Smarter People Own More Stocks

 
Business Times - 26 Jan 2012

Smarter people own more stocks, says study
It finds a direct link between IQ and market participation

( NEW YORK ) The smarter you are, the more stock you probably own, according to researchers who say they found a direct link between IQ and equity market participation.


Intelligence, as measured by tests given to 158,044 Finnish soldiers over 19 years, outweighed income in determining whether someone owns shares and how many companies he invests in. Among draftees scoring highest on the exams, the rate of ownership later in life was 21 percentage points above those who tested lowest, researchers found. The study, published in last month's Journal of Finance, ignored bonds and other investments.

Economists have debated for decades what they call the participation puzzle, trying to explain why more people don't take advantage of the higher returns stocks have historically paid on savings. As few as 51 per cent of American households own them, a 2009 study by the Federal Reserve found. Individual investors have pulled record cash out of US equity mutual funds in the last five years as shares suffered the worst bear market since the 1930s.

'It's what we see anecdotally: higher-IQ investors tend to be more willing to commit financial resources, to put skin in the game,' said Jason Hsu, chief investment officer at Research Affiliates. 'You can generalise a whole literature on this. It seems to suggest that whatever attributes are driving people to not participate in the stock market are related to the cost of processing financial information.'


Mark Grinblatt of the University of California , Los Angeles , Matti Keloharju of Aalto University in Espoo and Helsinki , Finland , and Juhani Linnainmaa at the University of Chicago compared results from intelligence tests given by the Finnish military between 1982 and 2001 to government records showing investments the draftees later held. They found the rate of stock ownership for people with the lowest scores trailed those with the highest even after adjusting for wealth, income, age and profession.

While intelligence influenced things that might naturally increase equity ownership such as wealth and income, the authors said IQ determined who owned the most stocks within those categories as well. Among the 10 per cent of individuals with the highest salary, 'IQ significantly predicts participation' in the stock market, they wrote.

For example, people in the highest-income ranking who scored lowest on the test had a rate of equity market participation that was 15.7 percentage points lower than those with the highest IQ.

'If you look at the significance of IQ related to other factors like income or wealth, certainly it plays a very large role,' Mr Keloharju, a finance professor at Aalto, said. 'It's very difficult to get around that problem, but the results are so strong here. We are playing with lots of different controls and lots of different specifications, and all the time things work really well.'


American economist Harry Markowitz won a Nobel Prize in 1990 for his theory that owning a larger variety of assets tended to maximise returns for a certain amount of risk. The 2009 study by the Fed found that 51.1 per cent of American families own stocks directly or indirectly, and of those who do, 36 per cent have shares in one company.

'It's difficult to justify why someone wouldn't invest in the stock market, knowing what a good deal it has been,' said Mr Linnainmaa, a co-author of the study from the University of Chicago's Booth School of Business. 'The classical explanations for non-participation have been participation costs. It's not just that it may be expensive to buy stocks and mutual funds, but people may not have enough knowledge about them.'

Finnish soldiers were an ideal sample because differences in race, schooling and market access are minimised, the authors said. Draftees were about 20 years old when they were given 120 questions in math, language and logic. The authors divided the results into rankings and compared them with stock ownership records. People who don't serve in the country's military such as women weren't in the sample.

'There is an older literature on whether SAT scores of an investment manager's college helps predict his or her success,' Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller home price index, said in an e-mail. 'This paper has a much better measure of intelligence,' and the 'results are therefore a significant advance', he wrote.

Finnish draftees aren't representative of typical investors, said Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds. IQ is a function of culture and shouldn't be generalised across borders, he said. The authors also failed to discuss whether the test given to the soldiers was a valid way to grade thinking.


Finland's lack of ethnic diversity 'invalidates it for extrapolating it to other cultures', he said. 'That makes it that much more inappropriate to draw inferences from it about other cultures.'

The study's authors said the findings have implications for social policy. Avoiding stock investments cuts returns and may widen income gaps, they said. Individuals scoring lowest on the tests who still owned equities earned as much as 33 basis points, or 0.33 percentage point, a year less than the highest scorers. One way governments could promote better savings might be with plans that let people opt out of stocks, like 401(k) plans, as opposed to opting in, said Mr Keloharju.

