 4.34% to 8.00%, and the ICPS-i is expected to yield from 6.49% with a step-up of 1% annually till the maximum of 20% p.a. This, in our view, is a more costly way of raising capital, given the Group’s current balance sheet. That said, the RCPS-i issuance would minimise immediate dilution effect as the conversion is over a period of time

Source: PublicInvest Research, 06 June 2016

Trading Idea - Strong RM2.2bn orderbook to cushion downturn in oil & gas sector

  • In the news. According to the STARBIZ week on 4 June, Sendai is assessing a suitable course of action to be taken with regard to its 29.87% stake in Singaporelisted Technics Oil & Gas Ltd, which has lost almost 70% of its value amid downturn in the O&G industry coupled with a string of legal suits . Nevertheless, Sendai’s executive chairman and group managing director Tan Sri A.K. Nathan remains optimistic of its LT prospects given its strong tender book of RM22bn, of which RM10bn is for structural steel and construction projects and RM12bn for O&G jobs.
  • According to HLIB Institutional research (a BUY rating with SOP TP of RM0.91), Sendai managed to amass over RM700m worth of new jobs in 1Q (orderbook now at a record RM2.2bn). This is a commendable sum as it already made up 41% of the full year amount in FY15 which was a record high of RM1.7bn. Some of the notable job wins this year include (i) KL118 tower, (ii) a mixed development in KL, (iii) Al Maryah Central Mall in Abu Dhabi, (iv) Dubai Eye Ferris wheel and (v) its maiden job win in Thailand involving M&E for a 600MW coal fired plant.
  • Technically speaking. Sendai’s share prices had plunged 41.4% from 52-week high to end at RM0.615 last Friday. Despite its grossly oversold positions, near term outlook for Sendai remains uncertain following the breakdown of multiple key SMAs supports. Share prices are likely to build a base near critical supports of RM0.57-0.60 levels. Failure to hold the support will accentuate further selldown to RM0.485 (12 Jan 2015 low).
  • Outlook will turn positive if share prices swiftly reclaim RM0.67. On the other hand, Sendai’s near term technical outlook will only turn positive if share prices can stage a strong relief rally to quickly reclaim above 30-d SMA at RM0.67, which will lift prices higher towards long term target at RM0.745 (200-d SMA).

Source: Hong Leong Investment Bank Research, 06 June 2016

Friday, June 3, 2016

Evergreen Fibreboard - - Earnings Prospects Intact


  • The absence of pricing premium (as a result of demand weakness), coupled with rising transportation cost to the Middle East (as transportation costs are borne by Evergreen), management has started diverting its marketing efforts from the Middle East back to the Southeast Asian region.
  • Despite the ASP pressure for MDF products, we continue to see strong earnings prospects in the company.
  • Renewed weakness in MYR against the US$ arising from more hawkish Fed and lackluster domestic market outlook is a boon to Evergreen’s earnings.
  • Costs of key inputs (i.e. rubber log wood and glue) continue to trend lower, and these will partly alleviate margin pressure from lower ASP.
  • Evergreen is on track to reap more benefits from its cost rationalization exercise.
  • The new RTA furniture line has commenced commercial operations since May-16. Having convinced about the potential of the RTA furniture business, Evergreen has placed deposits for an additional RTA furniture line, which is expected to commence operation (hence contributing to its bottom line) by 2HFY17.


  • Escalating raw material and labour costs;
  • Weaker-than-expected demand for MDF; and
  • Fluctuating foreign currency movement (in particularly the US$).


  • FY16 net profit forecast lowered by 10.7% to RM102.8m, largely to account for: (1) Lower blended ASP assumption for MDF; and (2) Lower rubber log wood cost assumption
  • FY17 net profit forecast remains unchanged at RM123.4m as our lower blended ASP assumption for MDF products is offset by: (1) Lower rubber log wood cost assumption; (2) Contribution from the additional RTA production line; and (3) An upward revision in our US$:MYR assumption.


  • BUY
  • Positives - (1) Attractive valuations with good earnings visibility; (2) Healthy balance sheet; and (3) Rubber plantation land bank value has yet to be reflected in current share price valuation.
  • Negative – Demand weakness from Middle East.


  • Maintain BUY recommendation with unchanged TP or RM1.60 (based on unchanged 11x FY17 core EPS of 14.6 sen).

Source: Hong Leong Investment Bank Research, 03 June 2016

OIL & GAS - OPEC Meeting –Maintains Hands-Off Policy

Organization of the Petroleum Exporting Countries (OPEC) members met in Vienna yesterday, to a much anticipated outcome of once again failing to commit to any production targets (previously collectively 30m bbls/day). OPEC members will thus continue to produce output as they see fit. All is not lost however… we can see that members are beginning to build trust and discussed on issues that could eventually lead to the reinstatement of a production ceiling, coupled with mending their hostilities which were displayed in their previous meetings in December 2015 and April 2016. We retain our Neutral outlook on the O&G sector for the interim as we anticipate continued pressure on oil prices considering last night’s outcome that is expected to flood the market with further supplies yet again. Our average Brent oil price levels are predicted as follows: 2016 – USD44/bbl, 2017 – USD50/bbl and end 2017 – USD60/bbl.

Some agreements.
i) Appointment of Nigeria’s Mohammed Barkindo as the new secretary-general. He is the former head of Nigerian Petroleum Corporation. 
ii) Re-entry of Gabon as OPEC’s 14th member, bringing in fresh supply of 240,000 of production. Other issues that were discussed saw that Saudi Arabia was open to a collective production ceiling (rumoured to be a collective limit of 32.0-32.5m bbls/day) but Iran maintained they would only support individual country quotas. These policies could lead to further negotiations in the coming months that could make the upcoming meeting scheduled for November 30 a possible game changer… or not. It was certainly too complicated and too early to be implemented yesterday however.

Notable developments
Saudi Arabia’s new energy minister Khalid Al-Falih shared a shift in tone for the nation, by emphasizing on the country’s desire for long-term market stability, and no desire for oil shocks. He continued to press on Saudi’s keen interest to revive OPEC’s relevance. We understand this was flagged by the potential for an oil shortage as investment cuts in the global energy sector has made historic waves to the potential depletion on production going forward, assuming these rate cuts are prolonged. Put it simply, OPEC controls about c.40% of the world’s crude output and any shortage going forward from the repercussions of global capex cuts would need to be filled. The fall in global energy investments by about 25% or USD126bn among all producers is forecasted by Consultancy Rystad Energy to reduce further by 1/5th this year.

Anticipated outcome
Since the flop of April’s Doha summit, the chances of a deal have narrowed, fueled further by the continued climb in oil prices to just around the USD50/bbl band. Despite OPEC’s hands-off policy for now, oil price dipped initially yesterday, but reversed course on figures showing that US crude stockpiles had fallen in the past week.

Oil price movement factors
US crude stockpiles fell 1.4m bbls last week according to Energy Information Administration (EIA). Futures also fell more than 1% yesterday on OPEC’s decision of a “no production ceiling” at this juncture.

Source: PublicInvest Research, 03 June 2016