Stocks Are Cheap!

Here's link to legendary investor, Bill Miller, commentary for Q2 2007. http://www.leggmason.com/funds/knowledge/management/2007MillerCommentaryQ2.pdf

Ah, given the extent of the woes around the global markets, I'm ass-u-ming that most would like to know what's Bill Miller's opinions on the market outlook. (see page 3)

• I am constantly asked for my market outlook, so I will give one, not because I know but because I am asked.
  
  The market last week had its worst week since the fall of 2002, which was a pretty good time to buy stocks. Other things equal, lower stock prices mean values are better and future rates of return higher. This latest sell off to 1458 on the S&P 500 — from a high of 1553 reached only a few weeks ago — puts us still above the 1449 level of February 26, which preceded the sell-off in early March that occasioned much angst but, of course, should have been bought. We are now trading just about the same level after this sell-off that marked the high before that sell-off.
  
  The proximate cause of this sell-off is a reappraisal of risk in the credit markets, starting first at subprime but now having spread to the riskier parts of corporate credit, namely high-yield bonds and loans to finance buy-outs. Many high-profile deals are being delayed, and banks have been unable or unwilling to sell bridge loans into the secondary market, raising fears about future credit problems. While all this is understandably unnerving, there was a lot of sloppy underwriting in subprime, and risk premiums in deals were too low, in my opinion. The current problems in the credit markets are a prelude to sounder lending in the future.
  
  Stocks are lower in the claim chain on corporate assets than bonds, so when bondholders demand better returns, stocks suffer in the short run. In the intermediate or long run, stock returns depend on valuation relative to fundamentals such as growth rates and return on capital.
  
  According to data compiled by Bloomberg, stocks are now the cheapest they have been in 16 years. The S&P 500 is valued at 15.4x estimated earnings, the lowest since January 1991. Again, a pretty good time to be a buyer of stocks!
  
  Even after this decline in the stock market, over the past 12 months the market is up 17% with dividends reinvested, which is well above the long-term average.
  
  I began the year quite bullish and remain so.

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Where's My Munchies Dude?

Read a fantastic news article posted on Business Times: http://www.btimes.com.my/Current_News/BT/Friday/Nation/makan.xml/Article/

• Shareholder watchdog: Forget the food, protect your rights
  By Chong Pooi Koon
  pooikoon@nstp.com.my
  
  August 10 2007
  
  SMALL shareholders need to be united so that their voice can be loud enough to be heard, a watchdog group said.
  
  Minority Shareholders Watchdog Group (MSWG) chief executive officer Abdul Wahab Jaafar Sidek and head of client services Lee Leok Soon - who have both attended over 200 shareholder meetings - observed that retail shareholders often come to meetings without a clear objective.
  
  Citing the example of FCW Holdings Bhd, Lee said the company's annual general meeting recently should have been adjourned after the chairman was absent from the meeting for two years in a row.
  
  "But some shareholders disagreed with MSWG's call for the meeting to be adjourned, simply because they were attracted to the food provided outside," Lee said, "That's ridiculous!"
  
  He said some unscrupulous directors may take advantage of such situations if shareholders are not united.
  
  In some cases, he said, directors who are not running the company in the right way need to be removed, but minority shareholders have to come together to get sufficient numbers to pass or block resolutions.
  
  "Don't be attracted by the food, that's not important - dividends from a well-managed company are," Lee said, reminding small investors to attend shareholder meetings with a clear investment agenda.
  
  MSWG yesterday held a retail shareholders' dialogue in Kuala Lumpur to discuss the way forward for the group.

A well-managed company!!!! That's so rather crucial from an investor point of a view yes?

Remember as an investor, you are a part owner of the company. As a part owner, it's simply imperative that you want to be invested in a company that's well managed.

Well here's the thing for me, if the company isn't well managed, why stick around for the agm? Shouldn't one have VOTED WITH THEIR FEET long ago?

Just mumbling out loud ya.

Hey, where's my munchie dude?

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Some comments on Subprime

• The catalyst for the global financial turmoil is investors coming to terms with the reality of the massive losses on their housing and mortgage-related investments. Of the approximately $2.5 trillion in subprime, Alt-A, and jumbo IO and option ARMs outstanding—equal to almost one-fourth of all mortgage debt outstanding—some $1.3 trillion is at serious risk of default (see chart). These at-risk loans were originated between late 2004 and early this year with less than 10% equity at time of origination. House prices are expected to decline 10% from their late 2005 peak to their nadir later next year. Of those at-risk loans, nearly $425 billion worth will actually default, ultimately resulting in losses to investors who purchased securities backed by those mortgages of well over $100 billion.

