A few weeks ago, our stock market was rocked by the designation of Harvest. This stock shot up from less than RM0.10 in early October to more than RM2.00 in a mere four weeks. Many speculators (or more precisely, punters) were caught off guard & had lost a lot of money on this stock. Last few days, we learned that the play on another stock, Envair had come to abrupt end, when the main person behind the stock announced that he had sold off all his shares. Envair rose from a low of RM0.10 in early October to a high of RM0.485 over the past two months. For those who are keen learn more about Envair, you can go here & here.
Why do punters choose to risk their hard-earned saving on such risky stocks? Let’s examine the story behind Harvest first. This company was supposed to be acquired by Raymond Chan, a Sabah-based property developer and contractor. He was rumored to be keen on injecting his property investments into Harvest? As stated in my post (here), Harvest is a weak company, which cannot possibly pay for any large assets acquisition. Nor, can it borrow to pay for such acquisition. The only way it can settle any acquisition is by issuing new shares to the seller. As a seller, Raymond Chan would be silly to accept Harvest shares after the share has been played up. There were also rumors of other businesses to be injected into Harvest, which we can similarly conclude to be far-fetched. What about construction contracts to be injected in Harvest? Raymond Chan is undertaking a few mega projects and he was rumored to be keen to pump the construction contracts into Harvest. Again, you have to ask yourself whether Harvest can carry out any construction contract. If not, what is Harvest’s role in the whole scheme? Is it merely to book in a contract to make the company & in turn the stock looks rosy? It is very likely that Harvest will act purely as an agent, with the bulk of the work being carried out by Raymond Chan’s private companies. If so, I do not think Harvest’s earning from these contracts would be significant. On that basis, we can conclude that Harvest is grossly overvalued.
The next stock, Envair was supposed to get a contract to supply two million barrels of light crude oil on a monthly basis for the next sixty months to An Hong Shenzhen industrial Co. Ltd. of China (here & here). With crude oil trading at USD100 per barrels, the contract would amount to RM600 million per month over a period of sixty months. The numbers were so humongous that people should immediately be on their guard. Unfortunately, many chose to do otherwise. If only they had asked one simple question: Why the buyer chose to buy so much crude oil through a third party and not directly from the suppliers? What can Envair possibly bring to the table? If it cannot bring anything extra, Envair is nothing but an agent. Having an agent to act on your behalf would increase your cost. If you subscribed to the belief that there is no free lunch in the business world, then you would have concluded that the deal was highly unlikely.
Based on such simple analysis- which can be done with a little bit of critical thinking- you would have avoided Harvest & Envair. Some punters probably did but they still took a bet on these stocks. They did it because they believed that the players or syndicates could push the stocks higher and that other punters would join in at a later stage. To these punters, the thinking was simply “buy high and sell higher”.
Before concluding, let me share a good article with everyone. Barry Ritholtz, the publisher of the popular blog, The Big Picture contributed a good article to John Mauldin’s website, Thoughts from the Frontline recently. It is entitled the “Your Three Investing Opponents”, which I strongly urge everyone to read (here). The three opponents are Mr. Market, Your Rivals and You. To wit:
You are your own third opponent. And, you may be the opponent you understand the least of all three. It is more than time constraints, lack of discipline, and asymmetrical information that challenges you. The biggest disadvantage you have is that melon perched atop your 3rd opponent’s neck. It is your big ole brain, and unless you do something about it, it is going to lose all of your money for you.
We are coming to the end of a very tumultuous year in investment. Many issues have weighed down the financial market in 2011, such the Euro-zone problem, the continued deleveraging in the U.S. & the slowing growth in China. These problems will continue to impact the performance of our stock market in 2012. The challenging time ahead will truly test your investment skill. You will find that winning in this environment will be harder than ever. And, in this difficult environment, we will be tempted again & again by get-rich-quick plays such as Harvest & Envair. We must resist these temptations at all cost!
(This is my latest article in Merdeka Review. For the Chinese version, go here.)
what's your view on SYF?
ReplyDeleteSpeculate Speculate Speculate... Who doesn't like it?
ReplyDeleteGreat analysis.
ReplyDeleteThank you very much.
Alex Lu, I refer to your article “Speculators, be smart!” dated 26Dec 2011. You may have a point there, but in Malaysia vis-à-vis the KLSE it’s difficult to do so.
ReplyDeleteFirst & Foremost, I don't want you and the readers to think that I am a big time shareholder, and neither am I defending the management of HARVEST. I am just a small time investor who thinks that there is prospective value in this company from the recent newspaper reports and announcements.
I see that you have a lot of doubts about HARVEST. I doubted AIRASIA too when it first came on the scene. That was an opportunity missed – big time!
You have also said much in the article – much too much. You remarked, you insinuated – mostly bad, about HARVEST and about Raymond Chan. A good many of your remarks were based on assumptions, and when you “assume” all the time you know what that means – I rest my case. No! I must go on.
In the first place it’s quite unkind of you to say that Raymond Chan would be silly to accept HARVEST’s shares… He has done pretty well don’t you think, judging from all the newspaper reports of his mega projects, completed and ongoing ones. His flagship SAGAJUTA is a cash-rich company – you should feel free to check this out. So surely a man who has built up such a successful business conglomerate must know what he’s doing when he decided to use a listed vehicle which happens to be HARVEST in this case to expand his business further.
You asked “whether Harvest can carry out any construction contract?” Good question. Why not? You don’t need much to be a main contractor. All you need is good management, ample finances for operational expenses and many good sub-contractors – to put it simply. Now I ask you, did Tony Fernandez have any airlines business experience before he started AIRASIA? Does he know how to fly an airplane? Is AIRASIA a success story today?
