We all face risks; how to manage it

The Real Matter - A column by Pankaj A. Kumar

WE all know the saying that there are only two certain things in life – death and taxes. While one cannot deny the facts of life and that all of us will have to face the realities of life, not many, I believe, are prepared to accept that risk or risk management is the third element of life.
Ignore it and you will be cursed, embrace it and you’ll find a new meaning to life and it will change your perspective of life itself. Let me illustrate how risk or risk management determines our journey in life.
Many readers would have watched the movie Titanic – an epic 1997 American romantic drama film directed, written, co-produced by James Cameron about the sinking of the RMS Titanic. Twelve years ago when I watched the winner of 11 Academy Awards on the silver screen, I could relate to it only as a wonderful love story.
It was only recently when I attended a course on risk management that I watched the movie with a different perspective. The fact that it was her maiden voyage, untested in speed, the story offers many lessons to managers and corporates.
On hindsight, Titanic had insufficient number of lifeboats in case of emergencies and at the same time she was pushed to the limit in order to surprise everyone on her arrival in New York. She only had two lookouts for possible icebergs on calm waters and worse, warnings of iceberg were ignored as non-essential. By the time she hit a large iceberg, Titanic was travelling too fast to alter her route and to avoid the inevitable. The rest, as we now know it, is history.
How does the Titanic relate to the real world? As we now enter nearly 21 months into the second worst recession in history, there has been a lot of finger pointing to all sorts of market participants – the blame game – as investors try to find the root cause of the mess that the global financial institutions created.
From the bubble created by the US housing market to the subprime loans that came along with it, to the rating agencies responsible for the so-called AAA ratings assigned to these dubious instruments, to the regulators for allowing these transactions to take place, to the greed of investment bankers and sales persons responsible for pushing these products to the market, to even Fed chairman Alan Greenspan for creating the perfect environment of low interest rate environment, which made it even easier to create the mother of all bubbles – the credit market.
The reason markets went frenzy with the credit and housing market bubbles was that people were driven by greed and profits rather than best practices in terms of ensuring that whether it was an individual or a corporate, its balance sheet remained healthy despite additional bets taken on more products/services or transactions.
It is really funny that when we look back over the past two years or so, we hear how traders and sales persons were so well paid in the western world as they were measured based on the amount of deals they did and the amount of products sold, irrespective that the size of some of these bets could in actual fact, paralyse the whole institution.
Without these greedy traders or sales people, we would not have seen the demise of Lehman Brothers, neither would AIG be operating like a hedge fund. And, where was risk management in these institutions?
I am sure it was there, but totally ignored as business owners focused on profitability rather than ensuring that the firm’s position is not compromised. I believe that not many senior management staff of some of these large institutions had any idea that if things got out of hand, it would be equivalent to the Titanic hitting the iceberg.
There has now been a lot of debate in the marketplace of more regulatory enforcement, not only in areas related to governance but also on the issue of executive compensation. While it is really difficult to attach conditions of compensation – if regulators do really want to see changes in how a financial institution is run – risk management has to play a more prominent role.
It is not the traders or sales persons that these institutions should be focusing on in terms of rewards but risk managers as they are the true key drivers of profitability. Reward them well as they act as lookouts and ensure that a ship arrives at its destination on time, not earlier and definitely not later.
As humans, while death and taxes are certain, risk management ensures that we have a trouble-free journey and hence, we must embrace it.
Life itself is risky and as we journey on, we will be faced with many choices and changes. With risk management as a guiding tool, the journey of life becomes more fulfilling although it may not be all that satisfying.
● Pankaj C. Kumar is chief investment officer at Kurnia Insurans (M) Bhd.

