- We maintain BUY on Kimlun Corp with an unchanged fair value of RM3.28/share, based on a 20% discount to our SOPderived value of RM4.10/share.
- Kimlun yesterday announced on Bursa that has secured a SGD17.13mil (RM43mil) job to supply tunnel segment linings (TLS) for the East-West Transmission Cable Tunnel Project EW2 in Singapore.
- Kimlun is expected to deliver the TLS over a period of 33 months.
- EW2 is part of the 35km Transmission Cable Tunnel Project, a 60m underground transmission grid to supply electricity in Singapore.
- We view this news positively and expect Kimlun to secure more TLS and segmental box girders (SBG) jobs for upcoming MRT works in Singapore and Klang Valley. Kimlun also currently supplies SBG and TLS for the KVMRT Line 1.
- Kimlun is currently expanding its Johor plant (RM80mil sales p.a.) in anticipation for more MRT jobs while its Senawang plant is almost at full capacity (RM150mil sales p.a.).
- In our view, some of the upcoming manufacturing jobs include:- (i)Thomson MRT line in Singapore; (ii) KVMRT Line 2; (iii) other proposed extension of MRT network in Singapore, i.e. Eastern Region line, and North East line extension.
- Our channel checks indicate that the PDP for KVMRT 2 is expected to be appointed in July/August, with the SBG and TLS tender (worth ~RM300mil) to be awarded in the 2H of FY14F. We believe Kimlun is a frontrunner as it is one of only two major players in the industry.
- The new win reaffirms our view of Kimlun as a direct proxy to MRT jobs and to construction works in Iskandar Malaysia (IM).
- In our recent company visit, group CEO Sim Tian Liang said there had been a strong pick-up in construction jobs in IM and the Klang Valley post the 13th general election. However, the group will only tender for selective construction jobs with better margins of 8%-10%.
- Kimlun has a construction order book of RM1.2bil currently (end-Dec 2012: RM1.2bil) while manufacturing order book is currently at ~RM340mil.
- We expect new orders to grow from RM650mil in FY13F to RM900mil in FY14F and rising further to RM1.1bil in FY15F. Manufacturing order book is currently at RM300mil.
- With a focus on better margin jobs, we believe Kimlun’s valuations are undemanding given its strong fundamentals.
KUALA LUMPUR: Malaysia Steel Works (KL) Bhd (Masteel) is allocating RM100mil for capital expenditure (capex) over the next two years to construct a new steel rolling mill.
Managing director and chief executive officer Datuk Seri Tai Hean Lengis targeting the new mill to be completed by early 2015 and boost the company's annual steel bar production capacity to 550,000 tonnes from 350,000.
“The new mill is adjacent to our Bukit Raja, Klang, meltshop and would give us greater operational efficiency in terms of logistics and economies of scale,” he told reporters after the company's AGM.
Tai said that 65% of the capex would be funded with bank loans and the balance with internal funds.
On another note, Tai hopes works on the 100km intercity rail network from Iskandar Malaysia to Singapore will start early next year.
“We are targeting to finalise the financing by the end of the year and it would take approximately three years to complete the development,” he said.
The joint-venture company for project, Metropolitan Commuter Network Bhd, is 60% owned by Masteel and the balance by KUB Malaysia Bhd. Masteel would be in charge of the operations of the rail network post-completion.
As for steel sales, Tai expects the volume to increase by between 8% and 10% this year.
However, he noted that the company's revenue would experience slow growth this year due to declining global steel prices.
Tai said the company planned to increase dividends to 15% this year from 13.4% in 2012.
PETALING JAYA: Kimlun Corp Bhd has been awarded a S$17.13mil (RM43.1mil) contract to supply precast concrete tunnel segment linings for the East-West Transmission Cable Tunnel Project EW2 in Singapore.
In a filing with Bursa Malaysia, the company said the contract was awarded to its unit SPC Industries Sdn Bhd by SK Engineering & Construction.
