CORPORATE MAS or GOVERNMENT KPI? by Ameer Ali Mohamed

Corporate Malaysia was stunned by the surprise appointment of the 51-year-old (now former) Malaysia Airlines managing director/chief executive officer, Dato’ Seri Iris Jala @ Idris Jala as minister to oversee the implementation of the government’s key performance indicator (KPI) initiatives.

The main question on everyone’s mind is, has he been deployed to a position where he can deliver results? This is particularly relevant for someone who has been in the corporate world (with two large companies) since 1982 and whose political influence is unknown.

There are also questions on whether he has, since assuming the MD/CEO position in MAS on 1 Dec 2005 until 28 August 2009, taken the company out of turbulence to a stage where his successor can cruise comfortably.

Another equally important issue is MAS’ succession plan. There is no argument that one is in place: the main question is whether the plan is sufficiently mature at this point in time, given that Jala’s contract was extended just last year for three more years until 2011.

As expected, Jala’s appointment was greeted with positive responses from mainstream political and corporate figures. However, this is not the case for MAS staff and some advisors of institutional investors.

MAS Employees’ Union (MASEU) voiced its disappointment over Jala’s departure as MAS has not even completed half of its five-year Business Transformation Plan 2 (BTP2) that Jala initiated. The plan targets an annual profit of RM2b to RM3b by 2012. MASEU executive secretary Mustafar Maarof also questioned the frequent change of MAS’ CEO. There were three over the last 10 years.

Research houses were divided on the move. Some, such as OSK Research, ECM Libra, MIDF Investment and Credit Suisse, have issued an “underperform” or “sell” call on MAS. Credit Suisse considers Jala’s departure as a reinforcement of its negative view on the company;

MIDF Investment fears that a hastily appointed new CEO could hamper MAS’ return to stability and profitability; ECM Libra questions the ability of the current management team Jala left behind to guide MAS out of the woods, given the massive operating losses incurred in the first half of this year.

Jala was instrumental in turning around MAS from its worst ever loss in FY2005 to a record profit of RM851m two years later. However, economic conditions over the past year pushed MAS into another round of turbulence, evidenced by its performance in the last two quarters.

If not for derivative gains in the second quarter of 2009, the national carrier’s bottom line could have been more than half-a-billion ringgit in the red in 1H09.

MAS – Quarterly Performance

Source: MAS website

MAS – Net Profit before Derivative Gains

The ball is now at the feet of newly appointed MD/CEO Tengku Dato' Azmil Zahruddin bin Raja Abdul Aziz to prove the critics wrong, and that he can take MAS out of the turbulence in a matter of time.

Having joined MAS in August 2005 after running Penerbangan Malaysia Bhd as MD/CEO for more than one year, the 39-year-old chartered accountant partnered in Jala’s restructuring program for MAS. Now, he certainly needs a good caliber second man as Jala had enjoyed before.

As for Jala, will he be able to achieve his own KPI in his new position as a minister without portfolio in the Prime Minister’s Department, and chief executive of Performance Management and Delivery Unit? This is not so much a question of whether he is capable or otherwise. It is more a matter of having to deal with politicians instead of corporate men.

One also wonders why he does not report directly to the Prime Minister or his deputy, but rather, to another minister in the PM’s Department who also has a KPI to deliver.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

Republished with permission. This article was published in the Just Say It column in Shares Investment (Malaysia edition) September 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.

HIGH INCOME – HIGH COST – ECONOMY? by Ameer Ali Mohamed

Malaysia aims to become a high income economy within the decade, lest she gets caught in the middle-income country trap. While the objective is noble, the policy makers should ensure that the population at large will not be burdened with the ills of a high-income economy.

Prime Minister Dato’ Sri Mohd Najib Tun Abdul Razak made this a key priority under his leadership, in order to make Malaysia a developed nation by 2020, a vision first mooted by the fourth Prime Minister, Tun Dr Mahathir Mohamad.

In his keynote address at the 2009 Invest Malaysia, Najib highlighted efforts to formulate a new economic model that will be based on innovation, creativity and high value. It involves shifting the country’s reliance from a manufacturing base dependent on semi-skilled and low-cost labour to one that centres on high technology and a modern services sector dependent on skilled and highly paid workers.

Certainly when salary scale in Malaysia is raised close to international levels, we will be able to overcome the brain drain issue including attracting Malaysians currently working overseas and contributing to the economic development of other countries.

The main obstacle in such an endeavour would be above-average inflation. Often whenever a salary scale structure is elevated, it is followed by inflationary pressure, like it or not. It did not matter if the upward tweaking was due to rising productivity or worse, adjustments arising from historical inflation.



