SKPRES - Quick Comments on News

This one is dedicated to the folks at investssmart chatbox who first alerted my attention to this stock (you know who you are), and to subsequent folks who are persistent in asking me more about this stock. I am not an employee nor related to SKPRES owners nor management, merely a small minority share owner who enjoys trading the stock. Enjoy!

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On Mar 16, the Star carried an article on SKPRES. It gives a good introduction and I feel a decent analysis on the company. I recommend studying the article to supplement your research on SKPRES. My comments are numbered and marked in square brackets below.

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Friday March 16, 2007
SKP Resources eyes double-digit growth
By Izwan Idris
PETALING JAYA: Penny stocks offer a cheaper entry cost for investors [1], hence their popularity among retailers. It is also interesting to look at some of these companies, which are actually worth more than a punt.
SKP Resources Bhd, a Johor-based maker of plastic parts used in many consumer electronic gadgets like high-end television sets, in-car entertainment units and satellite radio receivers.
Its clients include household names like Sharp, Pioneer and Dyson.
SKP Resources' most recent quarter ended Dec 31 saw a 70% jump in net profits to RM4.8mil, or 0.8 sen per share. The company made a net profit RM2.8mil, or 0.47 sen per share, in the previous corresponding period.
“The third quarter was a record for the group. We also had a good start in 2007 and we hope to at least match the results in the last quarter (ending March 31),'' executive director Ivan Gan Poh San told StarBiz recently.
He said the strong performance was largely attributed to the group's expanded operations.
SKP Resources acquired rival SPI Plastic Industries Sdn Bhd in a RM30mil deal [2]completed in August last year.
The company had also completed a new factory in Senai during the year, which gives its an additional 176,000 sq ft of floor space.
“The acquisition and the new factory had given a lot of room for future expansion,'' Gan said. “With that, we don't expect to make huge capital investment over the next three years [3].”
SKP Resources had also benefitted from the trend among large multinationals to move their low-end manufacturing base to Vietnam or China, while existing factories in Malaysia shifted towards premium products [4].
“Margins are improving with better cost control [5] and, at the same time, we are now able to offer value-added services like product design and customisation of certain products,'' Gan said.
Items produced by SKP Resources include components for liquid crystal display TVs and some 200,000 sets of digital or satellite radio receivers bound for the US market every month [6].
“Our target is to register a healthy double-digit growth over the next two to three years [7],'' Gan said.
Assuming that SKP Resources would be able to repeat the performance in the last quarter, the stock is valued at around seven times [8] its estimated earnings for the financial ending March 31. (FY07).
For the nine months ended Dec 31, 2006 net profit had risen 36% to RM10.8mil, or 1.8 sen per share, on sales worth RM119mil. The results year-to-date have already surpassed the group's performance for the whole of FY06.
The stock gained 1 sen to 16.5 sen yesterday. It has risen 28% for the year and hit a 52-week high of 25 sen on Feb 22.
But it would probably take a few more quarters of rising profits for SKP Resources, with a market capitalisation of RM100mil, to attract the attention of big investors and institutional funds [9].
In the mean time, the stock's growth outlook and decent valuations make it a bargain for those willing to take a bet on a promising small cap play.

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Comments

[1] "Penny stocks offer a cheaper entry cost for investors".
Comments: Whilst this does not affect SKPRES Intrinsic Value, it is worth mentioning briefly that penny stocks do NOT really offer a "cheaper entry cost". However, what it does offer is "excitement". Significant profits (e.g. 10%) can be had with what might incorrectly be perceived as small increase in prices over a relatively short period (e.g. a "small" 2 sen increase from $0.17 to $0.19). However, one must always take into account trading expenses (both buy and sell) into any profit calculations. If you don't understand all this, my advise is to avoid penny stocks - the odds of you losing money is higher if you don't understand all this.

[2] "...acquired rival SPI Plastic Industries Sdn Bhd in a RM30mil deal..."
Personally, I like the acquisition for several reasons. 1. The price paid is equivalent to just 6 times earnings, which is slightly cheaper than current SKPRES P/E of 7. 2. It is a good use of surplus cash which doesn't earn anywhere near the potential earnings yield of 16%. 3. The acquisition also enables SKPRES to diversify its earnings base, as the acquired company is largely domestic, whereas SKPRES earnings appears to be largely overseas. 4. The acquisition also removes a competitor domestically. 5. The acquired company is confident enough to provide a profit guarantee of $5M per year for the next 2 years, which makes the investment safer.

[3] "...we don't expect to make huge capital investment over the next three years .. "
Again, I find this very comforting - especially from a cash flow perspective - as the recent cash acquisition has significantly reduced the coy's cash holdings, and one might be rightly concerned if a coy has plans to further expand via huge debts (think MEGAN, although different business model).

[4] "...existing factories in Malaysia shifted towards premium products ..."
Normally, I find this sort of comments neutral. There are some companies that succeeds in the shift (i.e. raise both revenue and margins), and many more that don't (resulting in overall reduced PAT as revenue fall does not match increased margins). Personally, I like to see some evidence of net profit increasing in $ terms (and so far, it has).

