Best Stock To Buy For A 1-3 Month Trade

The most frequent question friends and acquaintances would ask me is which is the best stock to buy - used to make me frown as its like asking a medical doctor during a dinner party about the gout problem you have and how to treat it - just because you are in a casual setting does not mean you can ask "professional" questions and not getting a fee for it.

I mean, you never ask a mechanical engineer at a dinner party how deep you need to lay the foundation for your house, as if you are going to do it yourself, ... though it seems for certain professions, doling out free advice is OK. Thats human nature I guess.

If the other person is a good friend, I would then ask how long they want to hold their stocks - the reply usually will be: "as short a time as possible, contra better still". Of which my sarcastic self will morph and say "IF I can do that confidently, why bother telling you the stock at all ... you might as well tell me how many lots you want to buy NOW ... and I will just give you the cash right now".

OK to be fair, you have to at least be willing to pick up the stock for 1-3 month. Since I think that the markets are going to be good for 2H2010, my best pick is .... (drum roll please) ....


SP Setia

a) 2Q net profit of RM51.2m (+26% YoY, +34% QoQ) was mainly contributed by strong property sales recorded, on track construction works as well as an improving operating margin,
b) EBIT margin improved from 13.6% in 1QFY10 to 16.2% in 2QFY10 due to lower construction costs c) the company chalked up commendable sales of RM598m in 2QFY10, vs RM608m in 1QFY10. Inclusive of May ‘10 sales, total property sales are around RM1.4b, accounting for 70% of its FY10 sales target of RM2b

Major Shareholders:
Skim Amanah Saham Bumiputera 20.6%
EPF 16.1%
Tan Sri Liew Kee Sin 11.1%
PNB 7.0%
Shares Issued: 1.016bn

If you look at the shareholding structure, its evolving rapidly into a major GLC. I expect PNB and EPF to continue to up their stakes in the company. Just last few weeks alone, EPF has upped its stake from 15.8% to 16.1%. Strategically I believe EPF and PNB have planned to use a reputable, proven and branded mixed developer to lead some major property development projects in the future. Just think of the bigger planned land developments over the next 2-4 years.

Made RM171m net profit for year ended Oct 2009 (eps 16.7 sen), I think they will make RM220m (21.6 sen) net for year ending Oct 2010. EV/EBITDA will go down to 12x based on this year's expectations. P/BV is at 2x, not cheap but not expensive for a company like SP Setia. Fully diluted RNAV is RM4.59 according to CIMB. The shares should move a lot higher than the fully diluted RNAV figure.

Reasons why I think RM5.00 (1-3 month view) is an easy target, a longer term target would be RM5.40 (6-9 month view):

1) The free float is technically at 59% but PNB has been gobbling up shares, and so too are long term funds, hence the effective free float should be less than 30%.

2) Though I think there has been some froth in Malaysian major cities' property market, I think there is no danger of a major correction. The strong liquidity in the system and regional Asian wealthy blanket should keep intense interest in good developers.

3) Anecdotal evidence that their major upcoming launch near Mid Valley was hastily postponed following some smaller development launching in the same area recently. The silly thing was the launch was 30% higher in price than SP Setia's proposed launch prices - and SP Setia's development is of a "higher value band".

4) Regional funds are looking to get a proper exposure into Asian property markets. A number of major private investors have been collecting good property shares in a big way (over the past few weeks) - think of it this way, if you are a Singaporean or HK private investor worth US$100m, you are not going to buy 2 condos here and 3 houses there, think of the logistics, costs and fees ... better off buying good developers' shares, plus its more liquid.

5) This is the key to my liking the shares, there is a dearth of choices for funds to plow their funds into Malaysia even though they might like equity exposure here in general. Ringgit looks positive and many want to have a double whammy exposure as well.

6) The final catalyst is quite silly in reality. If you get hold of most analyst reports, you will find that those which follow or has an international rating template will have almost the same target price for SP Setia (i.e. around RM4.00-4.05). That has been surpassed easily, but even when an analyst is still bullish on the company, they cannot just simply upgrade target price as that would mean having to upgrade the projections. Usually there is a 15% band limit in upgrades. They will only be able to do an upgrade till the next quarterly results are out. As things stand, many houses are stuck at a target price of RM4.00-4.05, but having talked to some, many are preparing to improve that to RM5.00 as soon as practicable.

The houses that are not contrained by that template, such as CIMB, have much higher target prices. CIMB has a RM5.51 target price.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Leader Universal's Transformed Fortunes

Leader is an integrated cable and wire manufacturer with subsidiaries involved in the Independent power plant and property businesses. Recent developments have warranted a reassessment of their prospect and platform.



Lets look at it as their business model now where the bulk of the revenue is from cables and wires, with less than 20% from power plant. However the contribution to net profit is about equal from both divisions.

