Takafulofshittystuff

As reported in theedgedaily today:
"Syarikat Takaful Malaysia Bhd chief executive officer (CEO) Md Azmi Abu Bakar failed to get re-elected as a non-executive and non-independent director of the company at its AGM on Nov 29. Md Azmi, 42, was appointed as CEO on Sept 15, 2005 and prior to the appointment, he was the chief operating officer from 2003. He took over as CEO from Datuk Mohd Fadzli Yusof, who also failed to get re-elected as a non-executive and non-independent director. Syarikat Takaful said the resolutions to re-elect them were rejected by the shareholders. It said the resolution to adopt the audited financial statements for the year ended June 30, 2006 was carried, but the auditor KPMG Desa Megat & Co had modified its report with an "except for" qualification. It did not elaborate on the qualification."

There is obviously something not right. If you were to glean through the NSTP BIz Times today you will find interesting sentences which kinda points to what is inherently wrong about having less than professional managers, or seeming pros who does not act like one.

Shareholders were shocked when the company disclosed that there were RM200m "unreconciled differences" in its financial statements ended June 30 2006. However the company's auditors, KPMG Desa Megat & Co, issued a modified report just before the AGM took place.
My Lima Sen - Unreconciled Differences, that only makes sense in a divorce case, if its an accounting thing, its not good. The auditors would have been trying to reconciled the differences for the longest time, and probably the accounting partners would have had to rolled up their sleeves when they also could not reconcile them - still unreconciled at AGM, very bad form. UR means you don't know where the balances went to, or things just went missing.

Syarikat Takaful Malaysia Bhd chairman Tan Sri Hadenan A. Jalil assures shareholders that there is no need to be alarmed over some irreconcilable items which the auditors brought up at the company AGM yesterday.He said there was no evidence of misuse of funds or other wrongful acts. It will not affect the performance of the company in terms of profits.
My Lima Sen - Accounting is a simple concept, its man-made, every credit must have a debit entry, left hand right hand. When it doesn't balances, and the accountants cannot find them .... there implies something grossly not right, and very poor controls, apparently nobody knows where is the RM200m. My god, even my mum would scream if RM20 was missing from her shelf! Whether there was misuse of funds or CBT we don't know, but we can be sure that the company have VERY POOR CONTROLS. Can someone from the company even admit to that? Even if the differences were to be on the credit side - that doesn't detract from poor operational controls.

The chairman added that the company's accounting system was changed from a cash to accrual accounting is also to be blamed for the differences.
My Lima Sen - That statement reveals a lot about what is wrong with a lot of senior management. If it was a Japanese company, the chairman and CFO would have committed seppukku already. Here we find the chairman grasping at straws, Takaful is NOT THE ONLY COMPANY or THE FIRST COMPANY to change from cash to accrual system in the history of corporate accounting. Just admit that the CFO was not up to speed and apologise on behalf of the less than perfectly-qualified accounting staff and overall poor supervision. Apologise for not being able to be aware of prevailing problems and inability to rectify them within a reasonable time frame. The failure to "acknowledge inferior performance", "inability to admit fault or what is lacking", "the persistence of coming up with slogans and excuses to mask inferior performance", "the inability to anticipate problems and plan ahead properly" - in one zorro slash of the sword, that's largely what's lacking in professional management in most GLCs.

Composite Index Reality

Its 11am and the Composite index is up a significant 14 points to 1078. However, everyone knows the underlying tone is not as strong as what the index is showing. What I am saying is, the market is good and there is good undertone to it but just not as strong as what the index is throwing off.

The index will have a very good chance this few days to tests the 1,100 level because:
a) the mega merger automatically pushes up a few index component stocks and will ensure that it stays there for some time owing to the merger proposals and premium pricing, as the deal is expected to take 12 months to complete, in a way the index will have a strong support level from these group of companies.
b) the view on plantations has been positive 6 months back on biodiesel, now most believe the palm oil prices will continue to surge ahead as biodiesel plants are actually up and running and even exported, bringing forward the reality, even the recent slump in oil prices did not deter from the feasibility of biodiesel.
c) the ringgit is still and undervalued currency and the weker USD over the last few days will only prompt more international investors to plonk their money here in Asia for better stock returns and currency exposure, the strongish ringgit will be able to deter imported inflation somewhat which is another positive for investors.
d) the mega merger may be seen as the beginning of a move to drive M&A activity for GLCs and other governemnet controlled companies, and this will be a very good thing as it will force better productivity and reduce duplication and harness economies of scale, we now have NSTP/Utusan, maybe more construction firms later
e) better openess by Bank Negara on the Anz Bank stake in AMBank is a very positive move and will improve market perception a long way, if only we can redress the REITs thing by waiving NEP equity participation for foreign controlled REITs, watch the surge of funds moving in if we do that.

