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.