[5] "...better cost control... "
A quick glance at the most recent quarter results showed higher PBT% than in the past few quarters, but I haven't really investigate in detail the financial statements to see if these has indeed been achieved via better cost controls (such as reduction in staff cost, etc). However, there seems to be no serious reason to doubt company management's claims.

[6] "...receivers bound for the US market every month... "
With strengthening RM, and possibly weaker US economy, there could be risks that SKPRES earnings could be adversely affected going forward. But I like the recent domestic acquisition which should increase and diversify its earnings base, mitigating this risk somewhat.

[7] "...target is to register a healthy double-digit growth over the next two to three years..."
For the next 9-12 months, I am quite certain that the coy will achieve double-digit growth, just from the recent acquisition alone. The challenge will be after that, if it has no more acquisition, as future growth will then depend on organic growth. The recent factory expansion which is expected to meet its growing needs over the next 2-3 years should give the company good odds of achieving their target. Given the relatively good odds, for the company to trade at a low single-digit P/E of 7 seems to suggest a significant mispricing.

[8] "...stock is valued at around seven times..."
At $0.185, SKPRES is now trading at slightly over 7 times. But FYE2007 only takes into account 2 quarters of recent acquisition results, and virtually nothing on its future growth prospects. Using a conservative FYE2008 which simply takes into account the full 4 quarters of recent acquisition results suggests a P/E of less than 7.

[9] "...attract the attention of big investors and institutional funds ..."
There's no doubt that should there be one large fund buying SKPRES, the only way the price can go is UP. I think, with current attention focussing on the big caps, it might take a (long?) while before the market shifts its attention to undervalued small caps. To be honest, I don't know exactly when - safer to assume it could be a very, very long wait, and not bet the house.

It's also quite possible that syndicates might not touch this stock, if this stock is a candidate for institutional investors - they might get cornered themselves, as they try to corner innocent retailers.

POTENTIAL RISKS
Like all stock investments, owning SKPRES has its own risks too. Some of the risks I perceive include:

1. Intrinsic value related risks ... e.g. possible increase in raw material prices for plastics. RM appreciation, reducing either the price competitiveness of its products in the US markets or its margins. Possible loss of key customers if not competitive. Etc. These are real risks, and much depends on management to control the controllable items and mitigate the risks as much as possible. So far, I like what I see - good use of cash, general avoidance of debt, sound acquisition at an attractive price, sound pace of business expansion, etc. And I like what the coy has achieved so far in the last 8 quarters. Whilst there are no guarantees in the stock market, I like the odds personally. (Remember to diversify, and don't over-trade).

2. Penny-stock reputation. Whilst penny stocks are popular with retailers, I won't be surprised if the vast majority of SKPRES owners in Bursa Malaysia don't really care a hoot about the underlying business behind the blinking ticker. I suspect "Buy and hold" investors might need to wait for a very long time, before the market appreciates its intrinsic value. I think shorter-term traders would fare much better with this stock, buying at the low end of the trading "box" and selling at the higher end of the trading box. Those who believes in its fundamentals may also do better by trading say half of their holdings in this manner. However, if you are a value investor who cannot identify the trading box (and they will vary over time), nor have the time nor inclination to watch the ticker symbol all day, then, my advise is don't buy this stock - there are much better value stocks around that will permit one to Buy and Hold, and sleep well at night. There are also risks with the syndicates "cooking" the price of the stock in order to profit from retailers, but I suspect that's what excites most experienced short term traders as the profit opportunities are bigger.

3. Possible lower interest and lower liquidity in future, as future profit opportunities get squeezed from having more better-informed investors, leaving retailers and syndicates to prefer other less sound, more exciting stocks with greater profit opportunities ...

CONCLUSION
I've read somewhere that it is unfair for any writer to give a stock a Buy recommendation, simply because when it comes to selling time, the writer is often unable to call a Sell recommendation in a timely enough manner to protect the owners who followed him. And since this is more of a trading idea than a "buy and hold" idea, I don't feel comfortable calling a Buy below a certain price, simply because I expect the trading boxes will change over time. So, this one, you're on your own.

Disclaimer
I own SKPRES and have traded the stock several times in the past.
As always, buy and sell at your own risk.
Comments welcomed.

TENAGA - News on Dividend Policy

Biznewsdb.com has a post on TENAGA this morning ... over the course of today and tomorrow, I expect more updated news to be posted there ... it should be interesting to watch how TENAGA share price behaves over what is supposed to be "good news" over the next couple of days. If TENAGA share price does not rise further, it's probably a sign that "distribution" has occured, and in the absence of more good news, the more likely immediate trend then would be for the price to head south ... Of course, in real life, things are never equal and rarely that simple - e.g. it is always possible that there could be a sudden large inflow of foreign funds and volume say next week that could push prices up (in the midst of a downtrend), etc. so, all my comments here should be taken within the context of probabilities, rather than certainties.