'If you look at these people over time, people with higher IQ scores and stocks become wealthier and wealthier at a much faster rate than people with lower IQ scores,' said Mr Linnainmaa. 'It makes them worse off in the long run, even more so than the difference in income.'

Mr Hsu of Research Affiliates said an explanation for why draftees with lower test scores owned less stock is that they found it harder and more expensive to receive financial education. Getting people information on investing at a younger age may help limit the disparity, he said. -- Bloomberg

 

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Improving Investor Relations, Long Way To Go

In The Edge I saw a snippet headlining: "Bursa Malaysia Wins Four Awards At IR Global Rankings". The awards were for Outstanding Corporate Governance in Asia-Pacific, Best Ranked Corporate Governance by Industry (Financials) and Best Online Annual Report in Asia-Pacific. Bursa Malaysia also won the bronze award for investors relations website in Asia-Pacific.



Its all fine and dandy for Bursa Malaysia to get the awards, what about the other 1,000 odd listed entities on Bursa??? They all seem to try to get away revealing the bare minimum in financials, rather than trying to really engage investors and analysts. To me, its not a matter of revealing trade secrets but rather the mindset you have as a listed entity. If you think investors are "fools" and "no need to spend so much time and resources on" and generally regard them with disdain - you will act accordingly.


Let me show you just ONE example of a listed Philippine stock, Universal Robina, a pretty good stock actually. This is their filing for quarterly results. Besides the usual Balance Sheet, Income Statement and Cash Flow ... you get a "real opinion" from management on operations:

http://www.universalrobina.com/2011/08/11/urc-sec-17q-3qfy2011/

URC POSTS STRONG TOPLINE GROWTH OF 18% TO P 50.578 BILLION FOR THE FIRST 9 MONTHS OF THE FISCAL YEAR 2011 BUT COST COMMODITY INFLATION IMPACTED PROFITABILITY RESULTING TO A 24% DECLINE IN NET INCOME TO P4.9B

» Click here to download – URC and Subs 17Q, Q3 FY2011 «

URC’s consolidated net sales and services for the first nine months of fiscal year 2011 (October 2010 to June 2011) amounted to Php 50.578 billion, a 17.7% growth from Php 42.964 billion in the same period last year. The increase was driven by the outstanding performance of our international branded foods business as well as the strong growth of the commodity foods group primarily due to high prices of sugar in the first half. This was tempered by the modest growth of our domestic branded business with soft sales in beverages and a decline in our agro industrial group as it entered the down cycle.

Sales performances by business are as follows:

URC’s branded consumer foods segment, including the packaging division, increased sales of goods and services by Php 5.493 billion, or 17.1%, to Php 37.556 billion in the first three quarter of fiscal 2011 from Php 32.063 billion in the same period last year. As of the first nine months, our Philippine branded operations grew modestly by 5.0% to Php 21.849 billion from Php 20.809 billion in the same period last year. Sales of our snackfoods business in the Philippines remains buoyant as we saw double digit growth in Biscuits, Cakes and Chocolates but this was tempered with the soft sales for our powdered and ready to drink beverages categories.

Our international BCF business meanwhile continued its outstanding performance with Vietnam and Thailand leading the growth at 47.4% and 32.7% respectively. While solidifying our leadership in Biscuits in Thailand and sustaining the strong demand for our RTD Tea – C2 product in Vietnam, we continue to successfully build our product portfolio across the ASEAN region. We grew sales by 35.3% from Php 10.651 billion to Php 14.413billion. In USD terms, sales already reached US$331 million for the first three quarters which is a 43.3% increase versus same period last year.

URC’s commodity foods group amounted to Php 7.927 billion in the first three quarters of fiscal 2011 or up 43.1% from Php 5.541 billion in the same period last year. Sugar business sustained sales growth of 74.2% while flour business also grew 8.5% as a result of multiple price increases to offset the high cost of wheat in the world market.

Net sales of URC’s agro-industrial group amounted to Php 5.095 billion for the nine months of fiscal 2011, a 4.9% decrease from last year. Feed business managed to increase by 22.6% to Php 2.537 billion while farm business declined by 22.2% due to low volumes and depressed selling prices for hogs.

