The economy in Malaysia may slow slightly in the second half of the year, but there are sectors that will continue to do well, or even excite. This is the view of fund managers at the roundtable discussion on the economy and stock market. The fund managers are ASM Asset Management Sdn Bhd chief investment officer ZALINAH A. HAMID, Kumpulan Sentiasa Cemerlang Sdn Bhd research director CHOONG KHUAT HOCK, Capital Dynamics Sdn Bhd managing director TAN TENG BOO, and TAN KOK KHENG who resigned as UOB-OSK Asset Management Sdn Bhd CEO last month and is now setting up his own asset management company. StarBiz associate editor C.S. TAN and reporter YEOW POOI LING moderated the discussion.
StarBiz: In your stock-picking, are there any sectors that you're looking at?
Choong: There's the oil and gas sector. The best proxy to that will be MISC. It is related to Petronas and with Petronas expanding globally, there is scope for MISC to service Petronas in many ways.
The other area, which is a bit overlooked, is the fact that Malaysia is quite strong in alternative telephony and internet space, things like voice over Internet protocol.
We have companies like REDtone offering discounted calls. We've got Jobstreet offering online recruitment.
The internet penetration rate in Malaysia is lower than that in Singapore, but because we have, like 26 million population now, in absolute terms, Malaysia is number one in Asean with regard to number of internet users.
So, for a lot of these businesses, Malaysia is number one. You know, when it comes to on-line recruitment, Jobstreet is the biggest in South-East Asia.
You've got AKN Messaging - they're the biggest provider of mobile phone content and solutions in South-East Asia.
The other sector that is emerging is the REIT. Axis REIT will be listed quite soon and I think it'll be very successful.
A lot of people are looking for yields because of the slowing economy and people are worried about earnings.
The good thing about REITs is that when they want to acquire more properties, they just issue new units at an attractive yield and buy properties with higher yield.
For instance, they issue units yielding 5%, they buy properties with 7% yield, so the spread will enhance their earnings. Through that, the more they buy, the higher will be the earnings and hence, the higher the price of the REIT.
StarBiz: Sounds like a very good virtuous cycle for the REITs.
Choong: Yes, as long as interest rates do not rise too much, because if interest rates rise, the attractiveness of the REITs will decline.
StarBiz: I hope the companies will be serious in managing the REITs and not just inject their properties into it.
Choong: Only time will tell. I'll presume they're quite keen to hold the REITs because the good thing about the REIT compared with a property company is that so many listed property companies are trading at such low PEs and often, they are traded at huge discounts to book.
StarBiz: What sectors do you like, Kok Kheng?
Kok Kheng: I think the REITs will do well, especially the first few weeks but I don't expect foreigners to like our REITs. First of all, there are a lot of REITs out there.
Our REITs portfolios are not diversified enough and they are probably less than US$1bil in portfolio size.
The other factor is management; a proven track record. Thirdly is the yield - 6%, 7% yield sounds good here.
But once you step out of Malaysia, for example, last month there is the global infrastructure fund by Macquarie, yielding about 7%.
It's the same yield but it's managed by Macquarie. Having said that, the local REITs will do well. Local funds like EPF will support that.
The themes that I like are those that have done well overseas and able to produce earnings, like Jobstreet and IJM, and secondly, oil and gas. And also services, (an area) where our talent can be exported.
StarBiz: Teng Boo, what sectors do you like?
Teng Boo: Unfortunately, we don't take a sectoral approach. As a value investor, we look at specific stocks. I'll pass.
Zalinah: We favour plantations and oil and gas, but this does not stop us from switching to other sectors for value.
StarBiz: Teng Boo, what are your stock picks?
Teng Boo: One that has excited us in the last one-and-a-half years is Lion Diversified, basically because of Parkson China. They're the largest foreign retailing group in China. By now, they would have 40 plus outlets.
If you look at Parkson China at the micro level and China at the macro level, you probably have an operation that can grow for as far as the eye can see. On Parkson China alone, I think it's worth RM3 a share already, because China retail companies that are listed in Hong Kong are trading at 25 to 35 times PE. As for Lion Diversified's PE in 2006, you're probably looking at maybe, seven times.
The second stock that we like is Mieco Chipboard. They've just launched their plant expansion, which will triple capacity. With their new plant, they will be either the largest or second largest chipboard producer in Asia.
We also like Fraser & Neave. Earlier, it was mentioned REITs will yield 6% or 7%. F&N yields 6%, possibly 6.5%. We prefer F&N because there's no limitation to its upside. You have a company which is number one in many of the segments and which has expanded to China for glass-making. The China operations offer tremendous long-term potential.
Our stock picks are for the long term, not for six to 12 months. Here I have a stock that gives me 6% to 7% yield and all I need is a 10% price appreciation and I double my money in five years.
DiGi.Com is interesting because valuation, I think, is on the low side. Some analysts say that companies are changing their depreciation policy, but we look beyond these kinds of accounting changes.
