Views and Projections for 2021 - Equities, Economies etc

As we enter into Year 2021 with lots of hope, various world-class analysts has came up with views and expectations for the Year 2021. What I remember clearly in Q3 and Q4 2020, we were often told that World's GDP will be the greatest at 3+%, which is never seen for the past 10 over years. Malaysian economy was 'expected to grow at 7%!'. Fueled with such optimism, we ended Year 2020 with pretty good returns in the stocks and indexes for almost all major stock markets.

However, as the days continue to pass in 2021, we realized that reality is fundamental will 'rationalize' the stock prices. Those who overshot their fundamental will have a pullback and those undervalued ones will play catch up. The recent political developments, rising COVID19 cases and resumption of Regulated Short Selling does a big impact on Malaysian stocks. 

In this article, I will share my thoughts and views on how 2021 will likely pan out. None of us have a crystal ball hence we are 'guesstimating' and 'forecasting' and after that place 'our bets' in the stocks or financial instruments that we believe will do well.

1. GDP Growth
My personal view is that the world's GDP will not bounce back >3% as per the optimistic economists think. The reason is due to point no. 2 on vaccine. Demand destruction sometimes is harder to recover and it will definitely take time. However, as Year 2020 caused the world's GDP to drop to a level where we were 2 years ago; from the lower base, it's definitely expected that the world's GDP will continue to rise but at a slightly more moderate ~2.8-3% instead of >3% that some economist forecasted. 

The caveat is however if Oil Prices (both Vegetable and Crude) keep increasing, it might cause a higher GDP (as a lot of countries like Saudi, Malaysia, Brunei's GDP as very tied to commodity prices). The more bullish economists of >3% might come true should Crude Oil stayed above USD55bbl and Soy and Palm Oil being the largest vegetable oil stays elevated for a longer period of time. 

2. Vaccine and COVID19
The vaccine roll out will be quicker in more developed countries (it's currently proven that mRNA technology is more effective and it needs colder storage temperature). However, the poorer countries will have difficulties accessing. This will continue to cause more lockdowns, more death and lower productivity as work places will need to shut down, movements of people being restricted to slow the spread of the virus.

I believed that COVID19 vaccines based on mRNA will be more successful than the traditional approach of muted virus and cause less side-effects. The downside is the logistical and storage temperature challenge. It will hence take a longer time and benefits the larger, more advance economies. Due to this, more advanced countries will get to move around earlier (will lead to faster economic recovery) vs poorer and less developed economies. 

3. Political Stability
US Presidential election just ended with Joe Biden set to be next President. There will be some changes to policies but it seems at the moment that US "fight against China" will continue. It is expected that any maneuvers be more predictable and not as chaotic as before (i.e. officials being sacked via Tweets). 

Malaysian Politics will continue to see a lot of changes, volatility and a big potential of GE15. Sarawak election might coincide with GE15 but all depends on the COVID19 cases and vaccination programme. Until a stable political alliances is found between PKR, DAP, PAS, UMNO, Bersatu, GPS etc and proven that the coalition can work, it'll continue to be chaotic and unstable. The results coming from GE15 will lay a foundation on whether the cooperation might continue or not.

Worldwide wise, it'll continue to see some volatility and changes in political arena. However, with the big brother US and China now seems to have a more stable political footing, it can be seen that policies making and agreements can be expedited or discussed extensively, which is good for world economy.  

4. Defaults/Shocks
There is an inherent risks of continued defaults especially in the SME arena. Also, in industries like Travel, Tourism, Restaurants and Hotels, Airlines which are hit the worst. The trend might continue and the increased in debt (due to debt payment deferment) will continue to 'haunt' the industry as they will have more debts to service going forward. 

Remember that any form of loan moratorium is just to defer your payments but the outstanding amount will increase. This although will bring hard hit companies through the 'winter' but they will spend a bigger amount of profit paying back debt later on.

5. Tourism
Tourism sectors including airlines and restaurants will continue to suffer at least for 1H 2021. Local tourism will resume first, estimated to be from May-June 2021 for more advance countries and year-end for poorer countries due to the slowness in the reach of the vaccines. 

International Travel is expected to restart in Q4 2021 but destination will be the more developed countries where the majority of the population has gone through vaccination. Countries who still have not vaccinate at least 80% of their population might face difficulties in attracting quality tourists and will have to rely on neighbouring countries or domestic tourists.

Stocks: Are Plantation stocks still worth looking at (with the current CPO prices hitting new highs)?