URC’s operating income decreased by Php 772 million, or 12.4% to Php 5.454 billion for the nine months of fiscal 2011 from Php 6.226 billion reported in the same period of fiscal 2010. The global increase in commodity prices relative to last year’s prices eroded the company’s margins. Higher input costs were partly offset by selling price increases and profit improvement initiatives on the company’s products.

URC’s unaudited net income for the first nine months of fiscal year 2011 reached Php 4.940 billion, a decrease of 23.6% from Php 6.468 billion posted in the same period last year. The drop was due to the decline in market values of bond investments and lower operating income despite higher sales.

Our balance sheet remains healthy. As of the period, we are still in a net cash of position of Php 3.886 billion, with a financial gearing ratio of 0.43.

If you click through for the quarterly results, you will get a most comprehensive Management Discussion and Analysis of the Results:


Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations

Business Overview
Universal Robina Corporation (URC) is one of the largest branded food product companies in the Philippines and has a growing presence in other Asian markets. It was founded in 1954 when Mr. John Gokongwei, Jr. established Universal Corn Products, Inc., a cornstarch manufacturing plant in Pasig. The Company is involved in a wide range of food-related businesses, including the manufacture and distribution of branded consumer foods, production of hogs and day-old chicks, manufacture and distribution of branded and unbranded animal and fish feeds, glucose and veterinary compounds, flour milling, and sugar milling and refining. The Company is a dominant player with leading market shares in savory snacks, candies and chocolates, and is a significant player in biscuits, with leading positions in cookies and pretzels. URC is also the largest player in the ready to drink (RTD) tea market, and is a respectable 2nd player in the instant coffee business.

The Company operates its food business through operating divisions and wholly-owned or majority owned
subsidiaries that are organized into three business segments: branded consumer foods, agroindustrial products and commodity food products.
- 3 -
The branded consumer foods (BCF) segment, including our packaging division, is the Company’s largest segment. The Company’s branded consumer foods division manufactures and distributes a diverse mix of snack, chocolate, candy, biscuit, bakery, beverage, noodles and tomato-based products. The manufacture, distribution, sales and marketing activities for the Company’s consumer food products are carried out mainly through its branded consumer foods group consisting of snack foods, beverage and grocery divisions, although the Company conducts some of its branded consumer foods operations through its wholly-owned or majority-owned subsidiaries and joint venture companies (i.e. Hunt-URC and Nissin-URC).

The Company has a strong brand portfolio created and supported through continuous product innovation, extensive marketing and experienced management. Its brands are household names in the Philippines and a growing number of consumers across Asia are purchasing the Company’s branded consumer food products. The Company’s packaging division is engaged in the manufacture of polypropylene films for packaging
companies.

The Company’s agro-industrial group (AIG) operates three divisions, which is engaged in hog and poultry farming (Robina Farms or “RF”), the manufacture and distribution of animal and fish feeds, glucose and soya products (Unversal Corn Products or “UCP”), and the production and distribution of animal health products (Robichem).

The Company’s commodity food group (CFG) engages in sugar-milling and refining through its Sugar divisions: URSUMCO, CARSUMCO, SONEDCO and PASSI; and flour-milling and pasta manufacturing and marketing through URC Flour division. The group supplies all the flour and sugar needs of the BCFG.

The Company is a core subsidiary of JG Summit Holding, Inc. (JGSHI), one of the largest conglomerates listed in the Philippine Stock Exchange based on total net sales. JGSHI has substantial interests in property development, hotel management, banking and financial services, telecommunications, petrochemicals, air transportation and business interests in other sectors, including power generation and insurance.


- 4 -
Results of Operations
Nine Months Ended June 30, 2011 versus June 30, 2010
URC posted a consolidated sale of goods and services of P=50.578 billion for the nine months ended June 30, 2011, 17.7% higher than the revenues posted in the same period last year. Sale of goods and services performance by business segment follows:

Sale of goods and services in URC’s BCFG, excluding packaging division, increased by P=4.802 billion, or 15.3%, to P=36.262 billion for the nine months of fiscal 2011 from P=31.460 billion registered in the same period of last year. BCFG domestic sales increased by P=1.040 billion to P=21.849 billion from P=20.809 billion which was largely driven by the strong performance of its snack foods which grew by 13.3% on account of growth in sales volume and increase in selling prices.

