Investing in ICULS (loan stock) in Bursa Malaysia

When a public listed company wanted to raise fund from shareholders and/or investors, it can either do it by issuing new equities (rights issue, private placement) or by issuing new loans (ICULS, bond).

Normally, to encourage subscription, free warrants are attached together during issuance, which will be detached and traded individually in the share market upon listing.

ICULS (Irredeemable Convertible Unsecured Loan Stock) is a kind of loan stock with the following 3 features:

• Irredeemable: you cannot redeem it for cash.
• Convertible: you can convert it into ordinary share at any time before its expiry, using the predetermined conversion method(s).
• Unsecured: it is not supported by any collateral. In the event of bankruptcy, there is no guarantee that you can get back any money from your loan stock holding.

On top of that, ICULS has the following entities in common:

• Expiry: similar to warrants, the ICULS will be burnt and of no value after its expiry date, if not converted into ordinary share. There may be a mandatory forced conversion upon expiry.
• Coupon rate: a predetermined fixed coupon interest rate, payable periodically at least once per year to its holder.
• Conversion method(s): traditional ICULS comes with a conversion ratio for its conversion to ordinary share. For example, a 2:1 conversion ratio means you need to use 2 ICULS to get 1 ordinary share. Nowadays, certain ICULS also provides a second option for holder to convert 1 ICULS into 1 ordinary share, by paying a predetermined conversion price (similar way with warrants).
• Premium/Discount: similar to warrants, the ICULS is trading with a price. When the ICULS conversion cost higher than its mother share price, it is said to have a premium. Otherwise, it is at a discount. If an ICULS has more than 1 conversion methods, each method will have individual premium/discount.

ICULS can give you the benefits of a bond that pays interest, until it is converted into equity.

For example, PUC-LA (0007LA) is a 3-years ICULS listed in Bursa Malaysia within the period of 2016-2019. Click here to read its profile for important information about this ICULS.

It has a nominal value of RM0.05 and a coupon rate of 4% per annum, payable on annual basis in arrears. This means if you have PUC-LA, you will get an interest payment of RM0.05 x 4% = RM0.002 per ICULS per year. If you have 1 million PUC-LA, you will get RM2,000 per annum as the interest payment.

Its maturity date is on 15 February 2019, which is 630 days from today (26 May 2017).

Its conversion price is RM0.10, which can be exercised using either one of these 2 options:

• By using 2 ICULS (nominal value at RM0.05 each) to convert into 1 ordinary share.
• By using 1 ICULS (nominal value at RM0.05) and top up RM0.05 cash to convert into 1 ordinary share.

Upon expiry, any remaining ICULS not converted will be mandatorily converted into new PUC shares at the conversion price (RM0.05).

Today, PUC share price closed at RM0.155 and PUC-LA closed at RM0.100.

For Option 1 (2 ICULS for 1 mother share):

RM0.100 x 2 = RM0.200.

Since mother share is only at RM0.155, it has a conversion premium of RM0.200 - RM0.155 = RM0.045.

Premium at percentage = 0.045/0.155 = 29.03%


For Option 2 (1 ICULS + RM0.05 for 1 mother share):

RM0.100 + RM0.05 = RM0.15

Since mother share has higher price at RM0.155, it has a conversion discount of RM0.155 - RM0.15 = RM0.005

Discount at percentage = 0.005/0.155 = 3.23%

If you want to convert now, definitely you will choose Option 2 for conversion.

If a stock has an ICULS and also a warrant at the same premium/discount rate, ICULS will be a better option because:

• Warrant won't get any interest nor dividend, while ICULS will get interest despite not getting any dividend.
• There is only one way to convert warrant to mother share, which is by paying the conversion price. For ICULS, there can be flexibly more than one ways.
• Warrant will definitely be burnt upon expiry if not converted. Certain ICULS such as PUC-LA will not be burnt as there is a forced conversion mechanism upon expiry.

So, in what situation you can consider buying an ICULS?

• When the ICULS is in the money (has zero premium or at discount), and mother share price has the tendency to move up. You will be benefited with the gearing effect.
• When mother share does not declare dividend. You will get coupon interest in ICULS.
• If there is a premium, when the expiry date is not too near from now.

Disclaimer: This article is intended for sharing of point of view only. It is not an advice or recommendation to buy or sell any of the mentioned stock counters. You should do your own homework before trading in Bursa Malaysia.

HLeBroking 1Trade - stock trading account with the best of both world

There are several types of stock trading account available for HLeBroking service provided by Hong Leong Investment Bank in Malaysia.

ValueTrade is a type of cash upfront account in which you can only buy with cash in trust account, with the advantage of low brokerage fee of 0.106% (including GST) and also interest to cash in trust account above RM1,000 at the rate of slightly lower than fixed deposit rate.

PowerTrade is a type of collaterized trading account which allows you to trade up to 2x cash in trust account and 2x share collateral value.

1Trade is a hybrid trading account that combine the best of both ValueTrade and PowerTrade. For 1Trade:

• If your purchase contract is fully covered by cash in trust account, the brokerage fee is 0.106%, same as ValueTrade.
• If you sell within T+3, your selling brokerage fee is also 0.106%.
• If you sell within T+4 and T+7, your selling brokerage fee is 0.1908% if the transaction amount is above RM100k, less than that the brokerage fee is 0.4028%.
• If you purchase without cash upfront, the brokerage fee is still 0.106% for day trading. If you don't sell within the same day, your brokerage fee will become 0.1908% (transaction amount is above RM100k) or 0.4028% (transaction amount is below RM100k). There will be force selling after T+7 if you still haven't settle the contract.
• If you do day trading, the brokerage fee for both buy and sell transactions within the same day is 0.106%.
• Regardless how the transaction is done, the minimum brokerage fee is RM8.48 including GST.

Therefore, with 1Trade account, you can:

• Enjoy low brokerage rate for day trading and T+3 cash upfront buying.
• Enjoy the flexibility of 2x trading limit like other collaterized ordinary trading account, with the trade-off of higher brokerage fee.

I would advise for you to stay disciplined with ValueTrade trading account if your overall portfolio value including cash and shares is below RM300k. If it is above and you got tendency to trade stock in amount of at least RM100k in a batch, then you can take advantage of 1Trade by converting to it.

New 2017 formula to determine amount of EPF Account 1 money that can invest in Unit Trust funds

If you want to diversify the money in Account 1 of your Employees Provident Fund (EPF, a.k.a. KWSP) by taking it out to be managed by local Unit Trust fund managers and invest in EPF approved unit trust funds, which then invest in various markets locally or globally or both, depends on the funds' prospectus, the first thing you need to know is: what is the maximum amount of money you can take out from your EPF Account 1 to invest in those approved unit trust funds?

