Technology index advanced despite of the dropped in volume of KLSE

 31 July 2021

Dear Fellow Investor,

Despite the low volume drop in the KLSE last week, the technology index advanced. Our tech holdings in Inari, Pentamaster and Frontkin were not affected. Our blue chip dividend producing shares were also supported both in Malaysia and Singapore.

When I select shares, I follow Warren Buffet’s principle of pricing power. Pricing power calculates a firm’s markup or the extent to which a company can raise prices over and above costs. I combine this with other margin strength.

For example, Inari supplies Radio Frequency  chips to Apple for their I Phones.  Despite recessions, bad news, negative sentiment and inflation, Apple is able to raise their prices due to high and consistent demand .  Have you noticed how the Apple store in the KLCC is always filled with customers although many other shops have low footfall ?  Once the MCO is lifted, Apple store in KLCC will fill up again.

Other shares we hold with pricing power include Carlsburg and Heim. They have unique brands and a loyal following who will pay a premium price for their products.  In Singapore we hold SATS and Sheng Siong. Both have pricing power. SATS controls the majority of gateways at Changi airport and other airports which means other competitors are locked out of gateway catering services.  It gives them a moat and the  flexibility to increase prices should inflation become a problem. Sheng Siong operates a supermarket chain in Singapore mostly located in HDP flats. The have pricing power as HDP residents can conveniently buy their wide selection of meat, fish and fresh vegetables products without having to travel.  Even an increase in prices should not drive customers away. Because of their low debts and strong balance sheet if interest rates go up they are not impacted.  

The Star today had an article on the National Recovery Plan. It mentioned that Labuan now has herd immunity with 86% of the residents vaccinated. This is the mass vaccination trend which will lead to economic recovery.  By October 2021 the target is have Malaysia fully vaccinated. This could be the light at the end of the tunnel.

Combine this with low interest rates, quantitative easing, and loose money, expect funds to flow into equities.   Inflation  could be an issue, but buying high quality dividend producing companies with pricing power   should help us prosper despite inflation .

Keep safe

Bill

Quality companies with pricing power can help us tackle inflation.

Testing Support

24 July 2021

Dear Fellow Investor,

Testing Support

EWM, the Malaysia country fund traded on the NYSE is testing November 2020 weekly support.   This index consists of blue chip index shares such as Maybank,  Tenaga, Genting and Digi and is a good representation of the Malaysian stock market. Despite the extreme negative market sentiment the index is holding steady with low volume.  Low volume means there is not much interest in the market and no panic liquidation by professionals.   

My advice is to stay the course with your quality index linked,  export  and  technology related shares. Enjoy the dividends.

We will also reap the dividends of the vaccine rollout. Malaysia has the highest pace of vaccinations in the region   according to today’s Edge page 14 report.  A Bloomberg commentator this morning mentioned that the human spirit will overcome the virus. It took less than a year to come up with  effective vaccines which in part was made possible by advanced technology and operation warp speed by Donald Trump.  Malaysia is now administering over 410,000 shots a day compared to 170,000 a month ago. This is a warp speed rollout and could be one  reason the KLSE is not collapsing.   

This is the path to herd immunity and a normal economy. Hong Kong now allows  full capacity in restaurants with fully vaccinated staff and vaccinated customers . Singapore now allows groups of up to 5 for dine in. Customers must prove they have been vaccinated.  This could happen in Malaysia.

Keep safe

Bill

Thank God for free markets and capitalism. That is what will pull us out of the health crises and economic slump.

Bidenflation

17 July 2021

Dear Fellow Investor,

Bidenflation

US markets were hit Friday by a combination of factors. The catalyst for the fall were comments by   Treasury  secretary Janet Yellen who said expect inflation to rise over the next few months before falling. Other Federal Reserve officials even suggested that tapering would be scaled back and interest rates might go up. This spooked the markets and the Dow which had been up over 100 points dropped to close down 299 points while the tech heavy Nasdaq dropped 115 points.    

What is the reality ? According to the latest CPI numbers:

Here are the items really driving up inflation: Car rental 87.7% (y/y change) Used cars 45.2% Gas 45.1% Laundry machines 29.4% Airfare 24.6% Moving 17.3% Hotels 16.9% Furniture 8.6% Bacon 8.4% TVs 7.6% Fruit 7.3% Shoes 6.5% Fresh fish 6.4% New cars 5.3% Milk 5.6% Rent (OER) 2.3%

Below is the US Federal Reserve balance sheet as of 15 June 2021.

The trend of money creation is up despite what the authorities are saying about transitory inflation. If the fiscal stimulus programs of 3.4 trillion USD are passed by the US congress the money creation trend will accelerate.  The odds favour it will be passed as politicians love to spend.  Other central banks will join the party . To give a maximum economic boost interest rates will be suppressed . This will benefit stocks . We must remain fully invested.  Buy the dip.  