They are, if you look one year ahead, 11, 12 times PE. And most of the institutions are a bit wary because it doesn’t pay dividends. In our case, we are not particular. If the company can keep the dividend for shareholders and is able to generate a better return, then let the company keep the money. What excites us is they're coming from behind, and coming very strongly.
Our fifth stock is PPB Oil Palm but it's gone up quite a fair bit. When it was RM3.30, RM3.40, it was one of our top picks. It has gone up 10% to 15% since then, so we now prefer the parent company, PPB Group.
Its dividend yield is not as good as F&N's but still better than fixed deposit rates.
And whatever benefits PPB Oil Palm gets, it'll flow through to PPB group. And the benefits from the upgrading and expansion of Federal Flour (FFM) will start to kick in this year.
Choong: I like Jobstreet. The good thing about Jobstreet is that it's like Monster of the US. There's a very high barrier to entry.
Jobstreet's current year PE is about the same as some of the traditional media stocks of 14 times now, but last year, its earnings grew 80%, and in the first quarter this year, it grew 60%.
It's achieving this growth with low capex, and making a million and a half (ringgit) every month. It's got almost RM30mil in cash in the bank.
Jobstreet is also number one in the Philippines, number two in Singapore, number three in India and I think they're going into Indonesia and perhaps Thailand as well.
The other stock is Landmarks. The RNAV per share is RM2.00. With the share price at 90-over sen, the downside is very limited. They've recently announced a Sungei Wang REIT and from our calculation, there should be enough units for a one-for-two distribution, that is, for two Landmarks shares, you get one REIT. That's equivalent to getting 50 sen per share back.
So, you pay 90-over sen for Landmarks and you get 50 sen back and you still have a lot of other good assets like the Datai and Andaman hotels in Langkawi that are doing quite well, and they still have a stake in a power plant.
The third company is Scientex Packaging, mainly because it's a bit like the rubber glove industry. It is the biggest stretch film producer in Asia. And they're going on quite a big expansion plan next year, which will make them one of the biggest stretch film producers globally.
StarBiz: They're biggest in Asia, that means including anything in China?
Choong: Yes, they are bigger than anything they have in China. In fact, the stretch film producers in Malaysia account for over 40% of total Asian capacity. Scientex's factory management is very efficient and it's trading at a PE of eight-over times, current year.
We also like Boon Koon, which is the largest company rebuilding commercial vehicles i.e the vehicle looks more or less new and the odometer is reset to zero, so it's more or less like a new commercial vehicle.
The only difference is that you're buying it at 30% to 50% cheaper than new commercial vehicles.
Last year, about 70,000 commercial vehicles were sold in Malaysia, and Boon Koon produced only about 1,000. It can't meet the demand.
And soon it'll be selling European commercial vehicles. The company has tied-up with Daimler-Chrysler in Britain and has an exclusive agreement to import used Mercedes commercial vehicles into Malaysia.
It's been growing its earnings 20% to 30% per annum and I think this year it should maintain that and it's trading at a PE of slightly less than 10 times.
And the last one we like is MISC. This is more for the medium term, even though we realise that earnings will not be that attractive because of falling tanker rates at the moment. But longer term, it's the largest energy shipping company in the world.
With all the oil and gas finds in Malaysia, there'll be more export of LNG.
With Petronas doing very well in other countries, there will be a need to ship from all the countries that Petronas is in. It's trading at a PE of 12.5 times
Kok Kheng: Two that have done very well and with overseas track record would be Jobstreet, one, and the other one is IJM Corp Bhd.
Not that I like the sector but I just like the stock. The management is very capable within Malaysia and outside Malaysia.
A lot of them have gone overseas but they have not made any money, but IJM has a proven track record in that.
It has a concept of buying land and developing it for others. That's the right way to go. They are always on the cutting edge in terms of doing things.
For the banking sector, I would still look at Maybank as one of the index stocks, strong franchise, good dividend also.
When there is an inflow of foreign funds, it's always Maybank.
Between Maybank, Telekom and Tenaga, I would prefer Maybank.
There are a few oil and gas stocks, but I'll just pick Tanjung Offshore, a new IPO. Its stock price has not done very well.
It's hovering just above the IPO price and valuations are still very decent.
The company has just acquired an RM85mil contract. RM85mil is quite a good size (contract) for a company like that. And I think that by year-end, we're going to see more contracts.
StarBiz: What segment of the industry are they in?
Kok Kheng: They have support vessels for oil and gas. They're acquiring new ones.
They're small right now but I think it's going to be quite big, given that the exploration in Sabah and Sarawak that was announced again two days ago, new Murphy find, again it will get those contracts.
StarBiz: It's in the same sector as Habib?
Kok Kheng: Yes, Chuan Hup, Habib. This is the area where we can do well. It's not a high tech thing.
The fifth one, I will pick a situational play, Yikon. It's like your Lion Parkson, but this one's just got a licence, the first given by the Chinese government to have country-wide goldsmith shops.
They got a national licence, not a provincial one, to set up goldsmith shops all over China
They have started deploying shops this year in major cities.
