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Monday, 31 August 2020

(Tradeview 2020) - Celebrating Our National Pride, Gloves on Merdeka Day

  



Dear fellow readers, 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :

Website / Blog : http://www.tradeview.my/
Facebook : https://www.facebook.com/tradeview101/
or Email me to sign up as private exclusive subscriber : [email protected]

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31st August 1957 will always be a historical and meaningful day in the hearts of  all Malaysian. Whenever I see the chants of Merdeka by Tunku Abdul Rahman, there is a feeling of nostalgia and great pride that flutters in my heart. I am not able to explain that emotion. It closely resembles the moments when I witness our Malaysians athletes competing at Olympics. 

I have much admiration of the leaders and founding fathers of our country. The hardship and journey endured to bring up a small diverse nation like ours is extremely difficult. What makes it harder is liberalising the country from the shackles of colonisation of the British Empire and forging an uncertain future. Here we are now 2020, the start of a new decade where the world is divided, volatile and fearful in the face of Covid-19 pandemic, Trade War between US & China and protests raging on in various parts of the world. Will there be a resolution to these issues we are facing? 

A global pandemic of this scale was not what I imagined how the new decade would begin. Domestically, a change in government mid way through a 5 year term was a rude awakening. Then came the global lockdown of unprecedented speed to contain the pandemic came underway. This showed the resilience of mankind. No matter what challenges were thrown at us, we adapt.

KLCI Index was trading at 1554 points as at 2nd February 2020, it then plunged to a low of 1207.8 points on 19th March 2020 before rebounding to a high of 1618 on 29th July 2020 and settling at 1525 as of 28th August 2020. What a roller coaster ride for the market and investors. 



We have witnessed records being made as well in KLCI with the highest every retail participation for the year.  Bursa volume hit record high on 11th August 2020 with 27.8 Billion shares traded whilst Bursa value hit record high on 4th August 2020 with 10.45 Billion. August 2020 was even a Bursa historical record high in volume and value for the month with 264 Billion units traded and RM 128 Billion value traded. What does this signify? Well, if any investors were able to buy / invest shares during the March plunge and hold it through to August months, they would probably have made one of the best returns from the share market in their lifetime. At least for me personally, I can say, this is the best year in investment returns in the shortest span of time since I started investing my first dollar.



Our National Pride - Gloves Industry

I would bet my dollar that 90% participants in the share market must have invested or held gloves stocks at any one point in 2020. Most would make money. Similarly,  I would also bet that the number of those invested in gloves stocks have reduced following the onslaught of negative news flows from Russia’s Covid-19 Vaccine, Maybank’s Windfall Tax Research Report, AmBank Downgrade of Glove Sector to Neutral, JF Apex Cutting of Gloves Stocks Target Price, Bloomberg Negative Comments on Profit Taking from Fund Managers and so forth. This would have cause substantial anxiety to other investors who are still holding on to the Glove stocks. With MSCI Inclusion, Bonus Issue and Top Glove results in mid September, those who are invested must have a deep conflict whether to continue holding or just lock in profit and move on. At least, I have received the plenty of questions on this. 

I have written on the Gloves Sector extensively before. I wont repeat here in detail, for those who missed it, you can read it here again : http://www.tradeview.my/2020/06/tradeview-2020-in-conclusion-is-glove.html

The Glove Sector was not built overnight. Today, Malaysia controls 65% of world supply with the next country being Thailand & then China at 18% and 10% respectively. Malaysia’s industry developed through sheer competitiveness, innovation and entrepreneurial spirit. In short, it is real “Kung Fu”, not fly by night con job tactics. The Glove Sector is also not the face mask or PPE sector. It is not easily replicated, it has high barriers of entry and there is no supply glut / potential supply glut. Unlike Face Mask & Covid-10 test kits :

Ex : face mask has a ceiling price which the government revised multiple times downwards. There is a supply glut in China.

Ex : Covid test kit is now affordable and fast with the latest being from Abbot Labs which cost only $5 per test kit which gives results in 15 minutes. 

Hence, it is right for investors to be fearful if they have chosen to invest in companies that ventured or announced MOU on producing face mask / distributing Covid-19 test kits. The same is not applicable to Gloves. The industry consolidated from 300 players in the 1990s to only about 40 players today in Malaysia with 20 world class suppliers. The industry went through intense R&D innovation with little support from Government, safety & quality standards certification and goodwill building with clients globally. Even the sector as a whole has evolved from vinyl plastic gloves to latex gloves to nitrile gloves. We all know Nitrile Gloves are what set us apart from our Thai and China counterparts. The king of Nitrile Gloves are right here in Malaysia - Hartalega, Riverstone, YTY, Kossan, Supermax and Top Glove. 

