O&G Play Set to Return

It is sad that the most important nation in the world - once the global policeman - is now a rogue nation. Yesterday the U.S. announced that it would impose sanction on any nation that imports Iranian oil (here). I equate this action to the invasion of Iraq by George W Bush in 2003.

Politics aside, crude oil has just broken above last 2 weeks highs of USD72.00 and put in a gain fo USD2.07 to close at USD74.04. It came close to testing the resistance at the horizontal line at USD75.00. 

The current breakout move is a strong move based on rising ADX. Notwithstanding a short-term pullback, I believe this move could eventually test USD80.00 before a more meaningful correction. Thus, I believe we may see another round of play in our O&G sector.

Chart 1: BRENT's daily chart as at Apr 22, 2019 (Source: Stockcharts.com)

Among O&G stocks, I prefer to go with the laggards, such as REACH & SAPNRG. REACH is sitting on a proven reserve and that reserve has just gone up in value. Similarly REACH valuation should also go up.

Chart 2: REACH's daily chart as at Apr 22, 2019 (Source: Malaysiastock.biz)

SAPNRG is in a stronger position after its rights issue. In addition, its major shareholders have invested in the company at RM0.30 per share (which comes with free warrants). This means that the current price is not too far from their cost. If you buy at the same price as the "sponsor", you are in relatively safe position.

Chart 3: SAPNRG's daily chart as at Apr 22, 2019 (Source: Malaysiastock.biz)

IWCITY & EKOVEST: Bandar Malaysia Play

The market was greeted with the news that IWCITY & EKOVEST are not involved in the revival of Bandar Malaysia (here). The share prices of both stocks rose sharply to attain limit-up yesterday.

The revival of Bandar Malaysia involved the original JV of IWH and CREC. IWH is a company controlled by Lim Kang Hoo while IWCITY is a subsidiary of IWH while EKOVEST is a sister company of both of these companies by way of substantial stake owned by Lim Kang Hoo. 

I find the announcement to be an accurate & fair comment to make to the market given the euphoria surrounding IWH/CREH revival of Bandar Malaysia. The truth is these 2 companies, IWCITY and Ekovest may still participate in Bandar Malaysia development. The directors of these companies do not want to be accused of standing idly when the market is obviously laboring under the wrong impression- leading to potential losses for investors.

I expect the share prices of both stocks to drop sharply this morning. Eventually the same incentive to buy into these stocks would re-surface and buyers would come back. If you have mistakenly bought into these stocks, you can consider riding out the drop today.

Market Outlook as at April 17, 2019

A few days ago, our PM replied to a question and said that "the government might impose measures to protect the ringgit again if speculators continue to attack the currency." I believe that the reply was a mistake in 2 ways; firstly, there is no attack on our currency and talking about it would create fear in the mind of investors and businessmen, and secondly, to suggest that we would impose measures to protect the ringgit would only rekindle the fear that capital control may be an option on the table. 

The net effect of this slip-up is the selldown being witnessed in the market for the past 2 days. Foreign funds who had invested in Malaysian stocks would not want to be caught out again like in 1999. So they chose to safe themselves by exiting our market.

Chart 1: FBMKLCI's daily chart as at April 17, 2019_3.00 (Source: malaysiastock.,biz)

Looking at the chart above, it seems likely that FBMKLCI may test its support at 1600 in the current decline. I believe that this level should hold up the market.

Now, after the foreign funds have disposed off their stocks, they will remit their proceed by selling MYR and buying USD- which will depress our currency even more. From the chart below, we can see that USD-MYR is pressing against the downtrend line, RR at 4.15. An upside breakout above this line would lead to the continuation of the prior uptrend.

Chart 12; USD-MYR's weekly chart as at April 17, 2019_3.00 (Source: malaysiastock.,biz)

****

In stock market, timing is everything. The current decline in Maybank share price is driven by development in one of its Singapore subsidiary's loans to the Hyflux group (actually to 2 subsidiaries, Tuasone & Tuaspring Pte Ltd). These loans, collectively account for 4.1% of Maybank Singapore's total assets, may not be settled soon as the white knight for the rescue of the Hyflux has pulled out.