Some Investing Pointers

1) Out of the blue - When someone ask you about a stock "out of the blue" (just like simon-alibaba below), gotta be suspicious. Especially if its a stock not on everybody's lips. Especially if its from someone who does not play stocks often as their sources have a higher hit rate.

2) Opening lower on huge volume - Look at MBf Corp today, top volume stock with a closing price yesterday of 21 sen. The stock opened at 16 sen and reached a high of 18.5 sen. You don't even have go looking for news, a stock that opens much lower on good volume, you can forget about bottom fishing. Its a very poor bet to buy now. Most investors have a big drawback, and that is Good Recent Memory, Poor Long Term Memory. Recent memory means we make recent experiences as a reference point - i.e. we are aware MBf Corp has risen and traded above 20-22 sen for the past few days, hence a pullback to 16 sen. looks bloody attractive. Poor Long Term Memory, sigh, remember 1997, ok too far back, were you aware that MBf Corp spent a long time around 10-12 sen with volumes being collected over the last 8 months, go back and check the charts. Nobody will sell you so much lower for no good reason.

3) Sporadic Shifting Themes - Yes, we are in a bull market, but you can easily spot weakness when players are rotating from one type of counters to another day by day. If the switching is rapid, it indicates weakness. For example, the market when breaching 1,050 was a bit shaky, and there was some sell off in plantations but undertone was still strong and players switch from counter to counter with no strong theme - when there is no strong theme but undertone is still firm, most players will look for leads in the newspapers - when that happens, we should withdraw and not join in. Looking for leads from newspapers is like going to Lucky Garden morning market and listening to the vegetable seller for tip of the day.

4) Judging strength of bull market - Again, look at the themes. There must be some themes you can quickly come up with. If you can't, then there is little strength left. Now, everybody can rattle off things like Plantations, M&A activity, GLCs being merged for efficiency and economies of scale, more openess with Bank Negara/ANZ, stronger ringgit/weaker USD and funds leaving more established exchanges in favour of Asian bourses. Plus a very mix of speckies and solids on the top 20 volume like now. Remember the market at 950-960, almost 90% are speckies and that is only a trading market (means have to cut swiftly on any signs of weakesness).

Ranhill Baby

simon_alibaba said...
do you have any call on Ranhill Utilities or RUBHD?

What a nice name... Ranhill ... sounds so British. Ranhill Utilities is not on any brokers' watch list, i.e. no coverage, i.e. nobody will touch the stock. Let's be fair and have a view on Ranhill Utilities. Its 100% subsidiary, SAH Holdings holds the water supply concession in Johor - some hoo-hah with the state government to restructure the concession. The project IRR is about 18%.

The only stock that research houses cover within the umbrella of Ranhill is Ranhill Berhad (the other listed counters are Ranhill Power and Ranhill Utilities). Surprise, surprise, the only exciting counter of the 3 is Ranhill Utilities. The Ranhill Power is also good but is plagued with land acquisition issues in Sabah. Both the power and unitilities units contribute nearly 50% of turnover for Ranhill Berhad. At operating profit level, the figure is even more ridiculous as the two account for 95% of Ranhill Berhad's profit.

So, the first thing to do, throw Ranhill Berhad out of your buy list. Of the other two, Ranhill Utilities is a better bet, but because there is scant coverage, it is difficult to move the stock, you will have to hold and wait because the company is controlled by Ranhill Berhad - so RB have not much incentive to improve the share price of RUB, RB would probably use the balance sheet and cash flow of RUB to finance their expansion (not a good thing). RB has ventured to very high risk areas for their construction projects, e.g. Libya... OMG.

Looks like Ranhill group needs a good advisory team... quick. Sell down stake in RUB, let RUB fund its own expansion into water projects on its own balance sheet. RB should refinance its own projects and cut ties with RUB and RPower. Right now, the best any of the companies can do is what the weakest link shows. Nobody is willing to embrace the stronger units.

Kinsteel, Looking Good
Whats Driving The Profitability

If you were to check Kinsteel's share price and volume traded for the past couple of months, there is nothing to suggest anything "sinister" or devious was syndicate involvement. The share is pretty clean. The company reported a ridiculous RM422m net profit for the 9 month preiod. That's largely due to recognition of negative goodwill (don't ask... go take an accounting class). What is a more relevant figure is the net profit after minority interests which came in at RM49.6 million for the 9 months. That was still a huge jump of over 200% from the same period last year's net profit figure of RM16.4m. The cumulative EPS for the 9 month totals a staggering 42.5 sen (mother share rose to RM1.40 today from the previous day's close of RM1.18).