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Tenaga's Profit Soared To Record in 2nd Quarter Updated :
17-04-2007 Media :
Dow Jones Story By : ELFFIE CHEW
via www.biznewsdb.com

KUALA LUMPUR, Malaysia -- Tenaga Nasional Bhd., Malaysia's biggest company by market value, reported a record quarterly net profit for the fiscal second quarter due to stronger foreign-exchange gains, tax writebacks and rising power demand.

The state-owned utility's net profit for the quarter ended Feb. 28 rose to 1.55 billion ringgit ($450.4 million) from 399.5 million ringgit a year earlier, which was above the one billion ringgit to 1.3 billion ringgit forecast range of four analysts surveyed by Dow Jones Newswires.

Revenue increased 18% to 5.68 billion ringgit from 4.83 billion ringgit a year earlier, reflecting higher sales as well as the higher price of electricity from June 1.

Foreign-exchange gains amounted to 437.6 million ringgit, compared with 126.1 million ringgit a year earlier, the company said.

Tenaga also said it aims to return 40% to 60% of its annual free cash flow as dividends, its first-ever dividend-policy guidance. It also declared an interim dividend of 0.10 ringgit a share.

Second-quarter results improved despite higher costs resulting from the commencement of the Tanjong Bin Phase 1 power plant, the company said. Chief Executive Che Khalib Mohamad Noh said that for the first half, the company paid 220 million ringgit for power supplied by Tanjong Bin and will pay 630 million ringgit to buy 85% of the capacity from the first two phases of the plant for the fiscal year ending Aug. 31.

The three-phase, 2,100-megawatt, coal-fired power plant is being developed by independent power producer Malakoff Bhd. The third phase of the project will begin operations in September.

Tenaga said it expects the performance for the rest of the year to "continue to be encouraging" but didn't elaborate.

Mr. Che Khalib said the company should be able to improve on its operating profit in the second-half. Operating profit for the first half was three billion ringgit, compared with 1.73 billion ringgit a year earlier.

He said the higher operating profit will be driven by continued strong demand for power from the industrial sector. "The industrial sector accounted for 50% of Tenaga's total demand [in the first half]."

Mr. Che Khalib said overall power demand for the first half rose 6%, compared with 3% growth a year earlier, and he expects "electricity demand to be sustained in the second half."

Comments:
Most of the content above are largely as reported. For Phase 2 of Tanjung Bin, management naturally opted for the lowest capacity payment (85%, instead of say 100%) due to current excess capacity, and so, the payment of $630M is smaller than what I used to estimate intrinsic value earlier.

To me, the most interesting news from above is the dividend policy. We should be able to estimate roughly how much the dividend might be. To me, the first issue is the definition of "annual free cash flow" since it is not defined in the article. My educated guess would be the "Changes in cash and cash equivalents" in the Consolidated Cash Flow Statement, but to be honest, I can never be 100% sure. I would like to think that what's distributed to shareholders should be after investing (e.g. after capex) and after financing (e.g. after repayment of bank borrowings). This would seem to be a more prudent and responsible way to run a company. Of course one could argue that if operational cash is guaranteed to be strong, then, why can't TENAGA just take new loans to pay dividends, but that is not what I would personally deem to be a prudent way to run a business. Still, it is important to watch how TENAGA management defines it, as it would give important clues as to the thinking of their management.

So, assuming it is the "annual net free cash flow" (i.e. net of investing and financing activities), this gives a H1/07 figure of approximately $2B. Annualize this gives $4B, and taking the mid-point of 40%-60% suggests a possible dividend distribution of $2B. A 10 sen gross interim dividend will cost TENAGA approximately $315M net of tax, so, $2B suggests that the final dividend might be quite generous, perhaps 5 times larger, say 50 sen gross. It will certainly be much larger than the final dividend paid in previous years which is only 14 sen in 2006 and 12 sen in 2005. Of course, my 50 sen final dividend is only a personal guess, and the actual value will depend on a number of variables, such as whether the company adopts a 50% figure, the actual definition, and the actual result and period for the annual free cash flow to be used in the calculation.

If the total dividend figure is 60 sen gross, this would translate to a gross dividend yield of say 5% p.a. (assuming $12 TENAGA share price). It would be interesting to watch how the market reacts to this news. For TENAGA warrant holders, it will be important to look out for the ex-Dividend date since warrant holders do not receive the dividends, but could potentially suffer from a fall in TENAGA prices on ex-Div date, if the prices don't recover immediately.

TENAGA - Quick Comments on Q2/07 Result

TENAGA posted its quarterly earnings results last night. PAT (Profit After Tax) for Q2/07 (Financial Year ending 31 Mar) was a mind-boggling $1.6B, compared to just $0.4B same period last year. On the surface, $1.6B is a huge number. For example, PBBANK reported a comparble $1.7B PAT but for the entire 2006 Financial Year, not 1 quarter. So, I suspect the market will react quite positively (perhaps irrationally) to cheer the latest TENAGA set of results, at least initially.