Glomac ...Target Price RM1.60 (32%) Glomac Bhd current =RM1.21 Buy

Review by TA securities.
Analyst : Tan Kam Meng, CFA

Glomac’s 1QFY10 net profit of RM8.3m came in within our expectations at 26% of our full-year forecasts and 24% of consensus estimates. For this quarter, net profit rose 7% yoy (+16% qoq) due to : 1) increase in margins on the back of favourable change in product mix with rising contribution from Glomac Tower and Glomac Galleria; and 2) revaluation gains of RM4.9m from investment properties, which we have treated this as part of operating income as similar to disposal gains as the group has entered into agreements to dispose these properties. According to new accounting standards, any properties to be disposed off are required to be revalued.

Updates from analyst briefing The total sales concluded in 1QFY10 amounted to RM61m (see Table 1), which was significantly lower than 1Q09’s RM82m. However, it accounted for 29% of our full-year projections and management remained bullish and confident to secure at least one en-bloc sales either from Glomac Damansara or Glomac Cyberjaya for FY10. In other words, sales are going to pick up in 2H10. The unbilled sales as at July-09 stood at RM333m.
Glomac Tower to fuel FY10 profit. Glomac has completed the sub-structure works and has awarded the building works to contractors. According to management, the company can be more certain now that the projects would provide 30% margins after the awarding of building works. Going forward, Glomac Tower would be the earnings driver for FY10 and FY11. Glomac Damansara is going hot. This project would contribute positively to FY10 earnings after securing a 70% sale of 12 blocks of 5&8-storey shop offices with GDV of RM53m. The group is currently in negotiations for en-bloc sales of a 15-storey office block and a 25-storey corporate tower with respective GDV of RM75m and RM170m.

Commendable take up on Glomac Cyberjaya. Glomac managed to secure sales and booking of about 90% of the phase 1 launch with a GDV of RM64m. Given the commendable take up rate, the group is targeted to launch phase 2 which comprises 24 shop offices with GDV of RM41m. Meanwhile, the company is in negotiations for an en-bloc sale of a 15-storey office block. Attractive dividend yield. We raise our FY10 sales projections by 24% to RM260m given the commendable take up rate for Glomac Cyberjaya. Meanwhile, we raise the margin for Glomac Tower to 30% from 25%. Sequentially, we raise our FY10-11 earnings higher by 32% and 16%. We also raise our dividend projections from 6 sen to 7 sen as the company has committed to at least maintain last year’s dividend payment.
Valuation Given the change in our earnings estimates, we raise the target price for Glomac to RM1.60 from RM1.24 previously, based on 12x CY10 EPS. Upgrade to Buy from Hold.

Note by blogger:
You act at your own risk.

Public Bank (PBKF MK, RM10.24, OP, TP: RM11.60, 13.3% upside) - Early redemption of sub-debt (Chin Seng Tay)

Event

• Public Bank has redeemed a US$350m subordinated debt which it issued in 2004. The early redemption is part of its capital management initiatives.

Impact

• The US$350m subordinated debt carried a coupon rate of 5.625%, and was redeemed on 22 September 2009. With the redemption, the group's CAR is estimated to be at 12.9%, compared with 13.9% as at 30 June 2009. The Tier 1 ratio of the group remains unaffected at 8.7% (bank-level Tier 1 was 11.2%).
• Note that the group had announced earlier a programme to issue up to RM5.0bn in non-cumulative Perpetual Capital Securities, which are stapled to subordinated notes, under a Non-innovative Tier 1 Stapled Securities Programme. To date, it has issued RM1.2bn of such securities. There is room for the group to raise more such funding, if need be.
• We believe capital management initiatives remain strong, given the interim dividend of RM0.30 (gross) and the 80.4m in treasury shares, which may be paid out to shareholders. At this point in time, our FY09 dividend estimate does not include the potential issue of these treasury shares to shareholders, which could potentially offer a significantly higher yield than our estimated 5.3% for FY09.

Action and recommendation

• The group has continued to track well with loan growth of 7.2% YTD in June, compared with the sector growth rate of 2.2%. At the same time, asset quality has remained pristine, with its 0.9% NPL ratio. Coupled with the potential for further capital management initiatives, we are maintaining our Outperform recommendation.