Gloves Sector is the only true bright spot in KLCI. It is also the glove stocks that single handedly lifted our index back to positive territory with substantial weightage today. Who would have thought that gloves (which is sold $10 sens per piece) would surpassed banks, casinos, plantation, utilities, telco, consumer and tech stocks in both value and volume invested? Hence this is why, Malaysia has a something unique to offer to the world which cannot be found elsewhere. Gloves did the extraordinary and placed Malaysia in global stage - for the betterment of mankind in the fight against Covid-19 pandemic. Personally, I am happy to root for the run to continue not only because I am invested but because this is one the rare occasions that Malaysia has a significant role to play in contribution towards mankind & humanity. 

Decision - To Take Profit or To Continue Riding?

I think before making any decisions, one must always know what is the pros & cons. This must be done in light of your own personal situation / background and recalibrate that fact with the pros & cons before deciding. One should not blindly follow newsflows. Just as there are good analysts & lousy analysts, there are also competent & incompetent fund managers and there are accurate newsflows & inaccurate newsflows too. Also, please do not listen to tips or follow prominent investors. You must consider holistically before deciding making your investment decision. I will share a few simple example which I hope can shed some light on making the right decision :

1. If you have substantial position invested in Gloves, you can consider taking 50% profit and ride the balance. This way you can protect your profit and enjoy the potential upside as well without having to run the full risk along the gyrations and volatility.

2. If you do not have a meaningful size in Gloves, you can consider to just continue riding all the way past Bonus issue and into the future quarterly results. This is because your position is small to make a dent in your overall portfolio, there is no harm riding.

3. If you have invested early and sitting on substantial profits (profits you have never experienced in your life), you are contented with the profits and do not want to stomach the risk of gyrations, then please sell all your holdings and enjoy the fruits of your investments. 

was reading an article from a local newspaper over the weekend equating gloves with face mask & PPE, calling it game over for Gloves. This is the ignorance of people in position to influence market participants. There will be even more such negatives newsflows along the way. For me, I am of the view that the market has not fully understand the impact of the earnings of the Glove sectors. Currently, with only 2 quarters into supernormal profits in an unprecedented global pandemic with future earnings lock in for at least another 4 quarters, whilst the entire economy is in shambles, it is too early to throw in the towel. 
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Food for thought: 




Saturday, 22 August 2020

(Tradeview 2020) Long Term Value Pick 4 - Mega First Corporation Bhd. (The Power Player with Continuous Growth Story)

 MFCB | MEGA FIRST CORPORATION BHD


Dear fellow readers, 

This is my Long Term Value Pick for 2020. 


Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :


Website / Blog : http://www.tradeview.my/
Facebook : https://www.facebook.com/tradeview101/
or Email me to sign up as private exclusive subscriber : [email protected]

__________________________________________________________

Long Term Value Pick 2020 : Mega First Corporation Berhad  (Initial Fair Value RM 10) 

This is my 4th “Long Term Value Pick series for 2020”. Reiterating, in the past, my long term value picks include the likes of Allianz, QL, DKSH, RCE Capital, Poh Kong, Riverstone Holdings, Oriental Holdings, Sri Trang Agro amongst others. To be classified as Long Term Value Pick it must meet 5 of my stringent criteria as below :

1. Strong, honest & capable management team / owner
2. Consistent Growth, Earnings & Dividend payout
3. Strong balance sheet & cash position / healthy cash flow
4. Can hold across decades / generations without risk of delisting or bankruptcy
5. Undervalued & lack of appreciation from investors

It is extremely hard to find a stock that can meet all the above mentioned criteria. This doesn’t mean all other stocks are lousy stocks but rather, to find a stock that I am willing to lock in my funds long term, it requires utmost justification as the time value of money must correspond with the potential return otherwise it is an act of futility. 

So why did I pick MFCB this time?  Please note, this is an actual successful power / utilities player. This is not Jaks. 