Begining 1 January 2017, EPF has enforced a new formula for this calculation, and the old formula used before was no longer valid.

While the old formula only allowed you to take out a maximum of 20% of your (Account 1 - Basic Savings) for unit trust investment, the new formula allows you to take out more. The maximum is now 30%.

The new table to calculate your Account 1 Basic Savings is as below:

For example, if you are borned in 1982 and your EPF Account 1 has RM100,000, your Basic Savings is RM50,000. Maximum amount you can take out for unit trust investment is (RM100k - RM50k) x 30% = RM50k x 30% = RM15k.

Same as before, you can withdraw your EPF Account 1 money for unit trust investment once every 3 months.

To make the case simple, assume that your EPF money does not increase.

Amount in Account 1 after the withdrawal = RM100k - RM15k = RM85k

3 months later...

Available amount for unit trust investment = (RM85k - RM50k) x 30% = RM10.5k.

You can continue the process every 3 months until your available amount for unit trust investment become zero or negative.

Note that:

• Normally, there will be around 3% one time charges by the unit trust company for this kind of investment. Subsequent years' management fees of around 1.5% are reflected in the fund price.
• Make sure at the end of the year, you are confident your fund can give you return higher than your EPF dividend. Otherwise, it is better to let your money stay in EPF.
• You are not necessary to withdraw the maximum amount. Any amount less than the maximum allowed is OK.
• You are not necessary to withdraw every 3 months. You can adjust the timing based on market conditions.
• You are not necessary to invest into the same fund for each withdrawal. You can choose different fund to invest, as long as approved by EPF.
• Once you sell out your unit trust, the money will go back to your EPF Account 1.

EPF declared 5.70% dividend for 2016

The Employees Provident Fund (EPF, a.k.a. KWSP) has just declared the dividend rate for financial year 2016 to be 5.70%, which is 11% lower than the 6.40% dividend declared for 2015 (last year).

Calculation: (5.70-6.40)/6.40 = -0.70/6.40 = -11%

This is the 2nd year of dividend decline since the historical highest dividend payout of 6.75% declared for 2014.

If you have already registered as an EPF i-Akaun member to access your EPF account detail with their online service, you can login to your online account now and check the actual amount of dividend in RM added to your EPF account by viewing your 2016 online statement.

With this dividend rate, it seems that those who have withdrawn their EPF Account II savings to reduce their housing loan during 2016 might be regreted to do so, as the effective mortgage rate is generally lower than 5.70% in 2016, due to a lower housing loan financing rate along the year (around 4.35% offered by most banks).

If you have withdrawn your EPF Account I savings for investment in unit trust or fund, your fund manager has outperformed EPF if your 2016 ROI in the fund is greater than 5.70%. Otherwise, you might want to meet up with your unit trust agent or fund manager to find out what's wrong.

Note that in 2016, EPF has recognized a net impairment amounting of RM8.17 billion, compared with RM3.07 billion in 2015 to reflect lower equity prices (meaning, paper lost in share market)!

If you had gain money (had positive return) in share market during 2016, you were indeed doing better than the fund managers of EPF in share market investing.

Stock fundamental ranking and screening with James O'Shaughnessy Trending Value

James Patrick O’Shaughnessy is the founder of quantitative money management firm O'Shaughnessy Asset Management, LLC.

In 1996, he wrote the best selling book "What Works on Wall Street", which has now evolved to its 4th Edition.

In the 3rd Edition of this book published in 2005, O'Shaughnessy unveiled the Cornerstone Growth stock screening method, which is based on the following criteria:

• Market capitalization >= $225 million
• 3-month average daily share volume >= 100,000
• Price-to-sales ratio <= 1.5
• 3-month total return greater than the median return of Russell 3000 companies
• 6-month total return greater than the median return of Russell 3000 companies
• Trailing 12-month EPS > 0
• Rank by highest 12-month total return

Subsequent to that, the 4th Edition of the book, published in 2011, introduced the improved Trending Value growth stock screening method, which claimed to achieved 21.19% annualized return over the 46-year period between 1964 and 2009.
Trending Value uses “value composite” (VC) instead of just the Price-to-sales ratio to measure stock undervaluation, which O'Shaughnessy described as "the top stock-market strategy of the past 50 years".

The value composite is composed of 6 value factors:

• Price-to-Book
• Price-to-Sales
• EBITDA/EV
• Price-to-Cashflow
• Price-to-Earnings
• Shareholder Yield

Listed companies in a stock market are divided into 100 groups (percentiles) based on the 6 value factors above. If a company's price-to-book ratio is in the lowest 1% of the dataset, it gets a score of 1. For some ratios it's the other way around, for instance EBITDA/EV. If a company belongs to the highest 10%, it gets a score of 1. If a value is missing, it gets a score of 50.

The same calculation is repeated for each of the ratios and then their values are summed up together. Companies are again divided into 100 groups based on this score. This final result is the so-called value composite.

A value composite of 1 means that the company belongs to the 1% cheapest companies according to these factors.
In the next filtering process, only the top 10% stocks ranked according to this value composite score are selected. Then these stocks are further filtered by a momentum factor, i.e. the 6-month price index. The result is an extremely cheap group of stocks that have been on the rise during the last 6 months.
O'Shaughnessy tested 3 different value composite scores as follow:

• VC1: based on the first 5 ratios only, excluding shareholder yield. By using this ratio his backtests showed a return of 17.18% annually.
• VC2: based on all 6 ratios. O'Shaughnessy uses this ratio in his trended value screen since his backtests showed an improvement in overall annual compound return of 12 basis points to 17.3%, a reduced standard deviation and downside risk.
• VC3: same as VC2 but the last ratio is replaced by buyback yield. Some investors are indifferent whether a company pays out a dividend or want to avoid these since they can be very heavily taxed. This VC generates an even higher return of 17.39% annually but with a slightly higher standard deviation compared to the VC2.

At the time of writing,  ValueSignals website ranked KLM Royal Dutch Airlines (KLMR.PK) with the following scores:

• VC1: 1
• VC2: 1
• VC3: 1

The value factors of KLMR.PK compared with the entire market, the Industrials sector, the Transportation group, and the Airlines industry, respectively, is as below:

However, KLMR.PK only ranked at 4,842 in Magic Formula screening method:

Anyhow, it still has a respectably high Piotroski F-Score:

ValueSignals website provides a very handy and straightforward online service for systematic value investing to perform quantitative stock screening, stock comparison and stock information, currently covering as many as 33,600 stock counters listed in 44 countries around the world.

