Ranhill: Privatization of a Listed Subsidairy

Delisting of a LISTED subsidiary is bad enough but the intent from the holding company to relist it again in the future is simply disgusting.

I was so disgusted to read this article.

• Ranhill not ruling out relisting power unit
  By Sharen Kaur
  sharen@nstp.com.my
  
  September 13 2007
  
  RANHILL Bhd has not ruled out the possibility that Ranhill Power Bhd could be relisted in the future, following plans to add value to the company after taking it private this year.
  
  Ranhill Power is expected to be de-listed from the official list of Bursa Malaysia Securities by October or November this year.
  
  Executive director Datuk Chandrasekar Suppiah said Ranhill plans to take Ranhill Power private to consolidate the company under the Ranhill group to maximise returns. ( article source: here )

If every listed company have such attitude, don't you reckon that it simply makes a total mockery of our stock market?

Sigh!

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More On the Single Tier Tax System

Published on the Edge Daily:

• 12-09-2007: Employees, pensioners among losers in single-tier tax system by Yong Yen Nie, 12 Sep 2007 11:59 AM
  
  12-09-2007: Employees, pensioners among losers in single-tier tax system
  by Yong Yen Nie
  
  KUALA LUMPUR: Employees lose more under the single-tier tax system as the Employees’ Provident Fund (EPF) will be unable to claim tax refunds, tax expert Ronnie Lim said.
  
  “The losers in this new tax system will be tax-exempt bodies such as the EPF, as well as lower-income groups such as pensioners,” he told The Edge Financial Daily on the sidelines of the 33rd Deloitte KassimChan Tax Management Seminar on
  
  “Introducing tax clinics-Breezing through taxing matters.”
  
  Under the present imputation system, companies are required to maintain a section 108 tax credit account in which, income tax paid by a company is “imputed” on dividends paid to shareholders. Excess in “imputed” tax is refunded to shareholders, provided their tax brackets are below that of the company.
  
  However, in the single-tier tax system, the section 108 tax credit system will be abolished over the six years transitional period ending on Dec 31, 2013 or when the section 108 tax credit account is zeroed. Hence, no tax refunds will be made thereafter.
  
  Lim, who is managing director for Deloitte KassimChan Tax Services Sdn Bhd said: “For instance, if the EPF receives a gross dividend of RM100, it means it receives cash of RM73 (after deducting taxes at 27% of gross dividend). Then, it will apply to the IRB to obtain the refund of RM27. So, EPF will still get total cash of RM100.”
  
  “But with the single-tier tax system, it will only get RM73 and nothing else. When the funds decrease, the employees will lose out, both the highly-paid and lowly-paid ones.”
  
  KPMG Tax Services Sdn Bhd executive director Nicholas Crist said: “Under the single-tier system, anyone who buys shares to obtain dividend income will be disadvantaged as the income is tax-exempt. Hence, interest expense paid in acquiring and holding these shares cannot be effectively set off.”
  
  Nevertheless, the single-tier tax system still benefits shareholders that are in the high-tax bracket (above 25%) because they no longer have to pay for the differences between corporate and personal tax rates, he told The Edge Financial Daily in an email interview yesterday.
  
  Crist said: “However, shareholders that belong to lower tax bracket (below 25%) will lose out because they can no longer claim tax refunds from the excess in section 108 tax credits on dividends. These shareholders include retirees who are dependent on dividend income.”

Previous blog posting: Retirees and the Single Tier Tax Dividend

Forum postings of interests: Budget 2008 and Min Brokerage Charges

Other noteable blog postings: http://stocktube.blogspot.com/2007/09/stock-brokerage-fees-debate-win-win.html

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The Current Libor Issue

Read this posting by Financial Sense market commentator, Frank Barbera, The View From 30,000 Feet

