Fund manager's stock pick 2016

MONEM A. SALAM

President of Saturna Sdn Bhd

Stock pick: Gamuda Bhd

GAMUDA Bhd is a good construction proxy to buy into to ride out the challenging market environment.

The group has strong prospects in the next few years and has an excellent track record in carrying out infrastructure projects.

As a regional fund management company, we do keep a close look at the construction sector throughout Asean.

The most prominent feature we have seen in Malaysia is that the government’s expenditure allocation for major infrastructure projects tend to be executed successfully, unlike some of its regional peers.

These projects are executed well via the project delivery partner structure. Note that Gamuda won two major projects as a PDP in 2015 – the RM27bil Penang Transport Masterplan Project and the RM25bil KVMRT Line II.

As an established construction player, Gamuda is set to make inroads on several fronts.

In 2016, we foresee that the group will be keen on bidding for Sarawak’s Pan Borneo Highway project. It has vast experience in road infrastructure works and stand a good chance of winning substantial contracts from this particular project.

Not many realise that Gamuda’s highway concession business is a vital and stable contributor to its cash flow.

Its water and expressway concessions segment contributed RM98mil in pre-tax profits in Gamuda’s latest quarter, or half of its overall pre-tax profits.

A strong balance sheet allows it to leverage when undertaking new construction projects.

We believe that Gamuda will have no trouble gearing up. It has been in a similar situation previously and successfully executed such ventures.

However, there are some caveats. The Government may yet consider reducing its budget given prevailing low oil prices. Any cuts will likely affect expenditure allocated towards infrastructure investments, which could slow down some projects.

PANKAJ KUMAR

Director & head of corporate strategy

KSK Group Bhd

Stock pick: Thong Guan Industries

GIVEN the pessimistic outlook for many sectors within the market, investors will have no choice but look for companies that are insulated from slowing domestic demand, tough economic conditions and beneficiary of weak domestic currency.

The export sector is a sweet spot and given the run that we had seen in 2015 among glove, furniture and chips sector and selected others in the packaging sector. Narrowing down the search, Thong Guan Industries is a rare gem, despite rising some 63% in 2015, the stock is still deemed to be undervalued as it is trading at P/B of about 0.85x and annualised forward 2015 basic PER of about 10.5x, which is still a bargain.

Thong Guan is also a net cash company, with cash of about 20 sen per share. Growth for the company will basically come from new capacity installation, which is 33-layer nano-technology stretch film line is expected to be ready soon. Thong Guan also raised its production capacity of PVC food wrap to 720 million tonnes with the installation of 2 additional lines this year.

These are key drivers for both topline and bottomline growth. With the new capacity, Thong Guan is rightly placed to benefit to rising demand for plastic films and this could drive earnings by 10%-15% in 2016.

Some 90% of Thong Guan’s revenue comes from plastic films and the current low oil price basically translates to lower selling prices for plastic and hence increase in demand. With a favourable exchange rate, Thong Guan is a winner due to lower input cost as close to 80% of its revenue are derived from exports.

KALADHER GOVINDAN

Head of research, TA Securities

Stock pick: SKP Resources Bhd

EXCITEMENT in a company’s shares always hinges on its track record, ability to deliver strong earnings growth and generate cash flows to reward shareholders with dividends.

SKP Resources Bhd fits this bill. Despite reporting a profit growth of 43% in the last financial year, the company is expected to record a 3-year earnings CAGR of 68.2% until 2018 based on our projections.

This growth will be underpinned by the RM1bil annual orders from its main customer, Dyson, to produce cordless vacuum cleaners. Considering this new source of demand is only taking up about 25% of its newly enlarged 20-assembly line facility that came on board last September, growth potential is enormous. Dyson plans to launch 100 new products by 2018 to satisfy increasing demand for its products and services.

SKP has also mitigated operational risks by having specific agreements with clients to pass through nearly 100% of costs related to changes in raw material prices and currency fluctuations. This not only provided business stability but also some predictability.

SKP has a high ROE of 40% and a strong balance sheet. With current net gearing of only 4.5%, it is expected to turn net cash soon on the back of strong profit growth and cash flows. Thus, our expectations for future dividend yield to remain attractive around 4.6% to 6% are not far-fetched.

While having Dyson as a single largest customer can be considered as a major risk, the management is aware of that and has taken a proactive step by acquiring the subsidiaries of Technic to diversify the product range and customer base. It has also succeeded in growing the business through a win-win strategy that has strengthened the relationship, for the partnership to continue into distant future.

