Wednesday, December 30, 2009

Eric Sprott Reckons SP 500 Could Plunge

Well... here's a 'bearish' outlook for twenty ten.

Ah.. if you do not wish to continue reading, perhaps clicking away is the best solution. :D

On Bloomberg News
Sprott Says S&P 500 Index Will Plunge Below March Low

  • Sprott Says S&P 500 Index Will Plunge Below March Low (Update3)
    By Matt Walcoff

    Dec. 29 (Bloomberg) --
    The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize, according to hedge fund manager Eric Sprott.

    The Toronto-based money manager, whose Sprott Hedge Fund returned about 496 percent in the past nine years as the S&P 500 lost 32 percent in Canadian dollar terms, said the index’s 66 percent rally since March 9 reflects investors misinterpreting economic data. He’s predicting the gauge will fall 40 percent to below 676.53, the 12-year low reached on March 9.

    We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Sprott, chief executive officer of Sprott Asset Management LP, which oversees C$4.3 billion ($4.09 billion), said in an interview Dec. 18.

    Investors in Sprott’s funds have been rewarded by his holdings in gold, which has climbed 48 percent since the S&P 500 peaked in October 2007. The stock has since fallen 28 percent and declined 0.1 percent to 1,126.20 today for its first loss in seven sessions.

    Sprott said the Federal Reserve has kept bond yields and interest rates artificially low through its program to buy agency debt and mortgage-backed securities. The central bank expects the securities purchase program to finish by the end of March.

    Expiration of the program would reduce demand for fixed- income securities, forcing up bond yields and interest rates and hurting economic growth, Sprott said.

    Loss of Faith

    Should the Fed renew the programs while the U.S. government continues to run record deficits, investors will lose faith in the U.S. currency, he said.

    “If they announce another quantitative easing, trust me, the gold price will go up another 50 bucks that day,” he said. Gold futures fell 0.9 percent today to $1,098.10 an ounce in New York.

    Sprott has been bullish in gold and gold stocks, which are used as a hedge against inflation, since at least 2001, when the precious metal was trading below $300 an ounce.

    Gold futures have slipped 7.2 percent this month in New York as the U.S. dollar has rebounded on data that signaled a recovery in the U.S. economy.

    American payrolls fell by 11,000 in November, the fewest since the recession began, while retail sales gained 1.3 percent, twice the rate forecast in a survey of economists by Bloomberg, according to government reports released this month.

    Unjustified Optimism

    Sprott says investors have been too eager to see the data as signs of recovery. While the S&P 500 added 0.6 percent on the day of the employment report, a 23rd consecutive month of payroll contraction was no reason for optimism, he said.

    “We don’t have employment gains,” he said. “We have less of a decline. That’s a sign of weakness. The data is weak.”

    Sprott said gold is the only asset about which he remains positive in the short term. His C$1.42 billion Sprott Canadian Equity Fund -- which is up 23 percent in five months -- has 34 percent of its portfolio in mining stocks and another 39 percent in bullion as of Nov. 30.

    He said though he has no target price for the metal he doesn’t think it has reached a ceiling after quadrupling over the past eight years.

    “If you get into this thing where you’ve got to keep printing more and more and more, who knows about the price of gold?” he said. “It will be the new currency in due course.”

    Growth Potential

    Within the mining industry, Sprott prefers companies with smaller market capitalization, which he said have greater potential to grow.

    Since last year, Sprott’s firm has become the biggest shareholder of Avion Gold Corp., which mines in Africa, and East Asia Minerals Corp., which explores in Indonesia. Avion is undervalued for its projected 2010 production, he said. According to a Dec. 16 note from analyst Eric Zaunscherb of Canaccord Financial Inc., Avion was trading at 2.9 times its estimated 2010 earnings, compared with a multiple of 10.5 for its peers.

    Regarding East Asia Minerals, Sprott said, “I just get the feeling that these guys could find a multi-double-digit-million- ounce property.”

    East Asia completed a 2,000-meter, 14-hole drilling program at its largest Indonesian property that Canaccord analyst Wendell Zerb called “encouraging” and indicative of a large zone of gold mineralization. Over the next two quarters, East Asia is to drill 45 more holes at the site and begin drilling in four more locations in the country, Zerb said.

    Outside of the gold industry, Sprott owns shares of Wavefront Technology Solutions Inc., a TSX Venture Exchange- listed company whose products are meant to increase oilfield production. Its technology could be used on at least two-thirds of the world’s oil wells, he said.

    Sprott, 65, founded his current firm in 2001 after divesting Sprott Securities, now Cormark Securities Inc., to its employees.

This is the link to Sprott Asset Management's December newsletter, in which Sprott is effectively asking "Is it all just a Ponzi scheme?"

And of course this newsletter was featured by Jesse Who Is Buying All These US Treasuries (And Can They Keep It Up in 2010)?

  • So what does all this mean?

    The bottom line is that the data seems to indicate that the foreign sector traditional buyers (at least for the past 20 years or so) of US sovereign debt are walking away from the market as they had said they would do, and
    are moving their reserves into other instruments.

    This may not be such a great problem if the US trade balance continues to narrow, but it certainly is not healthy to see the Fed and the US household sector as the major markets for US sovereign debt.

    If 2010 is not a year of recovery for the average American, the ability of the Treasury and Fannie/Freddie to keep expanding their debt offerings is going to become quickly constrained. How can Joe Sixpack keep saving and buying Treasuries, and at the same time consume at a rate sufficient to grow GDP? All on a stagnant median wage and a contracting housing market? Think the rest of the world is suddenly going to grow a taste for US exports? Will the US retreat into isolationism and trade barriers? That might not be Price Index friendly.

    The US is marshaling its ratings agencies and multinationals to cast doubt on the European union, their currency, and their solvency, and threaten to take them down first to maintain an equilibrium of failures.

    But in fact, the US is much closer to the point of a serious debt crisis than one might imagine from what is being put out by most US based financial analysts. There is a nasty convergence of constraints bearing down on the Fed and the Treasury that look to push the ability to market dollar debt to the breaking point. If a couple big States go under next year, the dominoes may start falling very quickly.

    I see the problem, but I have to confess that I do not yet see how the Bernanke Fed intends to dodge this collision. And I know that they must see this as well, and have a game plan. Could counting on an exogenous event that would provoke an artificial demand and neo-isolationism (something like a regional war, or at least a trade war) be called a plan? Can they possibly be in denial, and just looting the capital before the Empire falls? It is hard to see how the resolution of this will unfold just yet, but I am pretty sure that many of the simple scenarios that people are laying out so nicely with such fine rhetoric are more fantasy than probable outcomes. This is going to knock our socks off default-wise.

    If you think that this crisis will be deflationary, then you might be a bit surprised to see what happens if and when a US sovereign debt offering fails in the market. It will not be pretty. And it will not be dollar friendly in the longer term. But who can say what will happen, when there are so many possibilities.

    The market may likely reveal to us what is coming, if we are observant, and lucky, and have the willingness to listen to what we may not wish to hear.

    There are some definite gaps and assumptions in the case that Sprott makes, raising more questions than providing answers. It is possible that Americans have shifted an enormous amount of capital out of consumption and stocks into Treasuries. It is also possible that this is just masking something else, as Sprott suggests. But this does not affect the argument we make, that something has got to give, as the US consumer is tapped, and cannot sustain this type of sovereign debt purchasing given the offerings that the Treasury must make in 2010. And if it is something else, then that will be revealed 'when the tide goes out' next year. The Fed and its enablers are the buyers of last resort, increasingly so. And that means increasing monetization, and a stretching of the value basis of the bonds and the dollars.

See also: Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else

A Stock Called Ramunia And A Research Report Titled 'The Big IF'

Ramunia announced its earnings. It lost much less money (previous quarter it had 25 million in losses). LOL! (Why did I LOL?! Err.. sometimes, on any given day, things are weird in the market. like for example, losing less is good, it seems. )


Anyway, this article is not about Ramunia current and future prospect. This article is inspired by what had transpired back some couple of years ago, back in Oct 2006.

