Is 1997 Crisis Going To Repeat in 2015?

In The Edge Weekly latest issue (29 Dec to 4 Jan), the paper has provided several points to support the belief that 1997 Crisis is unlikely to repeat in 2015. Key points provided are as follow:

1. USD240b pool protection of Chiang Mai Initiative. The article quoted Ambank Group forex strategist Wong Chee Seng saying that the 10 ASEAN countries enjoy the protection of the Chiang Mai Initiative (CMI). Note that CMI is a multilateral currency swap arrangement to address short-term financial liquidity problems. It was understood that CMI has a pool of USD240b which is intended as a means of support when any member country face a financial crisis.

2. Forex reserves across ASEAN countries are now much higher or multiple times higher as compared to 1997 crisis time (The Edge quoted UOB Research). Additionally, corporate leverage is lower and debt is mostly denominated in local currency.

3. Malaysia current account balance and trade balance are both still in surplus. This is compared with deficit level incurred in 1998. It was mentioned that even with low crude oil and continued capital outflow, the account balance and trade balance will narrow but still in surplus. (The Edge quoted UOB Research).

4. Ringgit to decline to 3.63 if Brent crude oil stay at USD60 per barrel by 3Q15. (The Edge quoted Maybank IB Research). On the positive side, Ringgit can strenghten to 3.20 if Brent crude oil recover to USD100 per barrel.

5. Timing of US interest rate hike to affect Ringgit. (The Edge quoted Ambank). Consensus expectation is by mid-2015.

My view:

Regardless of the timing when US will raise its interest rate, it is quite sure that 2015 will be the year that US will begin raising its interest rate. 1Q15 should be safe as US Fed Reserve should take a wait and see attitude in view of slow growth globally. However, if US GDP growth can continue its strength of more than 3.0% for several quarters, we shall see first interest rate hike latest by Sep-2015. When that happen, global money flow is likely to return to US and Malaysia bond likely to decline. Having said that, all points above are valid and we unlikely to see 1997 kind of drop.

Hence, expect a bearish market in 2015... looking at FBMKLCI to test 1500 by Jun-2015 or Sep-2015. It won't tumble to 300 points like 1997/98 but slight decline of 200 points seems likely at this juncture.

APOLLO 1H15 net income drop 41% to RM10.3m

1.      Apollo Food Holdings Berhad (APOLLO) 1H15 EPS declined 39% to 13.16 sen as net profit slipped 39% YoY to RM10.5m. The lower earnings is mainly caused by 3% decline in revenue to RM103.0m and higher cost of materials (Cost of Sales +3% to RM76.0m). QoQ, net profit is also down 16% to RM4.8m in 2Q15 again due to higher cost of materials. Note that APOLLO financial year end is April.

2.      Net cash position remain resilient. APOLLO owns RM92.9m cash and no debt. This means net cash of RM92.9m or RM1.16 per share. As the share price is RM4.35, this means 27% of the share price is in cash.

3.     Recovery only in FY16 with FY15 earnings likely to drop YoY. Due to lower earnings seen so far in 1H15 which is down 39% YoY, FY15 EPS is expected to decline 30% YoY to 29.29 sen. The decline is likely to be caused by slower demand from consumer as their spending power decline due to higher cost of living after recent petrol price hike in 2H14. Outlook for FY16 should be better as demand return after consumer getting used to GST impact. Hence, FY16 EPS is expected to grow 15% to 33.68 sen.

4.      Fair Value of RM4.53. Using 10x PE on FY16 EPS of 33.68 sen, the business for APOLLO is valued at RM3.37. However, adding to the cash of RM1.16 per share the total value is RM4.53. This represents about 4% upside. On the positive side, this stock provide good income as it deliver 25.0 sen in FY14 representing dividend yield of 5.7%. However, weak consumer demand means negative earnings growth in the next 1 year.

SKPETRO - Best Of Time, Worst Of Time

1. Proxy to Malaysia Oil & Gas sector. SapuraKencana Petroleum Bhd (SKPETRO) need no further introduction as the Company is generally viewed as the proxy to Malaysia Oil and Gas sector. Note that SKPETRO provides integrated oil and gas services and solutions with its businesses divided into segments such as Offshore Construction & Subsea Service (OCSS), Drilling and Energy Services (DES) and Fabrication, Hook-Up & Commissioning (FAB and HUC). Latest market cap is RM14.7b and this made it a member of the prestigious FBMKLCI.