BCFG International sales significantly increased by 35.3% to P=14.413 billion for the nine months of fiscal 2011 from P=10.651 billion posted in the same period last year. In US dollar amount, sales registered an increase of 43.3% from US$231 million posted for the nine months of fiscal 2010 to US$331 million recorded in the same period of this year due to increase in sales volume by 39.4%. This was supported by strong sales growth in Vietnam, Thailand, Malaysia and China.

Sale of goods and services of BCFG, excluding packaging division, accounted for 71.7% of total URC consolidated sale of goods and services for the nine months of fiscal 2011. Sales in URC’s packaging division went up to P=1.294 billion for the nine months of fiscal 2011 from P=603 million posted in the same period last year due to significant increase in sales volume coupled by increase in selling price.

Sale of goods and services in URC’s AIG amounted to P=5.095 billion for the nine months of fiscal 2011, a 4.9% decrease from P=5.360 billion recorded in the same period last year. Feed business increased by 22.6% to P=2.537 billion on the back of increases in sales volume and selling prices. Farm business declined by 22.2% due to lower sales volume and farm gate prices.

Sale of goods and services in URC’s CFG amounted to P=7.927 billion for the nine months of fiscal 2011 or up 43.1% from P=5.541 billion reported in the same period last year. This was primarily due to upsurge in net sales of sugar business by 74.2% driven by higher sales volume and prices. Flour business also grew by 8.5% as a result of price increases.

URC’s cost of sales consists primarily of raw and packaging materials costs, manufacturing costs and direct labor costs. Cost of sales increased by P=8.016 billion, or 26.6%, to P=38.096 billion for the nine months of fiscal 2011 from P=30.080 billion reported in the same period last year. Cost of sales went up due to increase in sales volume and costs of major raw materials.


URC’s gross profit for the nine months of fiscal 2011 amounted to P=12.481 billion, a decrease of P=403 million or 3.1% from P=12.884 billion posted in the same period last year. Gross margin declined by 5 percentage points versus same period last year as a result of higher input costs.

URC’s selling and distribution costs, and general and administrative expenses consist primarily of compensation and benefits, advertising and promotion costs, freight and other selling expenses, depreciation, repairs and maintenance expenses and other administrative expenses. Selling and distribution costs, and general and administrative expenses increased by P=368 million or 5.5% to P=7.027 billion for the nine months of fiscal 2011 from P=6.659 billion registered in the same period of fiscal 2010. This increase resulted primarily from the following factors:

· 8.4% or P=203 million increase in advertising and promotion costs to P=2.605 billion for the nine months of fiscal 2011 from P=2.402 billion in the same period last year to support the new SKUs launched and boost up sales of existing products in light of increasing market competitions.

· 10.5% or P=160 million increase in freight and delivery charges to P=1.683 billion for the nine months of fiscal 2011 from P=1.523 billion in same period last year due to increase in trucking and shipping costs associated with increased volume.

As a result of the above factors, operating income decreased by P=772 million, or 12.4% to P=5.454 billion for the nine months of fiscal 2011 from P=6.226 billion reported in the same period of fiscal 2010. URC’s finance revenue consists of interest income from investments in financial instruments, money market placements, savings and dollar deposits and dividend income from investment in equity securities. Finance revenue increased by P=27 million or 3.0% to P=942 million for the nine months of fiscal 2011 from P=915 million in the same period of fiscal 2010 due to increased level of financial assets during the period.

Market valuation loss on financial instruments at FVPL of P=81 million was reported for the nine months of fiscal 2011 against market valuation gain of P=903 million in the same period of fiscal 2010 mainly due to decline in market values of bond investments.

Equity in net income of a joint venture amounted to P=17 million for the nine months of fiscal 2011 against P=23 million in same period of fiscal 2010 due to lower net income of Hunt-Universal Robina Corporation.