• “It’s a matter of trust” says Robert Kessler, head of Kesslet Investment Advisors, a Denver based manager of Treasury Securities. While Libor rates are based on the rates between some of the world's largest banks, shaky confidence has led the market to demand higher yields on inter-bank lending versus the Fed Funds Rate and Treasuries, which are seen as risk free. The widening yield spreads in recent days have been quite dramatic, and have served to strengthened overseas currencies. Yet the big downside risk ahead still resides in the US Credit Market where the long march of “resetting” adjustable rate mortgages has just begun. Looking out over the next 12 months, the US is facing a monumental series of ‘resets’ to its pile of Adjustable Rate Mortgages on the order of $50 to $60 Billion dollars per month, with some months north of $70 billion. In this light, the surge in recent weeks in overseas Libor Rates is potentially devastating news for the US Homeowner because within the US, increases on Adjustable Rate Mortgages are tied to the LIBOR Rate, and NOT the Fed Funds Rate. In fact, a recent article by Randall Forsyth in Barron’s pointed out that most resets will take place at several points ABOVE LIBOR. “This means that some of those borrowers may face mortgage rates of close to 10%, with the recent rise in Libor rates exacerbating this squeeze.” Consequently, even if the Fed lowers the Fed Funds rate by 25 basis points, the offsetting rise in Libor Rate imply that for most borrowers, there will be no benefit whatsoever.

Do give the rest of the article a good read: The View From 30,000 Feet

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Review on Yi-Lai

Track Record.



The above table represents what Yilai has achieved since listing. As can seen from the above table, it would appear that fy 2004 was a peak for Yilai and the decline in earnings margins clearly indicates the current extreme competitive market for the tiles industry.

Last month, YiLai announced its 07 Q2 earnings. Quarterly rpt on consolidated results for the financial period ended 30/6/2007.

The following table shows YiLai's most recent quarterly earnings.



Couple of points to note.

1. First half 2 quarters earnings totals only 9.602 million, which is significantly lower than its previous year, fy 2006 first half earnings total of 11.311 million.

2. Inventory level is up a lot for the current quarter.

Dividends. Yilai just announced another interim dividend.

Here is Yilai's dividend track record.



Yes, YiLai pays fantastic dividend yearly and based at current traded market price of 1.20, the dividend yield for Yilai is certainly interesting.

However, let's be honest with ourselves, have a look at the above table. As can be clearly seen, the total dividend received shows a decline and the decline in dividend clearly corresponds with the decline in yearly earnings. So the current risk is such. Although Yilai dividend yield is fantastic now but if the earnings continues to slump, the investor should be realize that future dividends to decline as per the decline in earnings.

Now since I had made several blog postings on YiLai before, I would like to review past blog postings.

1. ROI on Yi-Lai - posted on March 13th 2006.

Review of Earnings.

The decline of earnings was noted back then!

• How do you rate such performance? Yes, total ytd net profit dropped from 29 mil to 27.8 mil. Is there a concern?
  
  Its profit margins. Did it deliver or not?
  
  Or are you worried about the slump in earnings?

2. ROI on Yi-Lai: Part II

Review of Balance Sheet.

The issue of inventory again.

• While I was told that the tiles do not deteriorate over time, however, the design of tiles is important. A good fashionable tile helps boost sales, while poorly designed tiles could get outdated and turn into dead stock. So when a tile manufacturer reports a rising inventory, the concern is that the inventory could consist of out-dated tiles. So when you consider that yi-Lai's inventory increased from 22.023 million a year ago to 32.690 million, how concerned would one be? The concern is that although the tiles have a long life-span since it does not deteriorate, an out-dated, out-fashioned tile is a dead stock which could not be sold. Is this a non-issue?

And the depleting cash issue or rather YiLai's aggressive capital expansion.

• Back in Nov 2005, RHB had a report which stated the following:
  
  Yi-Lai’s new line that boasts a production capacity of 5,500-6,500 sq m/day is now ready for commercial production but practically left idle due to the weak demand condition. The line may be activated over the next six months. Originally designed to produce multi-effect tiles that yield higher margins, the line may be switched to produce glazed tiles or other tiles that are in demand. Given that we expect the weak demand condition to persist over the longer term, it make sense for Yi-Lai to switch its existing production from some of the smaller, older and less cost effective lines to the new line
  
  
  Although the funding of this capex was done without any bank borrowings, a whole new production left practically idle does not bode well. All dressed-up but no where to go! How? What if the production continues to be left idle? Who is paying for the bills?

