Why Share Price Adjusts Lower after Ex Dividend?

A follow up to our post earlier on REITs, we felt that this would be a good supplement to understand why share price needs to be lowered after ex-dividend. We hope that these illustrations make it easy to understand rather than confusing words.

First, we imagine that net asset could be illustrated in the chart below. Your usual PPE, Inventory and net receivables are all in there.

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The ability of a company to pay dividend relies on its retained earnings. But if Asset = Liabilities + Equity, a lowered retained earnings will also lower assets on the other side.

This ended up being on the cash side of the account either if they borrow to pay or by any means necessary. When it is time for ex-dividend, a part of the company’s cash would be utilized to pay out dividends to its investors.

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After ex-dividend, shouldn’t the share price deducts the asset (in this case dividend) that was removed from the company to pay? Indeed yes! The latest price after ex-dividend shouldn’t include what was agreed to take out and shared among shareholders.

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If your burger business with a group of friends saw RM100k profit and you decide to take out RM100k to share it with everyone, basically your business worth in the name of the Sdn Bhd is RM100k less. That is to an acquirer’s point of view.

 

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Most Common Misconception on REIT, A Retail Investor’s Problem

Today, we are going to give our readers some pointers in making decision investing in REITs and caution some of the issues that most retail investors assume wrongly.

With Fed cutting rates somewhere this month, we could also expect the same goes to Bank Negara very soon. The rate cuts are in place all in the name of increasing the economic growth factor for US same goes for BNM’s reasoning for Malaysia.

When the overnight policy rate gets cut in Malaysia, this also meant that the money sitting in your fixed deposit account would be receiving less interest the next renewal. The people saving money and holding cash would face a difficult situation of possibly getting 3.5% on their 1-year fixed deposit.

Therefore, REITs would turn attractive to investors as they try to seek higher yields from regular fixed deposits. A common thing to do is to whip out a bunch of REITs and their dividend yield putting it in a table such as the one below.

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At some point, we are looking at 8.64% yield from HEKTAR which is great or what many could say the rate is double of what fixed deposit pays. But is it? Let’s take a quick look on HEKTAR.

A Quick Analysis

2.jpgThe dividend (cent) had seen solid returns from 2009 – 2016. The decline started in 2017 followed by one of the worst in 2018. This year, it is still a big question mark on the payout that’s coming. But if we took the easy way of multiplying 1.93 cents with 4 quarters, we obtain 7.72 cents which is even lower than what it was in 2018.

A quick visit to the charts would tell us how the share price moved and how closely correlated it is with the dividend payout.

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Clearly, the share price dips back to RM1.00 when the payout started to drop in 2017. Stabilized again in 2018 and saw a reversal once again when the Q1 2019 dividend payout were announced. The market expectation on getting a 9.01 cents dividend payout seems to be disappearing for 2019 and share price do reflect on it.

Going back to yields, the question is “an 8.64% yield for 2019 for HEKTAR is possible?”. Obviously, it’s not!

A historical reference on dividend payout doesn’t reflect the future yield that one would obtain. Moreover, the actual yield on the REIT you get may totally be off from the one received by your friend with a mere difference in 1 single cent.

This is why we always urge retail investors to be careful not to blindly select the one that shows the biggest yield number from the table. If it was that easy then we would all be out of jobs.

More Factors to Consider

The research work that needs to put in place understanding a REIT is almost similar to understanding other sectors such as manufacturing. When a REIT gain/drop in price, one has to look out for/understand what is happening with key points such as:-

1. Is a part of the building closed for refurbishment?

This would automatically assume that a revenue stream would be lost

2. Has an anchor tenant left the building?

For some office REITs, the anchor tenant leaving could create a domino effect on the attractiveness of the property.

3. Is there an acquisition coming or a disposal just happened?

Usually an acquisition would mean that profit made would be utilized and payouts will decrease while a disposal would mean that a large dividend payout just happened thus increasing yield.

4. Had the industry prospect changed?

Industrial or logistic related REITs such as warehouses would see ups and down based on the demand for these types of buildings.

5. Interest rates?

Yes. Even the bank’s interest rates would be affecting how these REITs perform. A lot of REITs use debt as their financing option for their properties and when the rates go down, financing cost literally could be lowered.

But when the rates are up! Preference to REITs would decline couple that with the rising cost of financing. A double problem for attractiveness!

Another Common Misconception

A 3% yield on dividend doesn’t equal a 3% gain from fixed deposit. Most common and we still see this looming in many retail investors when they are considering a high dividend yield company. Let’s illustrate!