As pandemic conditions normalize with lockdowns and increased vaccinations  expect Malaysia to recover. Infection rates are up but testing  rates are also up which explains this anomaly.  

There was a very interesting letter to the editor  in last week’s Star. It responded to a Bloomberg article by some UK critics saying Malaysia was a failed state  due to the slow  response to the pandemic.  The truth is that Malaysia has the 2^nd highest vaccination rate in Asia . The critics also said Malaysia is facing financial difficulties. The truth is S & P sovereign credit ratings  rates Malaysia as A- long term and A2 short term. In contrast the sovereign credit ratings of failed state Somalia is D according to the Economist intelligence unit.   In terms of FDI, foreign direct investment of RM 86 billion in the manufacturing services industries   were approved compared to  RM 41.2 billion in the 1st quarter last year. Rising crude oil and high commodity prices will also support our economy and balance of trade.  

Our focus on technology stocks should bear fruit and also our recovery stocks which have pricing power.  Inflation will help.

Stay the course

Bill

Political disputes are settled in the failed state Haiti by shooting the president. Despite the infighting and political bickering  Malaysians would not resort to such extremes  and another reason we are not a failed state.  

 

Key to Recovery

 10 July 2021

Dear Fellow Investor,

Key to Recovery

A few days ago I sent a message to one of my clients, a doctor, an ENT specialist who works  at a government hospital. I asked him for an update to the current pandemic and why vaccination roll outs are increasing while infection rates are increasing.

His objective analysis

From what we know:

1 The virus affects everyone and the susceptible ones may end up in ICU with respiratory illness.

2 Hence why vaccines are prioritized for susceptible individuals ie the elderly and those with co-morbid illness etc.

3 Vaccines in general protect us from getting severe illness (respiratory illness)  requiring ICU admission.

4 That is to say vaccination prevents covid infection  from becoming severely harmful to us.

5 But the vaccine doesn’t prevent someone from transmission or viral shedding.

6 Which means the vaccinated individual would still be a probable vector of transmission.

7 Hence why social isolation is still practiced to protect the unvaccinated.

8 Today we have the number of vaccinated increasing by percentage

9 But the percentage as compared to the countries population is still minimal.

10 Large numbers of unvaccinated are still at risk.

11 Mass vaccination will tilt the equation the other side. Where a big percentage of population would be vaccinated and a small percentage of non susceptible health individual will remain unvaccinated. (The unvaccinated and the anti-vaxer  and those with allergies to vaccines)

12 When we reach this stage the number of serious injuries will drop.

13 Then we can consider opening borders.

Point 11 is the key to market recovery- mass vaccinations-  and that is happening.  It was reported in the Star last week that on the first 3 days of the week that over 1 million citizens were vaccinated, some with their first shot and the other with their second shot.   Momentum is building and that is what will turn the KLSE and attract bargain hunters.  The SGX is performing well as vaccination rates have increased and infection rates have dropped.  With the backdrop of low interest rates, massive liquidity and stimulus odds favour Asian market recovery. If the local politicians could get on the same recovery page that could be the catalyst for Malaysia to join the world stock market party.  

Take care
Bill

MITEC convention hall are vaccinating over 8000 per day. I had my 2^nd Pfizer shot here and it took less than 1 hour for the process. Is there light at the end of the tunnel ? 

2021 - KLSE Outlook

 3 July 2021

Dear Fellow Investor,

This morning I attended a zoom presentation by Shareinvestor.com for the rest of the year outlook for the KLSE. The main speaker was Kong She Siang who heads CGS- CIMB retail research.  

His focus was both the technical and fundamental forces driving the market. The technical trend of the KLSE is down effected by the EMCO and political uncertainty. Most sectors are under a cloud including property, construction, health care, and hospitality . Bright spots include electronics, technology, logistics and export related stocks.  His recommendations included Inari, Wellcall, Public Bank and Uchitech which we hold.

He also presented fundamental reasons why KLSE valuations are at multi year lows for certain blue chip stocks while the trade statistics for Malaysia are positive.  Ratings agencies have not downgraded Malaysia but  fear and Covid hysteria are effecting the KLSE and keeping buyers on the side lines.  

He showed charts of Malaysian Covid infections, deaths, recoveries and vaccination rollouts. Vaccination rollouts are increasing nationwide, deaths are decreasing, recoveries increasing while infection rates are increasing.  As more people are vaccinated hopefully infection rates should drop.

as they have in Singapore, Taiwan, Japan, Australia, Europe and the US.