It's about research reports.

:D

Now most read the report, just to get the 'recommendation' and 'the target prices'. They read it to gauge the potential of the stock. Sometimes, such homework reading works wonders. Sometimes, it doesn't. In fact, sometimes, such reading could prove hazardous for one's financial well being if the stock tanks!

And some would be real quick to conclude that that there are many ways to fish in the market and research report reading is simply a waste of time.

But some still insist that research reports are essential and they would be real quick to point out that this is, simply is life. This is how the game is played in the stock market.

Without the strong brokerage recommendation, without the much higher target price imposed on the stock, how could the stock move higher?

Surely no stock can move themselves, yes? ( Can 'sendiri jalan' meh? Can 'kaki kia' meh? )

Isn't it true?

No?

And needless to say, some judge the quality the quality of the report based on the stock movement.

No?

What good is recommendation if the stock does not move as per the recommendation?

No?

And this is where it gets tricky. If the stock moves as per the recommendation, doesn't it mean that the recommendation was spot on? But what about the facts? What about the quality of the reasoning behind the recommendation? Does it not count?

6 Oct 2006. Ramunia was 1.23. OSK Research gave it a fair value of 1.51. By 25 June 2007, Ramunia hit 1.68!



How dude?

Would you say that OSK is good? Hey the stock outperformed, didn't it?

Now before I highlight the report, consider the following.

Say a stock was earning only some 9.7 million. The next year, the stock was projected to earn some 22.8 million. And the following year 58.8 million. And the following year, the stock was projected to earn a whopping 100.2 million!!!

Yup, the stock is projected to earn from 9.7 million to a whopping 100.2 million.

How?

When you read a research report with such a wild earnings projection, what does this indicate to you? ( LOL! The quick would be fast enough to point out that something smelly is most likely to happen. :P )

6th Oct 2006, OSK released a 13 page report on Ramunia. (There are colored pictures included in the report too! Incredibly, the stock was not rated but OSK specifically said in its closing statement " Nonetheless, Ramunia is well positioned in the industry to ride on the large number of contracts that will likely be awarded in 2007 and 2008. As such, we advise investors to keep a close eye on this company".



The first arrow on the top left indicates the 13 page report on Ramunia. (Such a long and colorful report but yet, OSK did not state boldly their recommendation on the stock.)

And the report was smartly titled, "The Big IF".

LOL! Nice disclaimer already, yes? If things did not pan out as mention in the report, could the report be held accountable?

At the end of the first page..


Yup, that's OSK projection of Ramunia's earnings back on 6 Oct 2006.

From earning 9.7 million in 2005, Ramunia was projected by OSK to earn 22.8 million in fy 2006 to 58.8 million in fy 2007 to 100.2 million in fy 2008!!!

I guess earnings could grow as rapidly like cow grass for Ramunia.

Now, the earnings projection was not the only issue on that screen shot.

  • Fair value of RM1.51 derived from 14x PER and 3.0x P/BV on a fully
    diluted basis
    .

With such a massive earnings growth projection, could you see that the analyst, Chris Eng, did not put which fy earnings the "14x PER" is based on. ( And a 3.0x P/BV??? LOL! Was it justifiable to have a 3.0x BV for Ramunia?) (Will get back to this issue later.)

So based on historical and current earnings trend back in 2006, how was Ramunia's performance? Was there any REAL justification for OSK to make such incredible earnings projection?



How? It was only a 'credible' performance as per OSK standard. (ps, yeah, Ramunia's NTA is only 0.66 sen. :P)

Yeah and it was credible despite "..EBITDA margins declined from 20.1% to 13.5% as the mix of contracts varied."

And the nice colored chart showed zero signs of Ramunia's potential explosive earnings growth as suggested by OSK.

LOL! Of course OSK justifies the explosive growth by stating the massive potential from its order book..




Of course, the analyst was quick to point out the risk for such projection in Ramunia.. (yeah.. how could he and OSK be held accountable since the report was already titled "The Big IF"



Nicely put, eh? "Big on promise, uncertainty on delivery"!!!

Does this means that the promise is there.. whether Ramunia can deliver or not, is another story all together.

And of course, there is the dilution in earnings..


It's only a dilution of some 43%.

Yeah, only 43%.

LOL! And yeah, it's a necessary evil.

So despite the massive dilution in future earnings by some 43%, and the risk of Ramunia unable to deliver its promise, this did not stop OSK from making the following valuation.



Quote: "Based on these parameters and a share base of 788.4m to value Ramunia. We value Ramunia with an EPS on 7.46 sen."

Multiplying the earnings per share of 7.46 with the share base of 788.4 million, we get an earnings of 58.8 million.

Which means despite all the risk mention, OSK is basing their valuation on an EXTREMELY optimistic fy 2007 earnings projection of 58.8 million.

Increible since in fy 2005, Ramunia earned only some 9.7 million.

(LOL! See how easy the game is played? Project the earnings sky high, then you will have the much higher target price for the stock! Easy peasy, eh? :P)

And of course, OSK had the nice 'disclaimer'..


Let's fast forward. December 2008. So how did Ramunia do for its fy 2008?

Quarterly rpt on consolidated results for the financial period ended 31/10/2008

Ramunia recorded a whopping 279 million in losses!

And Ramunia today trades less than 0.40 sen.

Ah... but some would say that this is a non issue. Ramunia did move much higher after the research report was published.

Ah... but some would also say that OSK was not the ONLY brokerage that was positive on Ramunia back on those days. Others were just as optimistic.

Ah... but some would also say this 0.40 sen is not a fair reflection because of there's the dilution caused by the conversion of warrants and then if not mistaken, there was also a rights issue back in 2008.

:D

ps... Wishing everyone a happy 2010. :D

Monday, December 28, 2009

Anthony Bolton: Investing In 2010






Thursday, December 24, 2009

PNB On Its Purchase Of Kenanga Building

Published on Business Times.




  • PERMODALAN Nasional Bhd (PNB) has confirmed that it has bought the 22-storey Kenanga International Building in Kuala Lumpur from Injaz AsiaEquity Property.

    PNB president and group chief executive Tan Sri Hamad Kama Piah Che Othman confirmed the purchase but did not reveal the amount spent.

    "I cannot remember how much the purchase price was and I don't want to be quoted wrongly on this," he told reporters after announcing the income distribution for Amanah Saham Nasional in Kuala Lumpur yesterday.

    The 22-storey commercial building with a three-and-a-half-storey annexed podium block was bought from Injaz AsiaEquity Property Bhd, which was jointly set up by Middle East Injaz Mena Investment Co and Singapore-based Asia-Equity Partners Inc.

    Hamad Kama didn't elaborate on the reasons for the purchase.

    Meanwhile, he said PNB is also considering listing its property arm at the right time.

    PNB had merged three of its companies - Pelangi Bhd, Petaling Garden Bhd and Island & Peninsular - into one big property developer.

    On the proposed 100-storey skyscraper to be built at the Stadium Merdeka site, Hamad Kama said a study is under way and is at a very advanced stage.

    "The site is owned by one of our subsidiaries, Merdeka Ventures, and we are looking into it. We plan to have a board meeting soon to discuss this in detail before making an announcement on the matter which will be quite soon," he added.

    Hamad Kama said although there were numerous people criticising the project, what was important to PNB was whether it could get good returns.

    PNB manages a total of 102 billion units in trusts funds.

WOW! Oh my gosh!

PNB's president and group chief executive order, cannot remember the purchase price of the transaction in which PNB purchased a 22 storey building!

Am I reading it wrongly?

Is there an error in publication from Business Times?

How could the president and group CEO not remember the transaction price of a purchase estimated by Business Times to be worth some 250 million????

How can?

Doesn't sound so, so incredible?