We have seen that there are many people calling for "buys" on the plantation sector due to the rising CPO prices. If you wonder where to find out on the latest CPO prices, they are mainly transacted via futures. FCPO is Malaysia's main platform to trade CPO and take delivery in future months. Hence, FCPO remains a good gauge on what will be the price for the future prices of CPO.

Below is the snippets of FCPO prices as of 28/12/2020

FCPO prices taken on 28 December 2020

So, are Plantation stocks a buy now? Let's look at the facts below before we answer the question:

1. Plantation stocks are normally trading below NTA (P/NTA of 0.3 to 0.8 times - depending on plantation size, location of landbank, productivity/age-profile of trees, lands' proximity to development and production cost per tonne). 

2. Plantation stocks are very cyclical and it normally has an uptrend during the CPO commodity price bull runs (due to a swell in earnings and potential dividend). 

3. Some of the Plantation companies like Genting Plantation, IOICorp has emerged into a developer as well due to their land being very close to "development areas". Places like Kulai and Puchong are being developed by Genting Property and IOI Properties as they were ex-estates. 

4. Production costs of FFB (Fresh Fruits Bunches) are estimated to be ~RM1,800. Due to logistical issue, cost structure of some more rural located plantation companies (especially at Sabah, Sarawak) has a slightly higher cost structure. Labour costs in peninsula Malaysia is slightly higher but at East Malaysia logistical issues often balloon the costs and also caused some FFB to degrade (hence commanding lower prices or even being dumped). 

5. Some of the bigger companies like FGV, TSH has landbanks and operations outside Malaysia (mostly all in Indonesia). Sime Darby Plantation has acquired NBPOL in 2015 hence they now operate and own palm oil plantation in Papua New Guinea. 

6. The fruits from the trees can be harvested, sent to the oil palm mill to produce Palm Oil. That is the priced asset. A young tree (normally defined as <7 years old) will yield very little FFB. Trees with age profile of 7 to 12 years old are normally deemed as young matured trees and I have read and seen some producing up to 18 tonnes/ha. The prime is said to be from 10 years of age until 23 years old where they can produce 18 to 25 tonnes of FFB/ha. This is again depending on the tree species. However, the machineries, mills and land cannot be monetize instantly. Land will take a longer time to be monetized as they need to be rezoned for other developments, divided into smaller plots and sold. The process usually take years to complete.

7. 1 tonne of FFB now sells for RM3,800 vs average production costs of RM1,800. The profit is tremendous as compared 9 months ago the average price is <RM2,500/tonne. 

8. Some of the Plantation companies are very illiquid and thinly traded. 

9. Tree stress will normally cause lower production after several months (6-9 months) of good production. Of course, dry weather is another root cause (while wet weather caused floods and harvesting issues leading to eventual reduction in production). This is one good reason on why CPO production and prices is always cyclical.

10. Windfall tax will be activated by Malaysian government (>RM3,000/tonne) and this is also a natural curb in profit. It's reported that in Jan 2021 a 8% Windfall tax will be collected.

Let's see how the companies in Bursa are being valued right now?

A truncated list of Bursa listed Plantation companies (filtered based on Market Cap)

Based on the filtered list above, you can see that the biggest players include Sime Darby Plantation, IOI Corporation, KLK, Genting Plantation is trading at P/B value of >1. One can always argued that the land have not been revalued over the years and if revalued now the book value can be higher, hence reducing the P/B value. 

In terms of P/E ratios, it might not be meaningful as months ago CPO prices were low and naturally profit is bad. 

If you observe well, most of the companies have gone up from their 52 weeks low and now trading almost at their 52 weeks high. 

Concerns

1. The share prices of most Plantation companies have risen and almost at their 52 weeks high. There is always a concern that despite the very likelihood in the hike in profits for the listed Plantation companies, it has already factored in all the good news. When the results come out, not all companies will report terrific profits (due to labour shortage factors, some companies' trees are either too young or old, logistical issues due to bad weather in Q4). Those who reports good profits might not experienced a sharp share price increased. 

2. Some plantation companies like JTiasa etc has pretty weak balance sheet. Some of the East Malaysian companies also involved in timber business and that segment of business wasn't doing well. 

3. Normalization of CPO prices. We can say that prices are market driven, so when prices rises it is due to sustained demand of CPO, the hike in price will dampen demand as well. Lower demand and potentially increase in production in coming months (especially after lots of rain from Sept onwards) could drive prices down.

4. Strengthening of Ringgit against US Dollar might put some pressure on CPO prices. The next edible oil which competes neck-to-neck with Palm Oil is Soybean and it's grown mainly in the West. Buyers buy CPO in USD and hence when RM appreciate, we will have to lower the price to compete with Indonesia.