URC’s finance costs which mainly consist of interest expense decreased to P=744 million for the nine months of fiscal 2011 from P=781 million recorded in same period of fiscal 2010.

Foreign exchange loss - net amounted to P=216 million for the nine months of fiscal 2011, 17.6% decrease from P=262 million reported in the same period last year due to lower realized foreign exchange loss on foreign currency denominated transactions.

Other income - net consists of gain on sale of fixed assets and investments, rental income, amortization of bond issue costs, and miscellaneous income and expenses. Other income - net decreased from P=103 million for the nine months of fiscal 2010 to P=60 million in the same period this year due to gain on sale last year of fixed assets and assets held for disposal.

The Company recognized provision for income tax of P=491 million for the nine months of fiscal 2011, 25.2% decrease from P=656 million reported in the same period last year due to lower taxable income and provision for deferred tax asset on unrealized foreign exchange, accrual of pension expense and reduction in deferred tax liabilities due to decline in market value of hogs.

URC's unaudited net income for the nine months of fiscal 2011 amounted to P=4.940 billion, lower by P=1.528 billion or 23.6% from P=6.468 billion posted in the same period last year, due to lower operating income and decline in market values of bond investments.
- 6 -
URC’s unaudited core earnings before tax (operating profit after equity earnings, net finance revenue and other income - net) for the nine months of fiscal 2011 amounted to P=5.730 billion, a decrease of 11.7% from P=6.486 billion reported in the same period last year.

Net income attributable to equity holders of the parent decreased by P=1.537 billion or 25.0% to P=4.616 billion for the nine months of fiscal 2011 from P=6.153 billion in the same period last year as a result of the factors discussed above.

Non-controlling interest represents primarily the share in the net income attributable to minority shareholders of the following subsidiaries of URC: URC International, URC’s direct subsidiary in which it holds approximately 77.0% economic interest and Nissin- URC, URC’s 65.0%-owned subsidiary. Non-controlling interest in net income of subsidiaries increased from P=315 million for the nine months of fiscal 2010 to P=324 million for the same period this year due to higher net income reported by URC International and Nissin-URC.

URC reported an EBITDA (operating income plus depreciation and amortization) of P=7.921 billion for the nine months of fiscal 2011, 8.5% lower than P=8.655 billion recorded in the same period of fiscal 2010.

The Company is not aware of any material off-balance sheet transactions, arrangements and obligations (including contingent obligations), and other relationship of the Company with unconsolidated entities or other persons created during the reporting period that would have a significant impact on the Company’s operations and/or financial condition.

Financial Position
June 30, 2011 vs. September 30, 2010
URC’s financial position remained to be strong with a current ratio of 1.68:1 as of June 30, 2011. Financial debt to equity ratio of 0.43:1 for the period is within comfortable level. Book value per share increased to P=19.89 as at June 30, 2011 from P=19.78 as at September 30, 2010. Total outstanding common shares as of June 30, 2011 decreased by 8 million shares to 2.062 billion shares from 2.070 billion shares as at September 30, 2010.

The Company’s cash requirements have been sourced through cash flow from operations. Net cash provided by operating activities for the nine months ended June 30, 2011 was P=7.257 billion. Net cash used in investing activities for the period amounted to P=4.381 billion mainly due to acquisition
of property, plant and equipment and financial assets at FVPL. Net cash used in financing activities amounted to P=2.665 billion due to dividend payment and re-acquisition of Company shares, net of loan availments.

As of June 30, 2011, the Company is not aware of any events that will trigger direct or contingent financial obligation that is material to the Company, including any default or acceleration of an obligation.
- 7 -
Material Changes in Fiscal 2011 Financial Statements
(Increase/Decrease of 5% or more versus FY 2010)
Statements of Comprehensive Income - Nine months ended June 30, 2011 versus same period in fiscal 2010

17.7% increase in sale of goods and services was due to the following:
Sale of goods and services in URC’s BCFG, excluding packaging division, increased by P=4.802 billion, or 15.3%, to P=36.262 billion for the nine months of fiscal 2011 from P=31.460 billion registered in the same period of last year. BCFG domestic sales increased by P=1.040 billion to P=21.849 billion from P=20.809 billion which was largely driven by the strong performance of its snack foods which grew by 13.3% on account of growth in sales volume and increase in selling prices.