The above was taken from today's market wrap posted by Chris Puplava: Fragile, Handle With Care

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Megan's Other Bossie

Here's a not too nice story to read given the troubles within Megan Media.

• 07-08-2007: Megan’s boss sold down ahead of crisis07-08-2007: Megan’s boss sold down ahead of crisis
  by Gan Yen Kuan
  
  KUALA LUMPUR: Megan Media Holdings Bhd executive chairman Datuk Mohd Adam Che Harun disposed of a total of 6.26 million warrants of the company between April 25 and May 4, a filing to Bursa Malaysia on Aug 3 showed.
  
  The transactions took place just before Megan Media announced on May 4 that its subsidiaries — Memory Tech Sdn Bhd and MJC (Singapore) Pte Ltd — had defaulted on maturing trade facilities amounting to RM47.36 million.
  
  Pursuant to its announcement on June 6 after an investigative audit,
  
  Megan Media uncovered accounting fraud at Memory Tech.
  
  According to Bursa filings, Mohd Adam sold the block of warrants on the open market via five transactions, which saw his warrants holdings in Megan Media being reduced to 63,700 units or 0.09%.
  
  Mohd Adam had been consistently selling his shares in Megan Media from March to May, according to several previous filings to Bursa Malaysia.
  
  Between March 9 and May 4, he sold a total of 2.96 million Megan Media shares via open-market transactions. A filing on May 7 showed that his shareholding in the company had been reduced to 4.72 million or 2.32%.
  
  After announcing financial irregularities at Memory Tech, Megan Media said on June 8 that the Securities Commission (SC) had begun investigations into the company.
  
  On June 19, it was classified as a PN17 company, and was given eight months to submit a substantive plan to regularise its financial condition.
  
  Megan Media released its fourth quarter results on July 2, and surprised the investing public with an unaudited net loss of RM1.27 billion for the financial year ended April 30, 2007 (FY07).
  
  Last week, SC chairman Datuk Zarinah Anwar said it was still investigating the accounting irregularities in Megan Media.
  
  Earlier, The Edge Financial Daily reported, quoting sources, that the outcome of the investigations on Megan Media carried out by investigative accountant Ferrier Hodgson MH Sdn Bhd would likely be announced in August.

Point is the transactions was DONE between April 25 and May 4 and these transactions was only recorded and announced on Aug 3rd 2007?

Why did it take so long to file?

Why?

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Notion Special Issues of Shares

My Dearest Alvan,

• Recently, if you read the announcement properly, Notion's major shareholders sold off portion of their shares to comply with with NEP requirement (i.e. 30% bumiputra spread). So, they are not diposing it because of the change in prospect or fundamental. Furthermore, there is no new share issued, so there is no dilution of share value. Correct me if I am wrong.

Subject: NOTION VTEC BERHAD ("NOTION" or "Company") I. PROPOSED BONUS ISSUE II. PROPOSED SPECIAL ISSUE III. PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL IV. PROPOSED AMENDMENTS TO THE COMPANY'S MEMORANDUM OF ASSOCIATION (COLLECTIVELY REFERRED TO AS THE "PROPOSALS")

If you read that announcement,

• 1. (b) special issue of 103,500,000 new NOTION Shares ("Special Issue Shares"), representing 17.65% of the enlarged issued and paid-up share capital of NOTION (after the Proposed Bonus Issue), to Bumiputera investors to be approved by the Ministry of International Trade and Industry ("MITI") at an issue price to be determined later ("Proposed Special Issue");

If you open up that Wordfile attached, you will see a table which clearly states what is happening.

Or you can see the screenshot below.



At the end, AFTER the proposed special issue, Notion was supposed to have an enlarged share capital of 689.819 million shares.

So correct me if I am wrong, after the special issue, the share based is enlarged. Is this not a dilution of earnings?

Some interesting links which shows the extension of time and the revisions made on this special issue of shares.

30th Nov 2006, Notion made a revision to this special issue: NOTION VTEC BERHAD ("NOTION" or "Company") Revisions to the Special Issue

22nd Jan 2007. Notion made an extension. NOTION VTEC BERHAD ("NOTION" or "Company") Extension of time to comply with the 30% Bumiputera Equity Condition

27th March 2007. Another extension. NOTION VTEC BERHAD ("NOTION" or "Company") Extension of time to comply with the 30% Bumiputera Equity Condition

17th May 2007. Another extension. NOTION VTEC BERHAD ("NOTION" or "Company") - Revision to the Promoters' Placement; and - Extension of time to comply with the 30% Bumiputera Equity Condition