It said the supply of concrete tunnel segment linings was expected to spread over about 33 months and was expected to contribute positively to the group’s earnings.
KUALA LUMPUR: Property developer Mah Sing Group Bhd is poised to achieve its RM3bil sales target for 2013, having delivered about RM750mil in sales for the first quarter of this year.
Year-to-date, the company has acquired four parcels of land with a combined gross development value (GDV) of RM7.78bil.
The said parcels of land include integrated commercial centres like D'sara Sentral, Greater Kuala Lumpur; Lakeville Residence, Kepong; Meridin@Senibong, Iskandar Malaysia; and the Kota Kinabalu Convention Centre in Sabah.
Further acquisition of prime land is feasible based on the current low net gearing of 0.19 times and cashpile of some RM822mil as at March 31.
“We have the financial prowess to take on more land, be they fast turnaround niche projects or large townships. Yet we can comfortably maintain our growth with our existing land bank,” said group managing director and chief executive Tan Sri Leong Hoy Kum at the company's AGM.
The main focus of future acquisitions would be Greater Kuala Lumpur due to the healthy market and urbanisation, he added.
The total land acquired by Mah Sing in 2012 amounted to a GDV of RM7.38bil.
The company has progressively launched new and existing projects, including Icon City, Petaling Jaya; M Residence@Rawang; The Loft@Southbay City; The Meridin@Medini; and Sutera Avenue, Kota Kinabalu.
With regards to Bank Negara's potential curb on the developer interest-bearing scheme (DIBS), Leong said “there has been no announcement yet”.
He, however, “hoped that any implementation would take into proper consideration the industry's feedback and the current market condition”.
He also noted that “the lending environment was generally still conducive, financing liquidity was still attractive and interest rates were still low”.
According to CIMB Investment Bank Bhd head of research Terence Wong, Mah Sing should be less susceptible and would still manage to break new sales records. This is because it had limited the offering of DIBS to only a handful of projects since 2012.
“We remain overweight' on the property sector, with Mah Sing as our top pick and robust sales and earnings growth as sector catalysts. Any weakness in property stocks is an opportunity to accumulate,” he said in a report.
The brokerage remains selectively optimistic on certain segments of the property market, particularly for the medium to mid-high-end segments.
“We still see good demand for serviced residences from 500 sq ft in prime city or commercial locations, landed properties below RM1mil in good schemes with easy access and amenities, or mid-high to high-end residences in matured schemes.”
Among the resolutions approved during the AGM was the declaration of the first and final dividend of 7.6 sen per ordinary share.
The company recorded a 16% year-on-year increase in net profit to RM69.5mil for the first quarter of 2013.
KUALA LUMPUR: The tapering of the US Federal Fund's quantitative easing (QE) stimulus is likely to bring headwinds to the countries in the region including Malaysia, said research houses. One of the main risks is a `sudden stop' in capital inflows, where the Asean markets recently bore the brunt of sell-off.
Drawing parallels with the 1997 Asian financial crisis were however, misplaced even though there may be similar factors which led to the contagion, said economists.
Frederic Neumann, senior Asian economist for HSBC Bank said the differences outweigh the similarities.
“What's needed to restore confidence is an all-out move towards structural reforms; above all in China, but elsewhere, too."
In events leading to the contagion, debt had soared as capital rushed into the region, spurred at first by a generous Fed and sustained by the Bank of Japan.
While the borrowed money was used to build and purchase property, this was not matched by productivity growth which led to shaky fundamentals and the reversal of capital, he said. Neumann said growth has shifted downwards in the region and market volatility will likely persist for a while.
“Still, the region's defences are sturdier than 16 years ago...that should help it brave the coming headwinds with a little more poise.”
Current account positions of most countries are in surplus which should cushion the blow from departing funds, while the region also no longer suffers from a currency mismatch between its assets and liabilities.
Although a stronger dollar will not impose `a crippling spike in debt service costs', it does not mean that foreign investors may not pull their cash out of emerging markets.