However, before we all rush out and buy TENAGA and its warrants, it is important to examine if these set of results are sustainable or not, whether the good results have been priced in fully (or not), and if not, what should be a reasonable long-term earnings and Intrinsic Value for TENAGA, based on what we know of TENAGA's business today. I am afraid this means that I need to pour some really cold water on TENAGA's latest hot, hot Q2/07 results first ...

1. Extraordinary currency gains. The $1.6B PAT includes approximately $430M of currency gains which requires some caution in interpreting. It is clear, this currency gain is not expected to be repeated perpetually in future. Yet, there is some expectation that going forward, at least for the next few quarters, that RM will continue to appreciate relative to USD, and TENAGA should be able to continue to benefit somewhat from this trend, due to its relatively high USD debt. For conservativeness, I think taking into account say 10% of the currency gain is probably a closer reflection to a reasonable PAT, than taking into account 100% of the currency gain.

2. Extraordinary tax write-back. In the last 2 quarters for FYE2007, TENAGA has written back approximately $170M worth of deferred tax to reflect the lower tax rates expected in FYE 2007 and 2008. Again, these are not expected to continue to benefit TENAGA perpetually in future, but has a very limited lifetime.

3. Tanjong Bin. The latest set of results, which ended 28 Feb 2007, has not yet reflected the recent commissioning of the second unit of the Tanjung Bin power plant on 28 Feb 2007. As stated in the news recently, we know that one of TENAGA's problems is its excess capacity payments to IPP. For FYE 2007, it is hard to put a precise figure on how much of Tanjung Bin's excess capacity could be actually utilized, but once the unit is commissioned, real costs can be expected to incur. TENAGA expects to incur costs of approximately $700M over the next 2 quarters. In terms of estimating future long-term earnings, it is not unreasonable to prudently assume a percentage, such as 50%-75% (say 67%) of that amount as being a true loss, as quite likely, it will take several years before TENAGA's present excess capacity can come close to being fully utilized in future. Note that 67% is just a rough and ready approximation, I expect the actual loss to be bigger in the immediate quarters (e.g. 100% on Day 1 of commissioning), and gradually reducing over time (e.g. 20%-40% after several years?).

4. Planned land bank sales, recovery of dilinquent accounts. At the start of the year, TENAGA announced that they planned to gain approximately $400M by FYE2007. For Q1/07, they gained $92M, close to $100M per quarter. I have not yet seen the figure for Q2/07. It is probably prudent to assume that there is some gains included in the latest set of results, leaving another $200M to be gained in the next 2 quarters. If it was nil in Q2/07, then, that should be a positive surprise. Again, it is unclear if these set of earnings are sustainable in the long term.

5. Potential additional revenue from 9MP, EGAT, etc. Higher electricity demand arising from the 9th Malaysia Plan projects as these continue to be rolled out. This is over-simplifying it, but steel companies are well known to consume huge amounts of energy in their manufacturing processes. It is hard to put a precise figure on the % increase in revenue that this would translate to TENAGA over the next year or two, but for the moment, it is probably enough to know that the potential additional revenue are more real than a dream.

So, what does this mean to TENAGA long-term sustainable EPS? Let's take a closer look at its historical results (in black). I have projected this to the end of 2007 FY, and the assumed inputs are in blue. In coming up with the projected values, I have tried to adhere to Buffett's principle that "it's better to be approximately right than precisely wrong" ... in other words, I know that my projections are precisely wrong, but the final EPS answer to be close enough to serve as a guide to TENAGA's intrinsic value.

A. Revenue.

It is comforting to see that TENAGA's revenue has been steadily increasing in the last 10 quarters, with a hike in Q4/06 (13%) due to the higher electricity tariff that came in at the start of the quarter. In the absence of fundamental changes (like tariff hike), a steady growth can be expected for TENAGA revenue due to natural GDP growth. So, for Q3/07, I would expect TENAGA revenue to continue to grow at a high rate (vs Q3/06). Then, for Q4/07, for the growth to slow down (as the impact of higher tariff rates are neutralized), but still slightly higher than past natural growth rates due to 9MP. So, I believe my projected revenue growth of 14% and 6% for Q3/07 and Q4/07 are not unreasonable.

B. PBT.

Since the revenue for Q3/07 is close to Q2/07, I have made some adjustments to Q2/07 PBT to derive a suitable long-term, sustainable gross earnings, in order to value TENAGA's business more appropriately. Specifically, I have made adjustments to TENAGA's one-time forex gains and deferred tax write-back as noted in points 1 and 2 above, as well as Tanjung Bin's extra costs (as noted in point 3 above). More specifically, $860M = $1,651 - $430M (forex gains) - $170M (tax write-back) - $350M x 67% (Tanjung Bin loss) + $43 (10% forex gain). On the surface, this looks conservative since $860M is only a bit more than half of the recent fantastic result of $1.6B PBT ... but since our focus is on long-term sustainable earnings for TENAGA, I believe a figure like $0.9B-$1B is probably closer to the truth, than assuming the entire $1.6B PBT.