BCFG International sales significantly increased by 35.3% to P=14.413 billion for the nine months of fiscal 2011 from P=10.651 billion posted in the same period last year. In US dollar amount, sales registered an increase of 43.3% from US$231 million posted for the nine months of fiscal 2010 to US$331 million recorded in the same period of this year due to increase in sales volume by 39.4%. This was supported by strong sales growth in Vietnam, Thailand, Malaysia and China.

Sale of goods and services of BCFG, excluding packaging division, accounted for 71.7% of total URC consolidated sale of goods and services for the nine months of fiscal 2011.

Sales in URC’s packaging division went up to P=1.294 billion for the nine months of fiscal 2011 from P=603 million posted in the same period last year due to significant increase in sales volume coupled by increase in selling price.

Sale of goods and services in URC’s AIG amounted to P=5.095 billion for the nine months of fiscal 2011, a 4.9% decrease from P=5.360 billion recorded in the same period last year. Feed business increased by 22.6% to P=2.537 billion on the back of increases in sales volume and selling prices. Farm business declined by 22.2% due to lower sales volume and farm gate prices.

Sale of goods and services in URC’s CFG amounted to P=7.927 billion for the nine months of fiscal 2011 or up 43.1% from P=5.541 billion reported in the same period last year. This was primarily due to upsurge in net sales of sugar business by 74.2% driven by higher sales volume and prices. Flour business also grew by 8.5% as a result of price increases.

26.6% increase in cost of sales was due to increase in sales volume and costs of major raw materials

8.1% increase in selling and distribution costs, Due to increase in advertising and promotions costs and freight and delivery charges

109.0% increase in market valuation loss on financial instruments at FVPL. Due to decline in market values of bond investments held

26.0% decrease in equity in net earnings. Due to decline in net income of Hunt-URC

17.6% decrease in foreign exchange loss - net. Due to lower realized foreign exchange loss on foreign currency denominated transactions
- 8 -
42.1% decrease in other revenues - net. Due to gain last year on the sale of fixed assets and assets held for disposal.

25.2% decrease in provision for income tax. Due to lower taxable income and provision for deferred tax asset on unrealized foreign exchange, accrual of pension expense and reduction in deferred tax liabilities due to decline on market value of hogs.

396.1% decrease in other comprehensive income. Due to decline in value of AFS investments from unrealized gain last year to unrealized loss this year and higher unrealized loss on cumulative translation adjustments from foreign currency denominated accounts.

Statements of Financial Position – June 30, 2011 versus September 30, 2010
17.0% increase in financial assets at fair value through profit and loss. Due to acquisitions, net of decline in market values of bond and equity investments
14.5% decrease in available-for-sale investments. Due to maturity of certain bond investments and decrease in market values
34.4% increase in receivables-net. Due to increases in trade receivables, due from related parties and advances to suppliers
12.1% increase in inventories. Due to increase in finished goods, work in process and supplies and spareparts inventories
13.6% increase in biological assets. Due to increase in population of livestock, net of decline in market value of hogs
18.1% decrease in other current assets. Due to decline in input taxes
8.8% decrease in investment in a joint venture. Due to dividends declared, net of equity share in net income of Hunt-URC
96.3% decrease in net pension assets. Due to accrual of pension expense
41.2% increase in accounts payable and other accrued liabilities. Due to increase in trade payables and accrued expenses
32.2% increase in short-term debt. Due to additional loan availments
100.0% increase in trust receipts and acceptances payable. Due to availment of trust receipt facility
13.8% decrease in income tax payable. Due to lower taxable income
- 9 -
9.3% decrease in deferred income tax liabilities - net. Due to recognition of deferred tax asset of the parent company on unrealized market loss on hogs valuation and foreign exchange and accrual of pension expense
26.5% decrease in other comprehensive income. Due to decrease in market values of bond and equity investments classified as available-for-sale and decrease in cumulative translation adjustments as a result of appreciation in value of Philippine peso against US dollar
15.4% increase in treasury shares. Due to reacquisition of Company shares during the period
36.2% increase in equity attributable to non-controlling interests. Due to share in net income of URC International and Nissin-URC

The Company’s key performance indicators are employed across all businesses. Comparisons are
then made against internal target and previous period’s performance.