Outlook? Is it still a buy now?

It is a difficult question to answer but our views are as below.

1. It is still possible to earn 10 - 30% profit by buying into Plantation companies. However, hoping for the stocks to double or triple up might be irrational (might happen in irrational market anyway). 

2. CPO Prices are set to come down after March 2021. The highest should be Jan 2021 which is around RM3,750/tonne.

3. Stocks are trading with a 6 months lookahead. Hence, it might be forecasting a reduction in profit going forward already. A good quarterly result might not help much in stock prices. It's the "Greater Fool's theory" in play right now as we also need to ask ourselves who is willing to buy at a higher prices.

4. If you use the "margin of error" methodology, you might not be comfortable. Margin of error might be lower now due to the price hike. 

5. If you want to take a bet, cherry-picking is the right way forward. Do make sure you read up the production of the Plantation companies (from Bursa's website as all plantation companies are required to post their monthly production figures).

Stocks: Why Index keep going up? And why it's not easy to beat it.

Warren Buffett has once mentioned: "In my view, for most people, the best thing to do is to own the S&P 500 index fund". He further believes that it's very difficult for most people to 'beat the index'. All of us were kind of puzzled and myself included has been asking the question on why is this?

An overview of historical KLCI and S&P500 chart:

After some hard thought process and discussions, we believed that the below are the reasons on why Indexes typically is on a long term uptrend (Japan excluded as they are the only one country in the world which faces long term deflation and hence financial products prices drop):

1. Indexes are being reviewed from time-to-time. Those who did not meet the criteria (i.e. free float, market capitalization) will be eliminated. However, when business is better they might be re-admitted again. Wikipedia (https://en.wikipedia.org/wiki/List_of_S%26P_500_companies) maintains a very good list on the current S&P500 component companies and the updates to it. The review process is already like a 'quality' screening of companies where ailing businesses will be removed and new and thriving businesses will be added.

You can see that only the fittest will "survive" being maintained in the index. This means that it's an auto elimination of businesses that were not doing well, either in the sunset industries or they have lost their competitive edge etc. Also, we know that size matters when it comes to businesses. Although the biggest companies may have higher cost structures and unable to grow as fast as a younger and smaller company, but the mid-to-bigger sized companies (that is likely to be included in S&P500) will have a higher chance of success as they already have competitive edge against their competitors (hence they can grow into the mid-to-bigger size) and have sufficient financial capabilities to do R&D (this is key to survival of a company). 

Notably, due to Technology sector's growth, more and more Technology companies are included into the index while old-school brick and mortar businesses and being kicked out.

2. Companies which are part of indexes are typically 'valued higher', including having higher P/E ratios, P/NTA etc. As index funds these days are gaining momentum, index fund managers have to buy stocks in order for the fund to 'mimic' the index. Hence, there is always demand for index-linked stocks.

3. Index-link stocks and companies does give business partners, investors more confident. Better investors' confidence will lead to point 2 as above while better business partners' confidence will mean that the ability to take loans at a cheaper costs, having slightly longer credit period and better consumers' confidence would also means better sales. 

Tesla, during the early days suffer in brand image and now that it has been included in S&P500 would bring better consumer confidence. The perception will be that it has to be a stable company to be included in S&P500. Similarly, stock prices will take a heavy beating should the stock be removed from the index. Don't be surprised that business might suffer as well post removal from index as customers' perception might be negative towards the company. After all, business is all about 'marketing and image' isn't it?

4. Other than Point 1, most importantly, these big and stable companies keep growing sales and profits, hence their share price keep rising to reflect that. Think of US companies (Google, Amazon, Microsoft, Intel, AMD, Qualcomm, Apple) and Malaysian companies (PB Bank, Maybank, Tenaga, TM, Hong Leong Bank), these companies still manage to grow decently despite their size. 20 years ago we are all talking about Intel Pentium III processor based computers with CRT monitors but today we talked about iPad, Laptops etc. However, companies like Microsoft keep evolving and they have Ms Surface, yearly subscription service of their Office products (Office 365) and offer cloud storage which wasn't in existence 20 years ago. 

For those "old-school" technology companies, they reinvent themselves and came out stronger. For example, Google, Microsoft and Apple reported that "Cloud Computing" is the segment that grows 'double-digit' consistently for the past 3 years. While Google is a newbie but Microsoft and Apple were in computer business since 1970s (the era of Wintel vs Apple). If you look at Microsoft (1986 @ USD21) and Apple (1980 @USD29/share) share price, you will definitely slam the table hard for not putting your money in. After many splits, the USD21 you paid for Microsoft is USD0.10 and at current share price of USD222, it means that a USD1,000 would turn into a hefty USD 2.2mil!