2. 9M14 earnings jump 74% YoY to RM1.30b. In the latest quarter result, SKPETRO 9M14 earnings recorded huge jump as DES division earnings improved 14% to RM265m while Corporate Expenses declined 38% to RM97m. This signal that the Group has already start to manage its cost more efficiently.

3. Still cum dividend of 2.0 sen. The ex date is 12-Jan-2015. YTD, 4.35 sen has been declared and this translate into dividend yield of 1.9% based on share price of RM2.24.

4. Brent crude oil should have bottomed. Last Friday, Brent crude oil prices jumped 3.6% to USD61.38 per barrel. As it is, Saudi Arabia (world largest producer of crude oil with estimated 13% market share) has for the first time expressed its bullish view on crude oil. Full news can be read here.
http://www.bloomberg.com/news/2014-12-21/saudi-arabia-confident-in-oil-rebounding-on-global-growth.html

Also, it is logical that inefficient producer (with cost of production above USD65/barrel) should already stop production and all these means Brent crude oil should have bottomed.

5. Deep in value as SKPETRO has plunged 55% to RM2.24 (from its highest point of RM4.96 this year). Of course this is in line with crude oil plunge, the exclusion from Shariah list and highest fear on Oil and Gas sector at this juncture. Conventional wisdom tells me that me to look at any stock that has plunged more than 50% from its peak and SKPETRO definitely will be the one.

6. Buy with short term target of RM3.00 suggesting 34% upside. My Fair Value of RM3.00 is based on Forward PE of 13x to estimated FY16 EPS (year end January) of  23.07 sen.

YTLPOWR 1Q15 EPS +8% YoY

1.    YTL Power International (YTLPOWR) 1Q15 EPS improved 8% to 3.59 sen as net profit increased 12% YoY to RM243.8m. Key driver behind the earnings growth is the Power Generation (PG) division which saw its PBT +10% YoY to RM66.7m. PG division benefited from higher generation of electricity sales. Water & Sewerage (WS) division PBT also +3% to RM200.0m due to increase in price as allowed by UK regulator.

2.    10 sen dividend likely to continue in FY15. The 10.0 sen interim single tier dividend has gone ex on 29-Oct-2014. With this dividend of 10 sen, it is likely that the Company should continue its dividend payment in FY15 estimated at 10 sen also. Based on its latest share price of RM1.53, the 10 sen dividend works out to be 6.5% which is among the highest provided by any counter in FBMKLCI. We think the dividend is likely to continue in the future due to the very strong cash flow generated by YTLPOWR.

3.    Theoretical Target Price of RM2.00 sen based on 5% target yield. This means 30.7% upside and 6.5% dividend, hence overall 37.2% total return. The 5% yield is conservative as it is higher than FBMKLCI yield around 3.0% to 3.5% and is usually the minimum required by investors for stocks perceived as dividend stock.

OFI earnings flat YoY in 2Q15 at RM4.08m

1.  Oriental Food Industries Holdings Berhad (OFI) 2Q15 EPS declined 1% to 6.81 sen as net profit slipped 1% YoY to RM4.08m. For 1H15, EPS is down 10% to 12.20 sen. Key driver behind the slight earnings decline for 2Q15 is the decline in revenue by 3% to RM54.27m due to lower demand from customers in the snack food and confectioneries (SFAC) segment. Recall that SFAC division contributed almost 100% of PBT to OFIH earnings in FY14.

2.    2.0 sen dividend declared. Ex date is 12 Dec 2014. Coupled with another 2.0 sen announced in 1Q15, total dividend declared so far is 4.0 sen. Recall that in FY14, OFIH delivered 9.5 sen dividend representing 3.2% dividend yield based on its latest share price of RM2.97 on 28-Nov-2014.

3.    Net cash position remain resilient. OFI owns RM25.9m cash, Long Term Debt RM3.0m and Short Term Debt of RM1.6m. This means net cash of RM21.3m or RM0.355 per share. As the share price is RM2.97, this means 12% of the share price is in cash.