One may recall in the early 1980s, the starting monthly pay of fresh graduates in the public sector was about RM800 to RM1,000. The price of a new 1.2 litre car then was only about RM10,000. Ten years later, the starting pay for fresh graduates was from RM1,200 to RM1,400 while a new 1.3 litre car would cost RM28,000. Today, fresh graduates get around RM2,200 to RM2,500 per month while a new 1.3 litre car is priced around RM36,000.

Of course, thanks to technological advancements, the cars are far better today, but does that mean we must start comparing them with current 1.0 litre cars or five-year-old 1.3 litre second-hand cars?

Let us now compare the price of a plate of fried rice – RM1.50 in the early 1980s, RM2.50 in the early 1990s and RM4.00 to RM5.00 currently. What about prices or rental rates for basic houses or apartments, or perhaps rental for a room?

Based on official figures on annual inflation from 1980 to 2008 that peaked to 9.7% in 1981 and dipped to the lowest level of 0.3% in 1985, one needs to have RM237 in 2008 to have the same purchasing power of a RM100 note in 1980 on the assumption that his spending pattern is equivalent to the composition of the CPI basket. In other words, a RM100 in 1980 is only equivalent to RM42.13 in 2008 in terms of purchasing power.

Chart 1: Inflation and its impact on the money value


Hence, despite the increase in starting salaries over the last 30 years, the purchasing power has indeed remained at the same levels. Nonetheless, what has happened in the right way is that more jobs and business opportunities were created and more people had the opportunity either to work or do their own businesses.

Two other important issues to consider while we move towards the high-income economy is its impact on the country’s tourism industry, which in turn will also affect its supporting industries, and the trade balance.

Without doubt, one of the attractions of external tourists is the better priced goods and services in Malaysia. A reasonable hotel rate in Singapore may cost SGD250 (or RM600) per night but one will be able to get an equivalent room at half price in Kuala Lumpur. A plate of “lontong” for breakfast in Singapore would cost SGD2.50 (RM6.00) but only RM2.50 in Kuala Lumpur. And the list goes on.

In becoming a high-income economy, these may no longer be the reasons for international tourist arrivals. Our goods and services could become as expensive as in other developed nations due to two major reasons – inflationary pressure that is greater than the already developed countries and strengthening of the local currency. If these factors are not handled, international tourists must be given different reasons to visit Malaysia.

Managing the overall balance may be another issue. From the trade balance perspective, imports of final goods and services for local consumption may increase as (i) they become cheaper in local currency terms and (ii) Malaysians are paid better and therefore can afford them. We must also address productivity growth to at least grow in tandem with the salary increases. Otherwise, our products and services may become less competitive in the global markets.

Secondly, more and more Malaysians could afford to travel overseas for their vacation. While this may affect local tourism, the main issue is the rising outflow of our currencies to finance the rising outflow of Malaysian tourists.

While the efforts to transform Malaysia into a high-income economy should be supported by all citizens at all levels, policy makers and key participants in the economy should ensure that our beloved country will not be subjected to the high-income country trap.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

Republished with permission. This article was published in the Just Say It column in Shares Investment (Malaysia edition) August 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.

ASTUTE INVESTORS – EVERYONE DREAMS OF BECOMING ONE

Buy low sell high – a stock market adage easier said than done. In pursuit of putting this proverb into practice, sometimes an investor buying stocks at a low price ends up selling at much lower levels when the share price continues to slide and he must take steps to preserve his capital. Buy low sell high turns out to be buy low sell lower. Worse, if the price of that same stock moves higher within weeks or months after the sale!



There are also investors who are afraid to buy when prices are falling, lest they “catch a falling knife”. Indeed, catching falling knives can lead to financial disaster. However, if one knows how and when to “catch the falling knife” in a correct manner, the reward could be awesome compared with the bleeding suffered earlier.

To be able to do that, the investor needs to be an “astute investor”, a term used by stock market guru, Charles H. Dow, to explain the three market phases in his basic tenets of a financial market.

According to Dow, astute investors are those who sell their shares in the final phase of a bull market when everyone else seems busy recommending a buy and chasing to buy shares at higher levels, and they accumulate in the final phase of a bear market when everyone else seems busy recommending a sell and disposing stocks at lower levels.

If we were to recall the first three months of this year, many investment experts were divided on whether the KLCI would continue to slide, had reached a significant bottom or was nearing an important floor.

Having attended many investment seminars during that time especially in March, there were pundits predicting the index would slide further to around the 650 levels and there were some who envisaged the market having reached the bottom so long as the index did not break below the 800 levels.

There were also some who played safe by recommending a 50% exposure in equity due to the heightening global economic uncertainty then, notwithstanding the extremely attractive valuations of many blue chip companies.

After hitting this year’s lowest closing level of 838.39 points on 12 March, the KLCI advanced by 237.38 points or 28.3% up to 29 June, with many fund managers’ darling stocks that had become penny stocks registering returns beyond 100%.