5. The world economy is growing, with exception of Japan where they experienced 20 years of deflation. This will link to the points above that coupled with inflation, profits of companies will keep increasing.

Conclusion
Index investing has not only becoming a trend but for the lazy and less-skilled investor, it become a natural choice. Beating the index is one of the harder things to do as index provides sufficient diversification, 'quality' selection done from time-to-time (i.e. every 3-6 monthly). 

Top 20 Warren Buffett's Famous Quotes

Like I mentioned in my previous articles, there is no "right and wrong" in investment as long as it earns you money. However, there are some notable ways that  you may earn your money in a 'safer manner' rather than relying on lady luck. 

Warren Buffett's investment ideology champions value investing and contrarian investment. Let's see what are Buffett's top 20 famous quotes and remind ourselves again on the basics of investing.

1. Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.

2. Price is what you pay. Value is what you get.

3. It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

4. The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.

5. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

6. The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table.

7. Someone's sitting in the shade today because someone planted a tree a long time ago

8. If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes

9. When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever

10. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

11. Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be a more productive than energy devoted to patching leaks.

12. It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.

13. The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.

14. I believe in giving my kids enough so they can do anything, but not so much that they can do nothing.

15. Don't get caught up with what other people are doing. Being a contrarian isn't the key but being a crowd follower isn't either. You need to detach yourself emotionally.

16. The best chance to deploy capital is when things are going down.

17. Never invest in a business you cannot understand.

18. Risk comes from not knowing what you're doing

19. In the business world, the rearview mirror is always clearer than the windshield

20. Read 500 pages like this every day. That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.

Conclusion
His quotes are words of wisdom after over 75 years of investing. One can argue that Buffett lives in an era where inflation, growth, opportunities are all higher and his recent years bet aren't that successful. However, if you read my list of Top 20 Warren Buffett's famous quotes, you will realize that it talks about personal education/learnings, views on risks and how to tackle risks in investment, cutting losses and even money issues in raising kids. 

As a human, I always believed that we ought to review what we have done especially during this year end break and holidays. Review the year and have a vision on the next. All the best folks!

Stocks: How can we use 'Sentiments' to our benefit in stock investing?

In my previous article, we discussed about What Moves Share Prices. In that article, it is mentioned that Sentiments that is the key factor that affects and moves share prices. Now, knowing that the main contributor of share price movement is due to sentiment, how can we benefit from it? Remember one of the main mantra of Value Investing is "Price is what you pay and Value is what you get". 

I personally champion fundamental analysis and also a believer of Value Investing. However, since sentiment is not quite fundamental but it has to do with human behaviors and psychology, I will use mainly Technical Analysis method to select stocks and look out for opportunities.

1. Buy on Dips (if the overall market is on an uptrend)
If the investor has identified that the market is on a recovery and uptrend, buying during any dip is a feasible and proven option. As markets don't go up in a straight line, it's imperative that it'll correct itself once in a while and provide investors a good entry point to accumulate more shares. Normally in an uptrend market, actual data will provide support to the higher valuation and continuity of the bull market.

2. Buy on Price Irrationality (a combination of fundamental and technical analysis)
Often, there are companies that are selling below their intrinsic value. Some examples include property developers like SP Setia, Sime Property of even Banks like Ambank, CIMB, Affin Bank selling at 0.3 to 0.7 times of the book value. The prices are beaten down because of slow sales and anticipated massive impairments. However, if one were to look further and past the pain, most of these companies will bounce back strongly and valuation will rise certainly. 

3. Buy on Supports (Technical Analysis) I will not go in too detail as it involves a separate lesson on how to use each of the indicators (or a combination of them) effectively. Some examples as below:
a. Using Bollinger Band

b. Using RSI (oversold region <30%)

c. Using Stochastic

4. Using Contrarian Investing Strategy
Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time. A contrarian believes that certain crowd behavior among investors can lead to exploitable mis-pricings in securities. I have been using this strategy for over 12 years and it has been proven to be very profitable. 

However, risk management is key as when market sours, it normally means that businesses are suffering. This means that there will be some companies who will be bankrupt during the downturn. So, in order to exploit this method, you will have to study the balance sheet and fundamentals of the companies before you invest in them. This strategy involves buying companies' shares when stock market is having 'big discounts' (think of massive clearance sales) and hold them over a period of 2-5 years.