Fixed Deposit

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Simple to understand where assuming principal was RM1,000 + 3% = RM 1,030 in one year! Free Dinner!

Dividends

Assume you bought the share at RM1.00 and the dividends per year are RM0.01 per quarter. Another assumption we have to make would be share price not moving as we are comparing with fixed deposit which didn’t change for its initial principal.

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Due to share price being adjusted when dividends are paid out, the returns paid out aren’t giving you extra cash but merely giving you back the money that you’ve placed earlier. A very big contrast with receiving interest from fixed deposit.

When the share price goes up or down we either gain or loss but when the share price doesn’t move a year, we are actually wasting the yield we could have generated from placing fixed deposition

Conclusion

  1. We caution retail investors not to assume REITs as a replacement for fixed deposits.
  2. The yield recorded were last year’s not this year
  3. REITs require proper understanding similar to other counters on Bursa
  4. Might as well do a proper research on a potential growth company
  5. Money sitting in REIT takes too long to grow
  6. It is a long-term investment (like 5 – 10 years) only you would see the appreciation in value

CIMB – What to Expect Post ECRL Relaunch

CIMB categorized 3 sections in the ECRL civil works where each of the section has a different cost to it. The biggest is Section B where they believe that IJM Corp, WCT Holdings, Sunway (via unit Sunway Construction) and Muhibbah Engineering would be benefiting from it.

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See the full report here

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Glove Story by CIMB & What We Think

CIMB did a major coverage on the Malaysian glove sector (report below). Based on the idea that a rebound in glove demand would occur, their views are positive for the sector in 2H 2019.

Not So Fast

Problem is, we felt that Q3 2019 isn’t the quarter that we can see glove counters creeping up in price. A few reasons to that would be factors such as re-adjustment of expansion plans and USD weakening.

For example, the attachment in the report showed that capacity expansion plans were reduced for 2019. We believe that the current results are attributed to lower glove consumption globally while the share price had already factored in the revenue from capacity expansion.

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We think further drops would likely to happen when Q3 results are announced. The world might be in need of gloves (as shown in the shortage expected for 2019) but the demand could turn due to uncertainty in the economy.

The key industry users even medical related would reduce their orders depending on the confidence factor that they are expecting. The surplus couldn’t just be consumed fast enough in a slower economy. It is likely that the purchasing manager would maintain their orders rather than increasing it.

Technical Analysis Looks Bad

Our top pick is still Top Glove. But if you would to look at the technicals, they indicators are pointing it lower. We believe that it is not impossible to see it declining to RM4.25 in Q3 2019. Follow our page and we would be alerting when the time comes.

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Supermax would be our 2nd preference. Although admitting that the chart looks a little better than Top Glove, we believe that a possible RM1.45 would be visible in this quarter.

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There are plenty out there who picks Hartalega as their preferred. We felt that the growth story albeit solid, the market is currently paying a high premium for it. A price to earnings below 30 before the end of this year would get our interest up again for HARTA.

Going Long

The sector as a whole is still expanding and that’s the key into growing value. It is much easier to see your money growing by placing it in a growing business rather than a mere mis-match beaten down share that is slowly declining in revenue.

The demand would continue to rise but not in such an accelerated pace and we do not need another world epidemic to to make money out of this sector.

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Revenue is still key for generating profits and a bigger profit would have the market pricing the share at a larger market capitalization. That is the basic how share price should move and it happens slow but not speculative.

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Advancecon on the Radar?

Not long ago, we posted this report from DBS for Advancecon. DBS posted a RM0.62 target price which is 50% higher than the price of RM0.42 at the time of the report.

Obviously the construction sector hype slowly tapers off and this time around, CIMB returns with a report. Note that this is not a coverage but merely stocks on their radar.

Do you trust the target price by DBS?
Is the share price rising in the future when an official coverage gets initiated by CIMB?

Our thoughts would be to keep on the watchlist for the time being. Not initiating a buy call yet from our side.

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Leong Hup Initiate at a Buy Rating But We Think Otherwise

Stock price had been lackluster since IPO in fact trading below IPO price at the moment. Maybank provides a target price of RM1.37 or a 32% upside for FY2020. We believe that it is achievable judging from the expansion plans that are in place following the listing.

USD Concerns & Weaker Indonesian Rupiah

With the stock price not moving upwards, there might be reasons and concerns regarding the company at the current moment. A good example would be how strong USD was affecting the the poultry industry. The feedmill had always been denominated in USD and a stronger dollar value equals higher operating cost.

Meanwhile, it is good to note that LHI is also in the feedmill industry. As a matter of fact, they provide 10.5% to Malaysia’s market share for feedmill. We believe that this could be a factor to mitigate cost compared to smaller operators like CCK or CAB. But still, there are not statements issued saying that 100% of the feed comes directly from their own production facilities.