More On Gamuda Again

Comments received from the posting


  • jitseng said...
    A sharp view on the operation of gamuda.the nature of construction business always finance the clients.If economy turns bad,they will not be paid.during good times,margin will be small as developer dictate the terms.Most of contractor will turn to developer as they grow.never have long term view on them.

I first blogged on Gamuda back in 2006. Yes, it was that long ago. Of Gamuda and the Construction Sector. You could see that even back in 2006, I was not optimistic on the stock! (Will comment on that posting again later)

Here's another comment.

  • solomon said...
    When the horsie ran off from the turf, it means she cannot endure the races. If the same principle applied on the bossie, it should not far off ya Moolah?

    Mr. Koon, one of the former founders had indicated some structural issues in construction. If this is not overcome, I think the industry would not as efficient as we thought down the road.

    If I am Mr L, the company is not a family biz like Lim's Genting, I will do the same thing....sorry minority shareholders.

Ah.. the horse racing analogy. How true isn't it? Simple logic would see one pondering how could one trust the leadership of this company when the bossie clearly showed his hand. By selling his majority stake, isn't he telling the investing public that he does not have confidence in his very own company!

Yeah... sadly... most would do the very same. Sell and cash out.

And sadly... poor minority shareholders.

Ahh... that very posting back in 2006, Of Gamuda and the Construction Sector.

Now there's no doubt that Gamuda used to be one darling of a stock. It used to trade as high as 8.00 and it reaped massive rewards for many longer term investor.

Why did the market love the stock so much?

Simple. For me, it was a growth stock and that there were justifiable reasons that the stock became a multi-bagger!

  • Perhaps it would be interesting to see what was the main driver/catalyst that drove the stock so high, and for me it was the stellar earnings growth achieved by Gamuda. The earnings really was top-class.


    FY Sales Revenue
    2000 637.488 146.815
    2001 830.763 191.708
    2002 1042.752 193.899
    2003 1442.069 241.773
    2004 1719.032 281.869



    Based on the table above how could one argue Gamuda was no good?

    And wasn't it clear how the impressive growth in earnings was probably the main cause that drove the share so high? Long term investors would have been proud.

From a company earning 146 million in 2000, it became a company earning 281.869 million by 2004. How could one say Gamuda was no good?


That stellar growth made Gamuda and it's a known fact that the stock market loves growth stock. The growth in earnings simply equated to more earnings per share. How could the market not love 'more'? And this gave Gamuda the reputation as one of the 'strong fundamental stocks' in our local market.

And what was the driving factor again? Growth stock.

Now what if the growth story ends?

Wouldn't this not negate Gamuda status as a growth stock? Now without the growth, does Gamuda deserve its reputation as a 'strong fundamental stock'?

Now did things changed?

Continued from the same posting. (that posting was pretty much a copy and paste from one of my stock discussion
here )


  • Things have changed.

    The landscape has changed.

    Growth as they say it's rather finite...

    Now if I add in the last 2 year earnings (including yesterday earnings report), here is a different picture.


    FY Sales Revenue
    2000 637.488 146.815
    2001 830.763 191.708
    2002 1042.752 193.899
    2003 1442.069 241.773
    2004 1719.032 281.869
    2005 1661.453 265.778
    2006 1226.987 168.558




    Two years of decline. This fiscal year's earning was really poor.
    And based on the earnings revenue of 168 million, this would put Gamuda back to the levels it achived in its fiscal year 2000.

    As they say, the good times is over for now.

    So perhaps it would be better to remember that the 8-ringgit-Gamuda and current Gamuda is 2 totally different animal.
    The 8-ringgit-Gamuda had stellar earnings growth riding on its back. The current 4-ringgit-Gamuda is riding on the back of a serious decline in its earnings. Two different animals.

    And as you have said, the poor earnings is expected.

    Delay in recognition of revenue of on-going projects, completion of SSP3 and the delay in NT1 Laos (which was supposed to commence 2 years ago) were partly the reasons results are weak.

    And as you argued that you expect next year earnings is to pick up strongly. But where will the earnings driver come from? Moving forward, GAMUDA should resume its growth path with larger contribution from projects in middle east and NT1 Laos and its property development division. Naturally, it is also eyeing a slice of some of the targeted larger projects at home and I would be suprise if they are not successful.

    Very much possible. I WON'T be a bit surprised at all.

    However, I will be extremely cautious.
    I believe that Gamuda is paying the price of its earlier success and the issue of the size and reputation of Gamuda itself. Remember Gamuda is now really considered a five-star-construction company based on what it achieved from 2000-2004.

    But....

    The five-star-construction stock is simply missing the GODZILLA-sized mega, mega contracts it was enjoying back in the those days. Remember the issue of companies venturing overseas? The risks are so much more and yet these companies are willing to do so simply because the huge chunk of meat in our kampung is no longer as meaty.

    And because of these reasons.. i would be cautious.

That was what I written way back in 2006 and no, I did not turn cautious on Gamuda overnight!

Last night, I was reading some interesting comments from RHB Research. I find it rather enlightening.


Woahh...

  • In our forecasts, we assume Gamuda to secure RM1bn worth of new jobs in FY07/10. So far in FY07/10, Gamuda has yet to secure any new contracts.

'Yet to secure any new contracts'!

Makes one wonder over the state of the construction industry.

Now do not get me wrong. I do still believe that there are plenty of jobs available in the construction sector. However, the jobs that are offered, are generally smallish in nature and the big jobs are really scarce.

Yes, how many mega jobs do we see locally? Using RHB Research report as a source of info, tThe LCCT is one. The LRT is one. And then there is the Ulu Trengganu project is another.

And that's about it.

And is Gamuda even guaranteed to make a clean sweep of all these 3 projects?

How?

And this is where it will hurt Gamuda. (this is my flawed opinion hor. my 2 sen worth and if this is not enough.. lol... I am sorry but I do not see how I can top it up.)

To justify itself in the market, Gamuda needs jobs. Plenty of jobs. And it needs to deliver earnings to justify its stock market price.

Take current market expectations. Most expect Gamuda to earn around 320 to 350 million this fiscal year. RHB, on the other hand, is one of the least optimistic. It reckons Gamuda could earn only around 290 million.

What do I think? Well, Gamuda earned only some 63 million (do note, that I am taking the net earnings as it is, ie as reported by Gamuda and I will not dissect the earnings). On an annualised basis, assuming no growth, one is looking at around maybe 250 million in earnings. And even if I add in some 10% extra to Gamuda's earnings to compensate for 'unexpected growth' or 'better than expected' earnings, one is looking at maybe some 275 million in earnings. And for a stock like Gamuda, is 275 million in earnings enough to justify its current prices?

Wednesday, December 23, 2009

A Look At Gamuda Again

Here's a simple question.

When the major shareholder, the big big bossie, sells down his shareholdings, what should the minority investor do? Should the minority investor continue to hold for the longer period, just because that's THE GOLDEN RULE in investing and more so, since the company has a strong 'reputation'.

Yes, this was a real life scenario and many would know which stock I am talking about.

Discipline is very important in long term investing and the ability to hold strongly to our reasoning is also very important. For as long as our reasoning is correct, we should ignore the view of others. Never be afraid if our reasoning is correct and yes, there will be plenty of times when the market disagree with our believes and reasoning.

Which means, in a crude manner, one needs to be stubborn with our investing.

But there's one crucial point and this, in my opinion, is the most trickiest part in investing.

How damn sure are we that we are correct?

Not possible that our reasoning is not flawed? Not possible that we could make an error? As George Soros famously said, "I am rich because I know I'm wrong!"

Flashback 25 Feb 2008, on the Edge.


  • 25 Feb 2008: Cover Story: Lin drops a bombshell
    By Jose Barrock

    Who would have thought that Datuk Lin Yun Ling, who has helmed construction giant Gamuda Bhd as its managing director for the past 27 years, would reduce his effective holding in the company? Thus, the news came as a shock to the market when the gangling engineer reduced his already small interest of 5.23% in Gamuda to 1.73% last Thursday morning.