Conclusion
The above are some examples of strategies can be employed to profit from the stock markets. In the traditional market (non derivatives or structured products), the only way to profit is to "buy low sell high". For more advance or sophisticated investors, you may explore further instruments like warrants and futures which would allow you to bet both ways (able to profit when market is going up or down). However, the risks associated to it are normally higher as Warrants have an expiry date and normally trading at a premium to the underlying value. While Futures is normally purchased based on calendar month, it has a value (i.e. HKD10 per point for Mini-HangSeng) attached to the points movement. For investors wanting a smaller exposure it might not be suitable. 

How can Young Investors start Investing in Stock Market?

We were requested by some friends to share strategies on how they can start their investment journey. Understand that many are interested but have no or little clue on where and how to start. One of our authors has >13 years experience in investing in the equities market, he started young and is now investing and also trading various financial instruments. We have also shared in our previous article on where you can invest your money (legally)?

The aim of this article is to provide a simple step by step methodology to all our readers. If the way we approach investments does not align with what you have in mind, we seek your understanding as in the market no one is always right and we all learn with positive mindset and spirit. We also assume that the young investors would like to learn some fundamentals and invest in Malaysian stock market (i.e. Bursa Malaysia).

Step 1: Open a Trading Account 
There are a handful of trading platform providers including CGS-CIMB iTrade, HLeBroking, Rakutentrade. I3Investor does offer a list of trading platform providers that you can go through and select what is suitable for your trading needs.

Step 2: Learn Fundamental Analysis
There are a lot of things to learn in Fundamental Analysis. What you can do is to start with understanding of the terms below.
a. Price to Earnings ratio (P/E)
b. Net Tangible Asset (NTA)
c. Current Ratio
d. Return on Equity (ROE)
e. Earning Per Share (EPS)
f. Dividend Yield
g. Price/Earning to Growth ratio (PEG)
h. Price to Book ratio (P/B)

Learning Fundamental analysis is almost a lifelong process as we learn the various valuation methods of the companies (i.e. P/E, P/B or P/NTA, PEG, ROE, Discounted Cash Flow, Sum of Parts, Premium or Discount to peers and/or Book Value). There is no one fixed valuation method and it's often market driven and changes over time when there is new development to the business. P/E is the most used methodology and you will see that Analysts used various combination of methodology to value a company.

Step 3: Practice with a Dummy Account and familiarize yourself
Most of the trading platform providers has dummy account facilities so that newbies can practice trading or familiarize themselves with the system. Take advantage of this while you're learning the Fundamental Analysis

Step 4: Repeat Step 2 and 3 until comfortable with investing
You will need a certain amount of courage to use your own money in trading. So practice until you feel comfortable. You should also read books like 'The Intelligent Investor' and books associated with Warren Buffett. Look for books that are easy to read and understand. 

Step 5: Select a Stock and Start Investing
Step 5 may sound too easy to read than do - yes it is not easy for first timer. Which stock should you select and is the price right to buy now? Remember, "money is what you pay, value is what you get" - this is a famous quote in Value Investing Model. As this article does not intend to make anyone a value investor or momentum investor/trader, we assume that the first time investor will want to keep a stock for some time (i.e. a few months or years). 

Stock picking is difficult hence to ease that burden, do select companies that you know (i.e. Maybank, Genting, Boustead, SP Setia), you are comfortable with and that you believe have a good future (and business is either growing consistently or recovering from a temporary decline).

Step 6: Sharpen your skillsets and understand your personality vs investment
You will need to continue to learn new things and sharpen your skillsets. You may have know Fundamental Analysis and connect the dots on how they tie-in to the stock prices. However, you should continue to learn Technical Analysis where charts will 'hint' you on where is the 'entry' and 'exit' prices. 

You should also ask yourself what is suitable for you - are you going to be a longer term investor or day trading (not investment) is a better choice? It's a very personal question to answer hence I have no answer here for our fellow young investors. For me, I used a hybrid model where I have positions which I hold for a longer term (i.e. using Value Investing and Growth stocks methodology) and I trade some shares over few weeks cycle (i.e. using a combo of Technical Analysis and Fundamental Analysis). To add some thrill to my mundane day, I trade some derivatives like Futures (FCPO, FKLI, Mini-HangSeng Futures) as well. 

Bottom line is you will need to find out what is your "investment personality". However, a word of caution is the most successful investors "hold their position over a longer period of time". Those who got rich like Warren Buffet, Elon Musk, Jeff Bezos, Bill Gates have big positions (a lot of shares) in their companies and they didn't trade it (frequent buy-sell) like traders. Investing in a growing company will certainly yield you a lot of good returns but you will need to select the right stock (going back to Step 5). 