Beside O'Shaughnessy Value Composites, ValueSignals website is also able to perform screening (including multifactor cross-screening) of:

• Piotroski's F-Score
• Greenblatt's Magic Formula
• ERP5
• Altman's Z-Score
• Beneish’s M-Score
• Benjamin Graham's Net Current Asset Value (NCAV) to Market ratio
• EV/EBITDA
• Price index
• ... and many more

The screening can be performed across all stock counters, or limited to within certain regions,  countries, industries, etc.

As a user of ValueSignals, I recommend this website to all serious value investors and fund managers to boost your stock screening and selection process.

Top 30 property developers in The Edge Malaysia Property Excellence Awards 2016

The Edge Malaysia has just announced the Top 10 winners in their Property Excellence Awards 2016, which are:

• SP Setia Bhd
• IJM Land Bhd
• Sunway Bhd
• Sime Darby Property Bhd
• Mah Sing Group Bhd
• Eco World Development Group Bhd
• UOA Development Bhd
• Gamuda Bhd - Property Division
• IGB Corp Bhd
• UEM Sunrise Bhd

Following the Top 10 winners above, the subsequent Top 11-30 are:

• IOI Properties Group Bhd
• Tropicana Corp Bhd
• Eastern & Oriental Bhd
• Paramount Corp Bhd
• MKH Bhd
• WCT Land Sdn Bhd
• Selangor Dredging Bhd
• OSK Holdings Bhd
• Glomac Bhd
• Malaysian Resources Corp Bhd
• KSL Holdings Bhd
• Wing Tai Malaysia Bhd
• Matrix Concepts Holding Bhd
• TA Global Bhd
• Sunsuria Bhd
• YTL Land & Development Bhd
• Guocoland (Malaysia) Bhd
• Hua Yang Bhd
• SHL Consolidated Bhd
• I-Bhd

On top of that, Tan Sri FD Mansor and Datuk Richard Fong, both from Glomac Bhd, won the Outstanding Property Entrepreneur Award 2016.

Stock fundamental ranking and screening with Greenblatt Magic Formula

In 2005, Joel Greenblatt published a book titled "The Little Book That Beats the Market" and introduced his Magic Formula value investing method to the world. The book was supposedly wrote to teach his own children, in his Jewish family, about investment. That book became a New York Times bestseller with over 300,000 copies in print.

In 2010, the books content was updated, and its new edition is now called "The Little Book That Still Beats the Market" which you can still find in bookstores (both physical and online) now.

Joel Greenblatt is a hedge fund manager running Gotham Asset Management (formerly known as Gotham Capital) which claimed to have achieved an impressive annualized return of 40% from 1985 to 2006. He is also an adjunct professor in Columbia Business School teaching the subject of "value and special situation investing".

Greenblatt operates the Value Investors Club website for value investors around the world to freely join and share investment ideas. Another website of him is Magic Formula Investing, which is a free online stock screener (for stocks listed in USA only) based on his Magic Formula.

In his book, Greenblatt explained that in order to get above-average returns, one should buy companies with above-average return on capital at below-average prices. To find those companies, he first filters the stocks by eliminating certain industries including Utilities and Financials, which he found not applicable to his Magic Formula.

After that, he narrows down the search by filtering the companies based on market capitalization. Greenblatt suggests to apply Magic Formula to companies with market capitalization of above US$50 million. You can adjust this filter to search between large caps, mid caps and small caps targets.

Then he ranks the remaining companies based on 2 ratios:

• Earnings Yield
• Return on Invested Capital (ROIC)

whereby...

Earnings Yield = EBIT / EV

which...

Enterprise Value (EV) = (Market Cap + Total Debt + Minority Interest + Preferred Stock − Cash & ST Investments)

and that:

ROIC = EBIT / (Net Fixed Assets + Net Working Capital)

whereby...

Net Fixed Assets = (Total Assets - Total Current Assets - Goodwill)

Net Working Capital = (Current Assets − Current Liabilities)

There are reasons why Greenblatt uses ROIC in his Magic Formula instead of ROE or ROA or other similar return ratios, and Hurricane Capital has written an article to explain about this.

At the time of writing, ValueSignals website ranked Sandridge Mississippian Trust II (NYSE:SDR) which operates in oil and natural gas sector at the top of Greenblatt Magic Formula screening.

However, SDR only scored a low 3 in Piotroski F-Score.

If you apply both the screeners of Greenblatt Magic Formula and Piotroski F-Score now, you will find magicJack VocalTec Ltd. (NASDAQ:CALL) on top of the list.

It ranks #4 in Magic Formula screening result, and scored a 7 in Piotroski F-Score test.

 

This combined screening is expected to produce better result than just using a single screening factor.

ValueSignals website provides a very handy and straightforward online service for systematic value investing to perform quantitative stock screening, stock comparison and stock information, currently covering as many as 33,600 stock counters listed in 44 countries around the world.

Beside Greenblatt's Magic Formula, ValueSignals website is also able to perform screening (including multifactor cross-screening) of:

• Piotroski's F-Score
• O'Shaughnessy Value Composites
• ERP5
• Altman's Z-Score
• Beneish’s M-Score
• Benjamin Graham's Net Current Asset Value (NCAV) to Market ratio
• EV/EBITDA
• Price index
• ... and many more

The screening can be performed across all stock counters, or limited to within certain regions,  countries, industries, etc.

As a user of ValueSignals, I recommend this website to all serious value investors and fund managers to boost your stock screening and selection process.

Stock fundamental ranking and screening with Piotroski F-Score

Piotroski F-Score was introduced by Professor Joseph D. Piotroski in his paper titled "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers" published in January 2002 while he was teaching as an assistant professor in University of Chicago. He is now teaching in Stanford University Graduate School of Business, and has just promoted from associate professor to professor in 2016.

You can click here to download that interesting 39-pages paper written by Piotroski on his F-Score.

Piotroski backtested his F-Score screening method in his paper and concluded that by investing in the low price-to-book ratio companies filtered by the F-Score, one could have generated a 23% average yearly return from 1976 to 1996.

Today, Piotroski F-Score is used by quite a number of fund managers as well as individual investors in their value investment stock screening process. The F-Score has also been applied in many other academic papers and has so far proven to be effective for stock screening, especially when combined with other fundamental stock screening methods, such as Greenblatt's magic formula, etc.

A backtest by Olivier Dambrine (owner of MFIE Capital which operates the ValueSignals global stock screening website) revealed that a European stock portfolio establised by their Piotroski price-to-book screener is able to achieve an impressive 525% return between June 1999 and August 2011, while at the same period of time the  S&P600 Europe including net dividends has a return of -15%. You can click here to read that article written by Olivier Dambrine on 1 September 2011.

