Keuro's Rights

For those who have Keuro, be prepared to allow yourself some cash to pick up the rights. Basically it is a 3 for 4 rights at issued price of RM1.08 per share. This basically means that if you have 10,000 units of Keuro, you will be entitled to 7,500 (3/4 x 10,000) of the rights shares. That also means that at RM1.08, the amount of cash needed is 7,500 x RM1.08 = RM8,100. Call your remisier on how to pick up your rights. Also, the rights comes with warrants in which case the exercise price is fixed at RM1.18. Assuming the same rights amount of 7,500 is picked up, the number of warrants that will be provided is 3,750 units.

If you decided not to pick up the rights between 6 August to 12 August 2014, you have the option to sell your Keuro-OR. On those dates, the Keuro-OR will be traded and you will be allowed to buy or sell your rights options.

The Keuro's share will be traded ex-rights from 1 August 2014 onwards. This means its price will be adjusted accordingly based on the last traded price as at 31 July 2014 closing.

For me, I will definitely be picking up the rights and due to this, I have decided to sell some of the DKSH to pick up the shares.

Very recently, the update for Keuro it seems is that it will not be holding Talam Transform's shares and it is disposing part of its almost 30% shareholdings. I have blogged about the need to not hold Talam's shares as it is not the key business for Keuro. It seems that Tan Sri Chan Ah Chye is back into Talam with his son and daughter joining the board of Talam and to which Keuro sold some 230 million shares to the company related to Chan Ah Chye. The price sold is not a good price though i.e. below 10 cents.

While Talam's net book value (revised) is very good, I am not so sure with the old management back at the helm though as it has never been looked positively by property buyers before due to many broken promises in the pasts by the Talam group to its house buyers. In many cases, my mantra is to look upon the management that is supposed to carry the company forward.

IJM it seems is moving away from Talam as well with one of the JV which was planned on a piece of land in Gombak being terminated. However, IJM has gotten what it wanted i.e. the WCE and Rimbayu land.

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Kaletsky Crushes Schiller in a Knockout

OK, its a WWF meant for financial nerds. Schiller has done very well for the knowledge base of financial economics, in particular in terms of assessing property price cycles. Not too long ago, actually, over the past 2 years, when share prices moved north, Schiller came up with his own share price "index", which is really a ratio with his selected denominators. It appeared to be very convincing that the current share prices (for the past 2 years already) sems to be way overvalued and he basically barks at us that we needed to revert to the mean, i.e. massive downside prolonged correction.

I have always considered Schiller's ratio to be too simplistic but I cannot put my finger on it. Thanks to Reuters' very own Anatole Kaletsky (previously he was the highly respected economics editor/columnist for The Times), the explanation for debunking Schiller's ratio is utterly complete. This of course in now way suggests that the present markets globally is NOT overvalued - that is a separate subject altogether.

Kaletsky's arguments are highly worthwhile to read and re read again as there are plenty of investing nuggets, and ways to look at the same thing called investments and shares.
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With the stock market continuing to hit new highs almost daily despite the appalling geopolitical disasters and human tragedies unfolding in Ukraine, Gaza, Syria and Iraq, there has been much head-scratching about the baffling indifference among investors. Many economists and analysts see this apparent complacency as a symptom of a deeper malaise: an “irrational exuberance” that has pushed stock prices to absurdly overvalued levels.

The most celebrated proponent of this view is Robert Shiller, the Nobel Prize-winning, Yale University economist who is often credited with predicting both the 2000 stock market crash and the bursting of the U.S. housing bubble. Shiller may or may not have deserved a Nobel Prize for his academic work on behavioral economics but as a practical guide to investing, his approach has been thoroughly refuted by real-world experience.
 
Shiller’s status as an investment guru owes much to the timing of his book “Irrational Exuberance,” published just days before the collapse of Internet and technology stocks in March 2000. What is less widely advertised, however, is that for decades, both before and after that predictive triumph, the stock market strategy implied by his analysis has turned out to be plain wrong.

Shiller’s argument that stock prices have been inflated to irrational levels is centered on a statistic called the cyclical adjusted price-earnings ratio, or the Shiller price-earnings ratio. Conventional price-earnings ratios divide the current level of share prices by the earnings estimated by analysts for the year ahead.

This ratio for the Standard & Poor’s 500 is now around 17. On this basis many conventional analysts, including Federal Reserve economists, conclude that U.S. stock prices are reasonably valued. A price-earnings ratio of 17 implies that if companies can sustain this level of profitability, they will provide investors with annual earnings of one-17th, or 5.9 percent, which compares favorably with long-term interest rates on government bonds of around 1 percent, after adjusting for inflation.