• On behalf of the Board of Directors of NOTION, HWANGDBS Investment Bank Berhad (formerly known as Hwang-DBS Investment Bank Berhad) (formerly known as Hwang-DBS Securities Berhad), is pleased to announce that the Ministry of International Trade and Industry ("MITI") has, vide its letter dated 15 May 2007 (which was received on 16 May 2007) taken note and has no objections to the following:
  
  (i) Revision to the collective placement of existing ordinary shares of RM0.10 each in NOTION ("Notion Shares") by the promoters of NOTION, from 125,895,000 to 147,500,000 NOTION Shares to Bumiputera investors to be approved by the MITI ("Promoters' Placement"); and
  
  (ii) Out of the 147,500,000 NOTION Shares, the remaining balance of 51,000,000 NOTION Shares will be allocated by the MITI to Bumiputera investors to be identified later.
  
  MITI is agreeable to the above, provided that the Company obtains the approval of the Securities Commission ("SC") for the Promoters' Placement, and complies with the Guidelines on the Acquisition of Interests, Take-Overs and Mergers by Local and Foreign Interests.
  
  In this regard, the SC's approval was obtained on 4 April 2007.
  
  This announcement is dated 17 May 2007.

Quote: Out of the 147,500,000 NOTION Shares, the remaining balance of 51,000,000 NOTION Shares will be allocated by the MITI to Bumiputera investors to be identified later.

How?

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Notion Vtec

My Dearest Newbie,

• I would like to seek your second opinion on Notion Vtec as this stock is currently trade at RM0.45 which i would think it's strongly under-valued. I realized the recent sell-off by it's major shareholder and directors was due to complying listing rules, would this cause the temporary down-trend? Although it's listing history is only two years but the fast growth was impressive, together with the healthy financial status.

Regarding shareholders transactions. Let me repeat what I had mentioned the other day.

• In my opinion, tracking shareholding transactions is one of the most complex things an investor could do.
  
  I for one could not make heads or tails in most transactions.
  
  Are the shareholders right or are they wrong in each of their purchase/disposal transactions?
  
  Me? I always have no idea.
  
  Could never make any consistent intelligent decisions in such matters.

Regarding its earnings.

Here is an extremely simplistic Notion Vtec earnings track record. At this moment of time, Bursa website is down, hence I can get no verification of the numbers posted and also I cannot go much more in details. However, gauging from what you have written, I am assu-u-ming that you are interested in Notion due to its earnings growth.

And as can be seen from the earnings table above, the current trailing twelve months earnings (TTM) showed that Notion earned a whopping 29.299 million for the last 12 months, which gives a solid indication that fiscal 2007 will simply be grand for Notion. (Do note, I am discounting the quality of these reported earnings since the Bursa website is down)

Anyway, ass-u-ming a rough estimate earnings of some 32 million for Notion, and with a share based of some 586 million, this translates to an eps of 5.5 sen.

Now if you use the stock price reference of 45 sen, it would appear that Notion is selling at an awfully cheap valuation in the stock market given the current track record (the spectacular earnings growth) of what Notion has achieved since listing and more so given Notion extremely healthy earnings margin. (ps. again this is too simplistic for the assumption is that Notion earnings growth can be maintained!)

Possible events to note.

Notion has YET to comply with the 30% Bumiputera Equity Condition. Out of memory, if not mistaken, Notion had already been granted an extension and has to comply with this ruling before the end of this year. Meaning Notion has to place out 30% new shares to Bumiputera investors.

Couple of things comes to mind and the most obvious one is that given the quality of Notion's track record, why is this an issue? Surely selling 30% new shares to new investors would be easy, right? Why the difficulties? No takers? And for what reason the lack of interest? Is there something wrong with the company orr perhaps the company simply does not know how to market themselves in the equity market? How? Sorry but I do not have any answers.

Next is the most important issue is the dilution effect caused by this placement of new shares. 30% is heck a lot.

Here is why.

Using the earlier assumption of 32 million earnings eastimate, one is looking at Notion with an eps of 5.5 sen. With these new placements, Notion share base will explode to some 760 million shares. Which means Notion EPS will dilute or shrink to only 4.2 sen.

Taking this issue into perspective, say if one is a prospective investor now, should one buy at 45 sen?

Without the dilution of placement shares, Notion is trading at 8.1x fy 2007e earnings multple.

With the dilution of the new shares, Notion would be trading at 10.7x earnings multiple.

How?

Is this issue acceptable or not?

Hope these second opinions help.

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Them OnG Stocks!

My Dearest Sahamgurl,

• Btw, I notice you seldom write on O&G stocks in Malaysia..what are your thoughts on that? Personally, I like KNM, maybe UMW.Thanks!