Given their exchange rate exposure, they may now be more likely to do so than before but given the excess savings available, local financial systems should be able to cope.
“But there are two complications here. One, the transition of funding from foreign to local sources in itself is bound to be bumpy. The cost of capital is likely to rise, with fewer investors chasing assets,“ he said, adding that with excess savings at hand, volatility is bound to persist, funding costs to rise and growth to slow.
Neumann also pointed out that unlike the 1997 situation, the banking systems in most countries in the region are more robust, with capital buffers are higher, loan-to-deposit ratios lower, and the regulatory and risk control frameworks more advanced than they once were.
“The `sky-high' foreign exchange reserves, and the potential availability of regional swap lines (though so far untested), are perhaps the biggest dissimilarity between now and then,” he said, adding that for the most part, they should still prove plenty enough to stave off bigger trouble.
Since every crisis takes on a different guise, Neumann warned of vulnerabilities which may raise risks but confidence is key to maintain growth.
“With volatility on the rise, however, it takes a much smaller upset to knock down confidence, with unpredictable consequences for liquidity, leverage, and growth.”
Bond markets have also grown at a rapid rate, which has also raised risk that their institutional infrastructure -- building blocks such as a deep local investor base, tested legal certainty and experienced rating agencies - has not kept pace.
Distribution of debt also matters, he said.
He said leverage is also another risk to watch out for. If in the run-up to the Asian financial crisis, it was generally large, often listed firms that accounted for a big chunk of debt, today, the rise in leverage has been more concentrated in households, smaller companies and government entities (state-run enterprises or local government vehicles).
Touching on capital inflows, Dr Chua Hak Bin of Bank of America Merrill Lynch warned that Malaysia looks most vulnerable to a “sudden stop”.
Foreign ownership of Malaysian government securities is currently about 48.3 per cent, compared with 13.4 per cent in February 2009, just before the first QE started.
He pointed out that foreign ownership of Bank Negara Bills is even higher, at about 58 per cent of outstanding.
Although Malaysia bonds yields have risen because of the recent sell-off, the spike has not been as dramatic as some of the other Asean countries.
"Markets have treated Malaysian bonds as more defensive and stable in part because of the pension fund’s (Employees Provident Fund) captive savings.
"But soaring quasi-public debt and risk of a ratings downgrade if fiscal reforms are delayed may question these qualities."
Malaysia is the largest recipient of capital flows since QE started (whether QE1, QE2 or QE3), measured as percentage of recipient gross domestic product (GDP).
Since QE1 began, foreign portfolio inflows into Malaysia is the highest (7 per cent of GDP), followed by Thailand (2.7 per cent), the Philippines (2.3 per cent), Indonesia (1.5 per cent) and Singapore (0.3 per cent).
Portfolio inflows into Malaysia are largely through bond, rather than equity inflows. Between 2004 and 2012, cumulative foreign portfolio investment flows totalled US$248 billion, with the largest inflows seen in Indonesia, Malaysia, Thailand, the Philippines and Singapore.
Vard’s share price is off its low of SGD1.015 following an unwarranted selldown previously. While there are some easing of concerns over margins and order intake, further rerating would need to be triggered by real order wins which we believe would gather pace towards 2H13.
Vard has the most attractive valuations among the O&M stocks under our coverage, trading at 5.8x FY14F PER, 5-6% forward dividend yields and FY13-15F ROEs of >25%.
PhillipCapital starts Amara Holdings (A34.SG) at Buy with a $0.74 target.
While Amara has a hotel, luxury hotel, retail podium, and office tower in Singapore, the house notes that growth is coming from substantial overseas developments.
It tips Amara has a "visible growth profile from a pipeline of assets under development," including Amara Bangkok and Amara Signature, Shanghai.
It also tips a potential catalyst in a memorandum of understanding to develop a hotel in Yangon, Myanmar. The house notes that shares currently trade at an over 50% discount to its RNAV, "representing a value opportunity."
Lian Beng Group, the Singapore BCA Grade A1 construction group, has secured two projects worth $200 million, boosting its order book to about $1.4 billion.