The fair value ascribed to SKP Resources shares is RM2 based on a calendar year (CY) 2016 price earnings (PE) multiple of 18 times, which will dwindle to 16 times and 10 times in CY17 and CY18 respectively on the back of robust earnings growth.

AZLAN HUSSIN

CEO of MIDF Amanah Asset Management Bhd

Stock pick: Brahim’s Holdings Bhd

BRAHIM’S Holdings Bhd is involved in the food and beverage (F&B) business with its main contribution coming from the airline in-flight catering business.

The airline catering industry is a highly regulated industry due to the health and safety requirements and the Malaysian market is practically dominated by Brahim’s.

Due to the restructuring exercise taking place at Malaysia Airlines, Brahim’s earnings were affected as new contracts entered into were less favourable than before. This resulted in a selldown of Brahim’s shares.

Still, Brahim’s unique niche position in this industry allows them to focus on the provision and supply of halal meals. A key “game changer” for the group is the emergence of Singapore-listed SATS Ltd as a new strategic shareholder. Brahim’s should be able to leverage and benefit from the “halal-hub” position Malaysia is pushing for and from other government initiatives, especially in the tourism segment. We expect the potential for cost-benefit efficiencies of Brahim’s to improve further moving forward with their new business model.

Brahim’s is currently trading at a price-to-book ratio of 1.1 times which is reasonable given that its regional and global peers trade in the 2-3 times range albeit with a much larger footprint in the in-flight catering business.

Earnings are expected to recover from losses this year and should help support a re-rating of Brahim’s as it heads towards a recovery in 2016. We believe it offers an excellent opportunity to enter the market at a very attractive level.

MICHAEL KURTZ

Global head of equity strategy & chief strategist,

Asia ex-Japan Nomura Securities 

Stock pick: Malayan Banking Bhd

MAYBANK is one of Nomura’s Asia-Pacific ex-Japan’s top picks for 2016.

The bank is well positioned to ride out the competition for deposits among the local banks, in our view. With the largest network of 400 branches nationwide, it has the strongest current and savings account (Casa) and consumer deposit franchises. In spite of the tough competition for low-cost Casa deposits, Maybank has consistently been growing ahead of the industry growth rate over the last 10 years. Even so, given the higher term deposit cost, we expect net interest margins to fall by 8 basis points to 2.24% by FY17F, from 2.32% in FY14.

Compliance with Basel III requirements will lead to greater competition for retail deposits. We do not believe the bank is vulnerable to any particular systemic risk as it has a diversified portfolio and relatively strong risk management.

Maybank reported its 3Q results recently and there were no negative surprises. The underlying operating ratios were relatively stable and we believe the bank is in a strong position to withstand the current challenges.

Our price target of RM9.70 is based on an return on equity of 12%.

THOMAS YONG 

CEO of Fortress Capital Asset Management (M) Sdn Bhd

Stock pick: RHB Capital Bhd

Since the termination of its proposed merger with CIMB Bank Bhd, RHB Cap has embarked on an internal re-organisation programme.

In 2015, RHB Cap has completed its implementation of an employee mutual separation scheme that will generate cost savings of RM190mil per annum.

It has also completed a rights issue in December 2015 that raised RM2.3bil. This capital raising exercise effectively strengthens its core equity Tier-1 capital ratio to about 11%, meeting the BASEL III requirement.

RHB Cap will proceed with an internal restructuring to establish RHB Bank Bhd as the group’s listed holding company, assuming RHB Cap’s listing status. This will improve tax efficiencies and eliminate holding company inefficiencies.

Regional expansion is progressing healthily and we expect to see further growth from regional businesses compared to the current 14% contribution to top line.

Our primary premise for picking RHB Cap is its attractive valuation. Its current share price trades at a price-to-earnings ratio of 8.8 times and a price-to-book ratio of 0.72 times, which is lower than the level seen during the global credit crisis in 2008.

This valuation level should allow the stock to withstand any near term market challenges and offers investors an opportunistic base for price revaluation going forward.

NIGEL FOO

Senior analyst of CIMB Research

Stock pick: MyEG Services Bhd

OVER the next one to two years, foreign workers working permit renewal services are expected to be the MyEG Services Bhd’s main earnings contributor.

Currently, there are some 2.5 million legal foreign workers in the country, whereby MyEG makes about RM100 in revenue per foreign worker – RM35 for processing fees paid by the government and RM65 from commission selling compulsory foreign workers insurance.

MyEG is expected to register 1 million illegals in the financial year 2016 (FY16), which is a conservative figure given that there are an estimated 5 million illegal foreign workers in the country.

If the company could register 2 million illegal foreign workers, FY16 and FY17 earnings per share could be boosted by 18%-22%.