C. Tax rates.

We saw low tax rates for Q1/07 (7%) and Q2/07 (5%) due to the one-time deferred tax write-back. I am not an accountant by training, but I suspect, going forward, one can reasonably expect the write back to continue for the next 2 quarters. However, long-term, one should not expect future write-backs to continue perpetually. For Q2/07, I noted that tax was $242M, and write-back is $165M or approximately 2/3rds, i.e. if one strips out the write-back, the tax should be roughly 3 times bigger. So, I have assumed tax rates of 15% (= 3 x 5%). I use this instead of 27% (or 26%) tax rates as certain expenses incurred by TENAGA are probably tax deductible, and it is impossible for me as a lay person, to do a full estimation, and probably not worthwhile too. I suspect this assumption is quite debateable.

D. EPS

Based on the above methodology, I obtain an EPS of around $0.35 for H2/07 that factors in points 1, 2, 3, and some of point 5, and ignored point 4. Full year sustainable EPS is probably closer to $0.70, instead of $1.00 if one just adds up the full 2007 FY EPS.

Intrinsic Value Estimation.

To me, TENAGA is a consumer monopoly (no competitor) whose revenue, in normal circumstances, can be reasonably expected to grow at least, in line with GDP rates. Whilst it is a consumer monopoly, it is also a GLC, and it's ability to raise rates is somewhat limited, compared to a true consumer monopoly. Historically, its management calibre, rightly or wrongly, is also widely perceived to be below top corporates (e.g. the misjudgements made on the restrictive conditions set in the past limited-life IPP contracts). Nevertheless, I'm a believer that when average management runs an economically superior business, the economically superior business will eventually come out on top. Therefore, a P/E of 18 to 20 is not unreasonable for a business like this. Historically, I believe TENAGA has been rated at more than 20 times perhaps more often than not, and compared to its regional peers, perhaps even more, but I would feel somewhat uncomfortable personally to assume a P/E higher than 20, as the margin of safety then becomes smaller. Another way to view a suitable P/E is that with current 5 to 10 year government bonds running at 3.5% risk-free, it is probably safe (if one takes a long-term view) to assume that TENAGA's earnings should be valued at 5% interest rate from a security of earnings perspective. This also translates to an equivalent P/E of 20. So, a P/E of 20 looks about right.

This suggests an Intrinsic Value of $14, or maybe a bit higher.

CONCLUSION.

Given the mind-boggling set of results announced last night, I expect the market to cheer TENAGA's share price initially. I would not be surprised if the cheering results in temporarily irrational prices. I will also not be surprised if the current bull run results in TENAGA euphorically shooting past $15 as it gather more pace. Still, the timing of the commissioning of Tanjung Bin power plant seems like a somewhat doubtful management decision (given the substantial excess capacity that remains unabsorbed), and one can name some other problems with TENAGA. However, bottom line is that it is widely expected that the 9MP and Malaysia's reasonable GDP growth (5%-6%) will continue to absorb some of the present excess capacity over time, which should be positive for its revenue and its earnings prospects, that some further upside from the current price of $12.1 can be expected. Technically however, there is a resistance at $12.5-12.6 from the last attempt in Feb. At $12.1, personally, I might consider buying some TENAGA (warrant) this morning if I can get it at the right price (and if I don't have any exposure yet), but I doubt I will be able to get it at an attractive price. Certainly, I don't recommend anyone to chase after a hot stock (especially for new investors who hasn't the experience). Given its doubtful track record in the past (e.g. past management decisions and GLC status), it might not be as attractive as some of the other better stocks to hold for the longer-term (e.g. PBBANK). However, I believe more experienced traders can benefit from playing this stock (and warrant) due to its large market cap and its consistently high liquidity, although there are also better stocks to play.

Disclaimer: As I am writing this in the early hours in the morning, it is possible that I might have missed something. If so, please don't hesitate to point out any factual errors so that I can make the necessary corrections. Thank-you in advance. Even though I tried to be as neutral and objective as possible, it is possible that I might not be completely neutral as I hold some TENAGA-CA warrants.

The Intelligent Investor

This used to be one of my favorite investment books. Nowadays, I don't pick it up as often, but sometimes, I will pick it up, flick through some pages, read the highlighted parts when I need some investment inspiration. In the past, I used to read it diligently, every word and every page, highlighting the key points that I didn't know before - I did this at least twice years ago.



Wikipedia has an introduction of the book here - http://en.wikipedia.org/wiki/The_Intelligent_Investor. It looks similar to the one I have, except mine has yellowed pages, marked with various coloured highlighters, and looked a lot older than it really is.