Shiller’s price-earnings ratio, by contrast, divides the current level of stock prices by their average profits over the past 10 years (after indexing for inflation). To judge whether stock valuations are reasonable, Shiller compares them not with the prevailing level of interest rates, but with the long-term average of the Shiller ratio.

Viewed against this yardstick, Wall Street share prices look grossly overvalued. The Shiller ratio on the S&P 500 is now 26.3, far above the long-term average of 16.1, calculated by Shiller’s painstaking research on the profits of leading U.S. businesses since the late 19th century. The implication is that Wall Street is grossly overvalued and that investors should prepare for a loss of at least the 40 percent retreat required to return the ratio to 16.

In fact, the expected fall from today’s vertiginous price level should logically be much bigger than 40 percent. For the definition of an average requires that a long period of prices far above average must be balanced by an equally long period of deeply under-valued stocks.

Why then are investors not panicking? There are many theoretical objections to the Shiller’s approach. His arbitrary 10-year averaging takes no account of the length and depth of business cycles and makes no allowance for accounting write-offs. The Shiller price-earnings ratio will continue to be upwardly biased until 2019 because of the longest recession in U.S. history and the biggest-ever corporate write-offs then suffered by U.S. banks.

Even more damning is Shiller’s failure to adjust earnings for accounting changes and the impact of inflation on inventory valuations, distortions that greatly exaggerated profits in the 1970s and produced understated price-earnings ratios.

The most fundamental objection embraces all these technical arguments: Any comparison of valuations covering long periods is meaningless if it fails to take into account vast changes in technology, economic policies, interest rates, social and political structures, and taxes. Why, after all, should the returns expected today on Wall Street bear any relationship to what investors earned in the agricultural booms and busts of the 1880s or the Great Depression of the 1930s or the great inflation of the 1970s?

But leaving aside the theoretical arguments, what about the practical usefulness of the Shiller ratio as an investment tool? Recent evidence is conclusive: For the past 25 years, the Shiller ratio’s signals have been almost uniformly wrong. Since 1989, the S&P 500 has multiplied eightfold, while total returns, including dividends, have increased the value of an average equity investment 12 fold.

Investors who followed Shiller’s methodology, however, would have missed out on almost all these gains. For the Shiller price-earning ratio showed the stock market to be overvalued 97 percent of the time during these 25 years. Even during the two brief periods when the Shiller ratio was below its long-term average — in early 1990 and from November 2008 to April 200 — it never sent a clear buy signal.

Instead, Shiller’s approach suggested that the valuations in 1990 and 2009 were only just below fair value — implying there was very limited upside at the beginning of two great bull markets that saw prices multiply fivefold from 1990 to 2000, and threefold from 2009 to 2014 (so far).

The Shiller ratio’s predictive performance would have been just as bad in earlier decades if it had existed. During the equity bull market of the 1950s and 1960s, for example, the ratio would have said Wall Street was overvalued for 96 percent of the 19-year period stretching from early 1955 to late 1973.

Only in January 1974 did the Shiller price-earnings ratio move below what was then its long-run average, implying it might finally be a “safe” time to buy stocks. Straight after the Shiller ratio sent this first “buy signal” in almost two decades, Wall Street crashed by 40 percent in 12 months.

Time will tell whether the new Wall Street records are evidence of irrational exuberance or simply a reasonable response to gradual economic recovery, as suggested by Federal Reserve Chairman Janet Yellen (correctly in my view).
But one piece of evidence we can safely ignore in making this judgment is the Shiller price-earnings ratio.

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No Wonder MAS Was and Is in Trouble

The news statement goes like this:

MAS should buy AirAsia to resolve woes: former MD

KUALA LUMPUR: Former Malaysian Airline System (MAS) managing director, Tan Sri Abdul Aziz Abdul Rahman, has suggested that the ailing carrier acquire profit-making AirAsia as a strategy to resolve its financial woes and return to profitability.

"(There is) no need for a merger with AirAsia X. MAS is the one that should buy over AirAsia and make it a subsidiary. MAS as the national carrier should lead, rather than the other way round.

"MAS just needs to be managed properly based on market demand," he said.

Abdul Aziz also suggested that the national carrier, 69% owned by Khazanah Nasional Bhd, be delisted from the stock market.

"As far as the airline is concerned, this is not going to make any difference. Delisting will make the management's job easier, as there is no need to follow procedures as set by the exchange. But those who bought MAS shares at RM3 or RM5 would be unhappy," he said.

The former MD said the acquisition would enable the combined group to focus on the low-cost fare market that comprises 80% of the South-East Asia market, as well as the competitive premium market, which is a far better proposition than competing against each other.

Proposals and suggestions to save MAS have gained greater traction following net losses in the first quarter ended March 31, 2014 which widened to RM443.39mil from RM278.83 million a year ago.