4.  FY15 earnings growth adjusted down to flat growth (from 10% growth previously). Due to lower than expected earnings growth in 1H15 which is down 10% YoY, FY15 EPS growth is now adjusted to 0% growth. Although demand has been lower than expected as impact of high living cost has weaken consumer purchasing power, 2H15 earnings growth should recover ahead of pre-GST demand

4.  New Fair Value of RM2.92. Still on the same 11x PE on the lower EPS of 26.55 sen (from 29.21 sen), new Fair Value is only RM2.92 (5 sen lower than current Market Price of RM2.97). As a result, this stock is no longer on the BUY list. On the positive side, this stock provide regular income as it deliver dividend 3 times per year. However, low consumer demand means limited earnings growth in the next 1 year.

SYCAL 3Q14 earnings jump 69% to RM6.1m

1.    Sycal Ventures Berhad (SYCAL) 3Q14 EPS jumped 69% to 1.89 sen as net profit increased 69% YoY to RM6.1m. For 9M14, EPS surged 50% to 4.56 sen. Key driver behind the good earnings growth for 9M14 is the Property division which saw its PBT +102% YoY to RM8.3m. Property division is likely to have benefited from better property prices in Kuala Lumpur and Perak. Construction division PBT also jumped 44% to RM7.0m due to increased billing of contracts at Taiping and Ipoh.

2.    Rare construction company with net cash position. As of 3Q14, SYCAL net cash is RM4.6m. This is based on its total cash of RM10.7m, short term loan RM1.4m, long term debt RM4.7m and equity of RM202.3m. Comparitively, many other construction company has high net gearing exceeding 10%.

3.    Trading at only 40.5 sen or 35% below Book Value of 64.0 sen. This could mean the stock is extremely undervalued as its earnings visibility is good at 3 years, strong balance sheet and high earnings growth in 9M14 at 50% YoY.

4.    Theoretical Target Price of 53 sen based on 9x FY15 Fwd. PE. The 9x PE is in line with mid cap construction valuation. FY15E EPS should reach 5.94 sen assuming 8% earnings growth to FY14E EPS of 5.5 sen.

COASTAL 3Q14 earnings increased 25% YoY

1. 3Q14 EPS jumped 25% to 10.22 sen as net profit increased 37% YoY to RM54.3m. The higher net profit is caused by better PBT margin at 24% against 3Q13’s 20%. Again, this is caused by better sales mix of vessel delivered in 3Q14. As for 9M14, EPS gained 38% to 29.35 sen.
2. Stay positive on Oil and Gas outlook. Despite the short term weakness in global crude oil prices, the Company remained positive on oil prices in the long term due to limited supply and increasing demand. Hence, this should lead to continuous order for its vessel in the long run.
3. Book Value enhanced to RM2.51 (Sep-14) from RM2.09 (Dec-13). Note that Company that consistently increased its Book Value and paying dividend is the one that stay committed to increase shareholders value.
4. Theoritical Fair Value of RM4.50 based on 10x FY15 Fwd. PE.

The 10x PE is in line with mid cap Oil and Gas valuation currently. FY15E EPS should reach 45.0 sen assuming 10% earnings growth in FY15E and 30% in FY14E EPS. Such growth estimate is conservative as its 9M14 earnings growth is already at 38%. Based on latest share price of RM3.46 as of 21-Nov-2014, this means 30% upside

SPRITZER - Beneficiary of low crude oil prices?

SPRITZER (7103) – Beneficiary of low crude oil prices

Background:

Spritzer Berhad or SPRITZR is specialised mainly in manufacturing and distribution of natural mineral water. Other products (on much smaller contribution) include sparkling natural mineral water, distilled drinking water, carbonated fruit flavoured drink, non-carbonated fruit flavoured drink, functional drink, toothbrushes, preforms and packaging bottles. The Company derives its 330-acre site of natural mineral water sources here at Taiping, Perak. Operationally, the Company has two divisions namely Manufacturing (production of mineral water and other products mentioned above) and Trading (sale of bottled water and other consumer products). In FY14 (ending May), Manufacturing division contributed RM31.7m or 99% of the Group’s PBT. The remaining 1% or RM0.8m PBT is from Trading.