The overall improvement was due to the enlarged group which resulted in strong upstream activities, and overall improved demand from the region. ... That's basically bulls shit stuff. Kinsteel on its own is a decent company. In 2004 it made a pretax profit of RM26.2m from revenue of RM453m. In 2005, the pretax profit was RM20.5m from revenue of RM550m. However, cash flow was in the negative territory slightly, not a major concern but dissuades the company from expansion plans. In steps Maju Group, this is actually a very good backdoor listing for the revived Perwaja Steel.

The key was on 7 October 2005, the company entered into a conditional Strategic Alliance Agreement with Equal Concept ( Maju subsidiary) to acquire a 51% interest in Perwaja Steel. At the same time, Kinsteel will use a SPV named Perfect Channel, to acquire a 51% interest in Gurun Assets from various Maju subsidiaries (Maju Rebar Coatings, Maju Steel Centre, Perwaja Rolling Mill and PS Water). However, no liabilities will be assumed by Kinsteel.

Here lies another key: the purchase of Perwaja Steel is for RM197.6m, which will be satisfied via an issuance of 60m new Kinsteel shares at RM1.36 and a cash settlement of RM116m. The deal is a sweet deal for Kinsteel and also leveraged on Perwaja's strengths and masks its deficiencies.

Not many are aware but Perwaja is the biggest producer of hot briq iron and DRI at 1,200,000 MT. The nearest competitor is Amsteel at 750,000 MT. Perwaja also towers in Billet/Bloom at 1,300,000 MT production capacity equalling Southern Steel's capacity, while Amsteel has a 1,050,000 MT capacity there.

While I thought the deal was sweet for Kinsteel and Maju, the swiftness of results after consolidation took me by surprise. The big question for all is whether there is more upside... The key is in the issuance price to Maju, its at RM1.36. The stock basically was ignored for the past few months despite the proposed deal. Now that that is sealed and done, the company just went about reporting the actual financial figures and let the market do the rest. The stock jumped today from RM1.18 to RM1.40. The 9 month EPS figure is already at 42.5 sen. Even giving that a 4 times PER is already RM1.70. Again the issuance at RM1.36 to Maju is very critical as it already assumes a huge undervaluation in most cases of share issuance, thus more upside is very likely. In addition, there was no hanky panky in stock price and volume for past few months and that would also suggest that no one will be selling for a long time.

The warrants are even more attractive. Conversion price at RM1.00 and expiring in only 2011. Even at 61 sen, the premium is only 61+100 / 140 = 15% premium, and a healthy gearing at 2.3x. Assuming RM1.70 as a short term target and giving it a 10% premium, the warrant would then go to 86 sen minimum. Bodes well for all kind of players, just wished I had looked more closely at Kinsteel earlier, however, it looks like still not too late to venture in.

What Now, Brown Cow?
Just Don't Be A Bigger Sime Darby

If the end result of the mega merger of PNB companies result in just a much bigger Sime Darby, then don't do it. It is very silly and exhausting. I basically agree to the concept. There are a few questions though:

1) It looks like Synergy Drive was "created" as an independent party so that PNB could vote on the deal, which requires 50% plus 1 vote to push it through. If PNB has mooted the deal on its own, PNB will be forbidden from voting its stake. Hence Synergy Drive may not as "sinister" as the cynics might have it. However, Securities Commission could be tasked to look over Synergy Drive's existence, and whether PNB is in cohorts to circumvent the regulations to the detriment of minority shareholders. Ball in your court SC.

2) The entire exercise is expected to be complete by 4Q2007. This is one of the major hurdles we have to eradicate. By making companies having to jump through so many hurdles, and knowing that each hurdle tends to take time - this is what we call red tape, bureaucracy, causing misallocation and wastage of resources = inefficiency and lower productivity. Can the powers to be, please, implement a task force to reduce the red tape-gate. It is certainly not hard. If this deal were to be done via SGX or HKSE, I can tell you it will be completed with all the approvals within 4-6 months. The sad thing is, we don't seem to care, and just accept it as status quo - we could do things so much better. Dragging out the approval process to 12 months is highly unacceptable. Yes or no, it should be decided asap, as a lot of things get hung in the air, suspended like inert useless things.

Corporate moves like this is welcomed and would excite foreign investors. I am surprised that Bank Negara would be so welcoming to ANZ's investment into AMBank Group. This is yet another positive step and would win points in the eyes of foreign investors. As a whole, we need to keep an open mind and not be so nationalistic if we are to compete and attract FDIs. We can lock ourselves up and not sell anything and end up like North Korea. Certain critical sectors, we need to maintain national ownership but we must also be flexible. As proposed before, if we could revamp the rules regarding REITs - e.g. foreign controlled REITs need no longer comply with NEP equity ratio, watch the flood of funds snapping up commercial properties in Malaysia. Its a willing buyer, willing seller, no need to protect and say foreign interest owns a majority of our commercial properties - so what, its a reallocation of resources. Our minds need to think bigger than that.