News reports that Singapore PUB is now likely to step in to takeover the 2 companies as its assets are deemed to be of national interest. Analysts believe that Maybank is likely to receive a fair settlement of the loans granted, with possibly a small loss. In any event, Maybank Singapore has provided SGD106 million for its exposure to these 2 companies totaling SGD659 million. I find the analysts' reasoning to be logically sound. Thus I feel that the selldown may be overdone.

Looking at Maybank share price decline, it seems that the market is pricing in a big loss for the Hyflux loans. If that turned out to be incorrect, we can expect a nice recovery for Maybank in the near future.


Chart 2: Maybank's daily chart as at April 17, 2019_3.00 (Source: malaysiastock.,biz)

Meanwhile CIMB has been dropping steadily for the past 6-7 weeks. One of the factors causing the drop is the fear of an upset in the Indonesian Presidential Election. The logic behind this line of thought is that a victory for the challenger, Prabowo would lead to economic slowdown which would affect CIMB Niaga's profit. CIMB Niaga contributes more than 20% of the CIMB group bottom-line.

I find this effort of logic to be extreme. Personally, I believe Jokowi is likely to win, and even if there were to be an upset, I believe Prabowo is pragmatic enough to avoid instituting policies that would lead to economic slowdown which would in turn affect his chance of election for the second term.


Chart 4; CIMB's daily chart as at April 17, 2019_3.00 (Source: malaysiastock.,biz)

Based on the above, I believe Maybank and CIMB are worth considering for long-term investment after the selldown in the past few weeks.

MKH: Inching Towards Recovery

Result Update

For QE31/12/2018, MKH's net profit rose 411% q-o-q or 59% y-o-y to RM26 million while revenue was mix- down 20% q-o-q & 38% y-o-y to RM268 million. Despite the decrease in revenue by RM65.7 million, the profit before tax for the current quarter of RM41.1 million was higher as compared to the preceding quarter of RM25.2 million mainly due to inclusion of unrealised foreign exchange gains of RM9.4 million in the current quarter as compared to unrealised foreign exchange losses of RM9.5 million in the preceding quarter. Excluding unrealised foreign exchange gains/(losses), the profit before tax is lower in the current quarter of RM31.7 million as compared to the preceding quarter of RM34.7 million mainly due to lower profit contribution from both the property and construction and the plantation division as a result of lower gross profit.

Note: MKH's latest result was released on February 27, 2019.

Table: MKH's last 8 quarterly results

Graph 1: MKH's last 33 quarterly results

MKH's management runs a very tight ship. Despite a tough operating environment for property development and plantation, the group still managed to stay in the black for every segment. See the segmental results for 1Q in the last 3 years (ie. FY2017, FY2018 & FY2019).

Graph 2: MKH's segmental results for 1Q 2019, 2018 and 2017.

Future Prospect

MKH's bottom-line is dependent on 2 major segments- Plantation and Property Development. For Plantation segment, the CPO price chart shows that CPO has broken above the downtrend line, and it is now forming a base for a possible recovery. As for Property Development segment, MKH's unbilled sale as at Dec 2018 was RM1.0 billion as compared to RM903.5 million last year. Despite the gloom and doom for property sector, MKH is expected to do reasonably well for this business as its landbank is fairly well-located and its tied up with Panahome of Japan to build sustainable homes will be a strong drawing factor. Panahome is part of the Panasonic group. For more, go here.

Chart 1: CPO's weekly chart as at Apr 12, 2019 (Source: Tradingeconomics.com)

Financial Position

MKH's financial position as at 31/12/2018 is deemed adequate with current ratio at 1.61 times and total liabilities to total equity at 1.01 times.