For the year ended December 2008 revenue dipped about 10% from 2007 to RM2.54bn and net profit was RM65m. For 2009, it looks likely to put up revenue figures of just RM1.95bn owing to weaker selling prices for cables and wires. That was due to a steep decline in aluminum and copper prices last year. However, net profit is still going to be respectable at RM65m or an EPS of 15 sen. That would make the stock trade at a very low 6x at 90 sen a share. Already for the three quarters combined for period ended Sep 2009, the company has registered a revenue of RM1.42bn and a net profit of RM55.4m. If you take the net profit for the third quarter alone, its net profit contribution was already RM20m, which could very well mean that the full year's figure could surpass the anticipated RM65m easily.

If you read the UC Rusal prospectus you will find that the outlook for aluminum prices is looking much better in 2010 and 2011 and that should secure a large deal of comfort. One of the main reasons why Leader Universal is still so cheap after rallying a bit over the past few weeks is the very very large free float.

Major Shareholders (%)
Zun Holdings 12.0
LTH 6.2
Gold Connection Assets 6.1

Paid up is 436m shares. There are a lot of shareholders holding less than 5% but herein lies the problem, it is not a widely followed counter, thus prohibiting funds from making it as part of their portfolio. However, that is gradually changing. Right now, there is only OSK which has been following the stock. The Cambodia project was signed back in 2008 and took a long time to come into frituion. Hence you can say that at below RM1.00 a share investors are still just paying for its existing business and not for their Cambodia project.

There is a lot to like about their new project. It is substantial, and will elevate the company to be a lot less dependent on its cyclical cable and wire business.

Leader Universal Holdings Bhd has secured a 25-year deal with Cambodia’s state-owned Electricite Du Cambodge (EDC) to develop a 230kV power transmission system on a build-operate-transfer (BOT) basis. In a filing with Bursa Malaysia yesterday, Leader said its wholly owned Cambodian Transmission Ltd had signed an agreement to undertake the project, which is estimated to cost US$107 million (RM359.52 million). The project would be financed by internally generated funds and bank borrowings.

The project involves the construction of two substations and 110km of overhead transmission lines joining the substations, in Kampong Cham and Phnom Penh. The project fulfils part of the planned development of the Cambodian grid system and provides for future 230kV extension to other parts of the country around Tonle Sap, the largest freshwater lake in Southeast Asia, in Siem Reap. The Kampong Cham substation was expected to be completed by July 2011 and the one in North Phnom Penh by March 2012, with commissioning and commercial operation expected by Dec 31, 2013.

Leader, through its 60% subsidiary Cambodia Utilities Pte Ltd, currently owns and operates a 35MW power generation plant in Phnom Penh and supplies electricity to EDC under an 18-year power purchase agreement (PPA). The power plant has been in operation since 1997.

The company is also developing a 100MW coal-fired power plant in Sihanoukville via its 80% subsidiary Cambodian Energy Ltd. The electricity generated will be supplied to EDC under a 30-year PPA.

This development for positive Leader as it marks the company’s second major breakthrough in strengthening its power division's presence in Cambodia. According to OSK, the PPA could well provide an estimated IRR of around 11-14% (very decent). This stems from cost savings arising from parts sourced via Leader’s cables and wires division and possible lucrative rates provided. The project is likely to be financed at a 70:30 debt-equity ratio.

No early impact. The project shall comprise 3 stages. Based on the Bursa announcement,
the excerpts state that:
(i) The first stage of the project will be the new Kampong Cham Substation expected to be completed by July 2011;
(ii) The second stage will be the new North Phnom Penh Substation expected to be completed by March 2012; and
(iii) The completion of the entire Project with the commissioning of the approximately 110 km transmission line from North Phnom Penh Substation to Kampong Cham Substation, from whence the commercial operation date of the Project commences. This is expected by 31 Dec 2013. Given that the project shall span 4 years to full completion, OSK reckons that the earnings shall stream marginally starting from 2011 only. Thus there is no impact on this year’s earnings.

Prospects are booming. There has been a slew of positive developments involving Leader, which is growing the presence of its power division in Cambodia. We see near-term catalysts for Leader's wire and cables business as cable and wire demand improves in the SCORE region. Nonetheless, OSK estimated that there is a potential RNAV of around RM100m from this PPA - or 22 sen a share.

You have the UC Rusal listing factor, which will lift interest in Leader Universal and maybe Press Metal. You have the huge Sarawak thing in SCORE which will up the interest in Leader Universal's core products. Now you have a pretty substantial and viable Cambodia project, which will create a much better quality of earnings (power plant), thus lifting the and countering the cyclical nature of earnings, thereby moving up its valuations.

Its hard to put a target but even on existing business, its cheap below RM1.00. With all the catalysts mentioned, we might find Leader Universal as the new market leader in volume and market interest.

p/s photos: Song Hye Kyo