The American Association of Individual Investors (AAII) also revealed in an article titled "2008 AAII Stock Screen Roundup: Piotroski Strategy Defeats the Bear" by Wayne A. Thorp that the F-Score was the only one of their 56 screening methodologies that had positive results in 2008 (up 32.6% on average across 5 stocks, versus -41.7% for all of the AAII strategies over the same period).

Piotroski F-Score is the sum of 9 binary (meaning, either 0 or 1) scores in 3 fundamental categories of the stock, as below:

Profitability:

• Did the company make a profit during the last 12 months?
• Did it generate any cash?
• Was it more profitable compared to the prior year?
• Did it make more cash than the reported profit?

Leverage, Liquidity and Source of Funds:

• Did the company increase its relative LT debt compared to the prior year?
• Did the company improve its ability to pay short-term liabilities  (debt and payables) with its short-term assets (cash, inventory, receivables)?
• Was the company not required to issue new shares to pay for its future obligations?

Operating Efficiency:

• Was the company able to improve its margins on sales?
• Was the company able to improve productivity?

The above 9 criterias are tested by the following financial conditions, comparing the current year with previous year:

• ROA > 0, EPS > 0
• Operating cash flow > 0
• ROA growth
• Operating cash flow > Net profit
• (Assets / LT Debt) increased
• Current Ratio increased
• Share Outstanding remains
• Gross Profit Margin increases
• Asset Turnover increases

An example of stock counter having full F-Score is Forrester Research Inc. (NASDAQ:FORR).

You might want to double check if the counter is consistently scoring high F-Score throughout the years, or has been improving from lower F-Score to higher F-Score across the period. Below is the historical Piotroski F-Score Scorecard of Forrester Research Inc. as presented by ValueSignals website.

The scorecard above shows that the F-Score of the stock counter improved from quarter to quarter, from 5 in 2013 eventually to 9 in mid-2016. It also indicates which out of the 9 criterias had passed or failed the test in each of the quarters.

ValueSignals website provides a very handy and straightforward online service for systematic value investing to perform quantitative stock screening, stock comparison and stock information, currently covering as many as 33,600 stock counters listed in 44 countries around the world.

Beside Piotroski F-Score, ValueSignals website is also able to perform screening (including multifactor cross-screening) of:

• Greenblatt's Magic Formula
• O'Shaughnessy Value Composites
• ERP5
• Altman's Z-Score
• Beneish’s M-Score
• Benjamin Graham's Net Current Asset Value (NCAV) to Market ratio
• EV/EBITDA
• Price index
• ... and many more

The screening can be performed across all stock counters, or limited to within certain regions,  countries, industries, etc.

As a user of ValueSignals, I recommend this website to all serious value investors and fund managers to boost your stock screening and selection process.

About Private Retirement Scheme (PRS) and its funds performance at end of April 2016

Launched in 2012, the Private Retirement Scheme (PRS) is a voluntary (non-compulsory) retirement scheme in Malaysia for employees and also self employed to have another option of forced saving for their retirement.

In order to encourage savings under PRS, Malaysian government granted personal income tax relief of up to RM3,000 for individuals tax payers from their PRS savings amount deposited during the taxation year. 

Employers are also provided with tax deduction on contributions to the PRS on behalf of their employees above the statutory rate of 19%.

Note that this income tax relief for PRS is available for 10 years only, from tax assessment year 2012 until 2021.

Also note that the sales and admin charges deducted from your PRS contribution is not eligible for tax relief, you can only claim the amount from your net PRS contribution done within the year, up to RM3,000 per year.

Your PRS contributions will be deposited into your Private Pension Administrator (PPA) account, after your PRS fund provider deducted the sales and admin charges.

Your money in your PPA account is split into 2 sub-accounts (a bit similar to your EPF account). Once your money is parked in your PPA account, you can forget about it until you finally retire, because:

• 70% of your fund is parked in Sub-account A, which cannot be withdrawn until you retired.
• 30% of your fund is parked in Sub-account B, which you can only withdrawn once a year, and subject to an 8% tax penalty on the withdrawal amount.

Your money in PPA account is then allocated for investment by your fund manager with your selected fund scheme, which could be of category of growth, moderate or conservative.

There is no guarantee that your PRS fund will give you return. In fact, you can also lose money if your fund is not performing!

How is the performance of the available PRS funds so far?

Morningstar is tracking the PRS funds performance (there are 79 of them as at 30 April 2016) on a day-to-day basis.

As of today (30 April 2016), only 19 or 24% out of the total 79 PRS funds have made a positive year to date return. AmPRS - Asia Pacific REITs is the champion with 4.79% return YTD.

Those 19 PRS funds that have positive return year to date, and their YTD return are as below:

(Screen captured from Morningstar's PRS fund performance tracking website, double click on image to enlarge)

The worst PRS fund performer YTD, CIMB Islamic PRS Plus Asia Pacific Ex Japan Equity fund, has caused a 8.92% lost in 4 months time.

Anyhow, YTD return is for monitoring of latest return performance of the funds. If you see your fund continuously not performance well over a couple of months, you should consider switching over to another fund that is performing well over the same period of time.

Now, let's look at their full year return in 2015. There are a total of 75 PRS funds active in year 2015, and 74 of them had brought positive return, only 1 has lost money.

The champion in 2015 is AmPRS - Islamic Equity Fund with a return of 16.3%. The top 10 PRS funds in 2015 are:

And the bottom 10 PRS funds in 2015 are:

So, does it worth to lock down your money in PRS, and put it in the hand of your PRS fund managers to bring return or lost to you? You decide.

Negative interest rate - get paid from borrowing and get charged from saving

If you think that you can earn some interest by depositing your money in bank, and you will be charged with interest for borrowing money from bank, you have to reverse your mind-set in certain places that are having negative interest rate policy now.

I'm not kidding. The European Central Banks (ECB), Switzerland, Denmark, Sweden are already having negative interest rate for quite some times. Lately, Japan has joint the league too!

(Chart produced by Toronto Star)

The ECB started this game by charging banks that hold their cash overnight and at the same time offering a premium to banks that borrow in order to extend more loans.

During economic uncertainty time, people tend to be conservative with spending and/or investing and more keen to hoard money in their bank accounts. They are willing to do so even with zero interest rate. This brings the danger of deflation, and as an extreme measure to counter this situation, the banks started to "punish" people that keep money in their bank accounts by charging interest instead of giving interest, and to encourage people to take up loan for business and investment activities by giving interest instead of charging interest.

When this negative interest situation occurs, the traditionally safe havens to put your money, namely bank deposit and bond market, will become the places that most likely cause you to lose money. Yes, fixed deposit is dangerous, bond market is dangerous, because your money will go down the drain if you put it there, in the era of negative interest rate.