I am full of admiration for what KNM has done as a stock. Absolutely brilliant. However, as a business, I shall hold my reservations because in my opinion (I could be wrong here) the main driving factor behind KNM success is its acquisitions of other businesses. On one hand, these acquisitions has brought them great success, however I do believe that it's so difficult to lay judgment because if I view KNM from a business perspective, it's so difficult to gauge what's happening underneath it all the acquisitions and all its overseas ventures.

To give you a brief idea on what I am saying here.

KNM was listed back in 2003. A year later, here are some comments from Mayban Research (now Aseambankers) on KNM's JV with FBM.

• KNM’s JV with FBM-Hudson Italiana SpA (FBM) for acquisition of 50% equity interest in FBM's manufacturing plant in Jebel Ali Free Zone, Dubai (FBM-KNM FZCo) for Euro10m (=RM45.6m based on the exchange rate RM1.00: Euro0.2191)was completed on 15 October 2004. In addition, the Commercial Co-operation Agreement (CCA) with FBM for joint and exclusive marketing and manufacturing of FBM's process equipment within the Asean and China regions will take effect on 15 October 2004.
  
  Recall that FBM is the main income-generating unit of the Hamon Group’s process heat exchange business and is one of the top two global companies for air cooled heat exchangers for the oil, gas and petrochemical industries. Its plant manufactures aircooled heat exchangers, shell and tube exchanges, reactors, pressure vessels, condensers and desalination equipment for the oil and gas industry. With the completion of the exercise with FBM, KNM will have additional 3,000 tons of manufacturing facility.

Now using business like perspective, when I purchase this company, I have to consider myself as a part owner of this business. So if I am a part owner, surely, I would like to know what's happening with such ventures etc etc.

Here is the link to their last earnings report. Quarterly rpt on consolidated results for the financial period ended 31/3/2007. Open its word file attached and on the third page, you will see the following.

That's all they reported.

Now here's an interesting exercise. Go to Bursa website and under KNM's historical announcement web page, do a CTRL f (find) search on the word 'Acquisitions'. And you will be simply amazed by the number of aquisitions announcements made by KNM!

So if one uses the business-like investing approach, surely one would not be too comfy because one never truly knows exactly the results or what's happening after each acquisitions. Did the acquistion actually boost KNM's earnings? By how much? What's underneath it all?

Having said that, here is how KNM has done as a company.



And as you can see by the numbers, KNM has done pretty well. Despite its aggressive global expansion, it has done a wonderful job with its cash management. Receivables are slightly high and definitely could have been better but it's at a rather acceptable level.

And here is where it gets tricky. On one hand, as explained earlier, one might not be too comfy due to mainly lack of details from KNM on how each acquisitions has fared since. However, on the other hand, as whole, the end result is there. KNM has done brilliantly too! So for me, it really depends on the individual. We are all different and we all have our own mindset. For example, based on current results, one does have the justifications to continue to be bullish about KNM's future prospects. On the other hand, the conservatists, they might hold back since the success was derived from aggressive expansions and there is simply not enough information to gauge what's happening underneath all them acquisitions (they might even question on how long KNM can play this acquisition game!)

UMW.

Here is the link to their Q1 earnings. Quarterly rpt on consolidated results for the financial period ended 31/3/2007



Let's compare that Oil and Gas earnings with what UMW achieved last year, same period. Quarterly rpt on consolidated results for the financial period ended 31/3/2006



As can be seen, last fiscal year, for the same quarterly earnings, UMW's OnG earnings was absolutely bang on! They made a whopping 37 million from their OnG division. So perhaps, the perspective investor might want to know what happened this fiscal year where UMW only made 9.019 million.

Anyway, last fiscal year, UMW's OnG sector was absolutely brilliant! (This sector is hot and I am indeed optimistic about it). See UMW's Q4 earnings here: Quarterly rpt on consolidated results for the financial period ended 31/12/2006

Under the Segmental Reporting, UMW reported that its OnG division reported earnings of 251.514 million from a revenue of 1.441 billion. This is absolutely impressive. A rising star or a hidden gem sector within this group?

So the potential is there. However, the last reported earnings showed tremendous weakness in this OnG sector.

Why?

According to UMW in its Q1 earnings notes.

• The lower revenue was mainly due to lower vehicle sales and the deconsolidation of the financial statements of Wuxi Seamless Oil Pipe Co., Ltd. from 15th November 2006, when it became a 30.6%-owned associated company of the Group.

So a change in accounting treatment, sees UMW declaring Wuxi as an associate company instead of a subsidiary.

So the potential for UMW's OnG division to deliver is certainly there.

Hope my second opinion helps.

Regards

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