Summary of Conference: Malaysia: A New Dawn

  1. Tax Increase
  2. Debt Decrease
  3. Government Accounts Strengthening

These are all the key points in yesterday’s conference. Obviously we know that the debt position isn’t ideal and that created a sell-off yesterday. (10 Oct 2018)

The sell-off yesterday could be seen pointing towards the likelihood of a unknown tax that might be implemented under Budget 2019. That is inclusive of a very scary ‘capital gains tax’ and that is what probably shook markets.

The Budget 2019 would be the deal breaker for marke directions as the market had expected that it would be bad as hinted by Finance Minister, Lim Guan Eng.

Today’s (11 Oct 2018) sell off mainly due to the US side so don’t get things jumbled up. A drop yesterday could recover mainly through confidence in the government not doing too many cuts and tightening measures.

See the summary and impacts in the report below.

1

Advertisements

Globetronics. Where to buy?

2.jpg

With the latest iPhone XS in the market, we aren’t seeing a huge rise in Globetronics’ share price. Obviously, sales aren’t that great and as usual, the ‘S’ series iPhone don’t always see a huge growth in sales due to limited improvement.

Take a look at the latest report by DBS where it did state that we should wait for a potential catalyst but only in 2019. Looks like weakness on the company’s share price would continue at least for another quarter.

1

Our technical analysis suggests collecting below the price of RM 2.20 and provide a strict cut loss point of merely 13% from the target. We believe that this opportunity will arise in this quarter after the results release.

9CD0zoTb.png

Summary of P&L from OWG’s Free Warrants Issue

Based on the article posted earlier, OWG – Making Profits on Warrant

The Profit and Loss Summary are as follows.

Summary of Collection

1.jpg

Previously done with the trade on CCK and again, we proved that this could work out pretty well for OWG.

Indeed, due to the nature of newly listed company warrants that are priced at extremely high premiums to the mother shares, I could leverage on companies who are distributing free warrants for a slight gain when warrants go live on the market.

Bear in mind that our profits got buffed up by a bit with some trading when the market goes haywire seeing gains of 5% in a day. But knowing that in the end, the warrants would be the ultimate goal, I shouldn’t fear on trading the share around as well.

I felt that the trick for this is still going back to basics of buying cheap and selling it if it gets too expensive. The sell call at 1.05 was triggered by low volume and fast price rising which experience tells me that the price is unsustainable. Furthermore, it’s merely only a day since we bought and I decided to sell half of it.

You might ask if we are so confident, why not buy more?

The truth is at times, I look at company fundamentals as well. OWG isn’t trading at one of the best PE ratios against anyone in the same leisure business. In fact, business isn’t that great at the current moment.

If fundamentals were a little bit better than what it should be, then it is likely that we see a higher allocation altogether. Anyway, we will still be in the lookout for trades like this and hopingly we could bring you some of them.

Review Q3 2018 & Lookouts Ahead

Two reports by different research houses to end Q3 2018.

1

2

The foreign participation is still one to highlight sustaining local markets. Retail remained really soft at only 20% for the month of September. Altogether, the KLCI sees flat over the month of September.

3

Our View

Moving forward, we target KLCI to close higher Q4 compared to Q3. Backed by stability in the economy after SST implementation, rising strength of the ringgit and riding on oil’s tailwind.

Although we believe that oil price at the current point wouldn’t stay for long due to a supply side issue, it takes a while until the demand comes back. We expect oil to be fair at $80 until the end of the year.

Gamuda Jumps into Loss Making

Indeed the Q4 2018 results stated losses of RM 100 million but it is not as bad as it sounds. Almost all segments were lifted only leaving the impairment charge of RM 305 million which dragged results down.

Without the impairment charge of RM 305 million, we are still looking at an EPS of RM 0.08 which brings the PE to only 9.97 times.

We believe that Gamuda is still a long term play and if you are caught with the drop that came after the election, we suggest you to hold on. It is still a buying on weakness strategy for us. The construction company shows resilience and good management who continuously seeks growth opportunities.

Surprisingly, property division saw better than average growth comparing to pure play property developers. This is why it proves that it would endure the current spending cut on construction project by the government.

9CD0zoTb.png

Meanwhile, here are two reports by Malaysia’s top research firm.

1

2

UOBKH on Malaysian REITs

REITs continue to grow in terms of earnings with occupancy rates still above average.

1.jpg

The biggest risk for investors of REITs would be the narrowing yield spread versus the risk free rate from the government or even the US Treasury yields when we factor in foreign investors.

It seems though nothing is stopping the event of narrowing yields. Although earnings continue to rise, the preference of investors towards REITs might continue to drop in the months to come.