However, this measure doesn't seem to be effective to stimulate the economy, as people there are still very cautious and tend to hoard with their money. With the negative interest rate, they are forced to take out their money from bank deposit account, and then they are keeping the money in their drawer or safe instead of spending it. (Reuters: Negative ECB rates fuel demand for safe deposit boxes, German banks say)

The impose of negative interest rate in Eurozone and Japan has shown unfavourable sign of worldwide economy. What will be next after quantitative easing and negative interest rate? If there is no more option ahead, we can foresee a huge economic catastrophe forming and will hit all of us at anytime.

Are you prepared for it? And the question is: how to get prepared for it?

Income tax declaration of property rental - which expenses are deductible and which are not?

For most property owners in Malaysia who rented out their property, the rental collected from tenant is regarded as a non-business source of income and therefore is charged to the owner's income tax under section 4(d) of the Income Tax Act, 1967.

The amount of property rental income need to be declared is the gross rental income deducted by certain expenses incurred by the property in order to generate the rental.

The expenses that are income tax deductible including:

• Assessment
• Quit rent
• Property loan interest
• Fire insurance premium
• Expenses on rental collection
• Expenses on rental renewal, including the stamp duty
• Expenses on repairs and maintenance
• Expenses on replacement of rental assets
• Property service charges, maintenance fees, sinking fund, and Indah Water bills
• Legal expenses on renewal of tenancy agreement, recovery of rental arrears, etc. 
• Expenses on pest control
• Property agent fees/commission to renew the tenancy

The expenses that are not income tax deductible are initial expenses before the property is rented out, including:

• Advertising cost to get the tenant
• Property agent fees/commission to obtain the tenant
• Legal cost and stamp duty for initial tenancy agreement
• Expenses on renovation and improvement to get higher rental or to be more attractive to potential tenant

If the total rental income received is less than the total deductible expenses for the year, which shows that you have rental income loses instead of rental income gains for the year, then your taxable rental income for that particular year will be zero.

Note that rental income losses cannot be used to offset your other taxable statutory income of the year. The losses also cannot be carried forward to the next taxation year.

For more comprehensive information, you can refer to LHDN Malaysia Public Ruling No. 4/2011 : Income From Letting of Real Property.

Some discussion about the recent slide in oil price and its impact to world economy

The slide in crude oil price from above $100 per barrel in 2014 all the way down to around $30 per barrel today has caused quite a lot of worries and volatilities in the investment market recently.

I found some data on the annual average prices in US$ per barrel of domestic crude oil from InflationData.com and plotted the graph of inflation adjusted oil price from 1946 to 2015 as below:

In fact, there is also a historical inflation adjusted oil price chart in the website of InflationData.com shown like this:

Looking at the historical oil prices since World War II, and adjusting it for inflation in today's currency value, we can see that most of the time, the oil prices were within the range of $20 to $40, which is what it stays at now.

Observing from my graph above (which is a clean version of the original graph from InflationData.com website cluttered with more information), there were 2 bubbles in oil price, one is in the 1970s where oil price crisis occurred due to wars in the Middle East, and another in the 2000s which once affected by the 2008 economic crisis but quickly restored until the recent burst.

The 1st bubble in the 1970s made Soviet Union into a major exporter of oil, and its burst in 1980s eventually caused the dissolution of Soviet Union in 1991.

Now the 2nd bubble in the 2000s which brought oil price to a level of above $100 per barrel was a super windfall to the oil and gas industry and oil exporting countries, to the extend that their fiscal for 2015 and 2016 need the oil price to stay above $100 per barrel to breakeven.

The recent oil bubble burst sending the oil price to its "normal" price range of between $20 and $40 has no doubt caused trouble to the overspending oil exporting countries. It is also a big slap to the oil and gas industry which borrowed huge debt from financial institutions to finance their drilling activities. This include the shale oil companies in the United States which bloomed up during the bubble.

Who will be most affected by this oil price slide?

The website of World's Top Exports has a list of Top 15 crude oil exporting country in 2014 as follow:

• 1.Saudi Arabia: US$268.2 billion (18.5% of total crude oil exports)
• 2.Russia: $152.6 billion (10.5%)
• 3.United Arab Emirates: $98 billion (6.8%)
• 4.Canada: $88.1 billion (6.1%)
• 5.Iraq: $84.4 billion (5.8%)
• 6.Nigeria: $76.2 billion (5.3%)
• 7.Kuwait: $69.3 billion (4.8%)
• 8.Angola: $61.2 billion (4.2%)
• 9.Kazakhstan: $53.6 billion (3.7%)
• 10.Venezuela: $53.3 billion (3.7%)
• 11.Norway: $44.2 billion (3%)
• 12.Iran: $41.3 billion (2.8%)
• 13.Mexico: $36.2 billion (2.5%)
• 14.Oman: $34.8 billion (2.4%)
• 15.United Kingdom: $29 billion (2%)

 

And the website of US Energy Information Administration (EIA) provides a list of Top 10 net oil importers in 2014 as follow:

• China (6.1 million barrels per day)
• United States (5.1 mbpd)
• Japan (4.2 mbpd)
• India (2.7 mbpd)
• South Korea (2.3 mbpd)
• Germany (2.2 mbpd)
• France (1.6 mbpd)
• Spain (1.2 mbpd)
• Italy (1.1 mbpd)
• Taiwan (1.0 mbpd)

The website of World's Top Exports also provides a list of Top 15 refined oil exporting country in 2014 as follow:

• 1.Russia: US$114.7 billion (12% of total refined oil exports)
• 2.United States: $110 billion (11.5%)
• 3.Singapore: $66.1 billion (6.9%)
• 4.Netherlands: $64.8 billion (6.8%)
• 5.India: $60.8 billion (6.3%)
• 6.South Korea: $49.1 billion (5.1%)
• 7.Belgium: $40.8 billion (4.3%)
• 8.China: $25.8 billion (2.7%)
• 9.United Arab Emirates: $24.7 billion (2.6%)
• 10.Kuwait: $22.8 billion (2.4%)
• 11.Saudi Arabia: $22.1 billion (2.3%)
• 12.United Kingdom: $20.2 billion (2.1%)
• 13.Taiwan: $19.3 billion (2%)
• 14.Malaysia: $18.5 billion (1.9%)
• 15.Germany: $17.9 billion (1.9%)

Generally speaking, high crude oil price will hurt China, United States, Taiwan, Germany, etc. which are top importer of crude oil and also at the same time the top exporter of refined oil. Low crude oil price will hurt Russia and countries in Middle East which are both the top exporter of crude oil and top exporter of refined oil.

 

However, the market is worried that economy slowdown in places like China will cause them to consume less oil domestically and therefore export more refined oil, bringing oversupply situation to the world's oil market, which will then further dampen the oil price.