All that from a quarterly report. When will we ever get to this stage? First, the GLCs have to take the lead, be transparent and try to engage all investors. Sooo much work-la ... yea, and the Filipinos have a lot of spare time isssit???

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Sapura Crest and Kencana

This is a shrewd move and one which should do well over the longer term. Is two better than one, well, its two well networked and connected entities. Suffice to say that I think the management at Sapura Crest is a tad better at operational stuff, so its wise that the guys at Kencana merge their outfit now that they are doing bigger stuff.



As a merged unit, they will be able to rsie much more funds easily and take on the larger chunks of projects in oil and gas. To be a real player, you need to be big in this industry. Kencana has not been around long enough for a credible track record but Sapura Crest has, this is really a pretty merger.

Finance Asia: SapuraCrest Petroleum and Kencana Petroleum will merge in a $4 billion deal to create a larger, more integrated oil and gas services firm, which is better placed to compete both domestically and across Asia.

Integral Key, a special purpose vehicle (SPV), will buy the Kencana business for M$5.97 billion ($1.97 billion) and the SapuraCrest business for M$5.87 billion. The deal will be settled through shares of Integral Key and cash. The price translates to M$3 for each Kencana share outstanding and M$4.60 for each SapuraCrest share. On Friday, the last trading day before the deal was announced, Kencana traded at M$2.80 and SapuraCrest at M$4.50 on the Bursa Malaysia. Integral Key intends to subsequently delist both companies from the stock exchange.

"The merged entity will be in a strong position to undertake larger and more complex projects, thus significantly improving business prospects," said Integral Key in a written statement. The new entity will be the largest oil and gas services provider in Malaysia.

The rationale for the merger is compelling as the new company will have enhanced scale and resources capabilities, said a source close to the transaction. He also noted that the deal is in line with the government’s economic transformation programme.

The merger will give a substantial league table boost for three local M&A advisers involved in the deal, as well as Credit Suisse. Integral Key is advised by CIMB and Maybank. Kencana is advised by Credit Suisse and AmInvestment Bank.

The structure being used to effect the merger — the sale to an SPV — was previously used in Malaysia in 2007 for the merger of Sime Darby, Guthrie and Golden Hope into a vehicle called Synergy Drive, which was subsequently renamed Sime Darby.

One advantage of this structure is that the controlling shareholders of the companies being merged, in this case SapuraCrest and Kencana, are allowed to vote on the proposal. As the vote needs to be approved by 75% of shareholders, this is a useful starting point. Around one-third of Kencana is owned by a son of former Malaysian prime minister Mahathir Mohamad and about 40% of SapuraCrest is owned by Shahril Shamsuddin, founder of the Sapura group.

This is truly a merger of equals, according to the source. The new company will be jointly managed by both partners, but precise details have yet to be ironed out, he added.

Analysts generally commented favourably on the development, agreeing that the new company will benefit from scale.

The offer by Integral Key will close by mid-August, but the deal will still take a few months thereafter to reach final close, said the source.

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Perisai Looks To Be Just Starting Its Run

My stock picks have been very few of late thanks to the drowsy market. However, I am a bit more comfortable with the tone and make up of stocks investing. Hilary hinted strongly that Gadaffi may be already looking for exit options. The other factor in play is that VIX has dropped back to below 20. Prior to the Japan situation and Libyan crisis, VIX was around 16.

Basic Chart Get Basic Chart(s) for:

VOLATILITY S&P 500 (WCB) Range: 1d 5d 3m 6m 1y 2y 5y max Type: Bar | Line | Candle Scale: Linear | Log Size: M | L Compare: ^VIX vs S&P 500 Nasdaq Dow

I have been loathed to recommend any oil and gas counters even though they had been performing spectacularly over the last 4 months. Largely I don't know who will get what and why. This one, I am warming to it thanks to the make up of shareholders, their technological expertise within, and the fresh shareholders.



