Stock Investment - what is the most important thing?

I have been talking to my son on his course selection lately as he is preparing for his uni next year.
Out of sudden, he said " I want to learn investing and want to achieve financial freedom as soon as possible, can you tell me what is the most important in investing? ".


He really surprised me with his question, though I am happy to hear that but at the same time a little concern as I would very much like him to stay focus on his studies. In addition, that's a tough question! I have read some of the most popular stock investment books and have come to know some of the very successful stock investors and yes, they have some similarity but at the same time vast differences in approach/methodology as well as behaviour/habits, but which is the most important criteria? I have no clear answer for his question, so I have chosen a safer way to answer.


This is a tough question as after 25 years in stock investment, I am still learning and I have also read about successful investors changed their approach from time to time to improve their returns on investment. Hence, I believe the non stop learning attitude is the most important. Though the principle of winning stock investment is very simple - buy low and sell high! Everyone knows it, but to do it well is not  that simple as that will involve lots of hard work from understanding and analysing the financials ( or analysing charts for some), trying to know the business, assess the management integrity, learn to perform simple valuation to compare price vs value, a little behavioural finance, technical analysis, patience, discipline, learn from past mistakes, etc etc. Wow, the list seems long but over time, you will acquire the knowledge and skills and develop good behaviour and habit to win the game.


Yes, continuous learning attitude to me is the most important thing, not only in investment but any thing that we pursue in life.


     

Bottom Fishing when market at peak?

With more than a thousand companies listed on Bursa Malaysia, to look for companies that are deeply undervalued is as hard as searching for a needle in a haystack. Are there more efficient and effective ways to discover or uncover the hidden gems?

Frankly, what I am seeing today is information overflow rather than not having enough information many years ago. One could find lots of stock recommendations or research reports from research house, social media, blogs or subscribed to research reports, whatsapp group, etc, etc. As a result, most of the companies have been "researched" - big companies by research houses and medium to small companies by stocks sifus, bloggers, forums, etc except for some "dead" stocks where not many will notice, either the company is dying or boring. (Please don't get me wrong - no...being contrarian in this scenario may not be the right approach because these companies could continue to remain as such for many many years.)
A recent chat with a friend has alerted me to look closer at his current approach - bottom fishing. The rationale for the change in approach from searching for undervalued stock with growth/high yield to bottom fishing is due to most stocks have gone up quite substantially and the fear of not much upside always linger in our mind. Of course, one must be able to separate wheat from the chaff when bottom fishing as there are reasons why these companies are at their low while market is almost at its peak - resulting in such a big divergence.
Hence, I have set some basic guidelines for bottom fishing when going through companies information and avoid taking unnecessary risks - it must provide some margin of safety at least from asset backing, no excessive gearing and the operating cash flow has to be reasonably healthy.
Some of the other information I look for that may have caused the share price drop :-
1. it becomes unfavourable due to one off event eg write off of assets (eg JTiasa - asset write off from loss making plywood business)
2. is the company in the middle of transformation/major change in business direction/substantial capital spending which has cut its dividend or impact its profit (eg Evergreen - going through what Hevea has gone through 5 years ago??)
3. change of government policy that may impact the business ( is it temporary or has long lasting impact - Tune Protect, Hexza ??)
4. major expansion, acquisition/disposal that have short term -ve impact are not well received by investing community ( APM, SOP, 3A??)
5. merely due to cyclical factors - when the cycle reverse, it will be a totally different scenario eg plantation, glove, cement, shipping?? (Good example will be steel industry- it has seen its up cycle since last year due to combination of factors - government policy change, closed down of country's biggest steel mill and cyclical effect and most of the steel stocks have doubled, tripled or even more - yes, I miss it, I don't have any steel stock at all)
6. the big project is still not completed yet and risks and uncertainty may be high or most investors have no patience to wait till its completion ( WCE??)


