Credit Suisse Investment Outlook 2018

Check out the 2018 investment outlook by Credit Suisse!

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OLDTOWN – The Harsh Reality of Takeovers

Roughly a 10% gain for the offer price of RM3.18 from previous close of RM2.88. By far this isn’t the biggest gain we see from a takeover. We see an immediate gain of 20% from IGB then and this isn’t close to what we expect. At least they could have offered a price above  Not much premium to talk about here and this is why there’s a harsh reality when takeover happens giving your rubbish prices.

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Pretty much around 3 quarters ago (Sep 2017), we see price dropping continuously and volume is still intact in a small range not to overly do the sell off or ignite somewhat any alert with huge spikes that bring in attention. The key here is to lower the price slow or slightly.

Why?

Days before the acquisition announcement turns official, we usually see volume and price spikes

This is the most common case since things tend to leak on the way to submission either its from the valuators, accountants or anyone dealing with the company. If you work in the HQ of Oldtown and see people walking in to your office every day, you can already tell that something is brewing (pun unintended; not coffee obviously) and words around office spread like wildfire,

That is why the lower the stock price goes before a trading halt is put into place, the bid price would seem to be giving more premium.

In the case of Oldtown, being such a big company has its cons where something like an acquisition involves a big group of people. More people knowing equals higher possibility of leak.

Lower last traded price = Lower acquisition price

Who doesn’t want to buy cheap?

Indeed there are cases where some acquisition can be planned over the course of few years because the main shareholders are huge and with the power to depress the price further.

It’s a major advantage where they can properly time the acquisition with the ideal price in favor of an expected huge rise in revenue or profit. Truly an unfair advantage but is likely going to happen only to smaller companies.

The next time you are buying a stock just because they have 50 – 70% of cash value, think again. Before you know it, they have the power to privatize and you are merely holding to a few thousand units which is not significant to make a difference.

This guy here… we still think that they list to get money and institutions are buying back at a cheaper price than listing.

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More room for price revision

This is just in case, where if the acquisition fails to get through they could bid higher slowly rather than already paying the maximum that they can afford.

The Harsh Reality?

In our books, Oldtown is a very good counter with tonnes of growth ahead. If you bought Oldtown earlier hoping that their growth into China would make the stock a multi bagger returner, your hopes had been shortened and expected profits had been reduced by a huge fraction.

Fundamentally the company also has a very strong cash holding with little debt to cover. Another good factor to take into account where these could be consider a strong buffer for a company entering a new market increasing its risk exposure.

The offer price is definitely lower than the expected FY2019, FY2020 price at current PE. We expect FY2019 to be somewhere around RM3.50 a share (assuming all plans executed). There isn’t much you can do other than hoping for a price revision in the case where most shareholders reject the offer bid.

Probability of a Rejection?

Old Town International Sdn Bhd is the biggest shareholder with a whopping 40.99% in the latest annual report. Based on this shareholding, we can only conclude that the deal will likely go through as the Sdn Bhd itself might want to take it private as well.

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Revenue and profit just started to stabilized and with such a rich cash holding (approx RM200 million) in their books, they have more than enough for the expansion in new markets. So why share with the public shareholders for the coming returns? Furthermore, the assets could sustain without increasing its debt exposure.

If the company requires funds to expand again, then it might list once more but until then this might be a good bye if you are very positive on making huge returns from OLDTOWN.

 

 

Market Slump Because Election Coming

The market going downwards the past month might seem to be the factor of ringgit strengthening causing profit taking to take place by foreign investors. It is true up to a certain percentage.

But one thing for sure is that the election is just around the corner. Now we put a 80% chance that election is happening in March 2018 during the school holiday period.

18th March 2018 will be our estimate for PRU 14

So Why Does the Market Slump Have Something to do with Election?

It’s all about the money !!!

Indeed it’s really about the money. The most important thing during election is money. Money buys a lot of things including campaign items like flags, fliers, handouts, you name it, they have it!

All these things cost money and money isn’t going to be printed out of thin air. Even the Bank Negara can’t actually print money out of thin air (technically).

But one mechanism can! The stock market. If you are institutions and you control few of the biggest corporations/blue chips in Malaysia then you have a game to play.

The simple rule of driving the market down and to start collecting stocks is key in obtaining big bucks in the quickest time. You can drive a stock down causing people to sell and although some wouldn’t budge with the sell-down, a high percentage of participants in the market do.

This is when institutions would start to buy at the bottom and when its nearing election the stock price would be pushed up again. Mark to market, we already see a gain and as long as the drive down takes minimum volume. A rule of thumb in stock price movements is low volume equals quick price correction.