3. ROI on Yi-Lai: Part III

Outlook.

• I reckon that there are three issues to consider.
  (1) Economic impact on the building materials market.
  (2) Massive capacity expansion by tiles manufacturers.
  (3) Competition from importation of cheap ceramic tiles.
  
  For the investor, would one be comfortable holding a stock in a sluggish industry?
  Is the company's product really durable and competitive enough to sustain a sluggish industry?
  And what if the sluggishness continues for a prolong period?

4. ROI on Yi-Lai: Part IV

The dividend issue.

5. ROI on Yi-Lai: Part V

Reviewing the whole Review Of Investment on Yilai.

• How? Are the reasons still valid to justify one to stay invested in the stock?
  
  Oh.. and some invested in the stock because of the dividend issue. And how would one evaluate their reasoning to stay invested in Yi-Lai since Yi-Lai has decreased their dividend payout this year?

Other postings made: ROI on Yi-Lai: Part VI and ROI on YiLai: Part VII

For the record, Yilai price at 31st March 2006 was 1.32 and currently Yilai is traded at 1.20.

So despite the fantastic dividend yield, the lack of earnings growth or rather the slump in Yilai's earnings has probably been the main factor for the current lackluster performance of YiLai's stock price.

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Retirees and the Single Tier Tax Dividend

Here is an interesting note regarding the single tier tax structure announced on the recent Buget. In the announcement it states that dividends at shareholders' are tax exempted.

It has been pointed out that this is rather misleading.

Commentaries has been made to suggest that this is a plus point for the man-in-the-street since the dividends are no longer subject to tax.

However, some opinions differs.

And according to several folks, this new structure will result in a loss to the public; retirees in particular and low income minority shareholders generally.

Let me quote what has ben said:

• What is being said is that dividend income received by shareholders will not be subject to tax. However, at the same time, shareholders will also not be eligible to claim back a rebate in the event that the shareholders tax bracket is lower than the the corporate tax rate.
  
  In truth, at the shareholders level, dividend income has never been subject to tax. Tax has always been paid at the corporate level. So to say that "dividends at shareholders' level are tax-exempted" is utterly confusing, and I am not surprised that most people are happy with this new tax structure, blissfully unaware that they would actually be out of pocket as a result of it.
  
  Let's take an example of a retiree who is not subject to income tax. If he owns shares in Company A, and Company A declares a dividend of RM1,000 to him, the retiree will (under current tax regime) receive RM730 from Company A, and then claim back RM270 from the IRB.
  
  So, even though Company A declares a dividend of RM1,000, the company knows that in terms of cashflow, it is only paying out RM730. The retiree has to claim the rebate RM270 back from the IRB.
  
  If we assume that Company A maintains this cashflow payout of RM730 henceforth, then the retiree is now RM270 short under the new structure since he is no longer able to claim back the rebate from the IRB.
  
  Of course, if Company A is generous and decides to still declare a dividend of RM1000, then there is no loss to the retiree who will get the full RM1000, all from the company. This however is because Company A has increased its cashflow payout, and not a result of the new tax structure.
  
  All said, the big winner is the govt who will no longer need to pay back the rebate to taxpayers whose tax bracket is lower than the prevailing corporate tax.

Would you agree with what has been said?

Me?

I rather agree very much that this new single tier tax structure actually becomes a handicap for the retirees.

And I for one, would rather prefer that this whole issue could have been represented in a much more clearer fashion.

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Gadang Holdings

My Dearest JL, Doc and Random,

Here is link to Gadang's homepage and from their homepage, Gadang is described as follows:

• The principal activity of Gadang is investment holding while its subsidiary companies' core activities are civil engineering and building construction, property development, manufacturing & trading of decorative & protective paints, mechanical & electrical engineering services.

Here is the recent track record for Gadang.



Here is the link to their latest earnings report (07 Q4) Quarterly rpt on consolidated results for the financial period ended 31/5/2007

Gadang earnings was rather dismal back in 2002 and 2003. However, as can be seen from the earnings table above, its earnings has improved much for the better. The only slight concern is the slight increase in receivables over the past couple of years despite the fact that the balance sheet has improved much for the better.