The shops are doing pretty well in in the department stores and stand-alone shops. They are putting their right people there, which is very important.
Profit margins are better than in the Malaysian market where there is a glut.
Year to date, this stock has been the second best performing in Malaysia, up 140%. The best is Habib, up 300%. So, I think the news has started to flow in.
StarBiz: Much of this potential is already in the price.
Kok Kheng: But if you look at the earnings growth, it's not factored in because they have only started a couple of shops in China, and they are negotiating for shops. The multiples could come down if the growth is there. But watch the growth.
StarBiz: Zalinah, what are your picks?
Zalinah: My top five picks are based on value. They expand overseas, with growth and to some extent, yield.
The first one is PPB Oil. It has yield, has expanded overseas and its new estates are planted with seedlings that provide better FFB (fresh fruit bunches) and OER (oil extraction rate). And they have a strong management team.
The second one is Petronas Gas, which has growth and yield, is in the right industry and has a strong parent company and potential earnings from by-products.
The next one is Malakoff, which is going for a project in Saudi Arabia.
In the banking sector, I like Commerce Asset. Even at current levels, it's still attractive.
Then, IOI Corp. It has diversified, strong management and good yield. The company has exposure in plantations, properties and oleochemicals.
StarBiz: Malaysians are looking at the overseas markets at the same time. How do foreigners view our markets?
Kok Kheng: If you look at the two stocks I mentioned - Jobstreet and IJM - they have quite a reasonable component of foreign investors in them.
It shows that if you have good companies which have proven track records in their overseas expansion, you will attract foreign investors.
But these are niche companies. Jobstreet is in Singapore, the Philippines. It's there and the model works.
Once you have that in place, you will naturally find foreign investors coming to those stocks.
The regulators can also liberalise the market by allowing foreign listings. Yes, there is risk. But there is risk in going overseas also.
StarBiz: These would be secondary listings?
Kok Kheng: No, it can be primary. For example, Singapore has done very well. Every month, there is a China listing in Singapore. When you have that, the Chinese, Hong Kongers, Taiwanese will come to buy your shares because they understand these brands and the companies.
That will generate interest, and when they are here, they will look at others.
The Government can play this part in opening up.
We need to open up to get foreign companies listed here, instead of listing small companies and Fountain View and all that.
StarBiz: Will there be a problem with the NEP?
Kok Kheng: No, I think the Government has stipulated that a foreign company can own 100% now.
StarBiz: But when you list, you normally need to have a 30% bumiputra shareholding.
Choong: I think that will have to be reviewed for foreign companies wanting to list here.
And also, Malaysia will be a good country for listing companies from the Middle East.
It will make the investing community here more regional and global in its outlook because then they can look at investing in global or regional stocks rather than just Malaysian stocks.
Zalinah: That will also allow smaller funds to invest in foreign companies, because we can only invest 30% (overseas) and that's really too small for some funds.
The local funds can then get foreign exposure without going outside.
Kok Kheng: There are risks like CAO (China Aviation Oil). But there will be. In this business of taking risks, the issue is have you taken the due diligence?
There are 40 to 50 Chinese companies listed in Singapore. You get one culprit, one black sheep but you also this in the local market, probably more.
In order to compete with other bourses in this region, you have to open up. You must do it quickly because you'll get all these companies listed everywhere in Asia, but not Malaysia.
StarBiz: Everywhere in Asia?
Kok Kheng: Singapore and Hong Kong are the main beneficiaries, and look at the income of the stock exchange of Singapore and the dividend that it pays. It's just great.
In the Singapore exchange, you get all these futures, derivatives, secondary listings, foreign, local, primary - that will attract foreigners to come.
StarBiz: Do the rest of you support that?
Choong: Yes, why should we let Singapore get the benefit of all the foreign listings.
StarBiz: In the past, Malaysian market was driven more by retail and Bursa wanted more institutions. Now it's swung the other way.
Kok Kheng: I think in order for the market to move up to the next leg, it has to be retail-driven.
The style of institutional funds is not to bash it up. It's basically the retail.
The retail participation is important, but we've not seen that for a long time.
The sentiment has to be right for the retail to come in, then the market will move. If not, I don't think you'll see an interesting market this year.
StarBiz: Do you see a large outflow of local funds to buy stocks overseas?
Kok Kheng: I don't think so, for many reasons. For one, capabilities are not there yet. The asset management companies, with a decent fund size, are looking to link up with foreign houses.
Some of them already have, like Commerce with Principal, Macquarie with Arab and OSK with UOB. For the smaller houses, it's a wait-and-see.
StarBiz: Is ASM making this kind of linkage?
Zalinah: It depends on the policy of the shareholders in the parent company. To have a joint venture with a foreign company is a policy matter.
StarBiz: Currently, are you invested only here?
Zalinah: Yes, in Malaysia.
Kok Kheng: And if your policy agrees with this, it will take time to look for a foreign partner. I don't think any serious foreign investments will take place this year.
Probably next year, we'll see some outflow of serious money.
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