1. Revisiting 2016 - One of My Top Investments Mistake 



Mega First Corporation Berhad  if you were to do some research it would appear on the surface that they are a conglomerate with diverse business interests across power, limestone & quarry, packaging, property development & plantation. However, in recent years, their core business has been the Hydropower Project in Laos called Don Sahong with generation capacity of 260MW. What is most important is  the full commissioning of this long term investment and project in January 2020. 

Now back in end 2016 - early 2017, when I first noticed this stock and told my subscribers to consider investing in MFCB, it was trading at around RM 2.10. It was also mentioned in public channel as can be seen from below. 




Again in March 2020, I called to buy MFCB at RM 3.40 and below during the plunge BUT I sold everything at RM 4.97. You can see it here. 





Fast forward to today, it is trading at RM 7.35. Hence why I mentioned it was my biggest investment mistake. I did not stick to my long term view to hold. Back in 2017, I was worried the delay in construction / commissiong is risky (which it did happen but for a short period only) hence after it hit my FV of RM 2.80, I let go. Subsequently in 2020, after hitting my TP of RM5, I decided to lock in profits to increase my cash holdings in the midst of an uncertain market. I failed to recognised that MFCB commissioning of Don Sahong in 2020 would mean the constant huge cashflow would be flowing be it Covid-19 lockdown or not. Seasonally, the dry season would affect their performance too. Hence, my short term thinking clouded my judgment. 

Few financial writers would publicly admit their shortfall, but to me, I made a wrong move. True, I enjoyed a profit of 46% in less than 2 months when I sold at RM 4.97 but I missed out on a further upside of RM 2.42 (+71%). This is why value investing for the long term will always beat the short term trading / contra methods as sitting and riding a fundamental value stock give multiple folds of returns over a duration of time. Please note, MFCB never returned to below  RM 4 since March 2020. 



2. Strong, Capable Management with Good Track Record


In my first paragraph, I quickly distinguished MFCB from Jaks Resources Bhd. I am sure many investors would have heard about the Jaks and may have a bitter aftertaste thinking about it. The fact remains, Jaks never was a good investment proposition to begin with because they have an incompetent and questionable management team. They are facing a huge LAD claim for failing to deliver Pacific Star project in Section 13 PJ to their joint venture partner, Star Media group, their Evolve Mall in Ara Damansara is a complete failure and of course, their notable "future cashcow", Vietnam Hai Duong Power Plant was delayed as well as draining all the balance sheet of the company. I never publicly wrote about Jaks because it is promoted by prominent investors and have legions of retail investors as fans of the company. My conclusion on Jaks - it has weak management. This article is not about Jaks, so lets leave it as that.

Now how about MFCB? The Chairman and founder of the company, Mr Goh was a graduate of University Malaya and is a seasoned entrepreneur with a strong track record of successes. Importantly, he has notable positive corporate reputation in the business fraternity of Malaysia. He was formerly the Executive Director of IGB Corp Bhd, the owner of Cambrew (Cambodia largest brewery with Joint Venture deals with PepsiCo and Carslberg) in addition to being the Chairman & Founder of MFCB. Have a look below :




Furthermore, D&O Green Technologies, another semiconductor listed company manufacturing for automotive sector shares the common shareholder with MFCB. With the strings of success and reliable track record, MFCB is definitely in good hands and should be not be taken in comparison to Jaks. Another very interesting point is that the entire scale and duration for the project from start to commissioning took 10+ years of effort. Hence, it wasn't that the management build this overnight. 


3. Reaping Fruits of Investment  

In Malaysia, we know the Independent Power Producers (IPP) sold power to TNB and in turn this made certain business prosper handsomely. For MFCB, Don Sahong Hydropower with the great Mekong River, it has power generation capacity of 260 MW to supply to the power grid of Laos. In addition, neighboring countries such as Cambodia and Vietnam with huge population and much greater need for electricity has signed G2G agreement with Laos to supply power to their grid as well. Hence, MFCB is a huge beneficiary in a strategic location which will contribute to 3 countries which is in dire need of power. 

Of course, what we see now is everything coming together and falling into place. But what people do not know is how long and how much effort it took for then entire project to come to commissioning. Investing in MFCB today with clear visibility in earnings in the years to come is a no brainer. The risk is limited with great upside potential. What surprises me is the lack of analyst coverage (Except Public Bank TP RM7.76 which MFCB has exceeded the forecast & Maybank TP RM7.50) and failure of appreciation towards this company's growth prospect. Some may argue that the growth period of MFCB is over, after all the share price has climbed from RM1+ to RM7+ over 5 years. For early investors, this is a multi-bagger. How about going forward? Can it go another 7X? For this, we need to understand the valuation.