So, who says Investing is easy? No, it's not difficult but to manage an investment portfolio which consistently earns a good returns and beating the market is very very difficult. Even the professional managers have difficulty doing that. But as an encouragement, you will have to start somewhere if you are keen, else it will never happen. Good luck and take action today.

Stocks: Bonus Share vs Dividend - are they the same?

 Recently, we have a lot of market activities and a lot of companies start to 'dish out' bonus shares. One of the latest companies who is proposing a bonus issuance is Public Bank Berhad, our Malaysian home grown bank which has the lower CTI (Cost to Income) and NPL (Non-Performing Loan) in the industry regionally. Others include G3 Global, Amtel, UWC etc.

Public Bank Berhad intend to give out 15.53bil shares to the existing shareholders and the most important question is should you buy Public Bank due to the bonus issuance? The answer to this question is to answer what is a bonus share? 

What is Bonus Share?
Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. This will increase the issued share capital of the company. However, by increasing the number of outstanding shares, it decreases the stock prices. Bonus share issuance is a 'zero sum game' exercise as the market capitalization technically does not change and investor don't actually gain more vs dividend (although they might if the share price was manipulated upwards later on). There is no tangible payment out from the company's account to the share holders

I would lay down some tangible examples of the benefits of Bonus Shares:
1. Enlarged share base will means that there are more shares to go around for transactions. Hence, for smaller companies it will increase the liquidity.
2. The stock price will be lower and hence perceived as 'cheaper' for retail investors (please take note that in investing, we normally define 'cheap' as low P/E ratio, low P/B ratio, EV etc, not with reference to the price of the share - however, a lot of non-financially savvy and strong retail investors will still assume that 'cheap' means 'low price'). 

How about Stock Split? Stock split is the action taken in which a company divides its existing shares into multiple shares to boost the liquidity of shares. Both Stock Split and Bonus issue is almost similar except that Stock Split will reduce the Par Value of the share. This is merely accounting issue where small and retail investors don't see any tangible difference between these two exercise.

What is Dividend?
A dividend is the distribution of some of a company's earnings to a class of its shareholders. In layman's term, the company made a profit and it channel part of it to its shareholders. It's being paid out from the company's accounts to the bank accounts of the shareholders. It normally has a ex-date where shareholders who owns the share by the 'ex-date' will be entitled for the dividend. We have a lot of companies like Maxis, KLCCP, REITS, Banking who are consistent dividend payers. And these days, the dividends received from Bursa Malaysia listed companies are tax-exempted as tax has been paid at company level prior to distribution.

Is Bonus and Dividend the Same and Should you buy in?
The biggest question in the room will be how should you react to news like Company A is declaring a dividend while Company B is giving out bonus shares. We will explain with scenarios below:

If you buy into Company A (which declared a RM0.50/share, assuming you own 1,000 shares), you will receive a dividend of RM500 (RM0.50 x 1,000) before costs of processing. Your share price will not be adjusted. However, sometimes post dividend the share price will drop a little as investors will have to wait 3 or 6 or even 12 months for the next dividend. 

If you buy into Company B (which declared a 1-for-1 bonus), you will not get any cash in your bank account. Assuming that the share price is RM1.00 and you have 1,000 shares. The share price will be adjusted to RM0.50 and you will have 2,000 shares post Bonus Exercise. The outcome from the result is it will be the same (RM1.00 x 1,000 = RM0.50 x 2,000). However, there will be some advantage as I mentioned above especially if you are holding a small cap stock with limited liquidity. There will be more shares to go around for investors to trade. 

I hope the explanation above will provide some insight to investors to learn and distinguish the difference between bonus and dividend. All of us (myself included) will start as a piece of white paper and we fill ourselves with knowledge as we grow in our investing journey. 

Stocks: The Market Cycle Clock

In any investments, there is always ups and downs. In fact, due to the correlation of economies, various commodities, demands etc and most importantly is human psychology, the market cycle clock sort of repeats itself over time.

We have seen a bust of the stock markets throughout the world due to the "black swan" event of Coronavirus causing major health crisis. The response to the health crisis inadvertently caused a very major economy slowdown and hence being reflected in the stock market. We, the humans responded to the health crisis by restricting people movement (interim measures) and researched for vaccines (long term solution). You can see that during the period of March till May, there were major corrections on commodities prices, property prices and stock prices. And once the vaccine news came out, the market reacted like nothing has happened and begin rebounding aggressively (bear in mind that none of any country has started massive immunization against coronavirus). However, it's always said that stock markets is trading with a 6-month forward looking. 