    Quickly, the word out in the market was that the man responsible for the company's success was cashing out. This was despite an assurance that he would remain steadfast as the managing director. A quickly dispatched press release, an attempt to control the damage, clarified that Lin's disposal of 70 million shares in Gamuda was for "estate planning purposes". It failed to calm the nerves of investors. News that Lin had cashed out hit the market and at a conference call with several fund managers last Friday, Lin somewhat confirmed this belief.

    According to one fund manager who attended the conference call, Lin stated that he had sold the shares and the proceeds are kept in a trust. He also maintained that he would continue to be at the helm of Gamuda.

    In fact, in Gamuda's press release, Lin has committed to an 18-month lock-up period on his remaining shareholding — amounting to 1.73%. He also reiterates his commitment to his role as managing director of the company.

    But the damage was grave. Gamuda's share price tumbled to RM3.92, its lowest since November last year, falling almost 25% over the past three trading days. Investors obviously did not like Lin's move, reading it as a signal that Gamuda had reached its peak.

    Despite reassurances from the company, most research houses were quick to change their take on the company.
    Citigroup's report was perhaps the most telling with the tag line, "Sell: What are you waiting for?"

    The report also highlights that other directors of Gamuda, such as Saw Wah Teng and Ng Kee Leen, have also been disposing of their equity. According to Bursa Malaysia filings, another director, Raja Datuk Seri Eleena Azlan Shah, has also been selling down her stake. In the middle of June last year, Raja Eleena had some 8.3% equity, but has since trimmed it to 7.8%. Most of this had gone unnoticed by the market and has only hogged the limelight since Lin's sale.

    Lin's silent exit
    "It is a matter of timing. It is bad. Why did he do it now? The sentiments are shaky and construction stocks have run up in the past year [due to projects announced by the government]. As the biggest construction firm, a selldown by a major shareholder certainly creates uncertainty among investors," an analyst says.

    According to Inter-Pacific Research Sdn Bhd, Lin raised some RM322 million, selling off his 70 million shares at between RM4.60 and RM4.69. Eyebrows were raised over the pricing as it is at a discount of between 5.8% and 7.6% to Gamuda's close of RM4.98 on Wednesday. Gamuda's shares have fallen by about 21% since early January this year.

    What does this mean? Is Lin sending the correct message? Does this mean that he feels that Gamuda is worth only between RM4.60 and RM4.69?

    It is also noteworthy that Lin had increased his equity early this month, buying some three million shares under an employee share option scheme.

    Nevertheless, CMS Dresdner Asset Management chief investment officer Scott Lim says, "No one can stop him from selling, even given that something may not be right… He's selling 75% of his total equity... the quantum is huge. So the expectation is that his commitment may not be there. People are going to be watching him for the next 18 months. We hope he delivers and lives up to the good picture painted."

    The impact of Lin's selling can be seen in Gamuda's share price free falling, losing some 25% of its value from the time the word of Lin's selldown hit the market on Feb 19.

    Gamuda shed some RM2.5 billion in market capitalisation. Another fund manager says, "After a certain age, people have different priorities in life. As he is already thinking of estate planning, Lin is likely thinking about life after Gamuda… I am adopting a wait-and-see attitude to Lin's assurance and his commitment to Gamuda after the sale disposal… (There is) no clear successor in place. Construction companies need a strong leader who can spearhead efforts to secure new contracts. There is no one of the same stature as Lin in Gamuda," he says.

    Without a doubt, the possibilities are aplenty as to why Lin could be selling. According to parties familiar with him, he could have decided to hold on to cash, considering the market volatility.

    "Gamuda is his only concern, so there is nothing else distracting him. All in, he should still have about 2% in the company, including some shares held under trust and others," an insider familiar with Lin says.

    Others speculate that he may have followed in the footsteps of Tan Sri Chua Hock Chin, who helmed Roadbuilder Holdings (M) Bhd for the longest time and hived off his company to IJM Corp.

    Chua's exit was also a well-kept secret, and only took place after he had sold off his equity to a third party which later hived the equity to IJM Corp in late 2006.

    It is not clear who the end buyer of Lin's equity is, but sources say funds from London and other parts of Europe are buying it off Credit Suisse (Hong Kong) Ltd, which was acting for Lin.

    "It was well spread out. The only problem with the sale is the timing that bashed down the price," says a merchant banker.

    Quickly, speculation cropped up as to who the purchasers were. Some were saying that Middle Eastern parties affiliated to Tan Sri Syed Mokhtar Al-Bukhary could be the ones taking up the shares. However, those in Syed Mokhtar's inner circle have denied this.


    Undue pressure?
    Another theory being bandied about is that Lin was prompted to reduce his stake following pressure after Gamuda, a non-bumiputera company, secured big jobs, including the northern portion of the RM12.5 billion double-tracking rail project.

    The double-tracking job has seen its fair share of hurdles, and was shelved the first time after its award to MMC Corp and Gamuda.

    The Malay Chamber of Commerce had been at loggerheads with Gamuda and its partner MMC on the awarding of contracts for the project — the chamber had hoped to secure several jobs under the contract, but failed. The friction could not have gone down well with Lin.

    "For the first time, Gamuda came under pressure from an entity like the Malay Chamber of Commerce. It was awarded the job but came under pressure to share the cake with other contractors. It is unprecedented and certainly unhealthy. What makes anybody think that future mega projects will not get the same treatment?" asks a construction player.

    Others say Lin is looking at cashing out to maybe invest in Vietnam. However, quarters close to him in Gamuda point out that he had been reluctant to venture into Vietnam in the first place.

    "In fact, Lin was reluctant to go to Vietnam. But, at the behest of others, he explored and has some good projects there," says an official close to Gamuda.

    Lin's move to sell down his stake has had far-reaching impact on other industry giants, such as IJM Corp Bhd, which was also feeling the heat.

    A fund manager with a local firm, who spoke on condition of anonymity, says, "A construction company is only as good as its management. Can it still maintain the strong order book? Will the jobs keep rolling in? Will Gamuda's policies, laid down by Lin, still be maintained?" she asks. "The construction industry is sleazy and tough in the sense there are a lot of competitors. And a lot of opaque transactions. So management is important."

    So many questions, no answers
    Strangely, Lin and most of his top brass are away, some say in Australia, and this is what has upset most investors.

    When such a material development takes place, naturally one would expect Lin, as the managing director, to hold a press conference, and inform investors what is going on and of his commitment to the future of the company.

    None of the senior management personnel, normally contactable by the press, was available to clarify the position. The top brass are known to be among the most transparent, especially on developments relating to the company.

    For instance, as soon as they were awarded the double-tracking rail job, Gamuda and MMC came out with detailed announcements on the award of the various packages by companies and shareholders. They particularly spelt out the jobs given to bumiputera companies, something that has not been practised by even government-linked companies (GLCs).

    Citigroup points out that the last time Lin sold his shares was in April 2002. Then his disposal of 10 million shares saw the company share price take a beating as well. The research outfit adds, "
    What concerns us most is that Lin knows the company and the industry very well. The last time he sold his stock was when the last construction cycle peaked before tumbling."

    Does this mean the industry is at the peak of an upcycle now?


    Considering the slew of projects yet to be announced under the Ninth Malaysia Plan, that certainly is not the case. But in Gamuda's case particularly, it would be hard to maintain its order book of RM11 billion. It has a churn rate of about RM1.1 billion a year, based on its annual report for the financial year ended July 2007.

    This means the present order book will keep them busy for another 10 years or so, based on the churn rate. But then, the double-tracking rail project is expected to take off next year and the churn rate would be higher, hence it would only be a matter of another two years or so before they woud be under pressure to bag another major job.

    Given that Gamuda is now under the scrutiny of not only competitors but also chambers of commerce, Lin had probably considered his options.

    "He probably thought that doing business is going to be tough," says a banker.