I believe there are many more reasons/factors and hence, it is worthwhile to start searching and analyse carefully the potential of these out of favour stocks - whether those factors affected its share price are temporary, whether the company has strategy to counter it, whether it is only a matter of time that the new development will bring results, whether the uncertainty will subside over time, etc. Can some of these stocks that are sitting at the bottom of the sea be discovered or brought up to shore by the next tide, only time will tell. Why? Fishing requires lots of patience, more so as this is bottom fishing!!

WCE - an leveraged asset play??

Once a while, I would take a look at WCE’s financial as well as share price performance. The share price has gone up from around Rm0.90 to Rm1.70 and its back to Rm1.28 lately.

Quick overview of WCE Holdings Bhd’s valuable assets:-

 
To make it simpler, let’s just focus on West Coast Expressway and ignore the 30% contribution from JV with IJM as the margin is very thin and keep the 40% profit from Bandar Rimbayu development as bonus. The expressway is still under construction and some sections will be opened for toll collection only by end 2018 and expected to be fully completed by 2019. I have not seen any comprehensive valuation done by analyst as I believe it is not an easy task considering it is going to be a new expressway competing with PLUS for traffics travelling between Perak and Selangor.

What is so exciting about WCE that it gets so much attention every now and then? I do not think there are many long term investors out there (willing to hold at least 5 years), so what are the short term investors/speculators after? I try to figure out the possible reasons.

1. Profit expectation from toll operation? – not likely as I expect loss or low profit in the initial years of operation– the amortisation/depreciation of Construction/Toll Concession cost (say over 50 years will be Rm120 mil a year) and its finance cost (average interest rate worked out to approximately 6.5% will be Rm300 mil a year), that is Rm420 mil before any operating cost. Let’s take a look at a news update on PLUS financials here if that is an good indication.  
2. Dividend play? – only in the very long term. If there is no profit, no dividend from WCE S/B even though cashflow could be very good. WCE Holdings Bhd may be able to give some from Rimbayu project??
3. It is a prime asset that worth a lot more than the construction cost when completed, hence re-rated with much higher valuation. Yes, I would imagine this is the likely reason.

Total cost of construction approximately Rm5.94 bil - Loan is Rm4.74 bil and balance Rm1.2 bil in equity. Frankly, I don’t know how to value it but what I can see is the expected return on equity can be very attractive due to its high leverage (5 x) if market is willing to give a much higher value to a completed infrastructure.
Let’s take a look what are the potential return ( taking a bull view with assumption that it will not be valued below the total construction cost and WCE Holding has 80% stake in WCE S/B)

WCE S/B			RM' billion		WCE Holdings Bhd		RM' billion
		Cost/ Value	Loan	Equity	80% Equity	Current Market Cap	*Expected Rights Issue	Enlarged Market Cap	Potential Return in 2 years
Cost of construction		5.94	4.74	1.2	0.96	1.28	0.256	1.536
On completion, value increase by
20%		7.128	4.74	2.388	1.910				24%
30%		7.722	4.74	2.982	2.386				55%
40%		8.316	4.74	3.576	2.861				86%
50%		8.91	4.74	4.17	3.336				117%
100%		11.88	4.74	7.14	5.712				272%

 *My rights issue assumption is based on the proceeds expected from the planned warrant exercise, which was expired last year and did not manage to raise any fund (thing doesn’t go according to plan sometimes).

However, there may be long gestation period before one can get the return expected. In addition, there is a short term dilemma, if you buy now, you must be prepared to subscribe for its right issues that will come sooner or later as WCE S/B needs to fulfil the debt-equity ratio of not more than 80/20. Hence, WCE Holdings Bhd needs to inject further capital into WCE S/B.
Yes, it’s potentially a very rewarding investment if one believes the Expressway could worth at least 40% more on completion but be prepared for a long winter before spring arrives. As usual, I guess many would rather wait till it gets closer to the completion date only go in for a quick kill.