Valuation

MKH (trading at RM1.38 as at 4:30pm) is now trading at a trailing PER of 10x (based on last 4 quarters' EPS of 13.5 sen). Price to book is at a very attractive 0.5 x (based on NAB of RM2.72 per share as at 31/12/2018). Dividend yield of 2.5% is still respectable despite heavy investment in the plantation segment. Overall, MKH is considered fairly attractive.

Technical Outlook 

MKH formed a base around RM1.10-1.40 over the past 1 year. An upside breakout of RM1.40 could be the start of the recovery for this stock.

Chart 2: MKH's weekly chart as at Apr 15, 2019_12.30 (Source: Malaysiastock.biz)

Chart 3: MKH's daily chart as at Apr 15, 2019_12.30 (Source: Malaysiastock.biz)

Conclusion

Based on satisfactory financial performance, reasonably healthy financial position, fairly attractive valuation and promising technical outlook, MKH is a good stock to consider for long-term investment.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

Padini: Upleg May Begin Now

Padini has finally surpassed the resistance from the horizontal line at RM3.90-3.92 as well as the psychological RM4.00 resistance. With these double breakouts, Padini is poised for its upswing. For more on this stock, check out my result update here.

Chart: Padini's daily chart as at April 15, 2019_12.30 (Source: Malaysiastock.biz)

Market Outlook as at April 8, 2019

Last week was a trying week for Malaysia! On Wednesday, we received the shocking finding of the Suhakam public inquiry into 2 missing persons, Pastor Raymond Koh and social activist Amri Che Mat. The committee found both persons were victims of forced disappearance that might be linked to our police force (here). 

Just as that shocking news began to sink in, we were hit by another shocking revelation on Saturday. This time, it came from the Prime Minister and the Foreign Minister who spoke about the hidden elements in the "deep state" that are threatening to topple the Government over the country signing the Rome Statute of International Criminal Court (here and here). These 2 news cast doubt on the stability of the current government and its continued ability to maintain law and order in the country. 

It is indeed a pleasant surprise that our market did not react negatively to the news today. In fact, FBMKLCI was up 2-3 points this morning before it dipped to overnight level at around 3:00 pm. I have expected the market to be weaker today, and to remain weak for a while until we have greater clarity that the threat to the current government has passed.

Looking at the 4 charts below, we can see FBMKLCI, which represents our blue chip stocks, has broken below the line connecting the lows for the past 9 years. This index is expected to stay weak as more foreign funds would reduce their position in view of the political risk. On further weakness, FBMKLCI may drop to 1600-1610.


Chart 1: FBMKLCI's weekly chart as at April 5, 2019 (Source: Malaysiastock.biz)

FBM70, representing 2nd & 3rd liner stocks, has tested the line connecting the lows for the past 9 years and rebounded from it.


Chart 2: FBM70's daily chart as at April 5, 2019 (Source: Malaysiastock.biz)

FBMSCAP, which represents the small cap stocks, has dropped back to where it was 9 years ago.


Chart 3: FBMSCAP's daily chart as at April 5, 2019 (Source: Malaysiastock.biz)

Strangely, FBMFLG, which represents the lowest rung of stocks on our exchange, is still in an uptrend line.


Chart 4: FBMFLG's daily chart as at April 5, 2019 (Source: Malaysiastock.biz)

In this uncertain time, the best approach is to stay at the sideline. If you want to take a position for whatever reason, you are advisable to take only a minimum position. Good luck!

Teoseng: Egg Prices Started to Decline

Result Update

In QE31/12/2018, Teoseng's net profit rose 146% q-o-q or 35% y-o-y to RM17 million while revenue rose 18% q-o-q or 25% y-o-y to RM147 million. The revenue increased by RM22.0 million representing 17.5% higher mainly due to the stable selling price of eggs and higher sales quantity.Due to higher revenue and better efficiency, the Group recorded a pre-tax profit of RM24.8 million representing an increase of 188%. The latest result was announced on 20 February.


