What will the management do next to us ?

28 July 2018

Dear Fellow Investor,

Mr Tong in his latest Edge column sums up my value investing approach and how to profit from the current uncertainties and fears dominating market action.  The only way to overcome emotions and profit is to have conviction in your purchases and sales.  This requires careful and objective research into your decision process. It means to access the quality of the company you are considering.

SINGAPORE (July 30): It is important to have conviction in investing. Stock markets are very much driven by sentiment and emotion. This is underscored by the roller-coaster ride we have experienced for the better part of this year. 

Markets are faced with a growing list of uncertainties, not least because of the difficulty in assessing and quantifying the potential damage from a trade war or geopolitical flare-ups. And when investors are uncertain, they tend to err on the side of caution.

As a result, share prices overreact and valuations get compressed. Over time, the picture will become clearer and fundamentals will reassert their influence on stock prices. 

But since markets are very short-term-oriented, this translates into opportunities for longer-term investors — if you can ignore the noise and focus on the underlying dynamics of the business, the secular trend for the industry and future outlook, earnings and cash-flow prospects as well as balance sheet strength. 

Crucially, we must hold on to our convictions, even (especially) when they are against the tide of sentiment.

By: 

Tong Kooi Ong

Last week, I sold all our Power Root shares for a small profit.  We still retain the bonus issue and warrants and will exit when the warrants are credited to your accounts. The reason I sold is because  the recent corporate exercise dilutes our shareholdings. The exercise is mainly for the benefit of the management/ insiders and to the disadvantage of the minority shareholders.

My concern is: What will the management  do next to us ?

There is nothing wrong with their coffee  business as demand for their coffee is rising but I do not feel we are being treated fairly. There are many other quality value opportunities run by ethical managers.  

Our analysts are diligently searching for you.

I advise that you pick up a copy of the latest weekly Edge and read Mr Tong’s entire column. He explains the rational for his recent transactions and why he is a value investor.  

Out of the blue, Mr Trump met with the European trade officials, and they and they worked out a trade deal.  This was a pleasant surprise and caught many analysts by surprise. Many expected an escalation of trade issues. European and US markets rose after the deal.

Perhaps, Trump can work out something with China and that would remove a major uncertainty from investor’s minds.  

Invest well and grow your wealth.

Bill

Today's 'critter's' opossum ..or 'possum' as it is known in the southern and Midwest U.S.A. It is a house cat-sized creature not known in the part of North America. They are table fare for some -- and their pelts have long been part of the fur trade.

SATS 1st quarter results

21 July 2018

Dear Fellow Investor,

On Friday, SATS one of our core PGWA holdings released its 1^st Quarter results.

Yesterday evening, SATS (SGX: S58) released its first quarter earnings for its fiscal year ending 31 March 2019 (FY18/19).

State Of The Business Now

Here’s a look at some of the important financial numbers for the first quarter:

• Revenue came in at S$439.4 million, up 3.0% from a year ago.
• Share of results of associates and joint-ventures (net of tax) was S$15.3 million, down 1.3% year-on-year.
• Profit attributable to shareholders grew by 11.5% to S$63.9 million.
• Similarly, diluted earnings per share was up 11.8% year-on-year to 5.7 cents.
• Operating cash flow rose 96.1% from S$46.6 million in the first quarter of FY17/18 to S$91.4 million. There was only a slight increase in capital expenditure from S$18.9 million to S$19.1 million, and as a result SATS’s free cash flow jumped significantly from S$27.7 million a year ago to S$72.3 million.  
• As of 30 June 2018, SATS had S$439.7 million in cash and equivalents and S$106.5 million in total borrowings.

The only disappointment was the termination of the Turkish airline catering deal as it could not resolve the bureaucratic issues with the Turkish aviation authority. The financial impact was minimal but the potential growth opportunity is lost. As in every business mistakes are made but the ability to cut and minimize losses and move on is the recipe for ultimate success.

On a positive note, there are several promising growth opportunities in the pipeline including  a second joint venture with Wilmar, Marina Bay Sands cruse liner catering franchise  and expansion with Air Asia into India.

CEO Alex Hungate during the earnings presentation commentated on the trade war impact on the aviation industry. Bottom line he thinks passenger and freight volumes will continue to grow regardless of how the trade war progresses.

On Friday SATS closed up 7 cents to SGD 5.17, reflecting the positive results.  

There are signs of recovery in the KLSE.  Last week there was positive foreign fund inflow  into  banking shares and other oversold blue chips. Support is building at current levels.

Consumer spending is picking up. Last week we visited a KLSE listed  finance company specializing in making small loans.  The CEO was very positive moving forward with the change of government. When I asked him about the new government and how it would impact his business his face lit up showing his optimism. 

Optimism is spreading in Malaysia just like a virus.

Invest well and grow your wealth
Bill

Today’s critter is a wombat from the Perth Zoo.

The wombat is a furry animal with short legs that resembles a small bear. We plan a visit to Perth perhaps in October and hope to get some nice animal photos to share with you our newsletter readers.