Some wild thought on the long Merdeka break!

Financial Reporting - negligence or incompetence?

The recent results announcement on Bursa has seen at least 2 companies amended their financial reports with "major" changes to the financial numbers. In the past, it was usually minor amendment on financial numbers or non key financial data, but this round, major change in profit figures and EPS for the quarter. Obviously, one of them has resulted in the share price dropped drastically in the morning and staged a strong rebound in the afternoon after the amendment.
I knew there are companies which practice proof reading as well as checking by different personnel other than the person who prepared the financial reports, they take this very seriously as it gives confidence to the investing community on the accuracy and reliability of the information provided.
Few years back, there was one PLC announced the results with a proposed dividend which surprised the market(more than 10% yield) and its share price went up sharply before it got suspended one hour later. Yes, it was an error, announced as 15 sen instead of 1.5 sen dividend. Fair enough, it was reprimanded by Bursa but what happened to the investors who bought the shares at the opening of market before suspension? Did they get compensated??


Most PLCs on Bursa Malaysia used a standard template as per Bursa's requirement and the wordings used are standardised too (could be some cut and paste jobs)! I believe most readers will check the section B1 - Review of Performance, B 2 -Comparison of results between current & preceding quarter & B 3 - Prospects. I find that many companies do not provide reasons for variances ( eg Revenue was lower this quarter due to lower sales or profit before tax was lower due to higher cost of raw materials, while this is not wrong but it did not provide useful info to the readers as to why??)


Annual Reports is one of the most important source of documents to investors who do not get involved in the day to day operation and affairs of the PLCs, hence, the reliance on the yearly reporting from PLCs to get some insight is critical (of course, going to AGM for more details would be the best choice). Many PLCs did not pay much attention to write up the operation and business review.
Worst, some do not even bother to have a proper write up for Chairman Statement in Annual Reports, especially the review of business and future outlook. No guidance is provided as to what the coming financial year look like or what is its challenges, plan, etc.


I have been reading some foreign PLC's announcement lately, most of them provide very good operational review, current challenges and strategies and action plan, I noted some even provide very detailed breakdown on its Capex on what %  are for sustaining, improving or growing business purposes.


Another area where smaller PLCs is lacking would be the company website. That is the primary source of information on the company's offering and development. What would be your first impression if you see the latest update was 3 years ago?? 


No doubt the financial reporting by PLCs has improved over the years (mostly by conglomerate and bigger PLCs), I believe there are still a lot need to be done especially for the small and mid cap companies (some don't even have proper content on their websites).
Can PLCs please take financial reporting and investors relation more seriously??

Uchitec - Dividend Stock turn Growth Stock??

I have bought this dividend stock in 2015, so far the compounding annual return is 23% pa (absolute return about 70% in 2.5 years) , though this return has nothing to shout about because many stocks have returned many times more than this.  But hang on, I bought it because of its steady dividend and only expecting not more than 10% return p.a. Now, it has far exceeded my expectation and this has prompted me to review how to pick the right dividend stocks in the future.
Below are my earlier write up on dividend stock   
http://m-bagger.blogspot.com.au/2017/04/dividend-stock-strategy-good-enough-for.html
http://m-bagger.blogspot.com.au/2017/05/is-dividend-stock-strategy-fool-proof.html
Yes, it could be pure luck that I have picked Uchitec and not other dividend stocks. However, when I checked my little diary, I found the reason stated for the purchase in 2015- the company has come out with a energy saving modules that comply with European Eco-design requirements of having standby and off mode electrical power consumption of less than 0.5 watt. All right, dividend stock with clear growth strategy or new products/services ( probably that was the reason I did not go for BJToto or Magnum).
What do I do when dividend stock starts to grow? I believe the answer is obvious, sit back and enjoy the show. Who knows, this could just be the beginning of Uchitec's new growth phase and based on its past dividend payout record (average more than 90%), I would expect higher dividend per share (>13 sen) for FY17 (even at 13sen , it is still a decent 5.9% yield based on Rm2.20).  