    But what's surprising is that Lin's exit comes at a time when a dividend policy has been put in place. In fact, the market is expecting a significant capital repayment from Gamuda's 45% unit Lingkaran Trans Kota Holdings Bhd (Litrak). As for Gamuda itself, it has set a target of paying out a base dividend of at least RM450 million a year.

    All this adds to the puzzle of why Lin is reducing his interest.

    Furthermore, the consolidation in the water sector is likely to see Gamuda benefiting. Under the exercise that has yet to take place, Gamuda would likely part with its 40% in Syarikat Pengeluar Air Sungai Selangor Sdn Bhd, the concessionaire for the Sungai Selangor Water Supply Scheme Phase 3, for cash. Market talk has it that Gamuda stands to walk away with anything from RM700 million to RM1 billion, which would come in handy to pay out dividends.

    The company's prospects also seem bright with an all-important foray into Vietnam, nicking a job to build a RM3.5 billion integrated commercial complex in Hanoi, developing a five-star hotel, an international convention centre and luxury condominiums, among others.

    In Laos, Gamuda has secured a RM2 billion contract to build, operate and transfer a dam as part of a hydroelectric project in late 2004.

    Due to the bright prospects and strong management, Gamuda commands a better valuation than its peers. According to analysts, from the standpoint of price-earnings ratio, Gamuda is trading at high multiples of over 20 times, which brings us back to why Lin is reducing his interest.

    "Of course, it makes monetary sense for him to sell shares when the price is high. The counter argument is that if there is upside, why not hold on? We have to wait for Gamuda's (financial) results to ascertain whether the selldown is ahead of negative development," the analyst says.

    However, the valuation can be justified, considering projections of 70% earnings per share growth this year and 80% between 2008 and 2009 by analysts.

    Nevertheless, there are many who view Lin's disposal with disdain. "In Genting (Bhd), the late (Tan Sri) Lim Goh Tong groomed (Tan Sri) Lim Kok Thay for years for the top position… Then he held an official retirement ceremony, which helped to ease the investing community's concerns over a new head in the company. If Lin had done that, the investing community would have been more prepared for his selldown. The market does not like uncertainty, especially during uncertain times," the analyst adds.

The statements in bold are worth reviewing now, yes?

Why did the boss sold down his shares by so much? Did he knew that the construction industry was peaking? And by selling down, it simply made monetary sense for him?

Yeah, Gamuda today is worth less than 2.70 and it pales in comparison to the prices that the bossie sold. (Oh, the following posting Credit Suisse has a target price of rm7.30 on Gamuda! makes good reading! :P)

And if the minority investor held on to the investing axiom that one should be holding for the longer period, the minority investor would have fared poorly today.

Now, I am not saying investing for the longer period does not work at all. Its just that the minority investor should realise that sometimes they should consider if they should discard the teaching and realise that there are fundamental reasonings that justify one to cash out of one's investment. Cashing out is no crime is it?

A more simplier and crude street sense reasoning would have been: "Big bossie also don't want his shares, why you still want? Why be a hero and hold long term?"

Now Gamuda reported its earnings last night.

I would like to compare what Gamuda earnings last night to the last quarterly announcement before the bossie sold.

17th December 2007. This would be the last quarterly announcement made before the bossie sold his shares in Feb 2008.

Here's a clip.

And here's the link to its report: Quarterly rpt on consolidated results for the financial period ended 31/10/2007

Earnings is rather important but I am one who likes to see strength in a company's balance sheet too. That for me is important.

Here's the screen shot of the balance sheet back in 2007.

And this is the bank borrowings then.


How? Back in December 2007, the fundamental weakness in the stock can be seen! The cash balances weakened tremendously compared to its previous year, same quarter. The receivables were up, indicating that despite its 'strong' earnings, Gamuda wasn't able to collect 'promptly' from its customers. Yes, Gamuda had collection difficulties. (As a business man or a business woman, don't you wonder, what good is the sales if the monies cannot be collected promptly?). The the borrowings increased. 889.959 million in loans is no small change, yes? (
ps: given these fundamental weakness and given the fact the boss disposed so much of his shareholdings, wouldn't it made logical sense that the minority shareholder would have been much better off disposing their investment back in Feb 2008 also?)

And given the fact, that the construction industry had really boomed for so many years, perhaps the bossie sold his shares because he reckoned that the boom cycle is over.

Back then, the market was expecting some 380million to 420 million in net earnings for Gamuda.

Fast forward present day, last night, Gamuda reported its earnings. It was decent (ah, for some it pales in comparison to what it did during its peak years!).


Again I more interested in its balance sheet.

First up, its loans!


WOW! Total loans now stands at a whopping 1.614 billion!

Now that's NO small change! Considering the fact that Gamuda ONLY had some 889.959 million in loans back in December 2007!


Look at the size of the receivables today! Adding the receivables and amount due from construction contracts, the amount is a whopping 1.4 billion! Two years ago, in December 2007, it was some 993 million. (so much progress, eh?)

And then we have marketable securities at some 100 million! Errr.. don't you wish Gamuda could be more transparent by stating clearly what these marketable securities represent?

And yes, Gamuda cash balance has increased.

How? Which do you prefer? Gamuda today or Gamuda two years ago?

And what do you think of the bossie selling down his shares back in Feb 2008? Don't you think he was so smart to sell?

Yeah, good for him but what about his minority shareholders, shareholders who held on believing that in the longer term, they should be rewarded handsomely?

And yes, there's another development yesterday. held on believing that in the longer term, they should be rewarded handsomely?

And interestingly, there was another development yesterday. Gamuda makes cash call; 1Q net profit up 14.5%

  • KUALA LUMPUR: GAMUDA BHD is seeking fresh capital from its shareholders via a renounceable rights issue of up to 267.7 million warrants.

    The exercise, on the basis of one warrant for every eight existing shares held, may raise up to RM714.8 million for the infrastructure builder and property developer.

    The RM714.8 million assumes full exercise of the warrants at an indicative exercise price of RM2.67 each, Gamuda told the exchange today.

    Gamuda said the proceeds would finance its capital expenditure needs and potential investments related to the company's existing businesses, besides the repayment of borrowings.

    "The exercise of the warrants will allow the company to obtain proceeds without incurring additional interest expenses and minimise any potential cash outflow in respect of interest servicing.

    "In addition, the exercise of the warrants will increase Gamuda's shareholders' funds/capital base and hence improve its gearing level for a more optimal capital structure," said Gamuda, which also owns infrastructure concessions.

    Existing shareholders of the company will be given the option to further increase their equity participation at a pre-determined price over the five-year tenure of the warrants.

    The proposed rights issue is expected to be completed by the first half of next year....

Yet another cash call from one of the local listed companies. (ps: see MAS to raise RM2.7b from rights issue oO )

I wonder... I really do wonder... do these companies really think that the local stock market is a bottom-less piggy bank, where anyone can simply raise cash as per their wimps and fancy? How rich is the local investing community??? How long and how much can our local listed companies continue to make these cash calls? Don't they understand that it's paramount that they manage their companies in a more efficient manner than continue to ask the market to support their cash calls? How?

oh... ps. I have no idea how Gamuda the share would perform in the future. ok?

Tuesday, December 22, 2009

Current Key Issues Ahead

On today's market wrap on financialsense, Tony Allison wrote: Trading, Investing and Speculating

  • Today’s culture seems to have a very short-term perspective on the just about everything. Wall Street focuses on this quarter’s results; Washington’s vision extends only to the next election cycle. The average Joe looks to the coming weekend, or perhaps his next paycheck. As the nation’s attention span appears to shorten further every year, so does its vision of the future. And as investors, it seems more and more people are adopting the behavioral characteristics of the trader.

    Looking out at some of the key economic issues directly in front of us we see:
  1. The oversold US dollar starting to strengthen, as most of the planet has been in the “short the dollar” side of the boat this year.
  2. Commodities starting to correct as the dollar strengthens, after a big run-up this fall.
  3. Developing countries like China and Brazil looking ready for a correction.
  4. The possibility of de-leveraging reasserting itself in 2010.