The group’s wholly-owned subsidiary, Lian Beng Construction (1988), was awarded the building contract of a condominium along Flora Drive in Pasir Ris estate worth $115 million.
The contract involves the building of nine eight-storey residential blocks, one block of clubhouse, a basement car park, a swimming pool, tennis courts and other amenities within the condominium compound.
The contract period will last 28 months start from July this year to October 2015. This condominium is developed by Tripartite Developers, a joint venture of Hong Leong Holdings, City Developments and TID.
Meanwhile, the group’s another wholly-owned subsidiary, Deenn Engineering, recently secured a contract worth $85-million on June 17 for a project in Singapore.
We raise our fair value to MYR1.82 and maintain our Buy rating on the stock. We view Tambun Indah’s (TILB) acquisition of the minority stake in Pearl City positively, given the resulted RNAV and EPS enhancement. We also bump up our GDV for Pearl City by 26%, as the latest launching price has way exceeded the price assumption for the previous GDV estimate. FY14 PE is compressed back to an undemanding level of 6.4x.
- Pearl City is now 100% owned.TILB is acquiring the minority stake in Pearl City from Nadayu for a consideration of MYR112.2m, to be satisfied via MYR40.7m cash and 55m shares issued at MYR1.30 each (worth MYR71.5m). Meanwhile, TILB has also announced its proposed private placement of 15m shares. Proceeds will be used to partly fund the deal and future new landbank acquisition. At the same time, it will also further enhance TILB’s institutional shareholder profile.
- A good deal. Based on our minority interest estimate of MYR23-24m (only for Pearl City), the transaction is valued at a PE of only 4.7x. Upon completion of the deal in Sept, Nadayu will emerge as the second largest shareholder, with a shareholding of about 13-14%, and Mr Teh’s shareholding will be lowered to about 38-39%. The composition of board members and control will remain unchanged. After factoring in the impact of the deal, our RNAV/share estimate is enhanced by 14 sen.
- Upward revision in Pearl City’s GDV. We are impressed with the management ability to buyout the minority stake in Pearl City. TILB now claims the full ownership of its crown jewel and it is a motivational deal for the management. This has always been the idealsituation as minority interest in P/L will be largely wiped out, and net profit will see a quantum leap immediately. Net profit could potentially hit MYR100m mark in FY15. We raise our GDV estimate for Pearl City by 26%, as the recent launch of terraces at Pearl Residence has already achieved an ASP of MYR438k/unit, vs. the price assumption of MYR350k for the previous GDV estimate. Our RNAV/share is boosted by an additional 18 sen.
- No dilution. Our FY13-14 net profit forecasts are raised by 9-37%. After factoring in the larger share base, our FY14 EPS estimate is enhanced by 9.2%, and FY14 DPS is now 7.8 sen vs. 7.2 sen previously.
- Our top small cap pick. Our fair value on TILB is raised to MYR1.82 (from MYR1.55), based on an unchanged 15% discount to RNAV. BUY.
APCharlie Munger is best known as the second-in-command behind Warren Buffett at Berkshire Hathaway (BRK.A)(BRK.B). He's also a world-class billionaire investor in his own right, capable of similar market-trouncing results as Buffett himself.
As a successful investor and all around nice guy, Munger often shares his investing wisdom with those who care to listen. Paying attention to what he says and acting upon his best advice should help you make yourself financially comfortable -- maybe even rich.
With that in mind, here are some of his most pertinent words of wisdom for those who want to invest.
1. The No-Brainer Secret to Getting Rich
If you're looking to do more with your money than just stick it in a CD or savings account, perhaps the most important Munger quote of all time is this one:
"Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer."
Because you need to spend less than you earn in order to properly invest, and because investing defers your ability to spend money from today to sometime in the future, even lousy investing beats not investing at all.
Following Munger's advice throughout your career is just about the closest thing you'll find to a guaranteed way for you to wind up financially comfortable during your retirement.
