Oil Outlook Review

23 November 2019

Dear Fellow Investor,

Some of you have asked me about my oil outlook. I am neutral with an upside bias based on my view that there will be some trade war resolution  A trade war resolution will boost Asian markets and be positive for oil companies.

We hold Dialog for our managed accounts which is an integrated oil company based in Johor. That means Dialog is exposed to upstream, midstream and downstream activities.  

Dialog is effected by crude oil prices but not to the same extent as most other oil companies.  The reason is that they own tank terminals for oil storage.  Their tanks are in Pengeran, a deep water terminal in Johor.  The location is strategic because they handle cargos from the Straits of Malaka, the second busiest oil passageway in the world compared with the Gulf of Hormuz. and are able to easily handle Asian demand.

Asian oil demand is steadily increasing and Dialog is centrally located in close proximity to Japan, Singapore,  Thailand, China, Indonesia and India.

These storage tanks provide residual income not dependent on the oil price. Demand for storage continues to increase and they have plans to expand their tank farm. They have long term leases established with several oil majors such as Exxon, BP, Petronas etc.

Stable income also comes  from the plant service team which provides a wide range of maintenance, shutdown, turnaround and specialist services for the refineries, petrochemical, gas and chemical plants.

On a negative note, revenue per share has been declining for the last 3 years, and on the positive side margin has been expanding. The debt level is acceptable. PE is 34  is on the high side but cash flows are healthy and should support this valuation.

Expect range trading next week. Hong Kong elections are tomorrow and if they are peaceful that could be a positive for Asian markets. 

Invest well and grow your wealth,
Bill   

Critter of the week

 Abandoned giraffe becomes good friends with watchdog at animal shelter (and no, it’s not a tall story!)

• Jazz the nine-day-old giraffe arrived at The Rhino Orphanage after a farmer discovered him struggling  in wild.

• Resident watchdog Hunter, a young Belgian Malinois, quickly began to care for the baby, befriending him.

• Keepers will reintroduce Jazz into the wild when he's ready, but for now he remains Hunter's cuddle buddy

Solarvest IPO Presentation

16 Nov 2019

Dear Fellow Investor,

Last week I attended an IPO presentation by Solarvest .

According to Inter Pacific research:

SOLARVEST Holdings Bhd stands to potentially benefit from Putrajaya’s aim to grow the entire value chain of the solar photovoltaic (PV) industry. There is a target price of 49 sen on the company based on a valuation of 13 times  price earnings ratio pegged to the financial year 2020.

“The government is committed in supporting the growth of the solar PV industry by setting a target for electricity generated from renewable energy (RE) at 20% of all power produced.

“On top of that, the government provides incentives by way of lower taxes for green technology projects, income tax exemption on green technology services and tax incentives for purchase of green technology assets, all of which reduce the investment payback period,” Interpac said in a research note.

Last month, The Malaysian Reserve reported that Solarvest aims to raise RM34.6 million from its IPO on the ACE Market of Bursa Malaysia, with the money largely for its working capital for daily operations and future projects.

The IPO entails a public issue of 98.83 million new shares with 19.5 million shares available for the public at 35 sen each.

The research house also said Solarvest currently owns a 1MW facility in Kedah and intends to own a large scale  solar PV (LSSPV) plant in the future.

“As an experienced subcontractor for LSSPV and a turnkey engineering, procurement, construction and commissioning (EPCC) contractor for three LSSPV projects in Kampar and Kamunting in Perak for Asia Meranti Group, Solarvest intends to tender for its own account as turnkey contractor in future LSSPV projects,” it said.

Inter-Pacific remains optimistic on the growth of the solar PV industry as the government intends to achieve a total installed solar PV capacity of 5,800MW by 2025.

Independent market research, Protégé forecasts the total solar PV installed capacity in Malaysia to grow from 438MW in 2018 to 3,322MW in 2023, representing a compound annual growth rate of 50%.

Solarvest is slated to be listed on Nov 26, 2019. This would be the 10th ACE Market listing for the year from a total of 23 listings in Bursa Malaysia year-to-date.

M&A Securities Sdn Bhd is the advisor, sponsor, underwriter and placement agent for the IPO exercise.

Solarvest is 45% owned by Main Market-listed Chin Hin Group Bhd. Upon completion of the IPO, Chin Hin’s shareholding will fall to 33.6%.

Solarvest specialises in turnkey EPCC services for solar PV systems. It also provides operations and maintenance services of solar PV systems.