Rather intesting issues, issues which were as mentioned by Dr. Marc Faber in the posting Dr. Marc Faber Investment Suggestions For 2010

  • Smart investors who made money in 2009 may sell emerging market stocks and start buying the S&P in the US as it may outperform because of a rally in the US dollar..
  • Global stocks, commodities and precious metals have rallied sharply this year following an unprecedented easing of monetary policy by central banks across the globe to avert a 1930s-like depression. The rally has pushed mainly emerging market stocks to high valuations which may not be backed by a corresponding earnings growth. Hence, western investors who were borrowing cheap and investing in emerging markets may get back to buying assets in developed markets which are recovering and partly in anticipation of higher interest rates too.

ps: the article highlighted by Tony is also rather interesting: The Debt Bomb

Saturday, December 19, 2009

A Look At Apollo Food Earnings

Apollo Food announced its earnings on Thursday. It looked really superb.

Its net earnings of 5.76 million is much better than what it achieved the same corresponding period last year and the half year profits indicates that Apollo should achieve decent growth.

Now, Apollo Food is rather well known to 'local investors' as a company which has a real sold balance sheet. As per its earnings reported, Apollo has an impressive 71.9 million in its piggy bank and no debts.

So is this a must have stock in one's investing portfolio? Is there any risk associated with such a stock?

Unfortunately, yes, there are risks.

And yes, I had highlighted this very same issue before. See Apollo Food's'Investments' In The Share Market and A Look At How Apollo Food Holdings Dabble In The Share Market.

I would like to stress again that I do applaud Apollo Food Holdings for being rather transparent because they do come up with reports indicating what stock they purchase and at what prices.

However, a company dabbling in the share market still equates to a company dabbling in the share market. And for some, this equates to one being uneasy with Apollo Food's involvement in the share market.

Why you may ask? Why should one being uneasy? If one is good, one can still make money, yes? Aren't you making money from the market?

Look at Apollo Food's latest earnings. Hasn't it done well?


Hasn't Apollo has done well with their investments? It made some 1.797 million for the quarter and 3.535 million for the first 6 months of this current fiscal year.

Impressive, yes?

And look at the size of shares held at book value. It has shrunk to a mere 2.2 million (compare this what's highlighted in the posting A Look At How Apollo Food Holdings Dabble In The Share Market ). So what's the problem?

Well, markets go up and down. There's no doubt that one can make money from the share market and Apollo Food had clearly shown.

But such money is rather poisonous. Not many can handle 'stock market winnings' well. Success creates the hunger and desire to make more. The greed to make more and not everyone can handle this well at all. Some can make fantastic money in their early stock market career but as easy as they can make, they can easily lose it all. The greed and the hunger to make more money, can easily cause anyone to take more risk in the market. Yes, for me, in my flawed views, I do reckon that in the long run, discipline is so very important. (nice read: Good Investors Stay Humble )

Now for me, from my flawed investing point of view, I would rather be in control myself. Which is one of the biggest reason that I invest personally in the stock market and not via unit trust fund managers. I like to control my stock market risks myself. I do not like to invest in an instrument where someone else invests and manage my money for me. It's like what if the person at the other end screws up by taking more risks in the market? Or what if the person at the other end, makes mistakes and is reluctant to acknowledge their mistakes?

And worse still for me, is when I see our listed companies dabbling in the markets, thinking that they are the super duper investors/traders/punters!

How could I sleep well knowing very well that they could easily make a mistake?

And because the management dabbles in the share market, won't the management lose business focus? Not true?

Having said all that, I do have to applaud Apollo Food for doing well and more importantly, it had really trimmed down its position in the stock market.


Thursday, December 17, 2009

Dr. Marc Faber Investment Suggestions For 2010

Some latest comments from Dr. Marc Faber: Investors likely to choose US over emerging mkts: Faber

  • MUMBAI: Smart investors who made money in 2009 may sell emerging market stocks and start buying the S&P in the US as it may outperform because of a rally in the US dollar, says investment guru Marc Faber, the publisher of the Gloom Boom & Doom report, who predicted a stocks rally in early 2009 when it was gloom all around.

    “There are people who made a lot of money in 2009 and this category is concerned that the markets have overshot,” Faber said in an interview with ET. “So, some of them have taken profits and some of them are inclined to do so.
    In theory, it is possible that there is a dollar rally and an outperformance in the S&P vis-à-vis emerging markets.”

    Global stocks, commodities and precious metals have rallied sharply this year following an unprecedented easing of monetary policy by central banks across the globe to avert a 1930s-like depression. The rally has pushed mainly emerging market stocks to high valuations which may not be backed by a corresponding earnings growth. Hence, western investors who were borrowing cheap and investing in emerging markets may get back to buying assets in developed markets which are recovering and partly in anticipation of higher interest rates too.

    He ruled out yet another year of stellar performance for stocks. “I don’t think the S&P or any market would go up significantly after rising 50-100% in the last 8 months and I don’t see the markets rising the same way over the next 8 months,” Faber said. “Now, can they correct or go up 20-30%? The answer is yes.”

    The ‘risk-reward’ to invest in equities now is not as favourable as it was in March 2009, says Marc Faber, global investor and publisher of the Gloom, Boom & Doom report . In a chat with ET , he speaks about the US dollar and gold rather than equities. Excerpts:

    Stock markets have been indifferent to all the events, positive or negative, happening around of late. What is your take on this situation?

    There are two types of investors. There are investors, who read that markets were incredibly oversold at the end of 2008 and early 2009. Given the oversold nature of the markets, they invested in equities, commodities and went short on the dollar.

    These are the people who made a lot of money in 2009 and this category is concerned that the markets have overshot. So, some of them have taken profits and some of them are inclined to do so. Some people, who got it right in 2009, will now reduce their positions in emerging markets and go long on the S&P because, in theory, it is possible that there is a dollar rally and an outperformance in the S&P vis-a-vis emerging markets.

    The other type of investors got in totally wrong. They bought US government bonds at the end of 2008 and early 2009; they were in dollars and they could not get into equities at the right time because they thought it was a bear market rally. So, we still have a lot of cash on the sidelines.

    Now, I think these people will be forced to buy equities, especially that cash at zero interest rate and government bonds are not attractive investment options because if the economy recovers there could be pressure on interest rates sooner or later and inflation expectations will go up, government bonds will go down.

    So, where is the balance between equities and the dollar tilted in the coming months?

    In the long run, the dollar has to weaken. I started to talk about the equation of weak dollar-strong asset markets and vice-versa several years ago. Now this has become such an accepted rule that everybody knows it’s a strong dollar-weak asset market.

    The rules of the game might have changed somewhat and what you could get is six months of a strong dollar and strong US stock markets, relatively speaking. I don’t think the S&P or any market will go up significantly after rising 50-100% in the past eight months. I don’t see the markets rising the same way over the next eight months. The risk-reward is not as favourable as it was in March 2009.

    What can go wrong for equities in 2010?

    The geopolitical situation around has deteriorated very badly. When you think of it, nobody is interested in solving the problems, but a lot of money is being channelled into these issues. These issues may not have an immediate impact on equities, but if the situation escalates, it can have a serious impact.

    Secondly, without the intervention of the Fed, US mortgage rates will be much higher and also the interest rates on treasury bonds. So, we will have to see how far the quantitative easing will proceed to support the market. If it stops, the bond market, will seem quite vulnerable.

    So, if the 10-year treasury goes above 5.0-5.5% and the BBB, say 7%, then it will be quite a competition to equities.

    A section of the market believes that gold is overpriced and a lot of speculative money has entered it. Being an ardent supporter of gold as an asset class, how do you counter these arguments?

    In general, there is very little money in gold compared to bonds, forex and equities. Now, there has been some speculation, but please tell me any market where there hasn’t been any speculation. That’s the problem with zero-interest rates, people just value anything, even a stock paying 1% dividend is very valuable.