The main question in the minds of many investors and traders would probably be whether an astute investor should use technical or fundamental analysis, or both. Indeed this issue is debatable and each of the fundamental and technical analysts would probably say that their approach is the best.

In fundamental analysis, experts would look at the potential of a listed company in terms of earnings, cashflow and dividend payable during the current and following financial year, given the company’s business operations and the economic environment. The forecasts on earnings, cashflow and dividend would allow an investor determine the important market ratios of price earnings multiple, price cashflow multiple and dividend yield.



In technical analysis, experts would look for reversal patterns to determine the end of a bear or a bull market campaign. In a bear market campaign, they would analyse the major trendline resistance, price formation, indicators and volume action, and monitor if a breakout has occurred.



The above basic analyses are indeed inadequate to determine a major market bottom and market top.

While fundamental analysis guides investors in terms of market ratios, the question is, what are the ratios deemed reasonable for investment or divestment? Price multiples are indeed moving targets in both bull and bear markets.

In addition, one would find that there were continuous downward adjustments in earnings, cashflow and dividend when the major economic trend is negative, resulting in depleting fair valuations for stock even after share prices have come down significantly. The opposite is also true when the major economic trend is positive.

As for technical analysis, no technician will be able to determine a market bottom until a reversal is established. For a confirmed reversal of a bear campaign, the price should have already been off low and for a confirmed reversal of a bull market, the price should have already been off high. Hence, it would be difficult to buy at the trough and sell at the peak.

So, what’s the solution? Based on observation amongst investing friends – professional and individual investors – there are at least five solutions: use the right economic indicators; be a market contrarian at the right time; be a risk taker at the right price; conduct an advanced fundamental analysis which takes into account its price behavior; and conduct an advanced technical analysis.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.



Republished with permission. This article was published in the Just Say It column in Shares Investment (Malaysia edition) July 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.

RSI – Probably the most misunderstood indicator

BUY when it is “oversold” and sell when it is “overbought” – this is what most traders, investors and even some technical advisors would conclude when using relative strength index (RSI) in technical analysis. But is this the right approach when using the indicator? RSI is one of the most used technical indicators but probably the most misunderstood.

Although the three main strengths of the RSI indicator are (i) determining overbought/oversold levels, (ii) discovering the positive or negative divergence against the price chart and (iii) centerline crossover, application on the first strength is normally used in a wrong manner!

The first mistake is to strictly stick to one level each for overbought and oversold levels. Yes, the founder of RSI indicator J. Welles Wilder recommended using 70 and 30 as the overbought and oversold levels, respectively. But this does not mean that it must be strictly adhered to.

Are they the correct levels for analyzing a price chart with its RSI having moved beyond 90 on the upside or below 10 on the downside? On the flipside, how are we to analyze another price chart where its RSI never moved beyond the 70 level or below the 30 level?

Hence, there is a need for some flexibility in determining the overbought and oversold levels. It should depend very much on the range of the RSI indicator for a particular stock or index over a period of time. The levels for a stock may be 70/30 as recommended by Wilder but for another, it may be 80/20 or a different combination.

An analysis on Chart 1 (below shows that an investor using an 80/20 preferred level for the stock will not be able to buy or sell the stock using this principle over the last one-and-a-half years although the underlying share price was volatile.


Chart 1, courtesy of NextVIEW Advisor Professional

The second incorrect usage is more astonishing – buy when it is oversold and sell when it is overbought. This makes us wonder whether we should sell a stock after its RSI crosses above the overbought level and buy after the indicator moves below the oversold level.

As if the RSI indicator is able to determine with high possibility the potential peak and the potential trough even before they are formed! If such an indicator is available, I don’t mind paying my one-month pay to purchase it!

By its name, RSI is an indicator which determines the strength of the underlying share price. For that reason, the higher the RSI escalates, the stronger the underlying share price would be. And when this happens, doesn’t it mean that there is a higher possibility for the share prices to move even higher when it crosses above the overbought level? If so, why sell? The opposite is also true. Why buy when the share prices become weaker?

Let us analyze Chart 2 below . If one were to buy upon the RSI going below 30 for the second consecutive day, he would have bought the share on 9 Oct 08 (closing price RM2.70; RSI-14: 29.03) and would have incurred unrealized loss of 40% by 24 Nov 08 (RM1.61; RSI-14: 9.71).


Chart 2, courtesy of NextVIEW Advisor Professional

If he were to sell the share on 13 Apr 09 (RM2.25) just because RSI-14 has crossed the 70 level for two consecutive days (at 82.22), he would have incurred an opportunity loss of 38% in six trading days as the price surged to close at RM3.12 on 21 April with RSI-14 at 92.74.

