CIMB on Malaysian Healthcare Sector

We agree with the recommendation for IHH but we still felt that this is the stock that isn’t worth buying when the price is consolidating. We prefer to buy IHH on dips during weak market times somewhat like today.

Valuation remains high for hospital operators but it is still a good business to invest in with REIT like exposure coupled with strong growth in the long term.

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CIMB Downgrades Malaysian Banks

The argument for the downgrade refers to the implementation of Malaysian Financial Reporting Standards (MFRS) 9. Somewhat similar to CET1 ratio, the provision methodology would change under MFRS 9.

It was estimated that under MFRS 9, it would negatively impact the net profit of banks in the future.

See the full report below including sensitivity analysis of respective banks.

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You Still Have a Job Because Ringgit Devalued

What if I tell you that the reason you are still working and the availability of jobs is still strong is the reward for depreciated currency?

What if I tell you that low ringgit value no longer has the effect of 1MDB in it?

What if I tell you that the GST is good and the only way to save this economy?

Well, these few statements might have spurred the anger of anti-government parties and opposition supporters. For starters, I would like to clarify that I do not vote because I believe in what taught in economic books where politicians are a waste of a country’s resources. In laymen’s term, I hate politics.

Depreciated Currency Equals Jobs?

Many people in the country complains about the weak ringgit and how it’s affecting travel plans. All of a sudden, a pre-booked trip overseas raises in price due to currency depreciation. Often, people forgot that the depreciated currency actually protected jobs in the country itself. This is a common problem because jobs had always been there since the recovery from 2008’s financial crisis. The sudden drop in currency value is still fresh in people’s mind.

Malaysia still relies heavily on foreign direct investment (FDI) with the likes of electronics being the top export and top destination to seek OEM manufacturers like Dyson seeking the two plastic molding companies in Johor. Penang for example is heavily involved with plenty of local OEMs and multinationals such as Intel undergoes manufacturing in this region.

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If ringgit did not devalue, it would mean that the cost of production rises for our country and the likelihood of foreign investors going to new frontier markets like Vietnam or India. So FDIs and high demand for OEM products is the reason why we still have a job at the current moment. The reason they are still here is because all of us are still cheap labor.

The weaker currency spreads across most commodities export sectors like oil, palm, plastics and rubber. Oil and gas sector in Malaysia sells at SGD per barrel but the cost denominates in MYR. The lower price of crude per barrel would have ruined the feasibility of oil production but the lower cost of production still has rigs operating albeit harder than it used to be.

Jobs are important to the economy because it ensures continuous spending by participants of the economy. The middle income is the biggest contributor to the GDP other than the government as well as the biggest percentage that earns their income in the form of monthly wages. Continuously feeding positive sentiment to this group would ensure that the economy works like a well-oiled machine.

Losing Jobs?

If you sell Nasi Lemak and mostly do local businesses, people losing jobs might affect you directly as well. Lowering of monthly income causes the general public to refrain from eating out taking the alternative of self-preparation.

This is why when people starts to lose jobs, its catastrophic. Sectors such as consumer, retail, travel, real estate and banking would feel the wave of deteriorating income when sentiment goes bad. Jobs remains the key catalyst in preserving the current strength of the economy.

1MDB No Effect on Ringgit?

Indeed it was a big scare earlier but bad news fades with time. The ringgit isn’t going to strengthen back to previous levels.

Reason 1: Chinese depreciated their RMB artificially to improve on exports. All export nations round the world would see their currency devalue automatically just to be competitive against China once again.

Reason 2: The currency traders had valued ringgit lower because it is hard for Bank Negara to raise the interest rates. Trader are banking on the inability for Bank Negara to raise rates since the government debt continues to climb. You wouldn’t want to raise the risk-free rate when you are trying to leverage on debt financing.

The macroeconomic environment had changed in respond to China and the need for more debt to finance and keep the infrastructure spending intact. Pretty clear that construction jobs are needed to spur the economy, the MRTs built are creating jobs for people directly and indirectly.

GST Saves Economy?

I might sound like someone promoting GST in the government department. But having an independent economic view, we are technically stuck between a rock and a hard place prior to the GST implementation. Yes, we can all agree that the government placed us in this bad situation in the first place but nevertheless that’s the way when one management passes the baton to another.

Management at the top would only strive to achieve what’s easiest or most visible to the people during their term. Longevity of a policy and the potential backfire from bad policies are not taken into account in the likelihood that might cause bigger issues in the future. In fact, it is someone else’s problem so its fine.

Things like that doesn’t only happen in Malaysia. We have yet to see the effect of excessive money printing in the process of QE by the US Federal Reserve. It just so convenient that it was the fastest feasible policy at that time and governments takes the easy way out. The problem that it creates close to 10 years later isn’t the problem of the initiator and this is why economic cycle are present in the world.