2. The Key Financial Lesson for Those Not Yet Able to Invest
For those not yet able to regularly sock away cash for their futures, Munger has these words of wisdom:
"Once you get into debt, it's hell to get out. Don't let credit card debt carry over. You can't get ahead paying 18 percent."
Once again, Munger is absolutely correct. He and his partner Buffett may be among a handful of investors in the world with a legitimate chance of outrunning credit card debt with investment earnings. We mere mortals don't have a prayer.
The long-run returns from investing in stocks is somewhere around the 8 percent to 10 percent annualized range -- and even that isn't guaranteed. When compared to the 13 percent or more interest rates that typical credit cards charge, the importance of always paying off that credit card bill -- and the futility of trying to beat that rate investing -- becomes abundantly clear. The most important instructions for those who do invest
Finally, for those who are ready to invest, Munger has two critically important pieces of advice. The first:
"The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage."
And Munger's second key piece of investing advice:
"There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn't awash in cash -- and I don't want to go back."
Taken together, they form the foundation of the value-investing strategy that made Munger and his partner Buffett two of the richest people on the planet. In essence, Munger's advice boils down to:
Figure out why a company has a right to win (its staying quality/competitive advantage)
Determine what that company is worth (the discounted future cash flow)
Pay less than that amount to buy it, and
It's a better idea to hold on to cash than to invest your money poorly.
It's a pretty straightforward strategy, but it's the one that made Munger the billionaire he is today.
These Words of Wisdom Work in Good Times and Bad
Those straightforward bits of timeless advice from Charlie Munger contain the keys that will let anyone able to follow them throughout a career wind up comfortable, if not downright rich. Yet while his advice can work wonders, life does have a way of throwing us curve balls. Jobs get lost, health is not always with us, cars get wrecked, and roofs leak.
Don't let those curve balls dissuade you: Following Munger's advice gets you in a better position to hit them when they come flying past. For instance, it's a lot easier to deal with the costs of a wrecked car if you've got a pile of cash awaiting investment than if you're already in a hole from carrying credit card debt.
Even if you're not yet ready to invest, structuring your financial life around Munger's advice can set you up for success once you're able to get started.
Chuck Saletta is a Motley Fool contributing writer. For investing ideas, try any of our newsletter services free for 30 days.
A GOOD education steeped in values is key if you want to ensure high corporate governance, with all the transparency, accountability and discipline that it entails.
Recently, we have the pleasure of being part of a journey not just to promote education, but to preserve the legacy of someone who did so.
An education fund, the Elena Cooke Education Fund (ECEF) has been set up in honour of Elena Maud Cooke (pic), who was the principal of the premier Bukit Bintang Girls' School (better known as BBGS) from 1958 to 1977. Not only was Cooke the longest-serving headmistress of this premier school, she was also the only person to have spent half a century in it as a student, teacher and then principal.
BBGS itself no longer exists, but hundreds of its alumni are celebrating what would have been its 120th anniversary this Saturday (June 22).
The ECEF is the brainchild of BBGS' former students, and was established four years ago to provide scholarships for underprivileged children to study at tertiary level. The already daunting task of selecting the scholarship holders well is even weightier because the inspiration behind the fund, namely Elena, was famous for maintaining very high standards in educational excellence.
Under Cooke's watchful eye, BBGS girls were taught lessons for life that could not be easily found anywhere else in the world. Her focus was on ethics, punctuality, sportsmanship and good old-fashioned hard work. Any BBGS alumna can tell you how upholding school discipline meant physically having to wash the school toilets every week, not rocking our chairs, ensuring we wore only extremely white shoes and taking care never to be scruffy in any way. Comic books were banned because they would take the focus off correct and appropriate language. Above all, BBGS teachers drummed into us how important integrity, honesty and doing one's utmost best at all times were. Elena was determined that each and every one of her girls would behave well, regardless of their personal circumstances.
In doing so, she has left behind a great legacy that all her students now pass on to their children, and their children's children.
