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Tuesday, December 25, 2018

Tong's Value Investing Portfolio as of December 20, 2018

Tong Kooi Ong

Cash dividend or share buyback?

Uncertainties and volatility remain heightened in global equity markets. Several hundreds point swings are now a daily occurrence for the Dow Jones Industrial Average, probably the most closely-watched market barometer in the world. It is enough to give investors whiplash. And may well be quite disheartening for those buying on fundamentals.

It does appear as though share prices are temporarily disconnected from underlying fundamentals and markets are being driven by momentum and sentiment, dictated by headlines of the day. This could be a symptom of the increase in beta investing – where analysis of fundamentals becomes secondary – or funds raising cash given prevailing uncertainties.

Case in point: The share prices for DIP Corp remained caught in a downtrend, sliding to a year-low even though the company reporting upbeat earnings in its latest quarter ended August.

Sales grew 10.3% y-o-y to ¥9,884 million ($121 million) on the back of rising number of job ads while net profit was up by an outsized 21.5% to ¥2,055 million. The margin improvement was due to economies of scale, including lower staff and advertisement cost to sales ratios, which indicate better sales productivity and application efficiency.

The outlook for job ads remains healthy, with a high ratio of job openings compared against job seekers. Japan recently passed a bill that allows more low-skilled foreign workers into the country, which bodes well for recruitment companies.

DIP revised up its net profit forecast for the financial year ending February 2019 by some 8.6% to ¥8,647 million and raised interim dividend to ¥24 per share from its previous forecast of ¥20 per share. Total dividends for FY2019 is estimated at ¥49 per share, compared to ¥43 per share paid in FY2018. That gives a yield of about 2.6% at the current share price. Raising dividends is a positive signal of management confidence in the future.

In view of the prevailing market sentiment, it makes sense for companies to return excess cash to shareholders. As I have noted, companies that pay out most of their earnings do seem to attract higher valuations in the market.

US companies, in particular, appear big subscribers to this theory. Companies in the Standard & Poor's 500 index have been returning record amounts of cash to shareholders in recent quarters. Total shareholder return increased to US$919.9 billion in 9M2018, up from US$692.8 billion in 9M2017 – and nearly reaching the 2017 full-year total of US$939.2 billion.

Notably, companies in the US prefer to return excess cash via share buybacks than dividends. The amount spent on buybacks totaled US$583.4 billion in 9M2018, compared to US$336.5 billion paid out as dividends over the same period.

This could be due to the greater flexibility accorded by buybacks. Anecdotal evidence suggests that investors react less negatively if companies subsequently reduce their buybacks in less good times.

On the other hand, share prices usually get severely battered down in the event of a dividend cut. Hence, companies tend not to raise dividends unless they are fairly certain that the higher payments are sustainable.

Therefore, it is interesting that companies in Malaysia and Singapore are not big fans of share buybacks. Tables 1 and 2 list companies with the highest percentage of treasury stocks on their balance sheets. Most are relatively unheard-of small-cap stocks.

I have also reproduced the two lists of select companies that consistently return high levels of cash to shareholders in both countries (see Tables 3 and 4). None of the Malaysian companies hold any treasury stock whereas the percentages are marginal for those in Singapore that do.

By contrast, the top five US companies with the highest buybacks in 3Q2018 were also some of the largest – led by Qualcomm, Apple, Oracle, Wells Fargo and Cisco Systems. Share buybacks are not only common in the US, they are also well liked by investors.

Share buybacks raise the earnings per share by reducing the number of shares. If valuations stay the same, it should be reflected in higher prices. A shareholder can then choose when to realise the cash payout according to his cashflow needs.

Perhaps there is a certain negative perception attached to the trading of one’s own shares, which companies prefer to avoid? It is likely not all shareholders would be happy with the buyback price. What would be a fair price to pay that would not be frowned upon and/or dilutive?

Case in point: The Singapore Exchange recently cautioned companies not to breach insider trading or market manipulation rules when conducting share buybacks. It also warned that creating a false market by artificially inflating the share price and/or trading volume is illegal.

Dividend, on the other hand, is transparent and easily understood. It is cash for shareholders today. The market determines the yield and, if favourable, gives the stock premium valuations. No dispute.

That said, transparent share buybacks could be value-accretive. This is especially when market fails to properly assess the company’s underlying worth, in times of massive broad market selloff and price collapse. Only a fool believes the equity markets are efficient all the time.

All of the stocks in the Global Portfolio except for Sunpower Group ended in the red for the past one week, mirroring the deteriorating investor confidence in global markets.

Total portfolio returns now stand at -17.4% since inception. The portfolio is under-performing the benchmark index, which is down by a lesser 8.3% over the same period.

The Malaysian Portfolio also finished lower for the week ended Thursday, falling 2.4%. This is slightly worse than the 1.5% drop for the FBM KLCI.

Total portfolio returns are pared back to 45.4% since inception. Nevertheless, this portfolio continues to outperform the benchmark index, FBM KLCI, which is down 9.8%, by a long way.