    Now, if I look at the growth in quantity of money worldwide, then gold around this level is not overpriced. Well, it’s not as much as a bargain as it was in 1999 to 2001, but I would believe that it’s not very expensive still now. When gold broke above $1,030, I said we have to wait to see a few days, whether it’s a genuine or false breakout. And it rose to the $1,200.

    Now, I suppose the $1,000-level, the level between $950 and $1,030, which was a resistance level, is the support. And central banks in the world will continue to print more money and there will be more quantitative easing and stimulus packages in the US. The fiscal deficit there will not come down much, so on that basis, gold has a place in every portfolio.

    What is your investment theme for 2010?

    In 2010, I would be just happy to preserve what I have made in 2009. You can make money here and there, but risks have increased and valuations are not as compelling as they were a year ago. In India, one has to focus on individual sectors. John Thorn, who runs the India Capital Fund where I am the chairman, is very optimistic about banks. So, that will be a sector to look at.

How Now For The Plantation Sector

Where would an investor get source of information for their investment research?

One of the SOURCE (and not chili sauce hor :p) is from the local financial media.

How can Bursa Malaysia stock market progress?

Don't we want more educated investors/traders/punters?

Now if we get conflicting and confusing financial news reporting, how could the local stock market progress? Without proper information, how long could the investor/punter/trader last in the shark filled stock market? How does one rate their chances?

Here's an easy example.

One of the strong sectors in our local market has to be the plantation sector. Yes? So as an investor/punter/trader, surely one might be interested in this sector since the crude palm oil has recovered a bit lately. Yes?

So how now for the plantation sector?

Let's use recent and latest financial news articles. Let's see if one can come up with an educated reasoning on whether one should be IN this sector, or not.


This was published on the Edge Financial Daily: Analysts maintain mixed calls on planters

  • KUALA LUMPUR: Analysts didn’t rush in to upgrade their ratings on PLANTATION [] stocks and forecasts on crude palm oil (CPO) prices despite a lower-than-expected stockpile in November 2009.

    Although lower stockpile signals a positive development for the near-term prices of the commodity,
    OSK Research maintained its underweight call while CIMB Research, AmResearch and ECM Libra stayed neutral on the sector.

    All research houses retained their CPO price forecasts, which ranged from RM2,240 per tonne to RM2,300 for 2009, RM2,380 to RM2,500 for 2010 and RM2,440 to RM2,700 for 2011.

    ECM Libra said there were risks that investors should keep tabs on — the rain levels in the low season starting this month, soy planting progress in Argentina, El Nino weather, crude oil prices and the corresponding US dollar.

    “We believe these key developments will induce the necessary swings in CPO prices in the year,” it added.

    Furthermore, it said although stock levels declined in November, exports were flattish month-on-month.

    “Looking forward, we do not expect export numbers in 2010 to be exceptionally higher like they were in 2009. To note, exports are so far, for the first 11 months of 2009, 6% higher than that in 2008,” ECM Libra said in a note.

    The investment bank, which has a target average selling price for CPO of RM2,400 per tonne for 2010, viewed plantation stocks as expensive.

    It retained hold and sell calls on all the plantation counters under its coverage, which include BOUSTEAD HOLDINGS BHD [] (sell) and TSH RESOURCES BHD [] (hold).

    OSK Research, meanwhile, said with valuations at “uncompelling” levels, it maintained its underweight stance on the sector.

    It said the risk of CPO inventory crossing the two million-tonne mark would emerge again in the second quarter of next year when supply starts to go up.

    The research house reiterated its view that the average CPO price would be lower next year due to supply normalisation of both palm oil and soybean oil.

    CIMB Research, meanwhile, maintained its CPO price targets at RM2,240 per tonne for 2009, RM2,380 for 2010 and RM2,450 for 2011.

    It preferred Singapore-listed planters for their more appealing valuations.

    CIMB’s picks in the region remained with Golden Agri Resources Ltd, Wilmar International Ltd, SIME DARBY BHD [], Astra Agro Lestari Tbk, London Sumatra Indonesia Tbk and Sampoerna Agro Tbk.

    HwangDBS, meanwhile, cautioned investors to remain selective, as based on its estimates, most local plantation stocks were trading at levels that had already priced in high CPO price expectations next year.

    It also expected both soybean and palm oil prices to moderate once soybean oil inventories get replenished post South American harvests.

    It favoured sector laggards such as Indonesia’s First Resources Ltd, Wilmar and Sampoerna Agro, which are fundamentally sound but yet overlooked in their earnings growth potential.

    HwangDBS’ forecasts for CPO prices were unchanged at RM2,300 per tonne for 2009, RM2,380 for 2010 and RM2,440 for 2011.

    RHB Research, perhaps the most optimistic among the lot, kept its outperform call on the sector while maintaining its CPO price targets at RM2,300 per tonne for 2009, RM2,500 for 2010 and RM2,700 for 2011.

    It noted the current CPO inventory level of 1.93 million tonnes in November represented only about one-and-a-half months of average historical monthly consumption.

    It expected inventory levels to continue to fall through to June-2010, as production levels taper off from the peak.

    RHB said every RM100 per tonne rise in CPO prices would benefit purer plantation players like IJM PLANTATIONS BHD [] (IJMP) and Genting Plantations Bhd the most, compared to more diversified firms like Sime Darby Bhd and IOI Corp Bhd.

    Based on Bloomberg data, IJMP is trading at a trailing price-to-earnings ratio of 25.12 times, Genting Plantations at 23.71 times, Sime 25.64 times, IOI Corp 28.25 times, Boustead Holdings 8.08 times and TSH Resources at 23.31 times.

    Meanwhile, regional peers Wilmar is trading at 16.13 times, Golden Agri at 14.77 times, Astra Agro at 21.38 times and First Resources at 8.38 times.


    This article appeared in The Edge Financial Daily, December 14, 2009.

So from the above article, what do we get?

  • "OSK Research maintained its underweight call while CIMB Research, AmResearch and ECM Libra stayed neutral on the sector... HwangDBS, meanwhile, cautioned investors to remain selective, as based on its estimates, most local plantation stocks were trading at levels that had already priced in high CPO price expectations next year. "

Underweight, neutral and cautious is the call, yes? That's 14th December 2009.

Yesterday, 16 December 2009, on the Business Times.

  • Worker woes may hit palm oil earnings

    By Ooi Tee Ching Published: 2009/12/16

    Malaysia could lose billions of ringgit in palm oil export earnings if a serious labour shortage in Sabah continues, industry officials say.

    The plantation sector in Sabah, Malaysia's most productive palm oil producer, has seen its workforce fall by a fifth recently, Malaysian Palm Oil Association (MPOA) chief executive Datuk Mamat Salleh said.

    Checks with plantation companies revealed that more than 10 sizeable oil palm estates in the state did not have enough workers because those who had gone home to Indonesia for the Hari Raya Puasa and Haji holidays did not come back.

    The main reason was that estates in Kalimantan were paying the same wages offered in Sabah, Mamat said.

    "If foreign workers, comprising half of the 600,000 workforce in the palm oil industry, are reduced by 30 per cent, our country's palm oil export earnings could shrink as much as RM10 billion a year," he told Business Times in an interview.

    Sabah produces seven million tonnes of palm oil a year, or 40 per cent of the national output.

    The palm oil industry earned a record RM65 billion in export earnings last year, thanks to high prices.

    Two months ago, East Malaysia Planters' Association (Empa) chairman Othman Walat reportedly said that oil palm planters in Sabah and Sarawak might recruit workers from China, Bangladesh and the Philippines to make up for the shortage of Indonesian workers.

    However, industry officials felt that it was easier said than done as other nationals did not prefer working on the estates, while Malaysians were under the mistaken assumption that the job did not pay well.

    "But plantations these days are offering productivity-based salaries. A harvester, for instance, can earn between RM1,500 and RM2,000 a month, depending on the quantity and quality of fruit bunches he harvests.

    "A family of three working together can earn up to RM3,000," Othman said.