4. Solid Financials and Healthy Cashflow (Updated with Q2 2020 Results)



As you can see the last 3 Quarters appears to be bumper earnings starting from Q4 2019 - Q2 2020. Q4 2019 delivered record high net profit of Rm 83 million as it coincides with the trial commercialisation of Dan Sahong. Furthermore, the official commissioning starts from January 2020 based on management guidance. This showed the continued results flow and earnings with Q1 2020 at RM57 million & Q2 20202 at RM 81 million. Q1 was weaker due to the record low levels of Mekong river due to dry weather, and despite so, MFCB still delivered strong earnings. Later on in recent Q2 results, it picked up again due to the wetter weather and hence higher energy availability rate exceeding expectations. There is no doubt the key takeaway from the results are as the following : 

1. The results has rerated in tandem with the commissioning of the jewel of the group, Don Sahong Hydropower Project. 

2. Management guidance has been honest, transparent and importantly factual. (This to me is one of the most important criteria in determining whether a stock is worthy of our investment)




Furthermore, if you look at the table above, the profit margin has increased steadily from 10+% to 20+% and most recently 40+%. True there is a concern of revenue falling, but do note that the revenue falling is logical because of the completion of the construction of Don Sahong project. We can easily summarise as the higher revenue from before is primarily derive from construction work. Following the commissioning of Don Sahong, it transitioned itself from a construction player to a power generation player which provides higher profit margin. 

This is why I am impressed with the management of MFCB. They are able to find revenue / income stream throughout the entire project lifespan instead of continuously expecting shareholders to wait & wait for the windfall day to arrive whilst raising debts & financing.






The explanation above is quite telling. Simply put, power division contribute higher revenue and PAT due to higher energy availability factor 86% compared to 70% Coupled with tax exemption from Laos government for first 5 years of commercialisation of operations, the packaging & labelling division managed turnaround from losses to profit (RM 0.3 million to RM 1.6 million). The downside is the Resources division affected by MCO lockdown both volume and ASP by 30% top line and 50% bottom line respectively.   



An important aspect of company that I look at is the balance sheet specially cash position vs liabilities. We all know that power projects are extremely capital intensive with long gestation period before returns can be seen. Now is actually the time where MFCB recoup their investments and lower their debts. As you can see from the above, the company reduced borrowings by RM56 million (from RM 746M to RM 689M) due to repayment of RM 84.7 million in debts and settle RM 90.8 Million to contractor. The cash flow has improved substantially from Rm 8million to RM 123 million. Even cash equivalent has jumped from RM 2 million to RM 89.9 million. To me, this trend will only continue with the strong income from Don Sahong coupled with with the low interest rate environment, there will be further savings as well bringing down financing cost. Naturally, a stronger, cleaner balance sheet will further command premium for higher valuation of the share price.



5. Future & Growth Potential  

Well, MFCB is not resting on laurels and definitely not taking it easy with the cash cow now generating returns continuously. I like the management for their continuous pursuit of excellence and expansion opportunities. For Don Sahong, MFCB is seeking to commence the construction of the 5th Turbine. For Solar, the company is seeking to tender for LSS4 by the Government in 2o21. Their joint venture with Pekat Teknologi SB for Solar & Commercial will start contributing to the bottom line of the company in January 2021. For Resources division, the rebound of demand has normalised to pre-pandemic levels. Lastly, the investments in packaging & labelling business is finally paying off. Due to strong demand from overseas customers, the company is embarking on expansion for another 2 more factories between 2021-2022. I expect this division to become a strong contributor in future years gauging from performance of other packaging companies like Daibochi, Thong Guan, PPHB, BP Plastics and Masterpack.




The notable power players in Malaysia are YTL Power and Malakoff. Both are trading at trailing PER of 15.7 PER and 12.66 PER. Unlike MFCB, both companies are considered mature, stable, dividend yielding stocks. Would MFCB transition from a growth counter to a yield counter? I believe so. With the strong foundation provided by Don Sahong, MFCB venture in power generation will continue to grow and the upside is there. Hence, in my view MFCB’s PER valuations deserve at least a minimum of 15x. Of course, you can use DCF calculation for Don Sahong and PER valuation for other divisions to arrive at your ultimate Fair Value