You claimed HARVEST is a weak company, again on assumption and without basis. But surely you would agree that to spot multi-baggers we would have to see the potential beyond historical data. And, in this instance, changes happening in HARVEST currently are significant. They have secured new core business - a new direction, a new and meaningful beginning sort of. Not just that. This will turn the company around, profitably for sure.
You also talked about rumours… well, you of all people should know better than to give credence to rumours as far as the stock market is concerned. Let's base our arguments on facts.
If you say HARVEST is grossly over-valued, then what do you make of the report by TA SECURITIES as the Principal Adviser and COVENANT EQUITY as the Independent Adviser on BURSA’s website on 19 & 20 Dec 2011? Was BURSA abetting TA SECURITIES and COVENANT EQUITY in cooking up the report on HARVEST’s new businesses? Somehow you inadvertently seem to be saying so!
Now on to the fundamental side, HARVEST has already been awarded RM199M worth of contracts and another RM609M by April 2012, refer to BURSA’s announcement on 19 Dec 2011. The total contract value over a 30 months period is therefore RM808M. Hence if we take an expected net profit margin of 10%, we get RM80m. On yearly basis, we get RM32M with an EPS of 17.7 cents based on paid up of 180m shares. And taking a PE of 10, it would give HARVEST’s share a fair value of RM1.77. Even at RM2.0, the PE is still in the teens. Not excessive at all!
In concluding, I hope you would give HARVEST another look based on BURSA’s report on 19 & 20 Dec 2011. We are just trying to justify why BURSA should not prolong the designation of HARVEST any further, let justice prevail. You have put up many good articles of stocks in your blog and I hope you will continue to do so.
Regards.
CoyPond
Alex Lu, I refer to your article “Speculators, be smart!” dated 26Dec 2011. You may have a point there, but in Malaysia vis-à-vis the KLSE it’s difficult to do so.
ReplyDeleteFirst & Foremost, I don't want you and the readers to think that I am a big time shareholder, and neither am I defending the management of HARVEST. I am just a small time investor who thinks that there is prospective value in this company from the recent newspaper reports and announcements.
I see that you have a lot of doubts about HARVEST. I doubted AIRASIA too when it first came on the scene. That was an opportunity missed – big time!
You have also said much in the article – much too much. You remarked, you insinuated – mostly bad, about HARVEST and about Raymond Chan. A good many of your remarks were based on assumptions, and when you “assume” all the time you know what that means – I rest my case. No! I must go on.
In the first place it’s quite unkind of you to say that Raymond Chan would be silly to accept HARVEST’s shares… He has done pretty well don’t you think, judging from all the newspaper reports of his mega projects, completed and ongoing ones. His flagship SAGAJUTA is a cash-rich company – you should feel free to check this out. So surely a man who has built up such a successful business conglomerate must know what he’s doing when he decided to use a listed vehicle which happens to be HARVEST in this case to expand his business further.
You asked “whether Harvest can carry out any construction contract?” Good question. Why not? You don’t need much to be a main contractor. All you need is good management, ample finances for operational expenses and many good sub-contractors – to put it simply. Now I ask you, did Tony Fernandez have any airlines business experience before he started AIRASIA? Does he know how to fly an airplane? Is AIRASIA a success story today?
You claimed HARVEST is a weak company, again on assumption and without basis. But surely you would agree that to spot multi-baggers we would have to see the potential beyond historical data. And, in this instance, changes happening in HARVEST currently are significant. They have secured new core business - a new direction, a new and meaningful beginning sort of. Not just that. This will turn the company around, profitably for sure.
You also talked about rumours… well, you of all people should know better than to give credence to rumours as far as the stock market is concerned. Let's base our arguments on facts.
If you say HARVEST is grossly over-valued, then what do you make of the report by TA SECURITIES as the Principal Adviser and COVENANT EQUITY as the Independent Adviser on BURSA’s website on 19 & 20 Dec 2011? Was BURSA abetting TA SECURITIES and COVENANT EQUITY in cooking up the report on HARVEST’s new businesses? Somehow you inadvertently seem to be saying so!
Now on to the fundamental side, HARVEST has already been awarded RM199M worth of contracts and another RM609M by April 2012, refer to BURSA’s announcement on 19 Dec 2011. The total contract value over a 30 months period is therefore RM808M. Hence if we take an expected net profit margin of 10%, we get RM80m. On yearly basis, we get RM32M with an EPS of 17.7 cents based on paid up of 180m shares. And taking a PE of 10, it would give HARVEST’s share a fair value of RM1.77. Even at RM2.0, the PE is still in the teens. Not excessive at all!
In concluding, I hope you would give HARVEST another look based on BURSA’s report on 19 & 20 Dec 2011. We are just trying to justify why BURSA should not prolong the designation of HARVEST any further, let justice prevail. You have put up many good articles of stocks in your blog and I hope you will continue to do so.
Regards.
CoyPond
Who does not want to make money??When punters or dabblers see frying including me would like to jump into the bandwagon. Of course, it is always wishful thinking to win because there is no chance or even time to check. The smart ones and earlybirds would laugh while the late comers and greedy ones would be hit by the hot potato. Then UMA is issued which is usually taken as a joke as most times the counter would jump higher maybe after a pause. Then all sorts of announcements are made including the SC. But on looking back on the actions taken and quite easily forgotten by the followers of KLSE. Some Companies and Directors are slapped with a fine, maybe RM200k, and mind you can also be negotiated before or during court proceedings. What is a fine anyway, as it can be recouped from the market again later. What happened in the aftermath of Kenmark? Well, we forget easily!! Moreover it takes such a long time for the courts to decide. So, as long as there is KLSE one cycle ends another one begins. Well,can we blame anyone except ourselves because don't expect anyone to extend help. Continue happy trading & HAPPY NEW YEAR!!
ReplyDelete