Do not built to impress but rather to provide a necessary service at a reasonable cost

14 July 2018

Dear Fellow Investor,

Last week the MOF announced that the LRT 3 project would go ahead with  a cut from 31.65 billion ringgit  to 16.3 billion ringgit.

The previous government had bloated  costs to construct lavish LRT stations  which would rival stations on the Japan’s national railway line. 

Kyoto train station leading to the central business district.

Notice the simplicity of the Kyoto station. It was not built to impress but rather to provide a necessary service at a reasonable cost. A few months ago we visited Japan and we found that the train stations were simple, well maintained, super clean but not lavish expensive structures.  

I am surprised that our local contractors did not visit Japan to get an idea of how to  build cost effective LRT stations.

Dr M realizes the importance of LRT infrastructure so he gave the go ahead to continue LRT 3. He is cost cutting for all the major projects and will eliminate those that do not make economic sense. This will save billions for the taxpayers .  

Last week the KLSE staged a minor rebound with some construction stocks leading the way.  Order books will be cut so there will be short term pain for the construction sector but longer term the economy will be more sustainable as wastage and corruption will be substantially cut.  

A similar thing happened in Singapore. In the last year house prices were up over 9 % so the government decided to prick the emerging bubble by raising down payment requirements for 2nd home purchases. This would make it easier for the average citizen to buy a home and cool the speculation.

Many property developer stocks dropped but Reits however; held up well and Singapore shares in our portfolios were not much affected. Our holdings in Hong Kong land were not effected and advanced to SGD 7.28.

They have properties in Singapore/Hong Kong/ Thailand and Cambodia We have weathered some major storms this year and made progress. We have maintained your capital with our dividend + value strategy. We have avoided the high flying crowd favourite stocks which have resulted in billions of losses for some funds.

If you think about it if you can earn a 5 % dividend yield and if you are careful in your stock selection another 8 % in capital gain that results in a reasonable return of 13 % with very low risk and should markets advance we make more.  

That is my goal but obviously nothing is ever sure and you might pick a stock like Top Glove which is a solid well managed entity but suffered a surprise and shocking  accounting irregularity and took a big capital hit.  I like the rubber glove sector but I do not like buying a high and chasing the hype.  We hold Kossan which has performed well and not effected by the drop in Top Glove.

Invest well and grow your wealth
Bill

Today's ''critter' is the moray eel...of which there are 202 different species.  They're a common sight when scuba diving most warm saltwater coral reef structures of the world . They have some fine examples in the KLCC Aquaria and most Malaysian reefs. 

Phillip Capital 9th Investment Conference

8 July 2018

Dear Fellow Investor,

I thank all of you who attended our Phillip Capital Investment Conference 2018.  I hope you found clarification to the market uncertainties such as Trump’s trade war, rising interest rates, rising oil prices and the collapse of many GLCs.  

Mr Ang our CIO gave a bullish outlook for Malaysia post election. The ministers Dr M appointed will plug the money leaks and cut the corruption  to put the country on a firm economic footing. This will in time attract foreign funds to Malaysia and possible rating upgrades.  

Royce Tan, professional futures trading gave a rousing presentation on futures trading. The takeaway for us as value investors was his slide of a giant great white shark . His advice was to trade with the sharks. Sharks are the metaphor for smart money or insiders. When I buy a share for your portfolios I always confirm with smart money accumulation found on the Bloomberg work station.

All the speakers spoke about the Trump trade war. The consensus view was that Trump will back down as he does not want to risk losing power should US stocks take a dive caused by China trade retaliation. I totally agree.  He won’t go too far and his flip flopping is a negotiating tactic.

Dr Nazri Khan shared his thoughts on KLSE sectors to benefit  in the months ahead. He likes soft infrastructure as Dr M encourages these sectors such as education, health care and consumer stocks.  His advice was to buy hot stocks in the hottest sectors but have an exit strategy. He mentioned that technology firm Cisco went from 10 cents to 100 USD before it collapsed in the 1999 internet bubble.   An alert investor with a disciplined exit strategy would have captured the bulk of the profit.

Invest well and grow your wealth,
Bill

Today's 'critter' is the golden pheasant, or Chinese pheasant. It is native to forests in mountainous areas of western China, but feral populations have been established in at least a dozen other countries throughout the world.  The male is unmistakable.  

A metaphor for the current market is a large ocean liner

30 June 2018

Dear Fellow Investor,

There was an interesting quote in the latest edition of Money Week, a UK investment publication.

“A trade war, meanwhile remains a danger, but bear in mind that US presidents always like to approach mid-term elections with low unemployment and rising stock prices. Markets shudder when there is bad news on this front. It may soon be in Donald Trump’s political interests to dial it down. All told, the cracks in the global growth story do not look fatal for equities.”

Unlike the US, China is not facing an election in 4 months, perhaps not in at least 5 years.

For this reason, I forecast Trump will strike a deal as China does not have an approaching  election. From a political standpoint China has the upper hand.