 

But I think the main worry is with those over-financed oil and gas companies and over-spending oil exporting countries (to erect skyscrapers and luxury places). This is because their repayment default and/or bankruptcy will definitely hurt the finance industry, and a troubled finance industry is really a bad news for the economy.

 

 

TPC Plus (TPC, 7176), will it be the phoenix rising from the ashes?

TPC Plus (TPC, 7176) is a high quality (mainly Grade A) egg producer in the poultry farming industry. It is based in Melaka and has been listed in Bursa Malaysia (KLSE) since 2003.

Among its range of products are TPC Lower Cholesterol eggs, TPC Omega eggs, TPC Organic Selenium eggs, TPC Golden Corn eggs, TPC Farm Fresh eggs, washed-sanitized-coated (WASACO) eggs, etc.

In spite of producing high quality products, its financial results were not so attractive, especially after 2006.

In 2010, London Biscuits (LONBISC, 7126) which is in the cake confectionery business whereby egg is a major raw material, acquired TPC by buying about 32% stake in TPC from its then executive chairman Yee Tiam Teck and managing director Jimmy E. Pian at the price of RM0.30 per share.

After that, LONBISC had made a voluntary takeover offer at RM0.30 per share for TPC, but the respond was not good. It ended up with 33.65% holding in TPC.

Shortly after that, LONBISC sold off all its egg business, comprised 23.29% of Lay Hong (LAYHONG, 9385) to QL Resources (QL, 7084) and this 33.65% of TPC to Huat Lai Resources (HUATLAI, 7141).

HUATLAI acquired the 33.65% stake of TPC from LONBISC at the price of about RM0.30 in 2011. After that, HUATLAI had made a conditional takeover offer at RM0.30 per share for TPC. It ended up with 51.05% holding in TPC in 2012, and TPC becomes a subsidiary of HUATLAI till today.

Since then, HUATLAI took over the management of TPC and replaced its board of directors with own management team. The managing director of HUATLAI, Mr. Lim Yeow Her is now also the managing director of TPC.

The management has undergone several restructuring exercises to strengthen the financial of TPC. We also see TPC expansion in production with new layer houses and pullet houses. The financial results of TPC gradually improves since HUATLAI's acquisition.

Chart taken from http://www.malaysiastock.biz

And the share price of TPC also gradually moves from the range of RM0.2x (when with LONBISC), to RM0.3x, and then to RM0.4x.

In February 2014, TPC was classified as a PN17 listed company after its auditors expressed concern over a net loss of RM4.1 million in the financial year ended 2013, and also took into account TPC’s shareholders equity as at 31 December 2013 was less than 50% of its issued capital.

Its share price dropped back to the range of RM0.2x immediately after the PN17 announcement, but gradually climbed back as seen in the chart above.

On 31 July 2015, TPC has obtained approval from Bursa Malaysia for its proposed regularization plan to uplift from PN17, which entails a proposed share premium reduction, proposed par value reduction, proposed rights issue with warrants, proposed capitalisation of amount owing to its holding company HUATLAI, as well as proposed amendments to its memorandum of association and articles of association.

TPC has called for an EGM to be held on 17 September 2015 to get shareholders nod on this proposal. Click here to read about the circular about this PN17 upliftment proposal.

Shareholders of TPC are proposed with Rights to purchase new TPC shares at the indicative price of RM0.20 per share on the basis of 3 Rights Shares for every 2 TPC shares held. For each of the 3 Rights Shares subscribed, the shareholders will get 2 free Warrants.

Under this proposal, TPC will be listing up to 180 million new shares for its proposed rights issue with warrants and proposed capitalization. Besides, a total of 80 million warrants with exercise price of RM0.20 will be issued pursuant to the proposed rights issue with warrants.

The proceeds to be raised from the proposed rights issue with warrants will be utilized by TPC for the purchase of layer houses, pullet houses,  equipment, working capital and expenses in relation to the proposed regularization plan.

TPC currently has 80 millions issued share listed in Bursa Malaysia. As reported in TPC Annual Report 2014, HUATLAI currently holds 52.91% stake in TPC. Only 54 shareholders own more than 100,000 shares in TPC after HUATLAI, which is equilvalent to 31.53%. About thousand over shareholders hold the remaining 15.56%.

As of today 10 September 2015, TPC share price closed at RM0.525. Its trailing 4 quarters EPS stood at 6.07sen, forming a PE ratio of 8.65. This is calculated based on its existing 80 million issued shares.

After the rights issue, its number of shares will immediately become 260 million, not accounting the 80 million warrants convertible to shares at the price of RM0.20. Not accounting for the result of share premium reduction and the proceed from rights subscription, its adjusted EPS will be 1.87sen. If taken those proceeds into account, the EPS figure will be higher.

TPC needs to maintain 2 consecutive quarters of operational profit in order to get upliftment from PN17. Will TPC be the phoenix rising from the ashes? Let's see.

Disclaimer: This article is intended for sharing of point of view only. It is not an advice or recommendation to buy or sell any of the mentioned stock counters. You should do your own homework before trading in Bursa Malaysia.

Investment opportunity in TravelCenters of America (NYSE:TA)

Some background information provided by the company to its investors:

TravelCenters of America (NYSE:TA) is the largest publicly-traded operator/franchisor of full-service highway Refuel-Replenish-Refresh (RRR) travel centers in the United States.

As of 31 March 2015, the Company's business included 251 travel centers, 175 of which were operated under the "TA" brand name and 76 of which were operated under the "Petro Stopping Centers" brand name located in 43 states.

TA and Petro Stopping Centers have the largest sites on average, with full-service offerings that include diesel and gasoline fuel, truck maintenance and repair, full-service and fast food restaurants, large convenience stores, car and truck parking and other services dedicated to serving professional truck drivers and highway motorists.

As of 31 March 2015, TravelCenters of America also operated 60 convenience stores with retail gasoline stations, primarily under the "Minit Mart" brand name.

When the US market opened on Thursay 7 May 2015, TA share price hit a 52-weeks record high of US$18.10 right after it announced its first quarter result. Surprisingly, right after the stock price hit this 52-weeks high, it slumped down all the way to close at US$14.98 on Friday 8 May 2015, wiping out more than one month previous price gain since its rally from March 2015 onwards.

Graph snapshotted from Google Finance

What's going on? I think The Specialist has written a nice article to explain about the situation in Seeking Alpha website titled "Oops, TravelCenters Of America Did It Again - Buy Time?" and I am pretty agreeable with his view. I'm not going to repeat the content in his article here, you can click the link and read his report if you are interested.

The diagrams about TA below are taken from NASDAQ Stock Market website.

The chart above shows that TA's revenue (US$1.407 billion) dropped a lot in first quarter of fiscal year 2015, compared with previous years in 2014 and 2013.