Let's have a look at the Merrill Lynch's Investment Clock below and see where are we? I remember I was looking at the same thing 10 years ago where we just emerged from the Global Financial Crisis (the crisis which started with home mortgages in the US in 2018 quickly spread throughout the world and by March 2019, most markets hit rock bottom).

Merrill Lynch's investment Clock

From the chart below, you can see those Asset and Sector Rotation over the economic cycles. The key question is where are we right now? At certain cycle, it might stay for a longer time and we might missed the opportunities by not making the right move.

Asset and Sector Rotation over Economic Cycle

Theoretical Economic Cycle - Output Gap and Inflation

The Market Cycle is very real but from what we have discussed, it's mainly for discussion and educational sake. Do use it as a guide for your investment portfolios. And a winning portfolio is normally held over time and not a short duration. Market timing remains something nobody is really able to master. For those who tried, majority has failed miserably.

Retirement Series: Golden Rules to a Successful Retirement Planning

In my previous Retirement Series articles, we spoke about retiring with RM2mil cash and RM3mil net worth. While those are the magic numbers where it will help thousands of Malaysian to retire but it will remain delusional or a dream. To make things easier to understand and achievable, we are going to look at ways that you can plan your retirement successfully.

Golden Rules to a Successful Retirement Planning
1. Start Retirement Planning the day you start your first job
The biggest mistake and misconception that everyone have is "I just started working and I am not going to retire in 40 years' time". I started to think about retirement when I was younger, way before I work. Of course none of us will know what kind of life you would want to live 40 years later but what you can easily do is to set aside a sum of money for retirement and 'rainy days'. What makes you think the government via EPF forced everyone to contribute at least 23% (11%+12% or for those earning below RM5,000 - 24%) of their income for retirement purposes? It's a form of forced savings that will help many in their older days. 

2. Any sum contributed towards Retirement Fund is welcomed
When you started out working, none of us will withdraw a big paycheck. Some fortunate ones will earn double to triple those working basic jobs. However, as the saying goes: "it doesn't matter how much you earn, what matters is how much you saved", it really is how much you save up. Just imagine is, a young man who spend his way out of a salary of RM4,000 with zero savings is worse off than a person who earns RM2,500 wages and save RM200/month. 

3. Try not to utilize the sum that you have saved up for retirement until Retirement happens
A lot of people saved money and they put all in a basket. When something turns up, they look into their "kitty" and say "hey I have got the money, let's buy a new fridge for Christmas" or "well, we have saved enough to buy a new car". Yes, it thrills us to spend the hard "saved" earnings but again, you will have to be clear like "money in retirement fund should not be touched" not unless you lost your job and have no where else to look for money to keep you going.

4. Hold on to "lifestyle" upgrades and continue living a frugal lifestyle as long as possible
It is easy for us when we have an pay increment every year and we actually "upgrade" our lifestyle and spend all of the increment. This normally involves the "want" category like I "want" Starbucks coffee because it's nice, I "want" to dine at a fancy restaurant thrice a month as "I can afford it". Yes you can afford them and not indebted. However, by holding back your "want", you are indirectly increasing your savings. That will tie-in well with Item 5 below.

5. Invest Retirement Savings as early as possible
Time is on your side if you start early and you can also invest a smaller amount. Below is a scenario for you to consider. If you're looking to have RM1mil at retirement (assume 60 years old), this is what you have to save monthly (assuming 6% return p.a.).
a. at 25 years old - RM 728/month
b. at 35 years old - RM1,478/month
c. at 45 years old - RM 3,485/month
d. at 50 years old - RM 6,154/month
e. at 55 years old - RM14,391/month
You can see that from the simulation above, it pays to save early and let "compounding gains effect" to help you. Don't get discourage with the numbers above as it also involves savings in EPF as well. Refer also to another article posted in the Ant On the Street Retirement Series blog.

Investing your money means that you don't keep your money in Banks only. Fixed Deposit is not really considered as "investments". Investments would mean vehicles like Unit Trusts, Mutual Funds, ETFs, Stocks etc.

6. Learn Financial Management and Investment early in your career life or even life!
Learning is lifelong as they say. Too bad we weren't taught financial management earlier in our formal education. We were taught finance, economics and other important subjects like science and math. Financial Management is one of the most important aspect in one's life. You see that a lot of people committed suicide, families torn apart or even those who went bankrupt due to illnesses or couldn't afford to have a proper roof over their heads at old age. It's very very sad to be in those situations but from studies done, majority of them is not due to poor luck in life but simply due to poor financial management. It involves a strong will, discipline and constant fight between "want" and "need".