The question now is –: was Wilder wrong when he introduced the overbought/oversold principle? Certainly not! He has indeed been misinterpreted.

What Wilder had written on this principle is that in general, it is considered bullish for the underlying stock when the RSI rises above 30 and conversely it is considered bearish for the underlying stock if the RSI falls below 70.

He did not say what should be done if RSI crosses above 70 but instead recommended what to do if the RSI crosses below 70. And he did not suggest what to do if RSI crosses below 30 but instead recommended what to do if the RSI crosses above 30. This is also in line with the third strength of the indicator, which is centerline crossing.

Shocking? We should go to the original source and understand the indicators that we use in the right manner.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.


Republished with permission. This article was published in the Just Say It column in Shares Investment (Malaysia edition) June 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.

APPLES AND ORANGES

Consider this: Malaysia’s economy managed to grow, albeit at a slower pace of 0.1%, in the fourth quarter of 2008 (4Q08) despite major economies including its neighbour experiencing severe contraction – the US contracted by 6.2%, the Euro area shrank 1.5% and Singapore contracted by 16.9%.

It is rather mind-boggling to see such figures, where Malaysia considerably outperformed the other countries during the final quarter of last year. Not that we do not believe that Malaysia is superior to the other three countries as its banking system was untainted by the global financial crisis because it was not exposed to the sub-prime mortgage issue. It is just the extent of the out-performance.

But analysing it further, there is in fact a reason for such an out-performance. It is simply because in this case the apple is not compared with other three apples but rather with three oranges.

Why?

In Malaysia, the gross domestic product (GDP) figures are always released in the form of year-on-year change. The 0.1% growth is arrived at when the real output in 4Q08 is compared against the real output in 4Q07.

However, in the US, Euro area and Singapore, as examples shown above, the figures are based on the percentage difference between the real output in 4Q08 and the real output in 3Q08, seasonally adjusted. For the US and Singapore figures, the figures are annualised.

Hence, while one can compare the performance of the US and Singapore economies when using the above figures, one should not compare them with the figure on the Euro area as it was not annualised and on Malaysia’s economic growth as it was y-o-y and not q-o-q.

For the US economy, the right number to use for comparison to Malaysia’s 0.1% GDP growth in the 4Q08 should be the 0.8% contraction it experienced between the 4Q07 and 4Q08. For the Euro area, it would be its y-o-y contraction of 1.3% in the 4Q08. And for Singapore, the republic’s economic output contracted by 3.7% in the 4Q08, y-o-y.

Hence the right comparison for Malaysia’s 0.1% GDP growth in the 4Q08 should be the contraction of 0.8% in the US, 1.3% in the Euro area and 3.7% in Singapore.



As said earlier, we are not doubtful of the strength of the Malaysian economy, but it is just whether she considerably outperformed the others. If someone wants to compare the 6.2% output contraction in the US, 16.9% in Singapore and 1.5% (not annualised) in Euro area to that in Malaysia, he should calculate Malaysia’s output in the 4Q08 against that in 3Q08. It is also a contraction, by 3.6%, not annualised.

But then, there will be an argument that such a figure may not be adjusted for seasonal factors, such as the number of days in the fourth against the third quarter, the number of public holidays and weekends, and other factors.



Notwithstanding the above argument, and for comparison, Malaysia economy registered growth both y-o-y and q-o-q in 4Q07, that is by 7.3% and 0.8% respectively. Likewise in 4Q06, growth rates were 5.3% and 0.3% respectively for Malaysia. However, one important observation is that in 4Q08, Malaysia economy experienced the first q-o-q contraction in the fourth quarter since 4Q00.

Chart 1: Malaysia Real GDP


Perhaps it is high time for Bank Negara Malaysia to also include quarter-on-quarter performance of the country’s economic output, seasonally adjusted, in its Economic and Financial Development quarterly report. Although the q-o-q figures, yet to be known whether or not they are seasonally adjusted, are available in the statistics table released, most layman investors and traders certainly refer only to the report instead of the tables.

Such an inclusion in the report would certainly allow traders and investors to use the right economic figures when comparing to similar figures of other countries, as well as for investment decision at macro level.

(Note: The 1Q09 GDP numbers for Malaysia are expected to be released not later than 27 May 2009.)

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.


Republished with permission.
This article was published in the Just Say It column in Shares Investment (Malaysia edition) May 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.

BEATING THE DEPRESSION: DERIVATIVES OR EQUITIES?

The current market and economic situation is a generational change in wealth. It will destroy the wealth many people have – or hoped to have – accumulated. It will also deliver the foundations of new wealth to other people. Investors face two challenges: first, they have to protect the wealth they have; and second, they need to participate in the creation of new wealth.