One of my clients asked me an excellent question about where is the current support in the KLSE.  My view is that there are 2 markets presently.  One market would be companies under a cloud such as some government linked companies, Najib and 1MBD linked companies.  Until the truth is revealed, I do not see support in this sector.  Our new government is doing a good job in uncovering the truth but it will take time. As they catch one cockroach, others will climb out of the woodwork. We need to wait for more cockroaches to be caught.

On the other hand, quality well managed companies not effected by the change in government are already finding chart support. This is the market I focus on for you our clients.  

A metaphor for the current market is a large ocean liner. The ship was suffering many leaks so the owner of the ship replaced the incompetent captain with a more qualified leader. 

The new leader’s first task was to plug the leaks to prevent the ship from sinking. That’s what is happening in our market now but there are many leaks to plug. At least the ship has stabilized and is not sinking.

Malaysia has a new ship, a new captain and a bright future just like the UK Brexit when it leaves the  mismanagement, corruption  and economic failure of the EU.

Next Saturday 7 July is the Phillip Investment Conference from 9 AM to 6 PM. It is to be held in Berjaya Times Square. Prominent speakers include Mr Ang Kok Heng whose topic is The Game Changer after GE 13. and Dato Nazri Khan whose topic is Chindia Renaissance and US Trade War.

 I will be there if you have any questions. To get a registration code please call our customer service at 03 2783- 0300/200, 10 CPE points will be given to guests. Try this link

http://www.fame.com.my/SeminarRegistration.aspx

Invest well and grow your wealth
Bill

Today's 'critter' turned out to be the great white heron or great egret-- and that's because Australian reader Garry Robinson sent me this excellent photo that he took of one wading in the Warners Bay/Newcastle area of New South Wales. 

Don’t let all the latest news rattle you

23 June 2018

Dear Fellow Investor,

Uncertainty has been chilling investor sentiment. Some of the uncertainties include trade wars, post election policy shifts, investment exodus from emerging markets and direction of interest rates.

Don’t let all the latest news rattle you…our portfolios are designed to be resilient and provide income no matter what the news flow is  on any particular day.

What matters are the earnings our companies are providing.

Those investors who were positioned for a Najib win have suffered billions in losses. Construction firms, property developers and many Najib linked companies have been hit hard. We hold none of these.

We were relatively unscathed as we focus on companies off the radar screen of the big fund managers and ones that produce solid earnings and cash flows.

The KLSE has suffered a classic washout which is the result of foreign selling by large funds as they exit emerging markets. 

Opportunities emerge after a washout. Buying fear is a high odds bet. I just bought Maybank for our clients as the odds favour an economic turnaround with the current new government headed by pro business leaders such as Dr M, Lim Guan Eng  and Nor Shamsiah our new Bank Negara governor.  

There was a powerful interview in the Edge today between Dr M and Jack Ma of Ali Baba. It lays out the technology vision between China and Malaysia which will benefit the recovery. Jack Ma has already invested over USD 100 million into Malaysia and said he will invest more. The focus will be on logistics and technology training to raise the standards of our local citizens.

We could not ask for a better endorsement of our prospects moving forward than Jack Ma.   He puts his money where his mouth is.

On Saturday 7 July Phillip is holding the annual Phillip Investor Conference at Berjaya Times Square from 9 am to 6 pm. Topics include new government, trade war and where we are heading. Several prominent speakers will be presenting. I will be there if you have any questions. To get a registration code please call our customer service at 03 2783- 0300/200, 10 CPE points will be given to guests. Try also this linkhttp://www.fame.com.my/SeminarRegistration.aspx

Invest well and grow your wealth
Bill

Today’s critter is a paradise shelduck, a large goose-like duck endemic to New Zealand.  Both the male and female have striking plumage.   

Why is the USD strengthening ?

16 June 2018

Dear Fellow Investor, 

To all our Muslim friends and clients we wish you a peaceful and happy Hari Raya holiday. 

Last week I reported on the strengthening US Dollar and how that will impact our investments . 

This week, the US Dollar continues to strengthen as money flows out of some of the developing markets including Argentina, Mexico, Indonesia, India and Philippines . 

Why is the USD strengthening ? 

Out of control deficits and spending in the US is the main reason so in order to attract funds to cover the deficits the US Federal Reserve has been raising interest rates. Rising interest rates attracts much needed funds. Fed rate hikes plus Quantitative Tightening is draining hundreds of billions out of emerging markets and those funds are going into the USD. Money always flows to where it gets the best return. 

Solid blue chip Singapore, Hong Kong, US and Malaysian companies with rising earnings, recurring revenue and reliable cash flow will continue to prosper and these companies are somewhat insulated from the currency volatility. The undervalued Ringgit has stabilized after the shock Malaysian election result while the Sing Dollar has actually gone up versus the USD. 

We will continue to focus on established value companies with low or no debt. This will allow us to ride out the Donald Trump induced trade war volatility and continue to collect our dividends. 

Invest well and grow your wealth 

Bill 

This week’s critter is a Maine Coon, the world’s largest cat. 

The Maine Coon is a native New Englander where he was a popular mouser, farm cat and, most likely, ship's cat! The good-natured Maine Coons are the largest domestic cats in the world. Despite their size, they are known as gentle giants because of their relaxed and easy-going personality.