Performance Comparison Since Inception (%)
  • Tong's Value Investing Portfolio
SCGM BHD11,0661.73719,218.41.10012,172.6(7,045.8)(36.7%)
AJINOMOTO (M) BHD1,50011.81317,720.018.00027,000.09,280.052.4%
PANASONIC MANUFACTURING MSIA60026.30717,182.037.90022,740.05,558.032.3%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.41325,340.02.66027,930.02,590.010.2%
FORMOSA PROSONIC INDUSTRIES18,0001.54027,720.01.57028,260.0540.01.9%
HONG LEONG INDUSTRIES BHD2,0009.12618,251.08.88017,760.0(491.0)(2.7%)
WILLOWGLEN MSC BHD19,9000.5009,950.00.4308,557.0(1,393.0)(14.0%)
MALAYAN BANKING BHD3,00010.25030,750.09.30027,900.0(2,850.0)(9.3%)
MAH SING GROUP BHD19,0001.01019,190.00.91017,290.0(1,900.0)(9.9%)
ECO WORLD DEVELOPMENT GROUP BERHAD15,2001.23518,772.00.91513,908.0(4,864.0)(25.9%)
DIALOG GROUP BHD5,7003.45219,676.43.02017,214.0(2,462.4)(12.5%)
Total  223,769.8 220,731.6(3,038.2)(1.4%)
Shares bought       
No transaction.       
Total shares held  223,769.8 220,731.6(3,038.2)(1.4%)
Shares sold       
No transaction.       
Cash Balance    70,006.5  
Realised Profits / (Losses)    93,776.3  
Change since last update Dec 13, 2018       
Portfolio      (2.4%)
FBMKLCI      (1.5%)
Portfolio Returns Since Inception  200,000.00 290,738.190,738.145.4%
Portfolio Returns (Annualised)      10.8%
Portfolio Beta      0.666
Risk Adjusted Returns Since Inception      68.1%
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,650.6(9.8%)55.2%
FBM Emas12,700.411,263.3(11.3%)56.7%
*Current price is as at December 20, 2018. 
*Portfolio started on Oct 10, 2014 with MYR200,000. 
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.

MIKRO MSC BERHAD01-Dec-1627-Jul-1742,0000.33113,920.00.54522,890.08,970.064.4%
CLASSIC SCENIC BHD01-Dec-1627-Jul-174,0001.4135,651.31.7907,160.01,508.826.7%
PANASONIC MANUFACTURING MSIA21-Jan-1627-Jul-1740026.12510,450.037.10014,840.04,390.042.0%
ELSOFT RESEARCH BHD30-Mar-1724-Aug-178,0001.84414,750.02.65021,200.06,450.043.7%
JOHORE TIN BERHAD - WA 12/1704-May-1724-Aug-1717,0000.65511,135.00.68011,560.0425.03.8%
FOCUS LUMBER BERHAD03-May-1730-Aug-176,0001.6609,960.01.5309,180.0(780.0)(7.8%)
WILLOWGLEN MSC BHD23-Nov-1630-Aug-177,0000.7685,377.01.43010,010.04,633.086.2%
WILLOWGLEN MSC BHD23-Nov-1628-Sep-177,0000.7705,377.01.1808,260.02,883.053.6%
LII HEN INDUSTRIES BHD14-Dec-1628-Sep-175,0002.82014,100.03.72018,600.04,500.031.9%
COMFORT GLOVES BERHAD28-Aug-1708-Dec-1725,0000.96024,000.00.93023,250.0(750.0)(3.1%)
JOHORE TIN BHD08-May-1708-Dec-179,0001.60014,400.01.18010,620.0(3,780.0)(26.3%)
THONG GUAN INDUSTRIES BHD12-Dec-1608-Dec-175,0004.24321,215.04.10020,500.0(715.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD12-Jan-1715-Mar-1811,0001.02511,280.01.54016,940.05,660.050.2%
KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/202308-Mar-1815-Mar-183,0000.0000.00.330990.0990.0-
LUXCHEM CORPORATION BHD30-Aug-1715-Mar-1816,5000.73212,072.50.72011,880.0(192.5)(1.6%)
WILLOWGLEN MSC BHD14-Dec-1722-Mar-1820,0001.01020,200.01.26025,200.05,000.024.8%
MUAR BAN LEE GROUP BERHAD26-Oct-1722-Mar-1813,5001.24016,740.01.17015,795.0(945.0)(5.6%)
CHOO BEE METAL INDUSTRIES BHD07-Sep-1716-May-188,0002.19017,520.02.44019,520.02,000.011.4%
CHOO BEE METAL INDUSTRIES BHD07-Sep-1721-May-188,0002.19017,520.02.30018,400.0880.05.0%
SUPERLON HOLDINGS BHD01-Dec-1721-May-186,0001.1757,050.01.5509,300.02,250.031.9%
OKA CORPORATION BHD14-Dec-1728-Jun-1812,0001.54118,488.01.27015,240.0(3,248.0)(17.6%)
SUPERLON HOLDINGS BHD01-Dec-1728-Jun-186,0001.1757,050.01.2107,260.0210.03.0%
WILLOWGLEN MSC BHD14-Dec-1728-Jun-181000.50050.00.54054.04.08.0%
PANTECH GROUP HOLDINGS BHD17-May-1802-Aug-1843,0000.58024,940.00.56024,080.0(860.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD10-Jan-1706-Sep-1811,0001.02011,225.01.40015,400.04,175.037.2%
LUXCHEM CORPORATION BHD25-Aug-1706-Sep-1816,5000.71711,825.00.65510,807.5(1,017.5)(8.6%)
HOCK SENG LEE BHD19-Apr-1806-Sep-1814,5001.52022,033.01.37019,865.0(2,168.0)(9.8%)
GENTING MALAYSIA BERHAD06-Sep-1828-Nov-183,8005.07019,266.03.06011,628.0(7,638.0)(39.6%)
TOP GLOVE CORPORATION BHD06-Sep-1806-Dec-183,6005.50019,800.06.03021,708.01,908.09.6%

A Note to Readers

It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.

Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.

Tong Kooi Ong

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