The answer to both challenges requires the same tools – derivative or equities. Derivatives were blamed for the start of the current financial crisis. The US Subprime Slime came from over-the-counter derivatives. These failed for many reasons.

The failure infected the financial system because of the belief that when risk is divided, it is isolated and reduced. The failure of one divided section should not affect the other sections. However, risk can be spread out but it cannot be eliminated. Risk must always be closely managed: it was not the derivative tool that brought disaster but the wrong application of that tool.

One of the most significant advances in recent years was the development of derivative products for retail investors. Some products were developed and endorsed by the exchanges, such as warrants, mini-futures contracts and exchange-traded fund products.

Other developments were the standardisation of some off-exchange over-the-counter derivatives such as spread-betting and contracts for difference. These derivative tools offer leverage, but they demand excellent risk management.

Derivatives are a way to increase capital in uncertain and volatile markets. Their first advantage is leverage. A small amount of money can be used to generate a larger return. This creates investment and trading income, and adds to the capital that can be used for investing in equities. Another advantage is the derivatives’ ability to trade short. This can be used to hedge or protect existing investments.

However, when market regulators disallow short trading, they leave investors with no option except to lose money. Faced with this situation, many investors will sell their stock, compounding the market’s fall. We saw this in China where the market collapsed dramatically partly because investors could not sell short.

Potential new investors will also shy away because regulatory limitations force them to only trade from the long side. Given the higher risk of losing their money, they simply stay out of the market.

Both these consequences take the liquidity out of the market and accelerates the downward pressure, depriving companies of the capital they need to keep the economy moving.
Derivatives created and managed by the exchange, or those approved and regulated by the exchange, are essential tools for investors who want to add cash capital into a depressed market environment.

Without capital and liquidity, the equities market will struggle. Investors must feel confident they can make money before they will return to the market. Investors must generate new money before they have the required capital to re-enter the market. Derivatives, when used correctly, can generate capital which can then flow back into the equity market as investments.

The markets have changed too much for these instruments to be abolished. Regulators and users must learn their lessons and curb unrestricted over-the-counter derivatives growth.
On their own, neither derivatives nor equities can beat the depression. A combination of both can restore liquidity, generate wealth and hasten the recovery of these depressing markets.
Regulators and market participants need to create conditions suitable for the sensible application of these instruments to preserve, protect and encourage efficient capital markets.

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The above was the speech text delivered by NextVIEW Chief Executive Officer Stephen Lai at the launch of the Asia Trader and Investor Convention (ATIC) held in Kuala Lumpur on 14 & 15 March 2009.

Stephen became CEO of NextVIEW Pte Ltd in May 2002 and has played a critical role in transforming NextVIEW from a home grown market data provider into a regional player in the financial information industry with direct offices in 7 countries in Asia. Stephen has professional work experience as an investment manager with an international fund management firm and in sales and marketing with a global financial information vendor.

VALUE INVESTING – BE CRITICAL WHEN USING BREAK-UP VALUE APPROACH

In times of economic uncertainty, value investing is one of the favourite valuation approaches investors use as it is purportedly one of the safest methodologies. However, investors must be wary and critical before using such an approach because in equity investments, there are no valuation methods without any risks.

With many developed economies already in a recession and Malaysia experiencing practically a pause in growth in 4Q08 y-o-y, investors are likely to be enticed into using this approach for their equity investment decisions.

One of the most popular methods in value investing is to invest in stocks that trade below the liquidation or break-up value. A more aggressive investor would evaluate the prevailing price of the securities against its net assets value (NAV). A conservative investor would assess the current price of a stock against the value of its net tangible assets (NTA).

While NAV refers to the shareholders’ funds item on the balance sheet, NTA removes all intangible asset items including goodwill, deferred tax assets and other intangible assets. The rationale is simply that intangible assets may have lower or no value at all when the assets or businesses of a company (or group of companies) are broken up and sold separately. Further, goodwill such as brand value may have a lower intrinsic value than the reported value on the balance sheet during times when business activities slow down.

While the uncertainty on the value of intangible assets can be addressed by using Price/NTA per share instead of Price/NAV per share, there are also some other delicate issues to consider when using such a valuation method. Whether these issues have been addressed or not remains to be seen.

This relates to the other components of assets, both current and long-term, on the balance sheet. In addition, it also relates to the company’s earnings for the current and future financial years that will affect the shareholders funds.

As far as the writer is concerned, there are three major asset items that may affect the accuracy of using such an approach: receivables, inventories and investments.

Receivables

Receivables are current assets derived from the company selling its goods and/or services on credit terms: it can be listed under trade or other receivables. Under current economic conditions, the ability of a company to convert all the receivables within an acceptable period of time into cash may be questionable. Some of its customers or debtors may no longer be in a position to pay their outstanding debts to the company due to cashflow problems.