Table: Teoseng's 8 quarterly result


Graph: Teoseng's 25 quarterly result

Egg prices began to slide in the last week of March. The decline accelerated in April. If this continued, we may see average egg prices dropping to 25-28 sen apiece.


Graph 2: Egg Average Price Chart as at April 5, 2019 (Source: DVS. gov.my)

Latest Financial Position

As at 31/12/2018, Teoseng's financial position is adeqaute, with current ratio of 1.11x and gearing ratio of 0.57x.

Valuation

Teoseng (closed at RM1.22 last Friday) is now trading at a trailing PER of 12 times (based on last 4 quarters' EPS of 10.12 sen). Based on this PER, Teoseng is fairly valued.

Technical Outlook

Teoseng broke above its long-term downtrend, RR at RM0.92 in December 2018.


Chart 1: Teoseng's weekly chart as at Apr 5, 2019 (Source: Malaysiastock.biz)

After the breakout of the downtrend line, Teoseng began its uptrend and hit a high of RM1.37. This upswing is supported by the short-term uptrend line, SS at RM1.18.


Chart 2: Teoseng's daily chart as at Apr 5, 2019 (Source: Malaysiastock.biz)

Conclusion

Despite improved financial performance and bullish technical outlook, Teoseng's rally is dependent on the outlook for egg prices. The current drop in egg prices could lead to lower revenue and profits in the near future. Thus, it may be a good idea to take some profit on this stock.

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

N2N: A Potential Fintech Play

Result Update

In QE31/12/2018, N2N's net profit rose 27% q-o-q but dropped 47% y-o-y to RM2.8 million while its revenue rose 10% q-o-q or 0.5% y-o-y to RM27.8 million. N2N's net profit y-o-y dropped mainly due to lower unrealised forex gain in the current quarter. However, the core profit of the Group increased by 46.6% from RM1.99 million to RM2.91 million mainly due to the combination of lower operating cost and improved margins.

N2N's profit after tax rose q-o-q but the core profit of the Group declined 4.8% from RM2.91 million to RM3.06 million mainly due to provisions for trade receivables. The q-o-q increase in profits was mainly attributed to the higher revenue and better margins for the current quarter in comparison to the preceding quarter. Revenue increased by 10.2% from RM25.24 million in the preceding quarter to RM27.80 million in the current quarter. [Note: The result for QE31/12/2018 was announced on 25 February.]


Table: N2N's last 8 quarters' P&L


Graph: N2N's last 49 quarters' P&L

Latest Financial Position

As at 31/12/2018, N2N's financial position is satisfactory, with current ratio of 5.2x and gearing ratio of 0.23x.

Corporate Development

In December last year, Japanese online broker SBI Japannext Co Ltd has acquired a strategic investment stake in N2N from its founder and managing director Andrew Tiang Boon Hwa in a deal worth RM91.4 million. SBI Japannext Co. Ltd purchased 65.276 million N2N shares at RM1.40 each from N2N's MD. This strategic investment is expected to lead to collaboration between Japannext and N2N, which will open up new opportunities for both entities through the promotion of more trading activities in the region, while encouraging greater uptake of cross border trading. For more, go here.

Valuation

N2N (closed at RM0.815 last Friday) is now trading at a PER of 32x (based on last 4 quarterly EPS of 2.53 sen). At this PER, N2N is deemed fully valued.

Technical Outlook

N2N is in a long-term uptrend line (SS) with support of RM0.80.


Chart: N2N's weekly chart as at Apr 5, 2019 (Source: Malaysiastock.biz)

Conclusion

Based on satisfactory, albeit weaker, financial performance, healthy financial position and positive technical outlook, N2N could be a good stock for long-term investment. It may benefit from a pick-up in equities trading in the region this year.

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

GenM: Sailing Into a Storm?

Many Malaysians are overjoyed to hear the news that the infamous luxurious yacht, Equanimity was successfully sold off for USD126 million (or, RM514.6 million). The buyer is a wholly-owned subsidiary of GenM. For more, go here.