This company can be seen striving to achieve to be a better company. This can be seen clearly by the corporate developments the past few months.

The below are some noteable corporate exercises, plans and announcements posted at Bursa Website. Do note some are just mere MOU announcements.

1. Memorandum of Understanding between Gadang Holdings Berhad and Qingxiu District Government, Nanning, China - Gadang's plan to participate in the investment of a waste water treatment plant in Qingxiu District, Nanning, Guangxi Province, China.
2. PROPOSED ACQUISITION OF 85% EQUITY INTEREST OF PT. HANARIDA TIRTA BIRAWA ("PROPOSED ACQUISITION") - The Proposed Acquisition will increase Gadang's interests in the treated water supply and concession business in Indonesia. The treated water supply will increase by 600 litres per second in 2008, slightly over twice the capacity of the water treatment plants currently operated by AUPL.
3. Update on the status of the Joint Venture Agreement entered into between Splendid Pavilion Sdn Bhd and Multiforum Sdn Bhd for the development of land in Segambut, Kuala Lumpur
4. Letter of Acceptance For Proposed Construction And Completion Part Of Projek Lebuhraya Kemuning - Shah Alam (LKSA), Highway Stretch From Kota Kemuning Interchange To Alam Impian Township in Shah - The contract sum awarded for the Contract is RM278,880,000 (Ringgit Malaysia: Two Hundred Seventy Eight Million and Eight Hundred Eighty Thousand Only). The construction period of the Contract is twenty-four (24) months from 1 September 2007, the date for possession of site and the date of completion for the whole of the works under the Contract is 31 August 2009.

Some recent news clip

1. Gadang in talks to buy more land
   By Zurinna Raja Adam
   zurinna@nstp.com.my
   
   July 12 2007
   
   PROPERTY developer Gadang Holdings Bhd is in talks to acquire six hectares of land, with an estimated gross development value (GDV) of RM150 million, in Shah Alam and Penang.
   
   Executive director Ling Hock Hing said the group hopes to finalise talks with landowners within the next three months, and plans to start construction work within two years.
   
   Gadang has a total landbank of about 48ha in the Klang Valley, with a total GDV of RM120 million, sustainable until 2012.



2. Gadang may clinch RM300m hospital deal
   By Sharen Kaur
   sharen@nstp.com.my
   
   August 10 2007
   
   CONSTRUCTION and engineering firm Gadang Holdings Bhd may soon clinch a RM300 million deal for a hospital project in Cheras, Kuala Lumpur.
   
   Managing director and chief executive officer Datuk Kok Onn said the group's unit, Gadang Engineering Sdn Bhd, is finalising talks with the Government for the proposed construction of the Lady Templer Rehabilitation Hospital.
   
   "We have tendered for over RM1.5 billion worth of government and private sector jobs where we can expect a success rate of more than 20 per cent. The hospital project is just one of the contracts we are looking at," Kok told Business Times.
   
   The Lady Templer Rehabilitation Hospital will deal with post-road accident cases, stroke victims, brain injury patients and other physically crippling injuries.



3. Gadang on a high
   
   KUALA LUMPUR: Gadang Holdings Bhd sees buoyant earnings for the financial years ending May 31, 2008 (FY08) to FY10 on the back of a burgeoning order book, said managing director and chief executive officer Datuk Kok Onn.
   
   “We've been working hard. Hopefully, our engineering and construction order book will touch RM1bil by the middle of next year,” he told StarBiz yesterday.
   
   The second board-listed company is involved in civil engineering and building construction, property development, manufacturing and trading in decorative and protective paints, mechanical and electrical engineering (M&E) services as well as treated water supply and concessions.
   
   At present, the engineering division has an order book of some RM600mil, which could sustain earnings for the next two years. Gadang also has submitted proposals and tenders worth some RM1.5bil.
   

Its current property projects can be viewed at iproperty website, Taman Seri Bukit Segambut, Mandy Villa, M.Avenue 3 & 4 storey Retail & Offices and M.Avenue 3 & 4 storey Retail & Offices

Couple of points that needs to be mentioned.