One way to overcome this would be to ascertain if the receivables of a company have been rising in relation to either cost of goods sold or revenue over time. For trade receivables, it is important to analyse the receivables turnover, which tells us whether or not the average number of days that credit terms are being settled by trade debtors has risen.

Inventories

Inventories are also classified under current asset items and can be divided into two – raw materials and/or semi-finished products that will be processed into finished products; and finished products that are pending sales. Both have become risky under the current economic uncertainty.

For one, a company may have produced goods based on the previous sales momentum, but the economic slowdown or recession may dampen current and future sales. This may affect the number of months needed to clear the inventories. In addition, slower sales and rising inventory may also impact the use of raw materials and semi-finished products as the company slows its rate of production.

For inventories – finished and semi-finished products and raw materials – that are relatively perishable, write-downs may become necessary when they are not saleable anymore. The same also applies to finished products that become obsolete within a short period of time.

There may be instances when finished products must be sold at prices lower than the production cost to get rid of them before they become obsolete. This can also mitigate unnecessary rising costs for storing the rising quantities of unsold finished products.

Investments and Earnings

Investments, a long-term asset item, may also need to be reviewed under the current economic conditions. Under present accounting standards, the lower of cost or value principle is already conservative. However, an investor must make certain that the reported value of investments on the balance sheet is not lower than the prevailing value, more so if the value may have dropped below the cost as at the reported date and may have dropped further as at the current date.

Current year earnings potential may also affect Price/NTA or Price/NAV of a company. If the company were to report losses during its current financial year, both ratios above will definitely become higher than previously because retained earnings, an item under shareholders funds, will be adjusted downwards. This may explain the abundance of companies already making losses with low Price/NTA or Price/NAV.

It is not the intention of this article to criticise the liquidation or break-up value approach in equity investment decision making. We wish to stress here that investors who apply the Price/NTA or Price/NAV per share approach must also include other related analyses such as analyzing relevant financial ratios and expectation of current and future earnings before making a value investing decision.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

Republished with permission.
This article was published in the Just Say It column in Shares Investment (Malaysia edition) March 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.

Rising expectations of independent directors amidst escalating economic uncertainties in Malaysia

The International Monetary Fund (IMF) released late last month yet another downward revision for the global economic growth for this year, predicting the lowest growth since World War II as global output and trade fell dramatically.

Global growth is, however, expected to pick up next year to 3.0% but one just wonders if IMF will revise this downward over time, just like what it did to its 2009 growth estimates, from a high of 4.4% it predicted in Jan 08 to a miniscule 0.5% 12 months later.

Table 1: IMF Global Growth Estimates – Any more downward revision?



No matter what, the latest figures for 2009 suggest escalating economic uncertainties would have an impact on investor sentiment, hence the future performance of equity markets, Malaysia not excluded.

Investors who brace themselves holding on to shares of their favourite listed companies would certainly need more updates on the performance and outlook of the companies from time to time – transparency is key to any decision whether or not to hold on to these investments.

One of the avenues for them would certainly be the independent non-executive directors (INEDs) of public listed companies (PLCs). Quoting Practice Note No 13/2002 of Bursa, an “independent director” means a director who is independent of management and free from any business or other relationship which could interfere with the exercise of independent judgment or the ability to act in the best interests of a PLC.

And quoting Securities Commission managing director and executive director Dato’ Dr Nik Ramlah Mahmood in her speech in October 2006, independent directors could do more towards enhancing shareholders' value and the long-term viability of a company by being proactive. They must be able to challenge and question decisions at board meetings to ensure that decisions made serve the interests of the company and minority shareholders.

Granted, most INEDs are not well paid by PLCs, drawing only a small fraction compared to the remunerations of MDs/CEOs and executive directors (EDs), but their role is enormous, especially to minority shareholders and employees – minority shareholders on company operations and returns expectation, and employees on remuneration, working environment as well as retrenchment or pay cut exercises, if any.

This month, most PLCs in Malaysia will be releasing their Oct-Dec 08 quarter results, where most MDs/CEOs or EDs will be having analyst and media conferences, enhancing what they have announced in the results.

However, we have not seen INEDs being quoted on the results and prospects of the companies on which they serve as directors. Either they do not attend the briefings or they are not questioned by the representatives of the minority shareholders, i.e. the financial/corporate journalists.

It is high time indeed minority shareholders are fed with statements by the INEDs, either through news reports written by the journalists or for the exchange to make it mandatory for PLCs to include statement by INEDs in all the quarterly releases as well as annual reports.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

Republished with permission.
This article was published in the Just Say It column in Shares Investment (Malaysia edition) February 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.

MALAYSIA ECONOMY: WHO TO SPEND?

As we enter 2009, it is no longer imperative the level of GDP growth Malaysia registered in the year that just passed – either 5.5%, 5.0% or even 4.5%. What is more important is the level of economic growth one foresees this year.