It's impossible to summarize a book like this in this blog. Everyone takes different things out from a book like this. Even the same person takes different things from this book at different times. To me, this is not the sort of book that will inspire one to earn 50% or 100% return from the stock market. Instead, it will teach you how to make intelligent investment amongst others, with "safety of principal" and "adequate return". (Graham believes that achieving a return similar to the market over the long term represents a great achievement - subsequent studies showed that 80%-90% of investors don't beat the market in the long-term).



Here is a small sample of the more interesting value investing concepts from various places in the book:

- "To invest successfully over a lifetime does not require stratospheric IQ, unusual business insights or inside information. What's needed is a sound intellectual framework to make decisions, and the ability to keep emotions from corroding that framework."

- A stock is not just a blinking ticker symbol... it's an ownership interest in an actual business with an underlying value that doesn't depend on its share price.

- The habit of relating (or comparing) what is paid (or price) to what is being offered (or value) is an invaluable trait in investment. A great company is not a great investment if you paid too much for the stock. An average company can be a great investment if it's given away close to nothing.

- Buying stocks is more intelligent when it is like buying groceries (looking for value and bargains) than when buying perfumes (when one typically tend to ignore the high price).

- The stock market is a pendulum, that swings between unsustainable optimism (giving high prices), and unjustified pessimism (giving low prices). Refuse to let other people mood swings govern your sound intellectual framework. Instead, the intelligent investor seeks to profit from this folly.

- Stock market fluctuations are certain. Prepare for it financially and psychologically. (E.g. in market crashes - you need both a lot of cash and a lot of courage to buy).

- No matter how careful you are, you can never eliminate the risk of being wrong. The future of security prices is never completely predictable. Always insist on a "margin of safety" to minimize the odds and the consequences of being wrong.

- Don't take foolish risks - it can put you so deep in the hole, that it's virtually impossible to get out.

- Being an intelligent investor is more "character" than "brains". The investor's chief problem - even his worst enemy - is likely to be himself. (To me, the hard part is not figuring out the sound intellectual framework, but sticking to it.)

- Whilst enthusiasm is necessary for great accomplishments elsewhere, on the stock market, it almost invariably leads to disaster. (e.g. stock market bubbles).

- Stocks become more risky, not less, as prices rises.

- Additional concepts for defensive (or passive) investors. 1. Limit the share universe to well-established stocks and funds. 2. Dollar cost averaging. 3. Portfolio or formula investing - "50/50 formula". (For 2. and 3., I used modified forms which I feel are more effective).

- Invest only if you feel comfortable owning the business, even if you have no way of knowing its daily share price. (or its daily volume; Buffett feels the same way too, as he always focus on "owners earnings" in his annual reports than the daily / closing share price).

- Graham thinks diversification can be achieved with 10 to 30 stocks (although if I'm not mistaken, I read somewhere that he himself holds nearly "hundreds" of stocks).

(If these concepts doesn't make sense, feel free to leave a comment or 2 here. All non-destructive comments and questions welcome! There's no such thing as a silly question. Graham goes into detail in many of the concepts in the book).

Most stock investors I know are not aware of the book. Fundamental and value investors might have heard it, but the few that has, have mostly yet to read the book in its entirity. Come to think of it, I have yet to know of another person who has actually read the book in its entirity twice (except for Buffett). The feedback I've heard is that it is heavy going, and it is ... but I must say that it has shaped my thinking a lot about investing intelligently. If it's any consolation, my first attempt to finished reading the book took me at least 4 years. If you are a value investor, and find the above concepts resonate within you, consider buying and owning this book as a lifetime friend and constant source of reference, especially if you still have decades of investing years ahead of you.

Special Note: If you are a trader ... sad to say Graham doesn't think too highly of traders ... during his time (he first wrote the book in 1949, and updated it several times in the 60s and until his death in 1976), he has yet to meet a trader who consistently beat the market in the long term. (Another interesting character in the early 1900s which Graham is certain to be aware of is Jesse Livermore, who is probably the world's greatest trader from that era - unfortunately, he lost nearly all his fortunes gained from trading, and eventually committed suicide ... ). What is interesting to me is that the few value investors I know are thrifty people who live simpler lives (including Buffett, the world's 2nd richest man), whereas the few traders I've heard about seem to have lived "the rich and extravagant life". Perhaps a generalization and stereotyping, but I can't help but wonder if that is because of the different approaches that successful value investors and traders acquire wealth - trading can bring wealth very quickly which can tempt one to spend it more lavishly, whereas value investors who patiently looks for bargains in the stock market tend to apply that habit to the other aspects of their lives, always subconsciously looking for value and bargain ... :-)

Happy reading and investing!