    Furthermore, the job offers housing, uninterrupted supply of electricity and piped water, medical, schooling and recreation facilities free of charge by the estate owners.

    These are now enjoyed by the foreign workers.

    While, the MPOA understands and fully supports the government policy to employ more locals and enhance mechanised harvesting on the estates, the reality is far from expectations.

    Mamat said that young locals entering the labour market were just not interested in menial jobs like the harvesting of oil palm fruits.

    "We do not want to be too dependent on foreign labour, but do we have any other feasible and practical alternatives?" he questioned.

What can one conclude from that above news article? Not too rosy, yes?

Today, 17 December 2009, on Business Times,

  • Plantation stocks set for uptrend

    By Ooi Tee Ching Published: 2009/12/17

    Analysts are generally bullish on plantation counters in the short term given the shortage of workers on oil palm estates in Sabah, the country's biggest palm oil producer.

    Shares of plantation companies bucked the broader market's fall yesterday after industry officials said that palm oil production could be hit by a serious lack of harvesters in the state.

    "The market needs to be aware that labour is a growing problem for oil palm planters today, especially with the massive greenfield development in Indonesia over the last two years," KAF Seagroatt-Campbell Securities Sdn Bhd senior analyst Vince Ng said.

    Among vegetable oils, palm oil is the most labour-intensive and productivity is also low. A worker can produce up to 20 tonnes of oil a year compared to up to 600 tonnes for US soyabean and UK rapeseed.

    It is also difficult to mechanise the harvesting process for palm fruits.

    Kenanga Investment Bank analyst Liong Chee How acknowledged that labour shortage in the industry was a longstanding structural problem, but over the last 18 months had become more severe.

    "In view of the current high palm oil prices, the short-term solution is to offer higher salaries to skilled harvesters," he said.

    "In the longer term, planters will need to invest in mechanisation and automation wherever possible," he added.

    Yesterday, palm oil futures on the Bursa Malaysia Derivatives Market rose the highest in six months to close at RM2,586 a tonne.

    On the stock market, IOI Corp Bhd, Negeri Sembilan Oil Palms Bhd and Chin Teck Plantations Bhd were among the top gainers.

    Another analyst, who declined to be named, has raised his palm oil price target for next year.

    "We've upgraded next year's average palm oil price forecast to RM2,600 a tonne from RM2,400 previously. We have also raised our long-term palm oil price to RM2,200 from RM2,000.

    "We stay overweight on plantation," he said, adding that his top picks included Sime Darby Bhd, PPB Group Bhd, Genting Plantations Bhd, United Plantations Bhd, Hap Seng Plantations Bhd and Kulim

I am so confused!!!!

I am sure you are too!

How on earth did that reporter comes up with such a headline, "Plantation stocks set for uptrend"????

  • Analysts are generally bullish on plantation counters in the short term given the shortage of workers on oil palm estates in Sabah, the country's biggest palm oil producer.

Errr.... so in the short term, shortage of workers means.... it's bullish? How did this conclusion come about?

Is that what the article or reporter is saying???

Let's look at the analysts mentioned in the article...

First one is Vince Ang from KAF.

  • "The market needs to be aware that labour is a growing problem for oil palm planters today, especially with the massive greenfield development in Indonesia over the last two years," KAF Seagroatt-Campbell Securities Sdn Bhd senior analyst Vince Ng said. Among vegetable oils, palm oil is the most labour-intensive and productivity is also low. A worker can produce up to 20 tonnes of oil a year compared to up to 600 tonnes for US soyabean and UK rapeseed. It is also difficult to mechanise the harvesting process for palm fruits.

What was Vince Ang saying? Wasn't he bullish or was he just acknowledging the problem associated within the sector?

Second one is Kenanga Investment Bank analyst Liong Chee How

  • Kenanga Investment Bank analyst Liong Chee How acknowledged that labour shortage in the industry was a longstanding structural problem, but over the last 18 months had become more severe.

    "In view of the current high palm oil prices, the short-term solution is to offer higher salaries to skilled harvesters," he said.

    "In the longer term, planters will need to invest in mechanisation and automation wherever possible," he added.

Ok... what is Mr. Liong saying? Isn't he just acknowledging the labour shortage issue? Does it state that he is bullish?

Now I am lucky I have a copy of KN recent report on the sector.


Ahem.... it would appear to me that Mr.Liong has stated clearly that he has a NEUTRAL recommendation on the sector. That report was dated 11 December 2009. Today is only 17 December.

How? Was this analyst bullish?

Lastly, the analyst, who declined to be named!
  • Another analyst, who declined to be named, has raised his palm oil price target for next year.

    "We've upgraded next year's average palm oil price forecast to RM2,600 a tonne from RM2,400 previously. We have also raised our long-term palm oil price to RM2,200 from RM2,000.

    "We stay overweight on plantation," he said, adding that his top picks included Sime Darby Bhd, PPB Group Bhd, Genting Plantations Bhd, United Plantations Bhd, Hap Seng Plantations Bhd and Kulim

How? So out of 3 analysts, only the one, that does not want to be named, gave the outright bullish call on the sector! My is he the special one?

LOL! Yeah, am I dreaming?

So 1 out of 3... and the financial reporter comes out with the conclusion that "Analysts are generally bullish on plantation counters in the short term"

Err.... like this also can meh????

And because of 1 out of 3 analyst... the news reporter boldly proclaim that "Plantation stocks set for uptrend...."

How lah?

Based on these financial news, should I or should not bet on this sector?

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Replies to the posting:

  • Gamelion said...
    Currently all commodities r followingclosely to the volatile fluctuationof US$ and have nothing to do with any of the fundamental of the commodities.This might explain the widely confusion and uncertainty among the analyst.

Gamelion, this posting merely reflects on what the local analyst said to our financial media.

This posting is NOT a posting on whether these anaylsts are correct or WRONG.

Let me repeat.

First article highlighted:

  • "OSK Research maintained its underweight call while CIMB Research, AmResearch and ECM Libra stayed neutral on the sector... HwangDBS, meanwhile, cautioned investors to remain selective, as based on its estimates, most local plantation stocks were trading at levels that had already priced in high CPO price expectations next year. "

These are "Underweight, neutral and cautious is the call, yes?" And that's 14th December 2009. (note: I am not debating if their calls are correct or not)

My main issue was what's published on today's Business Times article. How did the reporter come with the conclusion that "Plantation stocks set for uptrend...." ?

In that article, he mentioned 3 analyst. Did KAF Seagroatt-Campbell Securities Sdn Bhd senior analyst Vince Ng actually say he was bullish? Did Kenanga Investment Bank analyst Liong Chee say he was bullish? (Liong had a NEUTRAL call in his research report dated 11th December!)

And the only bullish analyst was the un-named analyst!!!!!!!!!!!!!!!!!

Given only 1 of 3 analyst mentioned, only the un-named one was bullish. So how did the financial news reporter come out with the following conclusion...

  • Analysts are generally bullish on plantation counters in the short term given the shortage of workers on oil palm estates in Sabah, the country's biggest palm oil producer.

That's my issue. That very statement. How did the reporter come out with the conclusion that analysts are generally bullish on plantation counters?

Yeah... some would quickly put of this fire by claiming that this is normal and that it's also normal with financial news article in the rest of the world. Normal practice what. Every other country does the same. US even worse.

Yes, I am afraid that's sadly so true.

However, what about us? Who cares about the rest of world? Don't we want to see improvement? Don't we want the best for ourselves? If others are bad, does it mean that our news report should also follow suit?

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solomon said...
If you think that production factors are generally going drive the CPO price up, there is two words for you "excuse me".

Off all, why not talk about more pertinents factors like world fats consumption (the demand), overall yield efficiencies (the supply) and the product alternatives like soya (the supply). It makes more cow sense writing, isn't it?

Let see what they write if next 3 months the CPO price suddenly collapse.

Lastly, my dad always says, "over-bullish sometimes can be bullshits" (Sorry not meant to offend, but this is what he says)