For the financial year ended June 30, 2015, MyEG posted revenue of RM141.52mil compared to the RM109.87mil the year before.

The improved revenue translated into a 35.8% increase in profit after tax to RM68.05mil from last year’s RM50.11mil.

Overall, potential catalysts for the stock include stronger than expected revenue from the foreign worker permit renewal services and undemanding stock valuations.

VINCENT KHOO

UOB KayHian Research

Stock pick: WCT Holdings Bhd

WITH RM2.8bil worth of jobs secured last year, WCT Holdings Bhd’s order book makes up 4.1 times of its 2014 construction income.

Besides the decade-high order book of RM5bil, margins for the outstanding jobs are also higher due to the slew of infrastructure contracts that could bring its pre-tax margins to between 5% and 8%.

The upcycle seen in the construction industry is among the few main reasons that WCT is one of UOB KayHian Research’s top picks. UOB KayHian sees earnings contribution from its bread and butter construction arm, which should come in as early as the first quarter.

There could be upside surprises if the company clinches more contracts going forward. It is tendering for construction jobs worth RM4.9bil.

Following the paring down of its stake in the 608 acres in Serendah to UEM Sunrise Bhd in December, there is the possibility of more asset monetisation in future.

WCT is in active discussions to unlock the value of its investment properties through a real estate investment trust structure, which could start with the Bukit Tinggi Shopping Centre and the Paradigm Mall in Kelana Jaya.

Both have a combined value of RM853mil and earnings before interest, taxes, depreciation and amortisation of RM70mil.

Another catalyst is the RM1bil cash settlement that it could recover from the arbitration case in Dubai for the next two to three years.

Source: http://www.thestar.com.my/

UMobile HERO Plan VS MaxisONE plan 188

U Mobile HERO plan, the new postpaid plan from U Mobile is expected to launch tomorrow. What’s most interesting about this plan is the unlimited free calls and the flat low price of RM70/month, including 7GB of Internet data. There no contract and the voice calls are truly unlimited.

Details of U Mobile HERO Postpaid Plan:

• Truly unlimited free calls to all networks (including calls to Maxis, Celcom Axiata, Digi, TM, U Mobile & others)
• 7GB Internet data (all day, all night)
• RM70/month

Our sources told us that all current U Mobile P70 postpaid plan users will be upgraded to the HERO plan automatically. The other two U Mobile postpaid plans, U28 and P50 will remain with extra Internet.

U Mobile won’t be offering Unlimited SMS for the Hero plan. Our source said that the 7GB Internet data is more than enough for using messaging apps such as Whatsapp, WeChat, KakaoTalk, Viber, etc.

Customers can walk in to U Mobile service centre and sign up for the U Mobile HERO plan starting 1st September 2015. More details please refer to U Mobile.

MalaysianWireless Comment:

Last Thursday, we published a story about MaxisONE plan, being expensive and we compared it to the U Mobile P70 plan. MaxisONE plans were only revamped about 2 weeks ago. The cheapest MaxisONE plan starts at RM98/month with only 1GB Internet. We believe U Mobile is responding to Maxis with the launch of HERO plan.

Here’s an updated comparison between U Mobile HERO and MaxisONE plan 188:

Plans	U Mobile HERO plan	MaxisONE plan 188
Monthly fee	RM70	RM188
Internet Quota	7GB	7GB+1GB (8GB)
Calls	Unlimited	Unlimited
	(all-net)	(all-net)
SMS	N/A	(all-net)

The U Mobile HERO plan offers more value for money. Not only it is 2 times more cheaper than MaxisONE plan 188, it has a faster 3G network too.

U Mobile is a new Telco, about 7 years old and it is still improving network coverage in Malaysia. Its 3G network works best in KL, Negeri Sembilan and other states such as Johor, Penang and in Perak. Apart from these areas, U Mobile has 3G RAN sharing network agreement with Maxis in selected towns in West Coast Malaysia, East Coast (Kuantan, Kota Bahru and Kuala Terrengannu) and major towns in East Malaysia (Sabah & Sarawak).

The “Orange” operator is deploying 1,000 new 3G sites and 1,000 new 4G LTE sites this year.

[Tip: U Mobile roams on Maxis 2G network, nationwide. U Mobile HERO users can set their phone to 2G and continue to make unlimited calls using the Maxis network]

In general, Malaysians spend an average RM80-RM100 every month on postpaid plans. As of Quarter 2 this year, the average revenue per user for postpaid are: Digi (RM82), Maxis (RM97, for MaxisONE plan its RM150) and Celcom (RM90).