Malaysia – Annual GDP Growth (Estimate and Forecast based on official figures)

The official forecast is for a growth of 3.5%. Although we do not disagree that the level of economic activity in 4Q08 – a figure which we will know only by the end of February – may suggest the extent of slowdown going forward, changes in the local and global economic landscape especially in the first six months may affect the projection in both ways.


Malaysia – Quarterly GDP Growth (y-o-y)

As we mentioned last month, many governments have already announced their stimulus packages to manage the impact of the slowdown with the intention to avoid a recession this year, Malaysia included. The question is whether it is only the government that should increase spending.

With Malaysia aiming to be a developed nation by year 2020 with aggressive expansion in the manufacturing sector, the significance of public sector spending is now at low levels. If one analyses contribution of the components of the “three-sector closed economy”, public consumption in Malaysia is relatively insignificant.

By definition, a “three-sector closed economy” comprises public consumption, private consumption and gross fixed capital formation (or investments). By adding net exports (exports less imports), it then becomes a “four-sector open economy”.

Between 2001 and 2007, public consumption or in other words, government spending, constituted only between 14% and 16% of spending of the three sectors. The more significant one has been private sector consumption, representing 55% - 59% of the three sectors, while investments comprised 27% to 31%. (available figures on investments are not divided into that of public and private sectors.)


Malaysia – From the 3-sector “closed economy” perspective (2008 based on Jan-Sept figures)

This observation means that for every 1% reduction in private sector spending, it can only be mitigated by a hefty 4% increase in government consumption to ensure total private and public sector consumptions remain unchanged, assuming status quo on other sectors. But for every 1% reduction in investments, it can be moderated by a 2% increase in public consumption.

For this reason, we see the decision to reduce employees’ contribution to the Employees Provident Fund (EPF) by three percentage points to 8% for two years starting this month as an acceptable policy measure to maintain private sector consumption.

Yes, it may affect employees’ savings for retirement but such a measure is only for two years. If this option is not exercised, more damages may await everyone if the economy succumbs to a prolonged slowdown or recession.



Malaysia – Loans growth, monthly (y-o-y)

This however does not mean that the RM7b stimulus package announced recently is sufficient. While the government’s move, intentionally or otherwise, to reduce public consumption to 13.8% of the three-sector closed economy in the first nine months of 2008 is a good move, the “savings” should now be used to increase its contribution.

In 2000 when the global economies experienced a technical recession, public spending in Malaysia only constituted 12.8% of the three sectors. But this was raised to 14.4% in 2001 with a reduction in contribution from investments but status quo on private spending.

The investments component may also be affected this year in view of the bleak economic outlook that may affect new private direct investments, not to mention possible close down of some existing operations. In addition, loans growth may also be peaking as financial institutions may impose stricter guidelines on new approvals and drawdowns.

We hope the same policy measures to be repeated, i.e. raising public sector contribution to the three-sector closed economy to 14.5% - 15.5% levels this year. This measure is necessary not only to maintain the level of economic activities in the three-sector closed economy but also to overcome any shortfall in net exports, which represented 14.6% of Malaysia’s four-sector open economy last year.

Especially so when the world output is expected to moderate significantly to only 2.2% this year from an estimated 3.7% last year as predicted by the International Monetary Fund (IMF) in its latest projections. It expects the US, Euro area and Japan going into recession this year with forecasted GDP contraction of 0.7%, 0.5% and 0.2% respectively.



Which means that Malaysia’s future exports is at stake as these countries represent 35% of its total exports, which dropped 2.6% year-on-year in October 2008. This has not included Malaysia’s other trading partners that may also reduce imports as they are also affected from the global slowdown.

Malaysia – Percentage of Net Exports (2008 based on Jan-Sept figures)

And finally, a reduction in imports in semi-finished products in line with the anticipation for a drop in exports in finished products will also impact manufacturing companies especially those in free trade zones. Any retrenchment exercise arising from this, which we are beginning to hear and read, will then affect private consumption.

So, while consumers will be able to spend more (in aggregate) but wisely following the reduction in EPF contributions, the government will also need to step up its stimulus packages in an effective and efficient manner to weather the current storm.

Stimulus packages can be in various forms, such as important infrastructure projects especially those that were delayed earlier due to high materials costs at that time, agriculture projects that can make us self sufficient on our basic food needs in 5-10 years, developing disbursement of a new fund for selected small and medium scale industries, as well as education grant for retraining retrenched employees.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

Republished with permission.
This article was published in the Just Say It column in Shares Investment (Malaysia edition) January 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.

Spend Wisely, Please

Stimulus packages here, there and everywhere! They seem to be the order of the day. They are there simply to provide an impetus for growth in a dwindling economy where financial markets cannot.