However, its EPS (US$0.41) recorded in the quarter increased a lot compared with previous years in 2014 and 2013. This means its profit margin actually jacked up a lot, which is the key argument point of The Specialist in his article.

When we look further to more older data...

we'll find out that TA actually used to make lost in first quarter almost every year, and its earning has a cyclical pattern which is normally weak during the 4th and 1st quarter, and will turn strong during the 2nd and 3rd quarter.

From here, we observed that:

• TA's result in Q1-2015 is actually very impressive. It is a hefty 40 fold from previous year, not to mention traditionally it is "suppose" to make lost during this quarter.
• Barring unforeseen circumstances, we expect TA's result in Q2 and Q3 will be better than Q1, as that is its cyclical trend for years.

In fact, we can see the institutional investors have more buying than selling of TA during this price drop after it hit 52-weeks high.

One month ago, Zacks Equity Research has written a report explaining the 3 Reasons Value Stock Investors Will Love TA, and I believe the points are still intact as of today.

So, is this really a great investment opportunity given by its price drop? You can continue to find out more facts and figures about it.


Disclaimer: This article is intended for sharing of point of view only. It is not an advice or recommendation to buy or sell any of the mentioned stock counters. You should do your own homework before trading in the stock market.

Anika Therapheutics (NASDAQ: ANIK) the HA biopharmaceutical expert

If you are thinking of investing in a biopharmaceutical stock, Anika Therapheutics (NASDAQ: ANIK) might probably attract your attention.

With a market capital of above $570 million, Anika Therapeutics is considered as a small cap in USA stock markets. However, it is a fast growing one, who ranked No. 10 in Forbes' America's Best Small Companies (Under A Billion) 2014.

It also has strong balance sheet with growing cash and working capital while holding a debt free position.

Anika Therapeutics, headquartered in Bedford, Massachusetts, was founded in 1992 from a spin-off of MedChem's HA research division. It has over 20 years of experience in developing and manufacturing therapies for tissue protection, healing and repair.

Anika core expertise is synthetic manufacturing of hyaluronic acid (HA), which is a natural, organic chemical occurring, biocompatible polymer found throughout the body, produces to help protect joints like the knee. To date, Anika research team has come out with more than 400 scientific publications, and also more than 50 patents on native and chemically modified HA.

Anika’s broad strategy involves synthesizing HA and applying it in 3 key Orthobiologic areas: palliative, restorative and regenerative. Beside that, their products also has coverage in dermal, ophthalmic, surgical and veterinary.

Their Orthobiologics products consist of joint health and orthopedic products which are used in a wide range of treatments from providing relief from the pain of osteoarthritis, to regenerating damaged tissue such as cartilage defects.

Their Dermal products consist of advanced wound care products and aesthetic dermal fillers which are used for the treatment of skin wounds ranging from burns to diabetic ulcers.

Their Ophthalmic business includes HA viscoelastic products used in ophthalmic surgery.

Their Surgical business consists of products used to prevent surgical adhesions and to treat ear, nose and throat disorders.
Their Veterinary product is used for treatment of joint dysfunction in horses.

They have 2 manufacturing arms, one in the HQ in USA, and another Anika S.R.L. in Italy.

A large portion of its current revenue is generated from the Orthobiologics sector.

More than 5% of the world's population is afflicted by osteoarthritis (OA) of the knee, making it the most common joint disease. Approximately 10 million Americans currently suffer from OA of the knee, and the number is increasing year by year. Therefore, the market demand for viscosupplement products is hugh, and Anika's goal is to capture 15% of the overall market.

Osteoarthritis is a common chronic, degenerative joint disease, in which the cushioning tissue, or cartilage, in the knee joint wears away and the thick fluid that helps lubricate the knee joint becomes thinner and less effective. OA is characterized by pain, joint inflammation and joint stiffness, and results in a substantial degree of physical disability and poor quality of life.

Currently, there are a total of 5 companies offering less than 10 brands of products, competing in the viscosupplement space, and Anika is holding the 2nd place after Sanofi.

As you can see from the table above, the single injection products are quite competitive in terms of cost per treatment than the multiple injection. Patients will prefer the single injection treatment, and there are currently only 3 products in the market.

Note that HA viscosupplement  is a high entry barrier industry, which requires multiple years of research and development, and a long waiting period of obtaining necessary certifications before any new product being able to hit the market.

What make Anika's viscosupplement products stand out from competitors is that it is made through a patented process that uses a species of bacteria to make a hypo-allergenic viscosupplement, while others commonly make it using bird proteins, to which some people are allergic.

In the pipeline, Anika has completed the clinical trial for new product Cingal. Cingal basically is an enhanced version of Monovisc with a therapeutic agent, or steroid. It is designed to provide the advantages of Monovisc with the added early symptom relief benefits of a commonly used steroid. This new product will hit the market soon once it obtained the approval from CE, FDA, and other required authorities, and is anticipated to further boost the revenue growth of Anika.

If you are interested to read more about Anika, the Henry Fund report has a comprehensive coverage on this company. 

Disclaimer: This article is intended for sharing of point of view only. It is not an advice or recommendation to buy or sell any of the mentioned stock counters. You should do your own homework before trading in the stock market.

Index call warrants and put warrants listed in Bursa Malaysia

The stock market has gone volatile recently. During a volatile market, sometimes it could be a better option to trade on index warrant, which is a structured warrant that is issued by warrant issuer (such as CIMB, Maybank, RHB, Ambank, Kenanga, Macquarie, etc.) over an underlying stock market index, such as the FTSE Bursa Malaysia KLCI (FBMKLCI, 富时大马指数), Hong Kong Hang Seng Index (HSI, 恒生指数), etc.

There are 2 kinds of index warrants listed in Bursa Malaysia. If you feel bullish on the market, you can look into the call warrants, and if you feel bearish on the market, you can
 on the other hand look into the put warrants.

Each of the index warrants has the following information:

• Expiry date: You can buy and sell the warrant in the market until its expiry date. Upon expiry, the warrant issuer will pay you money if your cash settlement amount is positive. Else, you will get nothing and your money invested in the warrant will be burnt.
• Exercise level (a.k.a. strike level): the index points to exercise the warrant. For call warrant, the lower the better. For put warrant, the higher the better.
• Exercise ratio: this is the leverage element of the warrant. It is the amount of warrants required to exercise one underlying index.
• Settlement level: the index points on the settlement day.

The cash settlement amount (CSA) is calculated based on the formula below:

where FX Rate is the forex exchange rate to convert overseas index warrant settlement value to RM.

The current index warrants listed in Bursa Malaysia is as below:

It seems like FBMKLCI-HB deserves some attention. You will break even if bought it at RM0.145 and KLCI drops to 1753.50.