KNM Group ... Price Target : 12-Month RM 1.10 >>BUY

Better prospects
• RM450m new project from JV with Verwater for oil storage tank in Malaysia • Contract flow has picked up since July 09
• Maintain Buy for more new wins and attractive valuations. RM450m new project from JV with Verwater. KNM has invested in a 50% stake in Verwater Industrial Services SB (VISM). The Verwater Group has secured a Euro220m contract from Lenstar Investment Ltd for an oil storage terminal in Kedah, Malaysia. KNM’s management indicated that VISM would be the project manager for the project under Verwater valued at between Euro180-200m. About Euro90m (RM450m) worth of fabrication jobs will be awarded to KNM over the next 1-2 years, and it will also enjoy a share of project management profit under its 50% stake in VISM.
Encouraging new wins. KNM has secured RM900m new wins YTD-2009, with RM400m new projects secured in the last 3 months. Together with the project from Verwater, KNM’s YTD-2009 new wins amounts to RM1.35b. While the estimated 20% gross margin for the
oil storage tank project under VISM is much lower than KNM’s average of 25%, we expect KNM to continue to secure new jobs to compensate for lower margins given the recovery of crude oil price. Maintain Buy for more new wins and attractive valuation. KNM is poised to secure new contracts as new projects from the Middle East have started to flow through. New
developments at the Northern corridor of Malaysia and Gorgan of Australia could also lead to more projects. Maintain Buy and RM1.10 target price based on 10x FY10F PE, which is its mid-cycle valuation. KNM is now trading at attractive 8x FY10F PE against local and
regional peers’ averages of 9x and 14x.

Analyst
June Ng

SGX: Equities market strength may not be sustained

Equities market strength may not be sustained

Maintain SELL on SGX. After equities market ADT rose to S$2.27b in May 09, it subsequently fell for two months before recovering to S$1.88b in Aug 09. The ADT for Jul and Aug 09 was S$1.73b, higher than our FY10 assumption of S$1.47b. However, we are maintaining our assumption as current market valuations are not cheap and investing interest may not be sustained. Our SGX target price of S$7.00 is derived from 22x of our FY10 EPS, which is close to the 22x average for the past four years.

Value per share traded is sharply lower than historical average, suggesting dominance of penny stocks trading. For the two months of Jul and Aug 09, value per share traded was S$0.79, sharply lower than FY08 and FY09’s S$1.08 and S$0.94 respectively. This suggests that trading activity is more concentrated in the penny stocks. Historically, the penny stocks were the last to move in an upmarket. We are not optimistic that equities market trading volume will stay high in the months ahead.

Our analysis shows that SGX target price would be S$8.00 if FY10 ADT hits S$1.84b, or S$9.10 if ADT is S$2.20b. Investors who are more optimistic on the market trading volumes can trade on SGX. But we are not so optimistic.

SGX’s earnings is less sensitive (than BMB) to ADT changes. Equities trading accounts for a third of SGX’s operating revenue, lower than Bursa Malaysia Berhad (BMB)’s 47%. A 25% rise in SGX ADT (above base case) will raise SGX FY10 net profit by 15%, whilst BMB’s FY10 net profit could rise by a stronger 21% for a similar percentage change in ADT. This is not a positive for SGX as we are forecasting FY10 ADT to be stronger than the FY09 level.

Dividend yield is also unexciting. SGX is committed to an annual base dividend of 14S¢/share. We are forecasting FY10 dividend of 28.9S¢/share, based on a 90% payout ratio (FY09 payout ratio was 90%). This gives an unexciting dividend yield of 3.4%.