Despite not having advertised the launch of the ECEF in a large way, its selection committee received more than 60 applications from all over Malaysia.
The committee has since selected three candidates for the scholarship, all of whom happen to be women not by choice, but by sheer ability.
The selection process is very transparent and all shortlisted candidates had to turn up for an interview by the committee. The interview weeded out those candidates who were just “fishing” for money to study, and were not even bothered to come prepared for the interview. This was evident when they did not know enough about the courses they wanted to study. There were also many candidates who had picked their courses based on advice from their parents, relatives and teachers, but not because of their own passion and interest for the course, which are vital for success.
The committee required candidates to have at least a specified number of academic credits, participated in extra-curricular activities, and be within a pre-determined band of financial constraints. And, of course, the candidate had to be a Malaysian citizen.
The committee's three chosen candidates for the scholarship this year have stories that would make all Malaysians proud. They are determined, focused and have a clear vision of what they want to do with their lives. This includes living without frills.
One of the candidates was so driven that she attended the scholarship interview after just having her appendix removed. She had not wanted to risk losing the scholarship just because she did not turn up for the interview.
As one of the members of the selection committee put it, “Although our candidates do not have top-notch results, they come through as young people of good, strong character despite having disadvantaged backgrounds. Overall, all our candidates have shown resilience, determination, courage in adversity as well as the spirit of giving back to society.”
The chair of the ECEF is Moey Yoke Lai, who is a well-known educationist. The fund is happy to receive any donations in cash or in kind, including scholarships from tertiary institutions. The committee will continue to match deserving applicants with a course they are passionate about at the donor tertiary institution or with tuition fees.
One may wonder why a fund like this was started. Well, it is from the will to take Elena's brilliance and passion forward, and this stems from the driven determination of a board of directors of the BBGS Alumni Bhd (www.bbgs.com.my), the administrators of the fund, who have benefited from the wise lessons and best practices of a really splendid Malaysian, who believed that education is the best answer to breaking the vicious cycle of poverty.
Let us all seek to empower the marginalised by giving them quality education. l Datuk Shireen Muhiudeen is managing director of Corston-Smith Asset Management in Malaysia, a fund management company that makes investment decisions based on corporate governance.
PETALING JAYA: Nadayu Properties Bhd’s major shareholders have proposed to take the company private via a selective capital reduction (SCR) and repayment exercise.
In an announcement to Bursa Malaysia, Nadayu said it had received a letter proposing the privatisation exercise from its major shareholders via ATIS IDR Ventures Sdn Bhd and Zhoujian Associates Sdn Bhdtogether with parties acting in concert.
Under the proposed SCR, shareholders other than ATIS IDR Ventures, Zhoujian Associates and parties acting in concert will receive a capital repayment of RM93.124mil, or RM1.39 for each Nadayu share held.
This will result in the reduction of Nadayu’s capital to 134.377 million shares, from 227.501 million, by way of cancelling a total 93.124 million shares.
The offer price of RM1.39 per share represents a 7.75% premium to the stock’s closing price of RM1.29 on Thursday, prior to the trading suspension of Nadayu shares.
Nadayu shares will resume trading on Monday. The proposed SCR will be funded via the company’s internal funds.
The rationale to privatise Nadayu stemmed from the low trading liquidity of its shares, with a daily average volume of approximately 88,138 shares for the past five years.
The major shareholders do not intend to maintain Nadayu’s listing status on Bursa’s main market.
The proposed SCR is subject to the approval of the Securities Commission, as well as Nadayu’s shareholders at an EGM to be convened at a later date.
Meanwhile, in a separate statement, Tambun Indah Land Bhd has proposed to acquire the balance 40% stake in Palmington Sdn Bhd and 30% stake in Tambun Indah Development it does not already own from Nadayu’s unit for a total RM112.234mil.
Tambun Indah Land owns 60% and 70% of Palmington and Tambun Indah Development, respectively.
Palmington and Tambun Indah Development are involved in the development of Pearly City in mainland Penang.