Just a month before the election starts, institutions that drove the stock prices up will start to liquidate their positions and immediately ‘printed money’ for the rightful winner. This is where the money obtained in such a quick time can be used to pay election requirements.

Let’s Observe Some Charts

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PRU 11 almost similar patterns in November and December – market down 6%

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It wasn’t that clear in PRU 12 since the financial crisis actually took over and stock market was at record highs.

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PRU 13 somewhere around November -4.88% rise 5% January -4.12% again

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So this time around, we see low volume drop from Oct where the ringgit factor start kicking in. Profit taking is always slow but it is not painful to the stock market. But since the start of November we see volume rising rapidly. Again this pattern is almost similar to PRU 13 and PRU 11!

Indeed, the stock market is one of the fastest way and legal to raise money. This is natural and happens almost every where in the world where the local institutions are the sharks in the market.

CS Expects Bank Negara to Raise Rates 1Q18

It looks like our interest rates will raise again following the US and this time, the sentiment shows positive results than before.

Consumer inflation from fuel prices had already turn into something that we can’t get away from and MYR had strengthened once again. Although we are indifferent than was it was a year ago, the consuming index continues to improve.

A simpler way to put this “Life goes on…”

Take a look at the report from Credit Suisse

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INARI Another Record Breaking Quarter

What wasn’t said had already been said by the stock price that flies this morning. It is easy to read when quarterly reports post higher revenue and higher profit where there’s no argument to be made clear unlike the TUNEPRO review (< click for link) that we posted earlier.

Although this is the record quarter for Inari, we think that it is not over for the obvious fact that Q1 2018 which ended in September 2017 doesn’t factor in the iPhone X yet. The teardown for the latest iPhone X has already been done and I count 3 parts in the preliminary teardown.

Broadcom BCM59355 wireless charging controller

Broadcom AFEM-8072, MMMB power amplifier module

Broadcom touch screen controller, labeled BCM15951B0KUB2G.

Not sure how these parts contribute to INARI but the whole list isn’t detailed yet in this teardown.

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Meanwhile, here is a report from CIMB on Inari Amertron

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Another Weak Quarter for TUNEPRO? Not Really

The EPS recorded this quarter was 1.69 cents which brings our forecast for FY 2017 forward PE ratio to 15.63. The deletion from MSCI Small Caps is already taking a toll and weakened the stock further but we still find value in this stock. Below are the few reasons why we still remain positive for this stock.

Business Not Growing?

Our previous article on TUNEPRO got bashed with comments especially from klse.i3investor saying that people who fly Air Asia are cheapskates and they would never buy travel insurance ever. We found that this claim is worst than saying Malaysia is going to bankrupt.

The revenue numbers for TUNEPRO continues to grow and Q3 2017 recorded the highest revenue ever at RM 140 million and this just proved that the public continues to be aware that there is a need for travel insurance even though you are not flying with Air Asia. The fact that EPS does not follow merely has one reason in our view.

But first, just to list things out, the few setbacks from this quarter’s report are:-

  1. Claims increased by about RM 600k
  2. RM 12 million for reinsurance expenses
  3. Management expenses of RM 2.6 million

I guess reinsurance is a major factor that caused the growth in gross premiums not translating itself to profits for the company. Reinsurance is a strange thing where it tests your tolerance as an insurance company towards the original premiums written.

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Think of it as a hedging tool if you don’t plan to increase your exposure, you buy some reinsurance opportunities to low the risk and manage what you can handle. Smaller insurance companies see this problem early in the game but eventually with the growth of assets and higher buffer zones, less reinsurnace transactions are needed to be done.

Obviously, an explosion in new premium earn but without the key people behind managing it properly meant that most of the original written premium goes to waste where the money can’t be put to good use such as generating higher returns.

Again, this takes time and this is why insurance is a long term business. From hiring to right person to manage the portfolio to slowly decreasing the rate of reinsurance, this definitely isn’t a two quarters game.

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Management expenses increases this is the part where money is well spent. Did you realize marketing had been stepped up recently for Tune Protect? Large billboards, TV spots are going on for marketing initiatives getting people to know the brand better. Since the customers shouldn’t only come from Air Asia, we think that ads will be beneficial even for others.

Other forms of general insurance would eventually benefit from a large-scale marketing campaign. A simple question survey shows that people have no idea the Tune Protect offers other form of insurance rather than travel. When the public gets accustomed to the available products, it is merely time when the business sees organic growth.

In the mean time, we recommend that you continue to accumulate on stock prices weakness in the coming months.

Our forecast for Q4 revenue to hit RM148 million with EPS coming in at 1.77 cents.

For more information on details in the breakdown of revenue, you can see the latest report by CIMB

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