That said, if occupancy rate and earning remain solid. When risk free yield stabilizes with certainty, we should revalue those REITs again.

Have a look at the latest report by UOBKH

2

VS – This Quarter’s Earnings Review

VS just posted a very good quarter even with the weakening of GBP. It turned into a hot stock yesterday when the news that Dyson would be bringing in new investments into the country. Stock is flying high but is the value there?

Our View?

Still a lot of clarification needed and the investment to be put in placed would take time to bear fruits. Continue with our initial plan of collecting when the market goes weak. But if we still see horrendous price spikes along the way, we might take profit for some profitable position.

Take a look at the report

1

Emerging Market Debt is The Crisis Brewing

The interest rates set by the Federal Reserve are particularly one huge element which could determine the direction of the world markets ranging from equity to fixed income as well as commodities.

The effects are excruciating towards the financial markets rather than the world economy as a whole. It had already been proven that economic growth doesn’t get reflected fully by the markets or rather the real economy being delayed in contrast to market movements.

2.jpg

The chart above shows that although market sees a huge drop during recession years, there’s no correlation between how severe a market drops versus the recession that we are facing. 2009’s drop is definitely huge compared to the dotcom bubble burst. But the 1960s seems to see the worst market sell-off even without mass recession.

Ironically, the weak markets don’t equal a slowing economy, but a weak market could induce economy to enter a recession. Often times, a recession could be due to a complete shift towards a compression on the credit side of things by the central bank where this time around, the Fed leads the way. Again!

Moving along in a higher interest rate environment, we should see radical changes on corporate operations and investments which would partly affect the economy and slowing down in the end. A lower capital expenditure with the non-existence of cheap financing sees multiple projects being delayed and turn non-feasible for the time being.

Over the medium term, we are bound to see less economic activity arising from a credit crunch. Therefore, the initial market response had always been weak when the market expects a higher interest rate to be announced in one of those meetings.

Going back to Fed. In hoping to lower economic activities in the US due to the risk of overheating, the Federal Reserve is reducing the money supply in the system by increasing interest rates. It is really that simple for a central bank to reduce the amount of money supply in the system.

But in the modern age of finance, the narrowing gap for cross border investment and financing just pushed the reliance of the world to Fed higher. US dollars had turn into a gold standard where almost the whole world refers to. Fed’s monetary squeeze specifically tethered for the American economy isn’t going to work for other economies who are dependent on the US dollar investment. Some countries just aren’t ready for a credit crunch at this time.

A good example would be the case of our local companies who borrow in USD earlier thinking that it is much cheaper that ringgit borrowing. All of a sudden, these corporations see their cost of financing increasing rapidly due to Fed’s decision on rising rates.

3

A good start for theses firms would be to start paring down their debt reducing their balance sheet even though tapping into cash reserves becomes a must. This is for the exchange for less volatility ahead. But what about corporations with cash flow issues? The problem is just about to start but if not sorted properly, this weak matchstick fire could turn into a huge forest fire.

On the investment side of things after the 2009 crisis, a lot of money made it to emerging markets and not forgetting we are one of the few who is the most attractive at that time with high growth and high yield rates. But comparing to what it is now, dollar denominated investment especially on highly rated American treasury bonds is already rising. The earlier investments into things such as the Malaysian Government Securities (MGS) back in 2009 become less attractive compared to US government bonds when rates rise. Logically, I would want to liquidate some MGS to seek stability and safer haven for my money.

That keeps the tension rising for the sovereign funds holding our government debt on whether to shift and seek stability or stay and risk and unknown future. Already clear that the continuous devaluation just on currency alone had been painful to these funds. This explains the equity market rout over the second and third quarter this year. Since equity is very liquid compared sovereign debt, we see funds reducing their exposure and that results it a lower market today.

Once again, a financial crisis is brewing and the Fed might be blamed this time around. But truly, they shouldn’t be a part to be blame for causing issues like these. Corporates who seek high returns over-leveraging are the only culprit in this situation. Bad managers of debt for nations who took up cheap finance are the other.

However in Turkey’s case, it just so happen that most corporate debts mature roughly the same time. How could that even happen? You seriously couldn’t blame bad management or over-leveraging in this case. All we can say is luck isn’t on their side.

To sum it off, much like the Global Financial Crisis of 2008, continuous rising of interest rates causes debt to turn expensive creating a domino effect of defaults left and right. Perhaps one thing to be happy is that it isn’t that toxic compared to the housing bubble, emerging market sees the worst impact from this with the risk of devaluation if you are not ready to rise rates or capital flee for investments of government bonds.

With the market going crazy on trade war that is happening now, the debt problems that is arising could seems to be a minor distraction. But when the problems becomes huge, it turns into an issues which couldn’t be reversed anymore.