HEXZA - Old Article #3

Some more interesting information about HEXZA's business. My quick take is:
1. Company has improved margins before when raw material cost increases (but this is never guaranteed for the future, although a good sign - can't read too much from 1 article).
2. The cash hoard has given them flexibility to expand their business with even better margins than in the past, further adding shareholder value.
3. They are market leaders in their own niche markets (60% ethanol market share, 30% resins market share in Sarawak).
4. Never missed a single dividend since IPO - that's impressive given that it has been listed since 1987, nearly 20 years!
5. In late 2005, SBB called TP of $0.68 - perhaps that explains why $0.67-$0.68 is an important resistance, as seen in the charts. Of course, HEXZA earnings have increased by another impressive 42% since then.

Sounds like a sound, long-term fundamental business isn't it? ... so, it's up to you dear readers to promote HEXZA more :-) Don't forget to buy more on weakness, and sell some at market tops, as it will take a while before the price shoot upwards ...

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Corporate: Pricier raw materials don't stop Hexza
By Nadia S Hassan
October 18, 2005

Despite rising raw material costs and increased competition, Main Board-listed chemical company Hexza Corp Bhd still managed to post an impressive net profit growth for the first half of its financial year ending Jan 31, 2006 (FY2006). Although revenue has remained fairly stable, net profit for those six months increased by 90.2% compared with last year's. And the news gets better. Hexza is expected to perform even better in the second half of FY2006 compared with the previous corresponding financial period, according to its chairman, Datuk Dr Foong Weng Sum. All this indicates that margins are improving at Hexza, according to Ng Jun Sheng, an analyst with SBB Securities, which Foong confirms in an e-mail interview with The Edge. "For the first half of FY2006, profit before tax [PBT] margins increased to 13.7% from 8.4% in the first half of FY2005, which shows an improvement in operating efficiencies and economies of scale," says Ng This is an admirable feat considering that the price of primary raw materials used by Hexza, which include methanol, urea and molasses, has doubled compared with last year, according to analysts. This is mostly brought on by high demand from China and steadily rising oil prices. However, even with margins improving, Foong admits that it has been a challenging time for the company. "Raw material costs have risen and margins still remain under pressure, but we try to minimise this by improving operational efficiencies and yields," Foong says. However, ensuring further operational efficiencies is not the only thing Hexza is doing to secure growth. "Hexza has plans for expansion of all its core businesses — formaldehyde-based resins as well as ethanol [ethyl alcohol] — some of which are in an advanced stage of implementation. The financial impact of these expansions should be accretive in the next financial year, (Seng: This refers to FYE 2007.) " Foong says. The company has already invested some RM9 million in capital expenditure to increase the capacity of its factories by early FY2006, as its Ipoh plants are already running at full capacity. With the expansion, Hexza expects output to increase by another 30% to 40%. Hexza also has factories in Port Klang and Sarawak. While its plants in Ipoh deal with the manufacturing of ethanol, its plants in Port Klang and Sarawak are involved in the manufacture and sale of formaldehyde and formaldehyde-based adhesives and resins for timber-related industries. To fund this expansion, Hexza has had to dip into its cash reserves. Even so, the company still holds about RM9 million in cash and cash equivalents and has hardly any borrowings, according to Foong. All of this should ensure that going forward, Hexza's margins should remain stable, says Ng. He adds that Hexza's pricing flexibility and product excellence would also help to sustain margins. According to a report by SBB's Ng dated April 12, Hexza is one of the largest local ethanol product manufacturers with a market share of around 60%. It commands about 30% market share in the adhesive resins market in Sarawak. Yet Hexza's public profile remains decidedly low key despite its good results and position as market leader. However, Foong says this does not mean that the company has not been active behind the scenes. "Hexza's core businesses are in very competitive sectors. And we are planning and working towards gaining greater market share for these core areas. But as to how much more only time will tell," says Foong. According to Ng, Hexza has a history of making prudent capital investments. "The group has invested about RM9 million over the last two years upgrading its R&D [research and development] and machinery in order to meet the high and stringent emission standards of overseas buyers." "Hexza has also signed an agreement with Orica Australia Pty Ltd, a leading multinational adhesives and resins manufacturer, for technology licensing involving the manufacture and application of low-emission resins in the wood adhesives and resins applications," says Ng. Hexza's share price has been hovering around the 47-sen mark over the past year. Its highest in 52 weeks was 50.5 sen on June 22 this year and its lowest was 44 sen (May 30). Ng has put a "long-term buy" call on the stock, with a 12-month target price of 68 sen. (Seng: No wonder there is strong selling pressure at $0.67-$0.68). There is also potential for dividend payments to increase. "Hexza has never missed an annual dividend since its IPO [initial public offering]. The company plans to declare a higher dividend with each passing year, although the increase will be at a prudent and measured pace," says Foong. Hexza's most recent dividend payment was 2.5% less tax. The company's net profit and revenue have also been growing steadily over the past three years. In FY2003, Hexza made RM3.7 million in net profit on RM97.8 million in revenue. For FY2004, revenue jumped to RM116.8 million, while net profit increased to RM4.8 million. Net profit then almost doubled in FY2005 to RM8.2 million while revenue increased to RM128.5 million.

