Written by InsiderAsia
Sunday, 29 November 2009 18:08
STOCK prices on Bursa Malaysia traded broadly lower last week, mirroring much of the region as investors turned more cautious amid a lack of fresh positive leads.
For the holiday-shortened week, the FBM KLCI fell for the first time in four weeks, declining 3.8 points or 0.3% to 1,270.6 points. Daily volume shrank to well below one billion shares, with around 700-800 million shares traded each day.
Most of the region also closed lower despite gains on Wall Street as investors turned more cautious, especially over the outlook for economic growth versus stock valuations. This is notably so as stock prices have rallied for some eight months, fuelled by low interest rates and "cheap money" from carry trades.
Malaysia posted better-than-expected gross domestic product (GDP) numbers for the third quarter of 2009 (3Q09), but they failed to boost investor interest on the local bourse. Our economy contracted a slower-than-expected 1.2% year-on-year (y-o-y) in 3Q09 — a significant improvement from the 3.9% decline in 2Q09 and 6.2% drop in 1Q09. The economy is estimated to contract 3% this year but is expected to resume to a 2%-3% growth in 2010.
Investors anxiously awaited a number of US economic data out last week. There were a number of positive US economic readings. Home sales rose 10.1% in October to the highest level in two and a half years, spurred by a tax credit for first-time homebuyers. Consumer spending and incomes rose in October while initial jobless claims fell to their lowest level since September 2008.
On the other hand, demand for durable goods and a barometer of business capital spending dipped. US 3Q09 GDP was revised downwards to 2.8% from the initial estimate of 3.5%. However, investors welcomed the Federal Reserve's upward revision of growth forecast for the US in 2010, to 2.5%-3.5%, up from 2.1%-3.3% previously.
These figures were just the latest in a series of mixed data, suggesting that the economic recovery will be patchy.
Financial markets in North Asia also reacted negatively to news that China's central bank was warning banks to control a lending spree, which has underpinned its robust economic growth in the midst of the global recession. This prompted large falls on China's Shanghai Composite Index as well as in neighbouring Hong Kong.
Investors are also now closely monitoring the movement of the US dollar and commodity prices, which highlight the extent of speculative carry trades. There is no doubt that part of the more recent gains has been due to carry trades, as investors leverage on the depreciating US dollar with low interest rates to seek riskier assets in stocks and commodities.
Among the major commodities, gold continued to rally as the US dollar weakened. Gold prices surged to a fresh all-time high of US$1,194 (RM4,048) an ounce last Thursday. Crude oil futures stayed near the US$80 per barrel mark despite concerns of tepid economic growth and demand.
Portfolio review
Our basket of 18 stocks declined 1.1% for the week, more than the FBM KLCI's 0.3% fall. Including our large cash reserves (for which no interest is imputed), the total portfolio value declined by a smaller margin of 0.8% to RM508,457.
Our model portfolio's total value and returns represent a significant achievement compared with our initial capital of just RM160,000. We started the model portfolio on March 3, 2003.
Our total profits are very substantial at RM348,457. Of this amount, RM222,366 has already been realised from earlier sales and the rest are unrealised.
This represents a hefty return of 217.8% compared with our capital of RM160,000. We continue to outperform the FBM KLCI very significantly, which is up by 96.4% in the same period. This was achieved even though the benchmark index is less representative of the broader market, and our portfolio holds a large amount of interest-free cash at all times for prudence reasons.
Reflecting the weak overall market conditions, last week saw just five gaining stocks while 12 stocks fell and one stock (Pantech) was unchanged.
The week's gainers were fairly small, led by MyEG Services (up 2.3%), HELP (up 1.9%) and DiGi (up 1.2%). On the other hand, the losing stocks fared worse, led by Muhibbah (down 8%), Notion VTec (down 6.6%), 3A Resources (down 5.9%) and Tanjung Offshore (down 5.3%).
Buying 10,000 shares of HELP International Corp
We are buying 10,000 more shares of HELP International Corp, at Thursday's closing price of RM1.64. This will cost us RM16,400, and increases our total stake in HELP to 35,000 shares. We earlier held 25,000 shares, acquired at RM1.32 each.
After this purchase, our portfolio will be 75% equity invested. We still have ample cash of RM125,977 for future investments.
HELP International Corp has defensive, resilient earnings with a solid brand name that is also gaining regional reputation. The education company has consistently delivered double-digit earnings growth over the last few years, even during the recent recession. Indeed, its net earnings have grown over 20% per year since 2006, and remain on track this year.
For FY October 2009, we expect net profit to rise 21.1% to RM14.3 million. At RM1.64, the stock is trading at only 10.2 times FY October 2009 earnings, and 9.3 times FY2010. Its underlying price-to-earnings (P/Es) are much lower if we subtract the sizeable cash reserves, although much will be invested in the new campus.
The company is embarking on its next phase of growth, which will see the opening of the Fraser Business Park campus in 1Q10 and the new flagship campus in Subang 2 in two-three years' time.
HELP has a solid balance sheet. Net cash stood at RM72.4 million in July 2009, or a significant 82 sen per share — half of the current share price.
Its present net trading asset (NTA) of RM1.02 per share is also severely understated. The company's main property asset is Wisma HELP, an 11-storey building in Damansara Heights, Kuala Lumpur. The 29-year old building has 269,086 sq ft of built-up space on 43,292 sq ft of freehold land. This property is carried in its books at only RM32 million — or just RM119 psf for the built-up space.
Although the building is relatively old, the valuation is far too low compared with current market prices of RM520-RM750 psf in the wider area Damansara Heights, Bangsar and Mont'Kiara areas, as well as current replacement costs.
If we place a conservative value of RM350 psf for Wisma HELP, we would arrive at a value of RM94.2 million for the building. Thus, the value of the building and cash alone would total RM168.8 million — or RM1.90 per share, or 16% above the current share price.
This implies — at the current share price and any price up to RM1.90 — investors are effectively getting HELP's other assets, including the underlying business, valuable franchises and strong branding built up for over 20 years, for free.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.