To sum it all up, the reason for writing this article is to urge the general public not to be so negative to our country’s current problem. People never focus on the good but the bad gets highlighted over and over again. I think we should be more positive and it is healthy to stay that way rather than focusing on the negative. Just remember that in economic cycles, bad times are short while booms are long!

The 7th of The Decade Again…

Well well well… It’s that time again.

7th of The Decade

2007, 1987, 1977, 1957, 1917. These were the peak years for Dow Jones Industrial Average. Well it doesn’t prove that a crash is imminent but historically, the data is really scary and proves that the 7th of every decade seems cursed.

2.jpgWhat happens this year then? Peak months are usually July and October according to CIMB. Take a look at the full article by CIMB on evidence  backing this evidence.

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CIMB Assumes Coverage on Bumi Armada

Such a long report for Bumi Armada by CIMB.

Click for Link

 

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Our Take

Bumi Armada is really one of the best there is for the oil and gas sector. We like it more than Sapura Energy due to its balance sheet. But of course, Sapura Energy would gain the most from the spillover from Petronas and likely most sensitive to oil price movements. Nevertheless, if you believe in oil this is a cheap counter to acquire at the moment.

Hexza a Definite Undervalued Stock

If you don’t see us posting many research reports these days it’s because most stocks in our target had liftoff such as TOPGLOV, MIKROMB or JOHOTIN. We look at HEXZA this time around and we felt that this stock is undervalued.

Industry

A niche market formaldehyde producer or likely the only large size listed producer of formaldehyde in Malaysia. For HEXZA, formaldehyde is used to produce adhesive resin meant for the use of furniture manufacturing which is a complement to the furniture industry. There are around 10 furniture companies listed in Bursa which meant that the market for adhesive resin is much bigger than the supply itself.

Formaldehyde had always been associated to high toxicity towards human and animals, evidently the use of formaldehyde had declined with building materials not adopting formaldehyde as the base material. Formaldehyde was part of the base used for roofing materials.

HEXZA is moving towards ethylene based manufacturing with its newly acquired such as the production of ethanol. This segment is gaining momentum and thanks to lower raw material prices, it couldn’t be a better time to have ethylene based manufacturing since we believe that oil will stay low for quite a while before it peaks once again.

Outlook Ahead

The company stated that it plans to acquire more businesses related to their core manufacturing segment and no doubt that they could go on a shopping spree with so much cash in hand. Although the company has zero bank borrowings, we felt that the management style of this company is less aggressive towards debt financing making it less likely to take up huge loans to finance a new acquisition.

In last year’s annual report, it stated that they are moving towards automation which is also a key factor in lowering cost in the future. Rising labor cost factors such as foreign worker levy and higher minimum wage increases labor prices directly affecting production cost. That is why, it is the right decision for the company to slowly move and invest in automation for the future. Expect to see stronger margins in the upcoming quarters.

With oil prices down again, raw material prices used as manufacturing feed would decline in tandem as well. Another good reason that this company could be reporting higher margins in the near future.

Financials

One thing that we really like with this company is how rich its financials are. The latest quarterly report showed RM 72 million in cash and equivalents with zero borrowings. This meant that if you are paying RM 1.12 per share, RM 0.3584 of it is worth cash.

Uniquely, a huge portion of HEXZA’s assets are classified as ‘Other Investments’ which represents investment in shares by the company. Again, this could be considered liquidity for the company which if it would to liquidate all its shares. The final number comes in at around RM 140 million worth of cash which is double the cash and equivalents amount.

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This again pushes up the cash per share to 63% which is really high!

Other Investments are quoted at RM 71 million in 31 December 2016. We all know that the markets gone on a crazy rally since the first day of trading for 2017. This again proves that the quoted number should be even higher than the RM 71 million listed in the balance sheet.

Performance wise, its YTD performance for HEXZA had achieved 20% and we can assume that the market had already factored the rally into the stock price but the amount of cash per share is higher than the 63% that we’ve calculated earlier.

The Idea

This time around, we are not looking at growth as we used to because most growth stock had already rallied with the market. HEXZA on the other hand comes with deep value in which the true value has yet to be priced in at RM 1.12

In a bull market like what it is now, growth stock had started to rally and it is not wise to chase high flying ones because one minor correction in KLCI would have the ability to wipe-out all the gains that were made if one is overvalued.

It’s stocks like HEXZA that’s filled with value suggest that it worth to put money in. If it doesn’t move, were only miss the bull run. If it drops, we continue to hold knowing that there’s value. During times like this, additional money available could be allocated to stock like this hoping for a revaluation by the market when the quarterly report comes out. In fact, HEXZA is likely to report its Q3 2017 report this week or so…

We recommend buying if you believe in value and doubt that we see a huge rise in capital gains in the near future except when the market goes on revaluation.

Technical Analysis

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According to Fibonacci levels, it suggested that RM1.08 is a major support. We determine RM1.05 as the cut loss point for the near term before we revisit this stock again after it has stabilized. We usually set lower tolerance towards stock that just got a big jump from last quarter’s results.