“The acquisition is a strategic move for the group to not only gain complete exposure to the fast-growing township near the Penang second bridge, but also to capture a bigger pie of the expanding profits coming from the Pearl City development,” Tambun Indah Landmanaging director Teh Kiak Seng said in a statement.
At present, Palmington and Tambun Indah Development have 267.46ha in land-bank slated for a gross development value (GDV) of RM2.7bil. The ongoing projects have a GDV of RM841.3mil, while future developments with a GDV of RM1.9bil will be carried out over the next six to seven years.
“The remaining GDV of RM1.9bil in Pearl City is expected to contribute to the group with a pre-tax profit in excess of RM600mil over the next six to seven years. With the future profits from the township to be fully attributed to our shareholders, we believe the deal upon completion would create great value for them,” Teh said.
The acquisition will be satisfied via a combination of RM40.734mil in cash and the balance RM71.5mil through an issuance of 55 million new Tambun Indah Land shares. Once completed, Nadayu will own a 14.2% stake in Tambun Indah Land.
The company also has proposed a private placement of up to 15 million new shares, or up to 4.71% of Tambun Indah Land’s capital. This will increase its share capital to 388.6 million from 318.6 million before.
The two acquisitions will be funded with internal funds and bank borrowings as well as proceeds from the private placement.
Tambun Indah Land expects the acquisitions to be completed in the fourth quarter this year.
NEW YORK: The stock market has been put on notice by the Federal Reserve: from here on in, you're on your own.
Stock markets worldwide have fallen sharply since comments on Wednesday by Fed Chairman Ben Bernanke laying out the U.S. central bank's plans to pull back on its $85 billion in monthly asset purchases. U.S. stocks endured their worst two-day selloff since November 2011, and the Dow Jones industrials fell 354 points on Thursday. <.N>
The declines, should they continue, would justify the fears of those who believed the rally that sent the S&P 500 <.SPX> to record highs last month was only due to Fed intervention.
"We are going to continue to see volatility until we get to a point where the markets come to terms with the fact that we have a sustainable recovery in our hands, that it is not in need of life support," said Peter Kenny, chief market strategist at Knight Capital in Jersey City, New Jersey.
Even though the move theoretically means market fundamentals will rise in importance, the selloff shows the process is going to be a tricky one for traders and investors to navigate as they encounter economic data likely to give off contradictory signals.
ADJUSTING TO REALITY
Many expect wild swings in the coming months as the market adjusts to this new reality. Investors are likely to worry that surprisingly strong economic figures will hasten the Fed's exit from markets - ironically putting the market in the position of rooting for good-but-not-great economic figures.
Just the same, if the Fed is bent on reducing its bond-buying program absent a calamity, signs of mediocre economic growth won't inspire buying, either.
So far this year "it was a matter of 'good data is good and bad data is good,'" said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.
"You can't take bad data any more as an excuse for a rally in the market," he said.
Investors are almost evenly split on whether the Federal Reserve will be able to manage the transition to higher interest rates without doing serious harm to the economy, according to the Wells Fargo/Gallup Investor and Retirement Optimism Index, released on Thursday. Forty-six percent of those surveyed said the Fed will be successful, while 43 percent said the economy will suffer great harm when policy changes.
Market participants are struggling with this right now. The CBOE Volatility Index <.VIX>, a gauge of anxiety on Wall Street, jumped 23 percent on Thursday to 20.49, the first time this year it has exceeded 20, an often-used line of demarcation between calm and stressed markets.
Along with the VIX, there were other indicators showing increased concern about declines. The S&P's one-month "skew," which measures the difference between buying downside put options and upside call options, surged to a one-year high, according to Credit Suisse. That means downside protection has gotten very expensive.
In addition, on a day when less than 5 percent of the S&P 500's components ended higher, shares of CME Group hit a 52-week high in a sign investors expect trading in derivatives to rise as traders protect against losses. More than 20 million options contracts traded on Wednesday, according to OCC, formerly Options Clearing Corp, the busiest day since May 22.