Leng Seng Choon, CFA

Highlights by Hwang on 11/9/09

Plantation Sector

Exports lose steam

· August palm oil exports dropped 9.5% m-o-m to 1.316m MT according to MPOB; offset by weak seasonal up-tick in production

· Negative bias in CPO prices may continue near term; but 4QCY09 rebound expected on lower inventory

· Top picks: Wilmar and Kencana Agri

· Malaysian palm oil production forecast cut; CY09F and CY10F CPO price maintained at RM2,300/MT

Astro (RM3.65; Fully Valued; Price Target: RM2.65; ASTR MK)

High churn, low ARPU

· 2QFY10 is in line with our FY1/10F estimate, but is below consensus, hit by highest churn in 4 years

· DCF-based price target tweaked lower to RM2.65

· Maintain Fully Valued. Absence of special dividend may disappoint speculators, with downside risk to consensus earnings.

CB Industrial Product (RM3.15; Fully Valued; Price Target: RM2.80; CBP MK)

Secured RM15.7m new contract from Central America

CBIP’s 100%-owned subsidiary, Modipalm Engineering Sdn Bhd was awarded a palm oil mill contract worth USD4.5m (RM15.7m) by Nacional Agro Industrial S.A. The contract requires CBIP to supply equipment and engineering services for a palm oil mill with an initial capacity of 15MT FFB/hour and expandable to 45MT FFB/hour at Guatemala , Central America .

Eastern and Oriental (RM1.49; Buy; Price Target: RM2.10; EAST MK)

ICSLS issue price fixed at 65sen

E&O's 1-for-2 renounceable rights issue of 8% irredeemable convertible secured loan stock 2009/2019 (ICSLS) has been fixed at 65sen each, as indicated earlier.

Malaysia Airports (RM3.40; Buy; Price Target: RM4.50; MAHB MK)

Yesterday’s off-market trade may involve Khazanah selling down its stake

There are talks that the 55m shares (5% of total MAHB’s shares) traded off-market yesterday morning at RM3.30 per share (3% discount to the last closing price), may likely involve Khazanah Nasional paring down its 72.7% stake. If this is true, it is in line with Khazanah’s intention to gradually reduce its stakes in government-linked companies (GLCs) to improve the stock market liquidity. Khazanah is the Malaysian government’s investment arm.

Tanjong PLC: Resilient laggard with 5% yield

Tanjong PLC: Resilient laggard with 5% yield

• IRB’s probing of IPPs’ tax payment is unlikely to result in negative impact for Tanjong

• Potential upside from new NFO game

• Attractive valuation vs local and regional peers. Maintain Buy with SOP-derived target price of RM19.25.

Minimal impact from tax issue. The Inland Revenue Board (IRB) is checking on IPPs’ tax claims, which may lead to potentially higher tax rates for IPPs. We believe that the check is unlikely to affect Tanjong, and Malaysia power plants account for just 20% and 19% of Tanjong’s FY10-11F net earnings respectively.

Potential new NFO game for Tanjong? Tanjong is the only NFO player that has yet to receive approval from the Malaysian government for a new NFO game in 2009, while Magnum and Berjaya Sports Toto have already received theirs. Near term contribution from the new game is likely to be minimal, but we expect the new game to contribute to revenue in the longer-term, as a potential “jackpot” type game should win over business from the “illegal” betting operators. Improving free cashflow and resilient power earnings will support future dividend payment and potential new acquisitions. We expect net yields of 5% for Tanjong.

Underperformance not justifiable. Tanjong has underperformed the KLCI and local peers with YTD share price appreciation of 18% against 31% for KLCI and average of 21% for local peers. The underperformance is unjustifiable given Tanjong’s resilient earnings, attractive valuations, and potential upside from new NFO games, as well as the prospects of unlocking the value of its power or gaming businesses in the longer term. Tanjong is trading at attractive CY10F PE of 10x against local peers’ average of 13x and regional peers’ average of 16x.