7. Be bold and look for a better paying job.
Be bold and take the risk - a lot of us will prefer to stay in the existing comfort zone because we are familiar with the work. Grab that promotion, grab that pay increment even if it means heavier responsibilities and tougher work. Work hard for it as hard work is the only consistent answer to success. No doubt hard work does not always yield good outcome but it's the most 'consistent' way. And remember, when you get that promotion or pay increment, first thing is to save the extra money you get, not to go into a new car, new bigger house, new hobbies. 

With the above Golden Rules discussed, we hope that our readers will not only enjoy reading them but will benefit from it by practicing those rules in your daily life. Take charge of your financials today, a baby step forward is what you need. Remember, one step at a time, not a big leap.

Retirement Series:
#1: Can you retire with RM3mil Net Worth?
#2: How can you retire with RM2mil cash?
#3: What is your spending power with RM6,000/month
#4: Is it possible to build a Retirement Portfolio averaging 6% return per year without EPF?
#5: Golden Rules to a Successful Retirement Planning

Stock Analysis: Boustead Holdings Berhad

Recently there is an escalated interests in Recovery Stocks and we do see some of them had a good run. I am going to do a quick analysis on Boustead Holdings Berhad as I realized that there isn't much of interest owing to the shareholding structure and a huge unlisted and listed companies under the big umbrella Boustead Berhad. 

According to their 2019 Annual Report, Boustead Holdings listed their subsidiaries under Page 262. There are a long list of companies and I will put down the major ones in the below table.

Boustead Major Subsidiaries and Affiliates

You can see from the above table that Boustead has 4 listed subsidiaries and affiliates, namely Boustead Plantations, Boustead Heavy Industry and Construction, Pharmaniaga and Affin Bank Berhad. There have a tonne of unlisted entities which will include the University of Nottingham in Malaysia, Cadbury Confectionery Malaysia, Sissons Marketing, Kao (Malaysia), Mutiara Rini (think Mutiara Damansara), Hotel and Resorts, BHP Petroleum, IKANO etc. 

On 3rd Dec 2020, the closing price is RM0.625 and command a market capitalization of RM1,267mil. I compare the market cap of the 4 listed companies look at how much they are worth. If I add all the corresponding value (percentage owned by Boustead Holdings), the collective market cap is RM2,377mil and Net Tangible Asset is RM 3,760mil. One of the main reason is Affin Bank Berhad is trading at 1/3 of the NTA. 

What do you get for paying RM0.625 per share for Boustead Holdings?

By paying RM0.625/share for Boustead Holdings, essentially you're also buying a portion (based on how much Boustead Holdings own) of the 4 listed companies at a steep discount (i.e. 66% discount to the NTA, 47% discount to the listed Market Cap). On top of that, you get a bunch of companies (I mean a whole bunch of them) free of charge. Is this a good value investing? It's a not a straight-forward answer but let's find out further below.

Earnings vs Value Trap
No doubt that Boustead Holdings has a long list of companies under it and also lots of valuable asset, the earnings were not so fortunate. 

Boustead Holdings: Last 5 years Quarterly Profit (after Taxation)

As you can see, profit for Boustead Holdings has been on the downtrend for the past 2-3 years and in Q4 2019, there is a big write down. However, the losses seemed to be under control now and businesses is slowly stabilizing. 

Boustead Holdings is definitely a bargain from Value Investing perspective. However, due to its sluggish earnings, it could also mean that it is a Value Trap for many. Now, let's look at who are the largest shareholders.

Boustead Holdings 5 largest shareholders

What Lies Ahead?

Recently, Boustead Holdings has announced that Dato’ Sri Mohammed Shazalli Ramly will be their new Managing Director. As you can see that Boustead Holdings is currently deemed as a 'conglomerate' and 'holding company', valuation is not exactly attractive. Also, a lot of their businesses are suffering or it's not efficient and generating good profit. 

1. Potential Restructuring and Sale of Non-Core, Non-Strategic, Non-profitable Asset.

There were market talks that the majority shareholder, LTAT is looking into possibility of restructuring Boustead Holdings. There are certainly a lot of unlisted and listed assets that Boustead Holdings can look forward to monetize and pare down loans and save on interest costs. This exercise will bring value to existing investors.

2. Potential Privatization

Boustead Holding due to its very attractive and deep value is very ripe for privatization. Privatization will allow majority investor to perform restructuring easier and also unleash the value within the holding company. 

3. Recovery in businesses 

Businesses of Boustead Holdings are slowly recovering post MCOs. 

For those investors who are patient, I believe that this could mean a meaningful bet.