U Mobile has a smaller base of postpaid users (likely due to its smaller coverage areas and perhaps it isn’t spending as much as the big boys when it comes to marketing), but we think that they now have the most attractive postpaid plan, flat at RM70/month (Hero plan).

Source: http://www.malaysianwireless.com

8 RED FLAGS TO WATCH OUT FOR IN YOUR FINANCIAL STATEMENTS

Here are eight red flags to look out for when reading your next statement.

1. AN ACCUMULATION OF CASH (OR LACK THEREOF)

A strong cash flow is one of the hallmarks of a successful business. But the key word here is flow. A growing but static reserve of cash can be a sign that your backlog is dwindling and you’re running out of work, leading to a stockpile in the cash column.

On the other hand, if you find yourself drawing on a line of credit when payments for a given project are slow in coming, you could also be headed for trouble. A construction company should always be in an overbilling position on a job. If underbilling is occurring, ask your financial advisor to perform an over/under billings analysis to get a handle on this dilemma.

2. DECLINING EQUIPMENT VALUE

Slow periods in your business can lead to an unnoticed decrease in your equipment’s value and force greater spending down the line. You may be tempted to think that, because your assets aren’t getting as much wear and tear, they’re maintaining their value.

But, just as it does for a new car driven off the lot, annual depreciation continues to steadily do its work on your assets. Plus, you’re not buying replacement equipment at current market prices, meaning you’ll likely pay more when you finally have to upgrade.

3. SIGNIFICANT LIABILITY CHANGES

Substantially changing liabilities warrant a close look. If your profits are dwindling, for example, certain liabilities may shrink as well, such as payments to profit-sharing plans or deferred tax liabilities.

On the other hand, liabilities can balloon if you take out a loan to keep your construction business afloat. Having a large amount of unsecured debt is a particularly bad sign for any company.

4. MORE CURRENT LIABILITIES THAN CURRENT ASSETS

Because many contractors have seasonal swings in their businesses, you may have more bills to pay than cash on hand at one time of the year or another. This is something worth tracking and planning around. Also, consistently having more current liabilities than current assets is typically a sign that you’re overleveraged.

5. SHRINKING GROSS PROFIT MARGIN

Your gross profit margin is equal to your building costs for a particular period — not including overhead, payroll, taxes and interest payments — divided by your sales revenue for the same period.

If this ratio is dwindling, it means your production costs are rising more quickly than your prices, or you’re charging less for your construction services (perhaps in an attempt to gain market share). Both trends can sink your business quickly, so track your profit margin closely.

6. INCREASING RATIO OF GENERAL AND ADMINISTRATIVE EXPENSES TO PROFITS

General and administrative expenses, such as rent and utilities, are less “elastic” than project expenses, such as labor and materials. Thus, the ratio of these expenses to your profits will skyrocket if workload sags.

Also keep an eye on indirect costs, such as insurance, that you allocate to each of your contracts. If the amount of these rises significantly, it’s often because you have fewer contracts to allocate these expenses to, which could spell financial trouble.

7. RECEIVABLES GROWING FASTER THAN SALES

If your receivables start to dwarf your actual sales, beware. It may be a sign that customers are taking longer to pay their bills — or not paying at all — and that it may be time to revamp your collection procedures.

8. FAR-OFF OR UNPROFITABLE FUTURE PROJECTS

Although you may take comfort in the sight of a lengthy project backlog on your financial statements, remember that not all projects are created equal.

If you have jobs scheduled in the distant future, but nothing for the next few weeks (or months), start strategizing how to pay your bills immediately. Quality also trumps quantity: A smaller number of profitable jobs may prove more beneficial than a large number of jobs with slim profit margins, or even potential losses.

Source: http://www.fdcpa.com

I just became a millionaire at age 35

 

On a recent Thursday night I logged into my brokerage account and saw an extra digit I'd never seen before.

$1,004,845

When I was in my early 20s I didn't think becoming a millionaire at 35 was even possible.

Back then I didn't have much money, but the little extra that I did — usually $500 a month — I saved and invested. So this is proof of what can happen when you do that:

Mr. Everyday Dollar

You might think when your account rolls over to seven digits that fireworks light up the sky, confetti falls, and champagne starts flowing. I can tell you that doesn't happen, in fact it's pretty anti-climatic; I was like, "Oh, cool," and then went back to work.

Honestly, the financial milestone that really mattered to me was making my first $1K from investing. That meant my investments could make me $10K, which meant they could make me $25K, and so on.