HEXZA - Another old article #2

Another older article (Feb 2004). Gives an idea of their resins business which is used to manufacture particle boards, MDF and plywood. Given HEXZA's undemanding P/E, I would think that higher P/E companies, possibly competitors of MIECO and EVERGRN, may want to consider taking over this part of HEXZA's business to boost their earnings. E.g. MIECO trades at a P/E of 30, that if it acquires another coy with a P/E of say 10 with the same size, that's an immediate reduction of MIECO's P/E from 30 to 20, which will trigger a market re-rating. Anyway, that's just a speculation on my part.

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Hexzachem, Norsechem to use technology from Orica Australia
18 February, 2004
Adhesive and resins manufacturer Orica Australia Pty Ltd will transfer its technology in the manufacture and application of low-emission resins to Hexzachem Sarawak Sdn Bhd and Norsechem Resins Sdn Bhd.
Hexzachem and Norsechem, both subsidiaries of Hexza Corp Bhd, will use the technology to manufacture particle boards, medium density fibre boards and plywood panels.
Orica, Hexzachem and Norsechem signed a technology licensing agreement in Kuching last Thursday. The signatories were Orica's Adhesive and Resins General Manager Dr George Barnett, and Hexza Chairman Dr Fong Weng Sum and Chief Operating Officer Jorma Kalevi.
The agreement will pave the way for joint product development by Hexzachem and Norsechem, increase their product range, and enhance the quality of their existing products.
Fong said the agreement represented Hexza's continuous efforts to apply the latest resins technology and formulations to cater to the increasing demands of customers. Barnett said Orica's partnership with Hexza would enhance its presence and influence in this region.
More than 70% of Hexzachem and Norsechem products are exported to Japan, Europe, and the US, among other markets.
Adapted from "The Star", 18 February, 2004

HEXZA - An old article

I was browsing around some old news just now, and came across an old article about HEXZA (nearly 6 months ago) and thought it's worthwhile sharing here. It is quite a positive/balanced article, with both good and bad points, and in the interest of telling you the whole story, good and bad, I hereby present it to you ... The only surprise I had is that I didn't know SBB covered HEXZA before, and now that SBB is part of CIMB outfit, perhaps CIMB might cover HEXZA. If anyone knows and has a CIMB analyst report, I would greatly appreciate receiving a copy of the CIMB Analyst report, to compare it with my own personal analysis. I will not post it in its entirity, but I would be happy to summarize an extract to post here. Thanks.

It is also worth mentioning that SBB also expects higher dividend. They think it could be 3 sen, i.e. 50% increase. That seems consistent with last year's increase, although I won't rule out a special dividend in view of their superb results.

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Hexza does well despite challenges
Friday October 13, 2006
BY KEITH HIEW
PETALING JAYA: Malaysia's largest ethanol products manufacturer Hexza Corp Bhd has performed “commendably” despite rising materials costs and intense competition, and should be a target stock for investors, said research outfit SBB Securities.
The research house said due to external uncertainties, the brokerage was inclined to focus on companies with good management and valuations rather than on specific sectors, and singled out Hexza as an example of such a stock.
The company's earnings per share (EPS) of 6.1 sen for the first half ended July 31 alone was equivalent to 77% of the EPS for the year ended Jan 31.
Turnover for the second quarter ended July 31 improved 23.9% to RM41.8mil due to expanded capacity in its chemical division and increasing demand for the company's adhesive resins. Net earnings increased 9% to RM4.8mil.
SBB Securities said the company had performed well in spite of challenges like increasing costs and competition due to rising demand of raw materials such as methanol and molasses from China and high oil prices. Hexza's operating margins, it said, had improved to 11.5% for the year ended Jan 31 from 8.5% in 2005, attributed to higher sales and rising economies of scale.
The research house's senior analyst Ng Jun Sheng told StarBiz yesterday that SBB recommended Hexza in October 2004 when the stock was at 54 sen, but the share has not been active and its price has traded in the range of 42 sen to 64 sen in the past two years. (Seng: this would be an awesome trading range!)
Ng said: “We believe the underperformance of the stock could be due to the lack of media coverage and promotion by the investment community, the eagerness of the company's management to keep a low profile, a lack of investor focus on small-cap companies and maybe a high free float among shareholders.''
He added that SBB believes the company is “ripe” for a re-rating given the resurgence of interest in small-cap stocks, savvy management, undemanding valuations and anticipation of earnings improvement for the year ending Jan 31, 2007 due to lower raw material costs, efficiency gains and lower effective tax rates due to reinvestment allowance.
SBB Securities expects a higher dividend of 3 sen for the financial year ending Jan 31, 2007 from Hexza on the back of higher earnings and stronger net cash of RM25mil.
Another analyst (Seng: anyone knows who besides SBB/CIMB?), meanwhile, said Hexza's existing shareholders were also keen to increase their stakes in the company over the past two years as they themselves also recognise the company's value.
Hexza shares closed 6 sen higher, or 11.5%, to 58.5 sen yesterday.