Beneficiary of low crude oil prices

Sources say that more than 75% of Spritzer cost is related to its bottling process in which the raw material is Polyethylene Terephthalate (“PET Resin”). PET Resin is a by product of petroleum processing and hence the price is correlated to petroleum. As Brent crude oil has declined significantly in October from USD95/barrel to USD85/barrel, SPRITZR is expected to benefit from lower cost of PET Resin. This should bode well for its FY15 and FY16 earnings going forward.

 

1Q15 earnings jumped 27% YoY to RM6.67m

SPRITZR 1Q15 earnings surged 27% YoY to RM6.67m due to higher sales volume, better average selling price as well as the reduction in packaging material cost. Accordingly, the EPS increased 33% to 4.91 sen per share. It seems likely that SPRITZR is likely to register another good year of earnings growth in FY15 and it should be reasonable to assume 15% earnings growth in EPS to 18.71 sen (against 16.27 sen achieved in FY14).

 

Still cum dividend of 4.0 sen

On 31-Oct-2014, the Company has announced its dividend of 4.0 sen in which its ex-date is on 2-Dec-2014.

Featured in The Edge Weekly recently

In the issue 10 Nov to 16 Nov 2014, The Edge Weekly reported an article with the title “Spritzer maintains earnings momentum” on Page 22. This should be positive to SPRITZR as more investors get to know SPRITZR.

 

Theoretical Target Price of RM2.43

Based on Forward PE of 13x to FY15 estimated EPS of 18.71 sen, SPRITZR theoretical fair value is RM2.43. Comparing this to latest share price of RM2.06, this represents 18% upside.

 

NESTLE - The Biggest Loser From Recent Petrol Price Increase and GST in 2015?

Background:

Nestle (Malaysia) Berhad or NESTLE need not further introduction as its products has been part and parcel of Malaysian lifestyle for more than 100 years. Please read the details on its rich history at the end of this page. Operationally, the Company has two divisions namely Food & Beverage (F&B) and Others (Nutrition & Nestle Professional). Nutrition deals with specific food for workout purposes while Nestle Professional is a one stop F&B provider that caters for out of home channels. In FY13, F&B division contributed RM595m or 80% of the Group’s Operating Profit. The remaining 20% or RM146m Operating Profit is from “Others”.

Challenging FY14 and FY15

Despite its rich history, NESTLE stands to face challenging year in FY14 and FY15 due to recent petrol hike which directly affect consumer spending. Some of its product in the high end market (e.g. Nestle Bliss, Kit Kat and Nescafe Dolce Gusto) may face lower demand due to lower consumer spending resulting in consumer purchasing more affordable products. Ultimately, this should result in lower margin going forward.

1H14 earnings declined 7% YoY to RM302m

Despite 1H14 revenue increased by 4% to RM2.54b, NESTLE net profit slipped 7% YoY to RM302m. This is caused by 1H14 EBIT margin which has declined to 15.9% (from 1H13 level of 17.4%). In its Bursa announcement, NESTLE blamed the lower earnings on “unfavourable input costs and higher marketing investments”. While this is true, it is possible that its higher margin product has experienced slow down in sales thus affecting whole Group margin.

Outlook for rising interest rate in 2015 made NESTLE share less appealing

It is widely expected that US Federal Reserves will raise its interest rate in 2015 although the timeline is still unclear. If such thing happens, NESTLE share (which tend to appealing due to its dividend) may be less appealing to institutional investors. Based on the flattish dividend of 60.0 sen at 1H14, it is likely that RM2.35 given in FY13 will remain same for FY14 this year. Based on this RM2.35 dividend expected and RM66.52 share price on 2-Oct-2014, the dividend yield is 3.5%. Note that this is already lower than 10-year bond yield of 3.89% meaning share price has to retreat in order for yield to be more comparable to bond yield.

Theoretical Target Price of RM58.75

Based on 4% yield target to FY14 estimated dividend of RM2.35, NESTLE theoretical fair value is RM58.75. Comparing this to latest share price of RM66.52, this represents 12% downside.

Nestle History in Malaysia.