Recently, a 25-year-old reader emailed me to ask where I was financially when I was his age. If you find value in benchmarking yourself against me — depending on your number that could be ill-advised — use this chart:

Mr. Everyday Dollar

As you can see, getting to $1M isn't a straight line. There were numerous times when I lost a lot of money in the market. For example, before the recession in 2008 I had $175K and nine months later I had $120K. When that happens it's scary because you think you're never going to make that money back.

But you have two choices when the market is falling and you're losing money — flee, or the stay the course. If you let fear take ahold of you then you're likely to make the wrong choice. Psychologically, it's quite normal for us to equate price volatility with risk, and ironically end up doing risky things like selling at the worst possible time.

During the recession, the financial talking heads advised us to invest solely in safe Treasury bills or bank CDs. For the people who took that advice, they're now earning essentially nothing on their savings that they thought would support them in retirement. If they hadn't acted out of fear, they could have built a great retirement portfolio with low-cost index funds.

I've reaped the rewards of staying the course, and now when I lose $70K in a month (which recently happened), I recognize it's just part of the process to build wealth.

How long will $1M last?

The right answer is, "It depends." The financial talking heads make us believe we need $3M to retire, so we can draw a "reasonable" $130K a year. So that's true if you spend $11K a month.

When I plug my numbers into the retirement calculator FIRECalc — yearly spending of $36K, a $1M portfolio, and 51 years left to live (based on the U.S. government's death calculator) — it tells me there's a 98.9% chance my $1M won't be depleted before I die.

That means I never have to work again.

Mr. Everyday Dollar

Even better, there's a few key assumptions not in this calculation:

• When my 15-year mortgage is paid off my spending decreases
• If I cohabitate my spending decreases (my girlfriend wants to split living expenses)
• I'll probably make some money at some point during the next 51 years
• My Social Security benefits kick in at 65

What I worry about are kids and their impact on spending. I think I can raise a child for $85K, but the USDA thinks I'll spend up to $500K. I just don't know yet, but my best guess is that my finances would be okay if I didn't work and had one or two kids.

So what's the secret to becoming a millionaire?

I didn't win the lottery, I didn't inherit any money, and I didn't start a company. If you're in the same situation then the fastest way to $1M is to decrease spending and increase income. Those are the two levers you have control of.

I found that the best approach was to go after the big wins, not like these crazy people.

Mr. Everyday Dollar

Instead of peeling bananas at the store to save $0.25, that person could be:

• Finding a small house or apartment to live in, that's close to work
• Defining their values so they can align their spending
• Selling their car (or one of their cars), and using public transportation
• Creating a plan to get paid more at their job, or finding one that does

Those are the big wins where a lot of money is hiding, so tackle those first before moving on to saving money in the produce section. Now, if you're pulling on the spending and income levers you're going to want to see the results, right?

How to track your spending, income, and investments

I know what you're thinking, boring! Nobody wants to plug numbers into a spreadsheet. I'm a weirdo because it might just be my all-time favorite thing to do. The reason I want you to start, or try it for one month, is because I guarantee you'll learn at least one thing about your finances you didn't know.

For example, in the late aughts I knew I was spending a lot but I didn't know it was almost as much as I was making. Through tracking came awareness, and that lead to making a decision in 2010 to my effort behind becoming financially independent. 

Mr. Everyday Dollar

Not surprisingly, by decreasing my spending and increasing my income the amount of money I could save exploded! I went from having about $10K a year to invest to having over $40K.

Mr. Everyday Dollar

To become financially independent, you need to reach the crossover point — when withdrawing 4% of your savings meets your yearly expenses. That is called the Safe Withdrawal Rate (SWR).

Mr. Everyday Millionaire

On average, I used to spend $4K a month. By decreasing my spending to $3K, I was able to reach financial independence faster. Simply put, the higher your expenses then the more money you're going to need to save to reach the crossover point. 

Mr. Everyday Millionaire

Convinced yet to start tracking? You can download the spreadsheet that I use at the end of this post, and try it out for yourself! It even makes that cool chart above.

Benefits of $1M

I know that I'm very fortunate to call myself a millionaire. While I wasn't excited about becoming one, it does allow me to live my life in a way that seemed impossible just a few years ago:

• I don't have to stress about work: layoffs, getting fired, failing, or navigating office politics
• If I choose to work I can be extremely selective, taking only jobs I'm truly passionate about
• If I wake up and decide I want to take a year (or 51) off, that's what I do

Most importantly, I've learned that money is infinite. If I work I can get more of it, or I can let my $1M grow to $2M. There's always more of it out there. But time is finite. I have a limited number of years left, and now I have the freedom how I spend it. 

This post was originally published on Mr. Everyday Dollar.

Read more: http://mreverydaydollar.com