Last week, I mentioned I would review SATS which I personally hold and also hold for some of our PGWA accounts.  This research is from Smart Investor who is run by David Kuo formerly of Motley Fool.  Analysis is by Royston Yang, a long experienced analyst. SATS is not just a turnaround stock but is a leading indicator for Covid 19 recovery which should benefit our portfolios.

Bloomberg daily chart of SATS with green arrows signaling insider buying. There are many reasons for insider selling but insiders only buy for one reason and that is they believe prices will go up. The last green arrow on the right side of the chart was a 300,000 share buy order by an insider.   Who ever bought believes Singapore/ Asia/ Malaysia will recover and Covid will be a bad memory. Money talks.

SATS is Still Acquiring for Growth: Why I Believe the Company Can Turnaround

The ground handler and food caterer is pushing on with acquisitions as it gears up for the eventual recovery.

By Royston YangJune 17, 2021

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2020 was one of the toughest periods faced by the aviation industry.

SATS Ltd (SGX: S58) did not escape unscathed.

As Asia’s leading provider of food solutions and gateway solutions for airlines, the group reported a massive hit to its top and bottom lines as the pandemic swept across the world.

Revenue for its fiscal year 2021 ended 31 March 2021 (FY2021) fell sharply by 50% year on year to S$970 million, along with an operating loss of S$10.1 million.

For FY2021, SATS registered a core net loss of S$23.9 million.

Despite the weak results, SATS continues to push on by announcing the acquisition of an 85% stake in Food City, a Thai frozen food producer, for S$21 million in early June.

Investors may be surprised to learn that the group is still on an acquisition trail.

This purchase comes even as peers Singapore Airlines Limited (SGX: C6L), or SIA, reported a massive net loss and cash burn.

SIA’s engineering arm, SIA Engineering Company Ltd (SGX: S59), also announced Phase 2 of its transformation program.

Here’s why I believe SATS is in a good position to engineer a turnaround.

Steadily improving financials

SATS has reported steadily improving core net profit since the outbreak of the pandemic.

During the quarter ended 30 June 2020 (1Q2021), when country borders started closing, the group’s core net loss was S$43.7 million, despite receiving government reliefs.

By 4Q2021, SATS was able to turn in a core net profit of S$13.2 million.

Even if we remove the effects of government reliefs, the numbers look promising.

From an initial net loss of S$106.5 million in 1Q2021, SATS has narrowed its net loss to just S$33 million.

Another positive point is that the group has continued to generate a healthy free cash flow of S$56.2 million for FY2021. 

Cargo is a bright spot

The global economic rebound is triggering higher demand for air cargo.

Seasonally-adjusted air cargo volumes for March 2021 rose 4.4% above the pre-crisis levels logged in March 2019.

The International Air Transport Association (IATA) projects that air cargo volume will rise by 13% year on year for 2021, exceeding the level achieved in 2019.

SATS has associates in Hong Kong, India and Vietnam that handle air cargo, and these associates were profitable in 4Q2021.

With volumes expected to grow further, the growing profits from these associates can offset some of the losses from SATS’ core business.

Less reliance on the aviation sector

The pandemic also had the unintended effect of decreasing SATS’ reliance on the aviation sector.

Back in May 2020, an interview by CNBC with Alex Hungate, CEO of SATS, revealed that the group had already started diversifying into non-aviation catering over the last few years.

SATS also does catering for sectors such as defence, hospitals and schools.

The group runs central kitchens to produce food for restaurant chains such as Haidilao International (SEHK: 6862), RE&S Holdings’ (SGX: 1G1) chain of Japanese restaurants, and Disney (NYSE: DIS).

For FY2021, revenue from non-aviation industries accounted for 44% of total group revenue and chalked up year on year growth of 27.3%.

This proportion was a massive jump from the previous year when non-aviation revenue made up less than one-fifth of total revenue.

Increasing its food catering capabilities

The acquisition of Food City in June is just the latest in SATS’ acquisition trail to boost its food catering capabilities.

The new addition to SATS will provide the group with access to 32 meal production facilities across countries such as China, India, Japan, Singapore and Thailand, to name a few.

The move follows SATS’s purchase of food innovator Monty’s Bakehouse in May last year. 

This commitment to growing its food solutions business to diversify away from aviation-related revenue should be lauded.

Get Smart: Positioning itself for the eventual recovery

To be sure, FY2022 is still going to be a tough year for SATS.

The bulk of its revenue is still aviation-based and its pivot to non-aviation food solutions will take time to build and grow.

Still, the group seems to be headed in the right direction.

Over time and with the possibility of further opportunistic acquisitions, I believe the caterer and ground handler should see better days ahead.

Take care

Bill

A tasty meal by SATS. We look forward to recovery so we can enjoy traveling and good food again.