Interestingly, these current efforts are not taken by individual countries, but rather en bloc. For example, at the recently concluded Asia Pacific Economic Cooperation (Apec) summit, the member economies agreed to coordinate their stimulus packages to avert a global recession.

Late last month, the European Union (EU) launched a Euro 200b financial package, equivalent to 1.5% of the 27-nation union's gross domestic product (GDP). Of this amount, 85 per cent will come from national government budgets with the remainder coming from the EU and the European Investment Bank's budgets.

Thus far, the United States had announced a package totalling US$1.5 trillion. Observers do not discount this ballooning to US$2.0b as economists are expecting an additional US$500b tax cut plan soon. The latest was a second stimulus package worth US$800b of two parts – US$600b to buy mortgage related debt and securities; and US$200b to buy consumer debt securities.

These do not include the possibility of President-elect Barack Obama considering a circa US$1.1 trillion economic stimulus package as soon as he takes office on Jan 20 in a bid to create or save 2.5 million jobs.

Other stimulus packages include Britain's £20 billion (slightly more than 1% of its GDP) and China's 4 trillion yuan over the next two years with emphasis on public welfare projects, infrastructure, environment protection and post quake reconstruction in south-western China.


IS RM7B FOR MALAYSIA ENOUGH?

In Malaysia, a RM7b stimulus package was announced, to be spent on “high impact” projects. The funds would come from savings due to lower than expected subsidies on retail fuel prices following battered global crude oil prices. It remains to be seen if this is sufficient to withstand the current onslaught of the global economic crisis.

What is certain is that the package appears minute, considering it is only 0.93% of Malaysia’s annualised GDP, at current prices of RM751b based on figures for the first three quarters of 2008.

Some may argue that the funds are complemented by the three-percentage-point reduction in the employees' contribution to the Employees Provident Fund, which could release RM4.8b per annum to private consumption if all employees opt for it. However, dwindling exports and net outflow of portfolio and overseas investments are points of concern.

Malaysia’s exports are already affected as its major trading partners – such as the United States, Europe, Japan and Singapore – have either gone into technical recession or are experiencing acute slowdown. Net real exports of goods and services dropped 14.8% in 3Q08, down from 20.0% growth in the previous quarter – a major factor that pulled down the 3Q08 GDP to 4.7% from a revised 6.7% in 2Q08.

Portfolio investment outflow rose to RM38.4b in 3Q08 from RM31.0b in 2Q08, due to the continued global de-leveraging process. Additionally, there was a RM16.1b outflow in 3Q08 for overseas investments by Malaysian companies against an inflow of RM3.6b in the previous quarter.

Hence, we expect additional stimulus to be introduced early next year.


BETWEEN STIMULUS, RESCUE AND BAILOUT

Certainly, the world's governments will have to face cynical comments from their respective opposition political parties and even the people who voted for them. Their cynicism may include their usage positive-sounding words like “stimulus package” to mask what is essentially a “bailout” of financial giants.

Political differences aside, one of the main reasons the leaders must use positive words, from an economic perspective, is to avoid extreme worry among consumers as this would aggravate the already subdued economic situation.

The value of national income is computed from the sum of private investments, public consumption and investments, and exports, minus imports. It would be a disaster if all the elements of investment, consumption and exports contract. So, it all boils down to managing confidence.

While growth in consumer spending, private investments and exports are moving into negative territory, one way to cushion the fall in national income is to increase government spending, with a view that over time, this will mend private sector sentiment.

Granted, stimulus packages must be spent wisely and channeled to sectors that are deemed to have a “higher economic multiplier”. As EU Monetary Affairs commissioner Joaquin Almunia puts it: “If the impulse is not coordinated, one plus one might not equal two, but less, even zero. If it is coordinated, one plus one may equal three.”

If a stimulus package is geared to rescue sinking financial giants, it must be done carefully – to rescue, not to bailout – for two main reasons, namely to rescue the financial sector (an important component of the economy) and to save the employees.

It is a “bailout” if, in the process, the current major or controlling shareholder(s) and top executives of the financial giants are protected while the employees, who have no say in the running of the institution, get retrenched. Giant institutions falter due to the doing or oversight of the top executives and, to a certain extent, the chairman and board members. Hence, they should be replaced if government monies are used to finance the rescue. Otherwise, the same mistakes may be repeated once the economic cycle comes back in the future.

Independent non-executive directors should also be seen to act in the interests of minority shareholders, and not for the benefit of controlling shareholders. It is high time indeed for corporate journalists, in their coverage of listed companies, to also quote independent non-executive directors to make them answerable to minority shareholders and employees.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

Republished with permission.
This article was published in the Just Say It column in Shares Investment (Malaysia edition) December 2008. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.