According to the prospectus, the listing expenses are 9 %. That means if you take up the IPO you are down 9 % before you take up the offer.

Although, I like the potential of solar power and the government supporting this sector based on the new budget, I would wait for a few months before acquiring. This share is not suitable for EPF/ investment  accounts.  

The business has a low barrier to entry and there is a lot of competition and I do not like paying a 9 % premium to the sales staff.

Expect window dressing in the markets as we approach the end of 2019. Blue chips, selected Reits,  the banking sector,and  plantations should be supported by the institutions and funds. This applies to the Asian markets we invest in.

Interest rates have stabilized but remain low as world growth is slowing. Focus on high quality established dividend shares to ride out the uncertainty/ low rates especially for your EPF and investment accounts.

Invest well and grow your wealth
Bill

Critter of the week is a 3 legged dog. He lives in an LRT station in Cheras and takes his food from passers by. He is active and healthy  If anyone is interested to give this dog a forever home I can give you more details.  

Negative on the Banking Sector

9 Nov 2019

Dear Fellow Investor,

These have been challenging times for Public Bank Bhd. Most analysts are negative on the banking  sector due to declining profitability. A recent Bloomberg analyst survey showed only 2 buys, 14 holds and 7 sells on Public Bank shares.

There doesn’t seem to be growth. Most analysts have cut earnings estimates for the banking sector. .  Most are forecasting that Bank Negara will cut interest rates and maintain reserve requirements. This will trim net interest margins which measures bank profitability. Reserve requirements will not be loosened which means a cut in banking profits.

Below is a chart by shareinvestor .com which tells a different story.  Ignore the technical indicators and focus on the price and volume.

Before the announcement on interest rates and reserve requirements , there was a massive wide range up bar on heavy volume. Price went up over 6 % which is an abnormal event.  Checking the Bloomberg work station  there was heavy insider buying preceding this massive move.  Foreign funds who hold 37 % of Public Bank shares were short covering. and reversing to buying.

Price over the last week has held through some profit taking meaning it is unlikely this is a false move. Maybank also had a good move up.

Subsequent to this price break, the authorities announced no interest rate hike and a reduction in reserve requirements. This is bullish for Public Bank and the banking sector .

What this means is that insiders  accumulate when news is bad and sentiment is negative. If you know how to read a price and volume chart you can get a jump on the crowd and take advantage of the crowd ignorance.

I bought Public Bank for clients on this breakout. There is no guarantee of profits but at this level the risks seem low. Public Bank has low exposure to commercial loans and is managed prudently PB has the lowest NPL (Non performing  loans)   in the Malaysian banking  industry.

Invest well and grow your wealth
Bill

Critters of the week are at the elephant sanctuary at Kuala Gandah about a 2 hour drive  from KL. This is a wonderful place to visit and take your family. There is an elephant museum and a theatre to show how elephants are rescued. 

Trade War Concerns

2 Nov 2019

Dear Fellow Investor,

Good News

Trade war concerns are getting resolved. US markets are advancing on better than expected earnings and positive employment numbers.

Asian markets are being supported by a weakening US Dollar and a resurgence in commodity markets.

 

Despite the riots in Hong Kong the EWH, the exchange traded HK tracker fund traded in New York advanced strongly on Friday signalling that the worst may be over in Hong Kong.   

The EWS and  EWM, the Singapore and Malaysia tracker funds also had strong up moves Friday.

Based on the Bloomberg short sale report, large hedge funds are covering their long term shorts betting that Asian markets have stabilized. This can be fuel for more up side.

With low interest rates, quantitative  easing and loose monetary policy money is flowing back into Asian equities.

Expect this to continue.   

Look for quality shares that have been beaten down to value levels.  If they pay dividends that is all the better so that you can be paid while you wait.

For those income seekers quality Reits are still OK  Make sure the Reit you invest in has a strong sponsor and preferable trading at less than book value.

Last week I profiled Well call, a maker of rubber hoses
They are financially sound and benefit from a focused management with a world wide distribution network for their rubber hoses.   

As a family business, some of you asked me if they have a succession plan. They do. The daughter of the CEO is a lawyer and drives the marketing while the son is a chemist and heads  R & D. They are the successors.  

Invest well and grow your wealth
Bill

Critter of the week is Conan, the hero Belgian Malianois  dog which helped capture and kill   ISIS head Abu Bakr al Baghdadi  Donald Trump has invited him to the White House, perhaps to give him a steak bone.