The airline put in place a turnaround plan recently but it has been scuppered by the missing MH370 plane incident in March, and things have worsen with the shooting-down of Flight MH17 in eastern Ukraine last week.

Shares in MAS which have fallen almost 35% on Bursa Malaysia this year, and was last traded Friday at 22 sen. – Bernama

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Just a recap of these two airlines - one is profitable, the other is very much in trouble now. By the way look at the market capitalisation of both...

As at 25 Jul 2014

As at 25 Jul 2014

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CIMB, RHB & MBSB

Just as the market was heading towards a period of listless trading due to the World Cup and prevailing cautious sentiments, trading in three financial institutions are being suspended today, paving the way for the formation of Malaysia’s biggest bank.

The trading of RHB Capital Bhd, Malaysia Building Society Bhd (MBSB) and CIMB Group Holdings Bhd are suspended today, all three told Bursa Malaysia separately yesterday.

It is learnt that the three banks will write to Bank Negara to seek permission to commence a corporate exercise which will result in a mega bank that will have a market capitalisation of more than RM90bil, assuming the deal is concluded at about 1.70 to 1.75 times book value.

“The deal is likely to be done at 1.75 times book value based on CIMB’s current valuation of almost 1.70 times book. It is unlikely to be transacted at anything less,” said a source.

At 1.75 times book value, RHB Cap would have a market capitalisation of about RM30bil, while MBSB’s total capitalisation would be about RM6.8bil. 

“Together with CIMB’s market capitalisation, the merged entity would fetch a market value of more than RM90bil,” said the source.

The Employees Provident Fund (EPF) will play a significant role in this merger because it has significant stakes in all three entities.

It is the major shareholder in RHB Cap with a 40.76% stake. The other major shareholders of RHB Cap are Aabar Investments PJSC with a 21.43% stake and OSK Holdings Bhd with a 9.91% stake.

The EPF has a 64.73% stake in MBSB and 14.46% in CIMB. 

The eventual merger will see the EPF emerge as the largest shareholder in the mega bank, with a stake estimated to be more than 25%.

RHB Cap and CIMB closed four sen lower each at RM8.72 and RM7.24 respectively, while MBSB ended 12 sen higher at RM2.34 at yesterday’s market close. 

At the close yesterday, CIMB was trading at 1.70 times book value, RHB Cap at 1.29 times book value and MBSB at 1.60 times book value. 

Sources said the exercise would possibly involve a share swap between CIMB and RHB Cap at a book value of 1.75 times and an outright buyout of MBSB.
MBSB is a building society whose loans are mainly for residential loans and commands a lesser premium. 

“But it is probably one of the most profitable financial institutions and has the fastest growing balance sheet. This is evident from the returns it has given to its shareholders in the last two years,” said an analyst.

A merger of the three financial institutions will result in a bank with the largest asset base, market capitalisation and earnings based on the latest published numbers.

Based on latest figures, the merged entity’s asset size is expected to be more than RM600bil and combined profits based on its last financial year will exceed RM7bil. It will surpass that of Malayan Banking Bhd (Maybank) that has a market capitalisation of RM91.1bil currently and asset size of RM578bil as of March 31 this year. 

Opinion:

a) The deal kinda saved MBSB and the people 'promoting' it as it was hit very hard by Bank Negara recent rulings (correctly), if you know what I mean. By keeping all the loans under a much bigger loan entity, somehow things will become very David Blainish. Will also save EPF from future blushes.

b) Kinda murky with Nazir becoming Chairman of CIMB, and probably elevated to a directorship at Khazanah, plus a significant role at EPF investment panel. Surely Nazir did not do anything to suggest such a merger. At least now we understand the rash and rushed move to resign as CEO and be made Chairman, plus the Khazanah's role better.  Hmm...

c) The deal is very good for RHB shareholders but the Aabar Group's block could still be tricky as their entry price was much higher. However there seemed to be more willingness by Middle Eastern big investors to finally take their losses and move on (e.g. recent Iskandar land deal).

d) This deal would be negative for Maybank and and negative for the rest of the smaller banks, by sheer size muscling through the industry. Hence Maybank is UNLIKELY to sit back and do nothing, but its common shareholder in this is EPF and that may be sufficient to be having a phone conversation along the lines"You do what you think is best for the company, but remember who you are going against ..."

e) This deal will go through. Ong Leong Huat will be much richer. More IB staffers will lose jobs ... how they wished they could be part of the "bank tellers union".

f) At the end of the day, the merger is natural, necessary, plus can cover some blots (if you know what I mean) ... and prepare for the ultimate on the agenda list ... having an entity large enough to propose a merger with Public Bank in the end. EPF being the driver could do that deal, but not Maybank. Kapisch!

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