LOOKING AT VALUATION
For some, the selling is not justified, as Bernanke made it that clear that only when the economy is healthy enough to thrive on its own will the Fed take away "the punchbowl," - a reference to the statement by former Fed Chairman William McChesney Martin that the Fed's job is "to take away the punch bowl just as the party gets going."
In addition, for all of the recent volatility, the U.S. markets have been a relative oasis compared with stock markets around the world, which have been hit harder since Ben Bernanke first broached the reduction of stimulus on May 22.
Japan's Nikkei 225 <.N225> has lost nearly 17 percent since May 21; Brazil's Bovespa <.BVSP> is down 15 percent in that time, and the MSCI All-World Index <.MIWD00000PUS> has lost 7.1 percent. The S&P is down just 4.9 percent, a signal that investors believe the U.S. outlook is stronger.
"If you look at the fundamentals of U.S. equities, not only in a stand-alone basis but relative to the rest of the world, in both those categories it is really hard to find a more attractive asset right now than U.S. equities," said Stephen Sachs, head of capital markets at ProShares in Bethesda, Maryland.
That thesis will be tested as the summer wears on, and as earnings season approaches. The relatively attractive valuations currently seen in markets have to take into account low borrowing costs that have helped companies secure cheap funding.
With the back-up in Treasury yields, the 10-year Treasury rate at 2.42 percent is more attractive than the S&P 500's dividend yield of 2.13 percent, notes Andrew Wilkinson, chief economic strategist at Miller Tabak. That could portend more selling in stocks.
Still, at 14.4, the forward price to earnings ratio of the S&P 500 is slightly below the historic norm. A pullback could be a shallow one if valuations become more attractive, depending on the corporate earnings outlook.
"There has to be a rotation towards more compelling, compressed valuations," said Knight's Kenny. "That should be welcome, but that doesn't mean it's going to feel good." - Reuters
TAN Sri AK Nathan, the founder of Eversendai Corp Bhd, says the company is undervalued by the market.
On a year-to-date basis, Eversendai shares, which are listed on the Main Market, are down by 12.35 per cent, while the all blue-chip FTSE Bursa Malaysia KLCI (FBM KLCI) is up by 17.67 per cent during the same period.
The slide in Eversendai's share price comes at a time when the broader market has been on a record-breaking feat this year, with the FBM KLCI surpassing the 1,700 points for the first time in its history.
Nathan owns 70.52 per cent of Eversendai, while the Employees Provident Fund and Lembaga Tabung Haji hold 8.52 per cent and 5.11 per cent stake in the company, respectively.
Eversendai shares closed at RM1.49 yesterday, while the FBM KLCI eased 1.170 points to end at 1772.88 points.
"The current share price does not reflect the company's true business potential and track record," said Nathan.
Data obtained from Bloomberg show that all the eight research firms that track Eversendai recommend investors to buy the stock.
However, the company's first-quarter results for the period ended March 31 2013 was a disappointment, with group level pre-tax profit dropping to RM24.45 million from RM31.25 million in the same period a year ago.
Nathan is optimistic of the firm reaching its RM2 billion revenue target and doubling its profit by 2017 .
"I foresee the company's net profit and revenue to increase progressively from 2014, driven by new building and construction projects and our venture into oil and gas. We are diversifying and moving into new territories such as eastern Africa and Australia," he said.
The company's outstanding order book is RM1.5 billion, which translates into 1.5 times fiscal year 2012 revenue and 1.3 times order book-to-market cap ratio.
Eversendai is in the process of bidding for structural steel, petrochemical and power plant construction jobs, and oil and gas fabrication worth up to RM8 billion. The projects are mainly in Azerbaijan, Saudi Arabia, Qatar, Oman, Dubai, Abu Dhabi, Sri Lanka, India, Singapore and Malaysia.
（星洲日報／財經）
A GOOD education steeped in values is key if you want to ensure high corporate governance, with all the transparency, accountability and discipline that it entails.