Open the word file attached to Gadang's latest earnings ( http://announcements.bursamalaysia.com/EDMS/annweb.nsf/8b25383a269fcce548256d79001af770/482568ad00295d07482573240037e4c3/$FILE/Notes%20GHB(May-2007)Q4.doc ) and have a look at their segmental reporting.

Its construction and property division are making money however its trading of protective and decorative coatings and its water division are NOT doing well.

Secondly, as can seen, whatever info is all from Bursa website and news articles. Hence there isn't any coverage from any research houses. (Is this that bad?)

How?

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Random Musing on the Timber Sector

Hope you do not mind but I decided to make some random musing on the timber sector.

In the timber sector, in my opinion, there are only two investment grade stock, WTK Holdings and Ta Ann. They are the leaders in the sector for their superior earnings performance and this has been reflected perfectly in the stock market.

Let's look at the recent performance of WTK Holdings until June 2007 ( I will show the bigger pix next). Now WTK had a recent stock Bonus Issue and share split ( see Entitlement - Others ). The below chart represents a priced adjusted chart to account for this corporate exercise. Chart is provided by Kenwealth.



I placed two jelly beans on the chart as simple markers. The first lower jelly bean indicates an ADJUSTED price of roughly 1.16 in Jan 2006. And the upper jelly bean indicates a price of 3.90 in April 2007. Hence an investment in WTK HAD BEEN EXTREMELY profitable for an investor despite the fact that WTK belongs to the highly cyclical timber sector.

They say earnings is always the main catalyst for a stock to appreciate much higher.

Back for its fy 2005 earnings, WTK earned some net earnings of 53 million. A year later its fiscal 2006 earnings rocketed to 127 million. ( See Quarterly rpt on consolidated results for the financial period ended 31/12/2006 - do note the extremely impressive cash flow generated for that fiscal year 2006! - and you can see this older blog posting on WTK - About WTK )

However, the recent two earnings, the weakness in earnings was seen. This was their May earnings note, Quarterly rpt on consolidated results for the financial period ended 31/3/2007 and this was their earnings reported recently Quarterly rpt on consolidated results for the financial period ended 30/6/2007 ).

So in May it announced it made 29 mil. Last month, WTK announced it made only 15 mil. Sharp decline in earnings? Remember the last 2 quarters of its last fiscal year, WTK was earning around 46 million plus!

Now for this fiscal year, its half year earnings totals only some 44 mil. At such a pace, WTK would probably be making less than 90 mil this fiscal year. Which would be a massive decline when compared to its fiscal year 2006 earnings.

Now back to the charts. Let me show you the full WTK chart, meaning to say, let's look at how the market is reacting to the current weakness in WTK's earnings.



WOW!

Yes, can you see how WTK share price is plunging?

This chart depicts the clear and precise danger in investing in cyclical stocks. When the cycle turns for either good or bad, the reaction in the market price would be simply drastic.

WTK's sharp increase in earnings saw it enjoyed a truly wonderful life. Its share simply soared. And when its earnings turned, indicating that perhaps the good fortune in the timber cycle has ended, the stock simply plunged.

Now let's look at Ta Ann.

Ta Ann earnings jumped from some 81 million to some 130 million for its fy 2007. Quarterly rpt on consolidated results for the financial period ended 31/12/2006

And its current half year earnings, TA Ann earned only some 50 million. A clear indication that perhaps this year, its fiscal year earnings would disappoint. Quarterly rpt on consolidated results for the financial period ended 30/6/2007

Have a look at the chart for Ta Ann.



WOW! Dejavu?

Anyway, again Ta Ann enjoyed incredible success. One could have purchased Ta Ann for around 4.80 back in June 2006 and a year later, one's investment would have soared to some 11.50! Now this is investment, eh?

But like WTK, the share has taken a drastic turnaround and top be more precise, the share price is plunging just like WTK Holdings!

How?

Would you use market leaders such as WTK Holdings and Ta Ann as an indicator for the timber sector?

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