I hope I can use the same approach to find other similar dividend stocks that have growth potential. Some of the potential dividend stocks that I have on my list - Asia File, FPI(recently only started to buy but price went up too fast :( , Bermaz Auto (I know, IB not bullish on this sector), Old Town and Cocoaland. But the bad news is they are not in my buy zone yet.
Please do your own assessment on Uchitec or any of the potential dividend stock above as this is not a recommendation to buy these stocks. Merely for sharing purposes.

     

TuneProtect - taking off early?

I have bought some TuneProtect shares earlier this year and always wanted to buy more but was holding back due to Q1 results not showing any indication it has put in place strategy to counter the opt in ruling for its travel insurance, worst, the high claim for motor insurance has caused a big fall in its profit.

http://m-bagger.blogspot.com.au/2017/05/tuneprotect-can-you-fly-like-airasia.html

Q2 results was just released last Friday (18 Aug) and the share price did not react much even though results was down >50% YOY.

		FY16 (RM'000)				FY17 (RM'000)
		Q1	Q2	Q3	Q4	Q1	Q2
Revenue	Investment Holding	5	8	13	9	836	621
	Collective Investment Scheme	4,969	4,841	4,662	4,891	2,542	1,561
	General ReInsurance -Rev	17,291	15,760	16,362	15,539	13,843	16,143
	General Insurance -Rev	107,279	104,926	105,039	115,027	112,860	115,553
	Total -Rev	129,544	125,535	126,076	135,466	130,081	133,878
PBT	Investment Holding	18,853	15,106	(4,908)	(3,841)	40,501	4,655
	Collective Investment Scheme	4,763	4,509	4,498	3,571	2,474	1,423
	General ReInsurance -PBT	16,582	14,482	13,914	14,856	11,494	13,250
	General Insurance -PBT	11,547	24,298	7,445	4,992	9,436	1,987
	Total	51,745	58,395	20,949	19,578	63,905	21,315
	Adjustment	(25,748)	(23,222)	(4,248)	(2,766)	(48,841)	(8,212)
	Consolidated PBT	25,997	35,173	16,701	16,812	15,064	13,103
PBT margin	General ReInsurance	95.9%	91.9%	85.0%	95.6%	83.0%	82.1%
	General Insurance	10.8%	23.2%	7.1%	4.3%	8.4%	1.7%

We can see that Q2 FY17 revenue has improved from Q1 but PBT was clearly disappointing. The results from Q2 clearly confirmed the reason given by the company that its claims on general insurance was high, I believe mostly from motor insurance. The recent appointment of CEO and actuary - one to address the sales & marketing and another to improve its actuarial development further stressed the seriousness of the matter.

What surprised me was that the share price did not react badly yesterday after the results was announced last Friday. I recalled a friend asked me what was my target entry price about 2 weeks ago when it was at around Rm1.03. I replied the price was already attractive but I wanted to wait for Q2 results as it was expected to be bad,  also hoping to buy some at even more attractive price. When I noted it did not really fall yesterday, I bought some at Rm1.00 and when the buying momentum built up, I bought some at Rm1.05 today. It is really unexpected as after bad Q1 results, the price dropped from May to Aug and now, Q2 results are not that encouraging except revenue is improving but profit still dropped due to high claims. Expectation already well built in its price earlier..the only explanation.  May add a little more when the price stabilise later as today is clearly very "hot". As I said before, I like TuneProtect for its scalability and asset light model. As it is on top of my shopping list, I wanted to wait further and hope to buy at lower price but at the same time worry that it will take off earlier than I thought. I hope I am not in too early ..of course I do not want to miss the flight either! Howard Marks once said " Risks of investment - not just risk of losing money but also risk of missing opportunity!".