Source: http://www.nestle.com.my/aboutus/nestle_in_malaysia/index

Nestlé's commitment to providing quality products to Malaysians dates back almost 100 years ago. Nestlé began in Malaysia in 1912 as the Anglo-Swiss Condensed Milk Company in Penang and later, growth and expansion made a move to Kuala Lumpur necessary in 1939.

Since 1962, with its first factory in Petaling Jaya, Nestlé Malaysia now manufactures its products in 7 factories and operates from its head office in Mutiara Damansara.

The Company was publicly listed on the KLSE now known as Bursa Malaysia Berhad on 13 December, 1989. Today, the Company employs more than 5000 people and manufactures as well as markets more than 300 Halal products in Malaysia. Its brand name such has MILO^®, NESCAFÉ^®, MAGGI^®, NESPRAY^® and KIT KAT^® have become trusted household names and enjoyed for generations.

HWANG - Super Undervalued

Background:

Hwang Capital (Malaysia) Berhad or HWANG is previously known as Hwang-DBS (Malaysia) Berhad. I will skip HWANG’s history but roughly it has sold its assets (stockbroking, investment banking, investment management and commercial banking) and distributed dividend per share of RM2.50 previously. What’s left with HWANG now is money lending business and “others – (likely to be property investment)”. For FY14 (ending 31 July 2014), money lending business contributed RM18.0m Profit Before Tax (PBT) or 99% to the Group’s PBT while “Others” contributed RM0.1m or 1% to Group’s.

Continuing operations doing well with PBT +77% to RM17.9m

In the latest quarterly announcement to Bursa on 25-Sep-2014, HWANG mentioned that its continuing operations PBT is up 77% YoY to RM17.9m. This is due to: i) increase in income arising from investments of proceeds from disposals of core financial businesses, ii) net gain on disposals of securities and iii) lower loan loss impairment. This is positive as it shows that HWANG earnings is sustainable even after the disposal of its asset. Book value improved to RM3.07 from RM3.03 in 3Q14.

Proposed dividend of 2.5 sen

HWANG recommended final single tier dividend of 2.5 sen. However, this is subject to approval in next AGM (likely to be passed). Assuming the 2.5 sen is paid every half yearly, total dividend is 5.0 sen representing 2.5% yield. This is the basic assumption only as the Company has lots of cash and can easily afford to give more.

Sitting on huge pile of net cash RM372.2m

On the asset side, HWANG has Cash and short term funds – RM81.2m, Securities Available For Sale (mostly unit trusts in Malaysia) – RM321.8m. On the liability side, it has borrowings of only RM30.8m.  Based on all these, the Company is sitting on net cash of RM372.2m

Theoretical Target Price of RM2.43

HWANG need to maintain its listing status for 2 years from the date of the Sale Purchase Agreement (SPA) signed to sell its asset previously to AFFIN. As the SPA date was 22 January 2014, this means HWANG should maintain its listing status until 22-Jan-2016 (not very far away as it is only 1 year and 4 months away).

Assuming the scenario that HWANG is unable to find new business, shareholder is likely to get more capital repayment. This valuation is super conservative as biggest assumption is only 80% recovery for the loans it gives out. Under this scenario, it is worth RM2.58 or 30% upside.

In normal case, at 95% recovery HWANG is worth RM2.81 or 41% upside from current share price of RM1.99.

Most conservative scenario at 80% recovery:

Details	From Balance Sheet	Recovery	Amount (RM m)
Cash & Short Term Funds	81.2	100%	81.2
Securities Available For Sale	321.8	100%	321.8
Loans, Advances & Financing (Assume 70% recovery)	393.9	80%	315.1
			718.1
Less:
Borrowings			30.8
Other Liabilities			29.0
			658.3
No of shares (m)			255.2
Fair Value (RM)			2.58

Normal scenario @ 95% recovery:

Details	From Balance Sheet	Recovery	Amount (RM m)
Cash & Short Term Funds	81.2	100%	81.2
Securities Available For Sale	321.8	100%	321.8
Loans, Advances & Financing (Assume 70% recovery)	393.9	95%	374.2
			777.2
Less:
Borrowings			30.8
Other Liabilities			29.0
			717.4
No of shares (m)			255.2
Fair Value (RM)			2.81