The Indonesian operation still contributes 33% to total revenue and the IDR continues to weaken could prove to be a problem for them.

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Zero Surprise Results Last Reported

Based on the EPS reported at 1.78 cents, an easy estimate would only bring us to EPS for 2019 coming in at 7.12 cents. Comparing this with the consensus, there are no surprises just yet. The market is awaiting further clarifications from reported results before moving the price higher.

Any EPS weaker than the last quarter would meant a revision downwards in the quarters to come. The next quarterly results would be announced in the month of August possibly in the middle of the month.

Uncertainties at Large

We believe that the current price could be considered fair with a little too many unknowns up ahead. We felt that if the next quarterly results comes out with an EPS of just 1.5 cents. We would be looking at share price below RM1.00.

Not an ideal buy at the moment.

Download the Maybank Initation Report

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Serba Dinamik & Contract Wins, DBS Report Inside

Our long term high conviction share just got flooded with a bunch of new contracts. The latest reporting quarter is for Q1 2019 and it is belived that FY 2019 would see the biggest revenue coming in from its orderbook replenishment.

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With only 1 quarter or results published, we still have 3 quarters or around 9 months for the share price to move up in tandem with the expect revenue rise. Going forward, the deal is to continue improving Serba’s orderbook for FY2020 and beyond seemingly a lower revenue would actually spell a decrease in EPS which also led to trading at higher Price to Earnings ratio.

Although the share price went up since the announcement of new contracts a couple of days ago, we believe that the upside is still huge.

Meanwhile, the report from DBS stated that there would still be a 47% upside to the share price. We believe that it should be 30% or so… But even if target price only reaching 20% gains, we are still looking at hefty profits from RM4.20 and below.

Have a look at the report, it has pretty much details on the company rather than just clarification regarding the latest contracts win.

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Maybank Initiates on Greatech Technology

Well well well! The IPO shining brightly this year would be Greatech Technology. From a listed price of RM 0.61 rising 58% to close at RM 0.965, here is Maybank’s initiation report on the company.

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Our Thoughts:

We are not recommending this company until it shows us a proper growth path. In the meantime, Maybank estimates in the report that it would see a slowdown for revenue in FY2020. But what differs is that they expect profit to rise eventhough revenue slows.

We find it hard to swallow that conviction because a year or two down the road, plenty of external factors could affect earnings ahead. It is better to expect a higher revenue moving forward as it actually signifies a growing business rather than expecting margins do sharpen.

Furthermore, we aren’t comfortable with the usage of IPO funds which we neglect the subscription of this IPO completely in the first place.

Timeline Perspective on Top Glove

Yesterday, Top Glove posted really bad results for Q3 2019 recorded 6.2% net margin which could be considered one of the lowest to date. The deal was that the company is suffering from higher latex prices lowering margins.

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No doubt the share price dropped as we saw it dropping 6% to a certain point yesterday before rebounding and currently making gains. The timelines perspective is important in evaluating this investment decision.

In a shorter timeline, we are looking at possibly one of the worst earnings but still open to the risk of recorded something similar the next two quarter. In short, it is easier to assume that there might be more drops going forward.

If the timelines is medium term, we understand that this quarter’s weaker margins was prompt to a higher latex price. Latex is a commodity which usually swings in price depending on supply and demand. How often do you see commodity prices maintained at a high level for a prolonged period of time? We could assume that when latex comes back down or normalizes with its long term average, we would be looking at recovery on Top Glove’s margins.

In contrast, a longer term timeline is definitely a strong buy for Top Glove. Just on The Edge today, a headline of a section stated that Top Glove will increased its nitrile glove production by 60% before 2020. 60% or 40 billion nitrile gloves is pushing total production from 65 billion for 2019 to 105 billion for 2020.

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A quick profit estimate would mean that revenue could be increased by 60% to around RM 1.9 billion a quarter. Assuming that margins were maintained, we are back to the profit per quarter recorded in 2018.

The production mix making it 60-40 would be more important going forward as detaching from volatile latex prices results in producing a more stable profit and operating margins proven by peers such as Hartalega.

Going back to the discussion, it really depends on what timeline you are looking at. Are your merely in a trade for quick returns off a bounce or are you holdings it into new rapid production growth time in 2020.

We believed that financials for Top Glove will see another set of bad results over the next quarter. But the share price woulds till be subjected to  market forces making it go lower or higher. We commit to buy when the market dips or when the share price stabilizes at some level closer to next quarter’s results.