Disclaimer: This article is intended for sharing of point of view only. It is not an advice or recommendation to buy or sell any of the mentioned stock counters. You should do your own homework before trading in Bursa Malaysia.

The Edge forum on 2015 Economy and Investment Outlook

The Edge Malaysia is organizing a forum on 2015 Economy and Investment Outlook - Make Better Decisions.

Date: Saturday, 1 November 2014
Time: 10.00am - 12.30am
Venue: Security Commission Malaysia, Bukit Damansara, Kuala Lumpur.
Admission: Free

The speakers are:

• Jason Chong from Manulife Asset Management Services Bhd
• Chen Fan Fai from Eastspring Investment Bhd
• Datuk Tong Kooi Ong from The Edge Media Group

Are you shocked with the recent market turbulence and want to listen to the view of these renowned fund managers and/or investors?

Click here for more information and online registration to The Edge forum on 2015 Economy and Investment Outlook.

Top 30 property developers in The Edge Malaysia Property Excellence Awards 2014

The Edge Malaysia has just announced the Top 10 winners in their Property Excellence Awards 2014, which are:

• Sunway Bhd
• Sime Darby Property Bhd
• SP Setia Bhd
• UEM Sunrise Bhd
• Gamuda Bhd (Property Division)
• Tropicana Corp Bhd
• IGB Corp Bhd
• Eastern & Oriental Bhd
• Mah Sing Group Bhd
• IOI Properties Bhd

Following the Top 10 winners above, the subsequent Top 11-30 are:

• UOA Development Bhd
• I&P Group Sdn Bhd
• Bandar Utama City Corp Sdn Bhd
• IJM Land Bhd
• KLCC Property Holdings Bhd
• Glomac Bhd
• YTL Land & Dev. Bhd
• Eco World Development Group Bhd
• Naim Holdings Bhd
• Bandar Raya Developments Bhd
• WCT Land Sdn Bhd
• Selangor Dredging Bhd
• Wing Tai Malaysia Bhd
• MKH Bhd
• Paramount Corp Bhd
• KSL Holdings Bhd
• PJ Development Holdings Bhd
• OSK Property Holdings Bhd
• Plenitude Bhd
• TA Global Bhd

Congratulation to the Sunway Group for winning this award. Besides, their Banjaran Hotsprings Retreat also won The Edge-PAM Green Excellence Award 2014.

iCapital.biz newsletter RM25 one year subscription special offer

In conjunction with the 25th anniversary of iCapital.biz, this newsletter run by Mr. Tan Teng Boo is now having a special promotion of RM25 for one year subscription (normal price: RM720), a very generous 96.5% discount!

This newsletter, available in English and Chinese language, in printed and online platform, contains detail analysis of local and regional macroeconomics observation, their view on equity markets in Kuala Lumpur, New York, Tokyo and Hong Kong, company news and analysis, several stock portfolios, trading picks, etc.

Considering the amount of effort, intelligence and skill required to produce this weekly newsletter, I believe RM25 is really value for money for all stock investors in Malaysia.

For the printed version, postage charge is free if you choose ordinary POS Malaysia service, and you will need to pay extra for other faster and/or safer delivery service.

Even if you choose the ordinary mail option, you can still access the updated content online while waiting for your printed copy to reach your doorstep.

Click here to find out more detail and online subscription to the iCapital.biz RM25/year special offer

Besides, Capital Dynamics is going to have their 2014 Investor Day on 11-12 October in Kuala Lumpur Convention Centre. You can click here for more detail and online registration to the event.

Favelle Favco (FAVCO, 7229) - business growing, share price yet to catch up

About 2 years ago, I mentioned about Favelle Favco (FAVCO, 7229) here.

Now, its share price already more than doubled up (29-Nov-2012 closing: RM1.47, 5-Sep-2014 closing: RM3.31, dividend paid between the period: RM0.18. Gain = 137.41%).

This stock counter caught my attention again, as its business continues growing over the period, but its share price topped at RM3.89 on 9 April 2014, after that dropped to RM3.24 on 9 May 2014, and has been side-lining until now. In fact, its share price dropped a bit during the last week in August 2014, and has been struggling between the range of RM3.25 to RM3.39 recently.

Below is its 3 year price chart, showing that despite its share price is laggard behind its business growth speed, but it is still keeping on moving up at a steady rate. In any month of the year, its share price in current year is always higher than previous year.

Now, lets see the changes in its fundamental over the past 2 years.

Traditionally, the 1st quarter is a slow period for FAVCO, which hopefully will improve in 2nd quarter, and becoming better in 3rd quarter, then slow down a bit in 4th quarter. This is reflected in its quarterly profit margin as shown in the table above.

The clients of FAVCO, who specialized in cranes, are mainly from Oil & Gas sector, and also from Construction (i.e. high-rise building), Marine (i.e. ship terminals), etc.

Its revenue derived from its outstanding order booked. Once the order booked materialized into revenue, the outstanding order booked will decrease. At the same time, new projects are secured with new Purchase Order (PO) received, which will then add on to the order booked figure subsequently.

FAVCO will announced their new substantial PO received in Bursa Malaysia Announcement website. PO with smaller value are not announced, but will be included in the outstanding order booked figure announced in the next quarterly report.

We can see that FAVCO's outstanding order booked has increased to above billion since the 3rd quarter of 2013. Over the past 2 years. every quarter in between the quarterly reports announcement, FAVCO had at least one announcement on new substantial PO received without fail. This mean they continue to get new business throughout the year, while fulfilling the secured projects on hand.

FAVCO announced their 2014Q2 report on 25 August 2014. This is a very good result, as its revenue and net profit growth are substantial, be it compared to last quarter or to same quarter in last year. It net profit broke a new record high. Its profit margin also gone above 10% for the 2nd time. However, its share price has not react to this good result, probably dragged by overall market sentiment.

Note that on 3 September 2014, FAVCO announced new substantial order booked amounting RM119.9 million. There are 2 more months to go before they announce the next quarterly report in November 2014. If within the next 2 months, they announce another new substantial order booked, then it will be confirmed that their outstanding order booked is breaking a new record high!

On 5 September 2014, FAVCO's share issued is 216.51 million. Its trailing 4 quarters net profit is RM84.228 million. We can calculate its EPS to be RM84.228/216.51 = 38.90 sen. With this, we can calculate its PE ratio on 5 September 2014 closing to be 331/38.90 = 8.5.

As long as FAVCO's business continue to grow, it is a matter to time for its share price to catch up and reflect its fundamental strength.


Disclaimer: This article is intended for sharing of point of view only. It is not an advice or recommendation to buy or sell any of the mentioned stock counters. You should do your own homework before trading in Bursa Malaysia.