Equanimity in Calm Water (Source:Malaysiakini)

Now, the shareholders of GenM must ask the question: How much return would an investment of RM514.6 million in a luxurious yacht generate?

Samples of Super Luxurious Yachts for Rent (Source: Charterworld)

Let's assume that the yacht was acquired for rental purpose. A quick check on Charterworld's website shows the rental rate for a luxurious yacht comparable to Equanimity to be more than USD300,000 a week. Assuming Equanimity is rented out at USD500,000 a week for 20 weeks in a year, then the revenue would be USD10 million a year. Will it turn in a profit? Let's see...

It was reported that the maintenance cost of Equanimity for 5 months when it docked at the Royal Malaysian Navy's HQ in Langkawai to be RM11 million (here). This sum may be understated as some costs may be waived by our navy. Assuming that it was the true figure, then the total maintenance cost for a full year would be RM26.4 million (or, USD6.5 million). On top of this, we have to add in the running cost of the yacht (with additional crew, food & fuel supplies) for 20 weeks when it is on rental. If we assumed these additional costs to be about 30% of the rental rate, then the operating cost would be USD150,000 a week or USD3 million a year.

Now we can compute the profit of this investment:

Profit = Income of USD10 m - [Maintenance cost of USD6.5 m + Running cost of USD3 m].

Profit = @#$%& (My calculator is not working!!)

Disclaimer: I am not an expert in luxury yacht rental. The above projection could have under-estimated the rental rate & over-estimated the maintenance costs. On the other hand, the projection could have over-estimated the rental period & under-estimated the running costs. If we want to be generous, it is possible that Equanimity could turn in a tidy profit of USD3-5 million if the variances are all positive. Alternatively, GenM can always operate Equanimity as an exclusive high roller casino yacht. No license is needed if it sailed into international water.


Chart: GenM's weekly chart as at April 3, 2019 (Source: Malaysiastock.biz)

The uncertainty of this enormous investment reinforce my preference for Genting over GenM.

Market Outlook as at April 2, 2019

FBMKLCI dropped almost 15 points to close at 1628.7 yesterday. The huge drop was mainly contributed by 5 stocks, namely PBBank lost 68 sen, IHH lost 20 sen, Maybank lost 7 sen, HLBank lost 32 sen and CIMB lost 7 sen. The scoreboard showed 445 gainers to 411 losers.

Looking at the daily chart, we can see FBMKLCI nearly tested the December 2018 low of 1627. We made a low of 1628. The index may rebound from here. If it failed to do, it may test the lower boundary of a potential wedge formation, ABCD at 1608-1610.

Chart 1: FBMKLCI's daily chart as at Apr 2, 2019_9.18am (Source: Malaysiastock.biz)

On the weekly chart, we can see that FBMKLCI broke below the line connecting the low since 2010 (AB). That breakdown, which occurred 2 weeks ago, led to the current round of decline.

Chart 2: FBMKLCI's weekly chart as at Apr 2, 2019_9.18am (Source: Malaysiastock.biz)

The sell-down of blue-chip stocks is especially bad among the banking stocks. However, we can see the Finance index is still above its long-term uptrend line.

Chart 3: Finance's monthly chart as at Apr 1, 2019 (Source: Kenanga's BTX chart)

Meanwhile we can see that other Asian markets (such as SSEC, HSI and STI) are starting to move up. It is disappointing that our FBMKLCI continues to go lower, instead of joining in the party. We have only ourselves to blame as we are too engrossed with non-stop politicking.

Chart 4: SSEC's daily chart as at Apr 1, 2019 (Source: Stockcharts.com)

 Chart 5: HSI's daily chart as at Apr 1, 2019 (Source: Stockcharts.com)

Chart 6; STI's daily chart as at Apr 1, 2019 (Source: Stockcharts.com)

Based on the bullish outlook for other Asian markets, it is likely that our current decline may find support, if not at the current level, then at 1610 or 1600. Despite attractive prices for some stocks, it is still prudent to be cautious and to watch for a recovery before buying.