NOMURA Malaysia Strategy - Malaysia Boleh #1: ride the next leg up

Despite a 34% rise YTD, we say the rally is not over. Post-crisis rallies have lasted an average of 76 weeks in the past four recessions. We believe it is too early to call an end to this 44-week old rally, with earnings upgrades just kicking in from July. Post the 1998-00 market recovery, earnings upgrades lasted for 18 months.

Malaysia Boleh #1: ride the next leg up

Clues from history
Average post-crisis rallies for the market last roughly 76 weeks. The current 44-week old rally is even shorter than the shortest post 1982-83 US recession rally (50 weeks). Arguably, there is still plenty of upside if one were to benchmark the current rally to the post 1997-98 Asian Financial Crisis rally that lasted 79 weeks, when the index rose 205%.

Too early to turn bearish
Malaysia has underperformed its regional peers. Despite the recent rally, recent fund flows continue to suggest low foreign participation, and there are still plenty of sceptics hoping for pull-backs, to allow them to participate in the market. Investors, in general, are still mixed on the direction of the market — even those that have participated in the recent rally do not seem to have strong convictions on its sustainability.

Earnings revisions: still early in the cycle
Consensus earnings upgrades only started in July 2009. After a series of downgrades, 2009F market EPS growth reached a trough in June, while the 2010F EPS growth started trending up from May. Looking at previous cycles, our revision index suggests that coming from a depressed level, upward earnings revisions could last up to 18 months, as experienced during the post 1998-00 market recovery.

Stay adequately invested in the defensive space …
We like DiGi and Tanjong Plc in the defensive space.

... be selective in cyclical names
AMMB, Genting Bhd and Berjaya Sports Toto are our top picks in this space. Investors should continue to reduce weightings on Genting Malaysia ahead the opening of the two new casinos in Singapore.

Chinese stocks surge 5.1%

The contrast couldn’t be more striking: Yesterday, the S&P 500 declined one-third of a percentage point ...

But overnight, China’s Shanghai stock exchange was up as much as 5.1%.

Why? Because while the U.S. economy continues to struggle through our worst recession since the Great Depression, the Chinese economy is exploding before our very eyes!

Almost nobody was prepared for this. As Europe and the U.S. fell into recession and our economies began to contract last year, demand for Chinese exports cratered. Many feared that the West’s economic malaise would cause Beijing’s economy to shrink as well.

It never happened. China’s economy continued to expand even as ours withered — and for a fascinating reason: China doesn’t have to depend on exports to grow its economy anymore — Chinese consumers are taking over as a major driver of economic growth there!

Hundreds of millions of new middle class and wealthy consumers are transforming China into a world-class IMPORTER of goods and services — both from Asia and all over the world!

In the first half of this year, China surpassed the U.S. as Japan’s #1 trading partner. In the second three months of this year, France’s exports to China and other East Asian economies soared 18.7% — and overall, exports from eurozone countries jumped 6.3%.

No wonder Citigroup recently boosted its estimate for annual Chinese economic growth to 8.7% for 2009 — and forecasts that China’s economy will expand at a blistering 9.8% next year!

The China Miracle is spreading throughout Asia

China’s transformation from a one-horse exporting nation into a major global importer and consumer of goods and services has also lit the fuse on economic growth throughout the region.

Early this morning, for instance, we learned that South Korea’s economy grew much faster than previously reported in the second three months of 2009 — the fastest since the fourth quarter of 2003!

There’s more:

• South Korean exports jumped 14.7% in April, May and June from the previous three months ...
  
  
• Construction investment grew more than four times faster than was previously reported ...
  
  
• In July, sales at major South Korean department stores rose for the fifth month in a row ...
  
  
• The nation’s manufacturers increased production for a seventh consecutive month in July ...
  
  
• Consumer confidence climbed to the highest level in almost seven years in August, and ...
  
  
• South Korea’s benchmark Kospi stock index was up overnight and has now gained a whopping 43% this year, beating our own S&P 500 more than three times over!