Short position

  • Business
  • Saturday, 30 Apr 2016

Getting smoked 

Talk about a stock that is going up in smoke. British American Tobacco (M) Bhd’s (BAT) latest quarterly results were a shocker, as not only did its net profit drop by about 30% from a year ago, but sales volume also saw a 7.7% drop in the first quarter of its 2016 financial year compared with the fourth quarter of last year.

The company in its filing to Bursa Malaysia said contract manufacturing volumes registered a large decline, resulting in a total reduction (cigarettes and non-cigarettes) of 36.2% versus the same period last year, largely attributed to lower demand from the Australian, Philippines, Singapore and Taiwan markets.

The biggest surprise, however, came in the dividend declared. BAT cut the dividend declared in the first quarter from 78 sen a share previously to 55 sen a share in the latest quarter.

The reaction to the shocking decline in profitability and dividends for the company, which has announced plans to sell its plant in Petaling Jaya, has been telling on its share price.

BAT’s stock, which has been treading water around the RM55 mark for much of this year, saw a huge plunge in its share price this past week.

Selling was sparked by the lower profit and dividends, as BAT’s share price plunged 16.21% from Monday’s close to a low of RM45.88. That is its lowest close since December 2012.

For investors who have owned BAT stock through the years, the steep decline in the business and share price is shocking. Among the blue chips, BAT has always been “bluer than blue” for its defensive nature. But the changes in the dynamics of the industry have sent a clear signal that regardless of the past, no company is immune to changes in market trends.

What has hurt BAT has been the steep increase in excise duties that has seen the price of cigarettes soar in recent years. Obviously, the decline in the volume of cigarettes sold shows there is a point in the inelasticity of its business, where smokers will say it’s too costly to continue with the habit.

The other problem it faces is not only smokers switching to vaping but also the illicit trade. Both have flourished at the expense of the legal industry.

The sell calls now being levied at BAT show that the investing industry does not think its previous valuations will hold in view of lower profits and dividends going forward. With margins being affected, BAT’s place as a dividend payee is not in doubt, only the amount it will declare. With that in mind, the adjustment process to the new normal for the cigarette giant might have some way to go.

Sona warrant, punters delight 

Sona Petroleum Bhd’s warrants have been actively traded in recent times. Even after Sona’s shareholders rejected the company’s proposed maiden acquisition on Tuesday, the warrants have seen active trade, albeit at prices which indicate that there are more sellers than buyers.

Still considering that the trading volumes were high in the last three days, it shows that there are investors wanting to buy the warrants, even at the lowest 0.5 sen value. What do they expect? They are clearly betting against the odds.

Following the rejection of the qualifying asset (QA) by Sona’s shareholders, the company said it will be moving to return the funds given to the company to its shareholders.

However, going by the rules, Sona has until July 29 to secure approval for its QA before it is in danger of being liquidated. So, there is still a slim chance that it could pull this off.

It has been well-documented that special-purpose acquisition companies (SPACs) like Sona have seen the entry of many yield-seeking investors keen on exercising the cash-back option present in these companies.

One way out for Sona is for it to find a big investor to buy out the shares held by yield seekers and to vote the QA through.

Another is if oil prices continue to rise and the asset becomes attractive enough for some of the existing shareholders to rethink their decision of not supporting the deal.

That’s clearly what those buying the warrants are banking on. At 0.5 sen, it is a cheap bet and one that can potentially give high returns. At most, they will lose 0.5 sen per share.

The odds, though, are stacked against the punters. Aside from the tight deadline, Sona also has to ensure that it can still pursue the Stag Oilfield asset, offshore Western Australia for US$25mil (RM96.8mil).

According to Bursa Malaysia filings, the cut-off date to meet conditions for the proposed acquisition of the Stag Oilfield has been extended by a month from March 31 to April 30. It has to get another extension to keep the deal alive.

The return and exit of Tanah Makmur

Pahang-based Tanah Makmur Bhd is being taken private two years after it was listed.

Its major shareholder, the Crown Prince of Pahang Tengku Abdullah Sultan Ahmad Shah, and parties acting in concert who collectively have 69.9%, have proposed a privatisation exercise via a selective capital reduction to buy out the remainder stake they own at RM1.80 a share.

The plantation and property company cited the stock’s poor liquidity as a reason for taking it private.

According to a filing made to the stock exchange, the average daily trading volume of the share was 498,000, representing 0.42% of the free float as at April 22. The company said the RM1.80 a share offer represented a 22.45% premium over the RM1.47 closing price of April 22.

At last look, the shares were trading at RM1.67.

So, its major shareholder reasoned that it is a good time for shareholders to realise their investment. The company would then apply for a delisting.

Investor euphoria for the stock only lasted for a short period since its listing in July 2014. According to Bloomberg data, its shares hit a high of RM2.05 on Aug 6 in that year. On its debut, the stock had opened at RM1.60 over the initial public offer of RM1.25 per share.

Since early last year, its price has been largely listless.

Recall that Tanah Makmur took over once-listed Kurnia Setia Bhd some six years. Kurnia was then a pure plantation outfit that was taken private because it was a thinly traded counter and an illiquid stock.

It was initially listed by the Pahang Agriculture Development Board on the Bumiputra Stock Exchange in December 1984, before being listed on the Main Market of Bursa in 1991.

The Tanah Makmur that is now listed has evolved. Besides plantation, the company is also involved in property and bauxite mining.

Bauxite mining is big business but has become a controversial issue in the wake of various environmental problems.

It was reported that the company started its bauxite mining venture in mid-2014 after its discovery of 1.2 million tonnes of bauxite deposits on its KotaSAS township landbank. Bauxite exports are said to contribute between 20% and 30% of Tanah Makmur’s revenue yearly.

A three-month moratorium on bauxite mining in Pahang was imposed starting Jan 15 this year, which has been extended for another three months to mid-July.

If and when the moratorium is lifted, Tanah Makmur would stand to pick up from where it left. That’s something minorities would want to think about.

Climate change

The long-awaited rains are here. For Malaysians, this will mean that they can keep a lid on their soaring electricity bills brought about by the higher usage of air conditioning. Perhaps, this is a good time to assess how changing weather patterns will eventually impact the climate.

The planet has gone through unseasonably warm weather in recent years, while the 20th century saw global temperatures rising faster than ever before. It is debatable whether El Nino cycles or their severity are a sign of climate change, but it has certainly played havoc with agricultural harvests. This is certainly the case for the local plantation industry. Extreme variations of wet and dry spells also do not help. There could be serious implications for food crops like paddy.

According to global-risk analysis firm Verisk Maplecroft in a report last October, South-East Asia will be one of the worst affected regions of climate change. “Heat stress” will impact productivity significantly.

The firm, using climate projections to calculate the drop in labour capacity, says Malaysia is set to see productivity decrease by 24% from current levels, with Singapore’s declining 25%, Indonesia’s dropping 21%, Cambodia and the Philippines going down 16% while Thailand and Vietnam could see a 12% drop.

It says by 2045, Malaysia will see “heat stress” days rise to 364 from 338 currently. As if that is not sobering enough, 45 of the 50 highest-risk cities in the world from climate change are in this region, including Kuala Lumpur, with 20 of the 50 highest risk cities in Malaysia.

That is something to act on, and will require both the public and private sectors to come up with plans to sustain economic growth while protecting, to the best of their abilities, this verdant patch of real estate we call home.

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Business , Short position , Tanah Makmur


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