CIMB recently initiated coverage on the stock: "We like Perisai for several reasons: 1) This under-researched stock is underappreciated. 2) The company is set to benefit fromopportunities in the deepwater transport & installation segment. 3) Skilled new management is firmly in place and is backed by Ezra’s operational strength. Gone are the days of corrosion control and earnings volatility as the company is now streamlined with a focus on vessel chartering. Our initiation is timely given Perisai’s recent clinching of a Petronas licence and ongoing acquisition of a vessel operator."

This is the key - An asset injection by Ezra will give Perisai a new revenue stream come 2Q11. Given Ezra’s big fleet, there could be more injections, especially in relation to deepwater assets. Over the next five years, eight more deepwater fields will come onstream in Malaysia, opening up opportunities for operators with deepwater expertise.

On 27 Feb 11, Perisai proposed to acquire 51% of vessel owner and operator Intan Offshore Sdn Bhd from Emas Offshore (M) Sdn Bhd a wholly-owned unit of Ezra, for RM45.2m in the form of 70.683m new Perisai shares at RM0.64/share. At the closing of the Intan acquisition in 2Q11, Ezra will become Perisai’s largest shareholder with a 27.3% stake vs. 19% currently. Singapore-registered Mercury will then be the second largest shareholder with a 24.2% interest. Perisai insists that it will remain a majority Malaysian-owned company.



Many looking at the chart spike will shudder. Considering the base of just 673m shares, you and I know that a couple of major oil and gas contracts will put this company into the RM1.00 territory. No point speculating, its the assets they will be having, they are deemed as "critical, even crucial" for the basis of most oil and gas projects being awarded.



NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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Does A MRCB-IJM Land Merger Makes Sense?

Apparently the word has switched from an IJM Land privatisation to a merger with MRCB. Something along the lines of a UEM Land-Sunrise deal it seems.



MRCB
1.37bn shares
P/BV 2.4x
Net Gearing 62%

Major shareholders: EPF 42%, Public Mutual 9.6%

IJM Land
1.1bn shares
P/BV 1.7x
Net Gearing 21%

Major shareholders: IJM Corp 62.5%, GIC 7.3%



MRCB
The value in MRCB due to its expected involvement/major role in the redevelopment of the federal government’s land in Sg Buloh, and a possible strong uplift to the construction order book from the 10MP rollout. MRCB has been assisting the Employees’ Provident Fund (EPF) in drawing up the masterplan for the Sg Buloh land. Thus, the group should be among the favourites to get one of the first pockets of land there. Details are sketchy at this juncture but the government is expected to announce the award and details by 1Q11.

MRCB group usually prefers to go at it alone. But EPF could be smarter to suggests that MRCB do it with the strong IJM Land proven brand power. MRCB currently has two low-key township developments in Perak and Kajang, with a combined GDV of RM4bil. Its track record in residential development is not significant, which means a link up with IJM Land would make a lot of sense.

MRCB has guided analysts that its involvement in the redevelopment of federal land would most likely be limited to Sg Buloh given that the Cochrane land is now to be auctioned off, rather than given outright to MRCB as previously speculated by the market. The government and the Employees’ Provident Fund (EPF) will form a joint venture to promote the development of the 3,300 acre-land in Sg. Buloh into a new hub for the Klang Valley. This land is believed to have a gross development value of RM10bil. This is a very positive move by the government given the scarcity of land in the Klang Valley where high land costs have resulted in very pricey residential properties. Homebuyers are now looking at prices of RM0.7mil-RM1mil for double-storey link houses in prime areas such as Bandar Utama, TTDI, etc.

Looking at the neighbouring areas of the MRB land such as Subang, Kota Damansara, Shah Alam and Sungai Buloh, land scarcity is prevalent even in recently developed Kota Damansara where only 30-40 acres of land are left available for development – most if not all are meant for high-rise developments. At 3,300 acres, the MRB land is about 3x the size of Petaling Jaya. Given it is bounded by the matured townships in Subang and Damansara and partly Sg Buloh, this parcel of land most certainly has a significant development potential.



IJM LAND
The recent tender by the Penang state government for 93 acres at Bayan Mutiara for RM200psf may establish a new benchmark price for seafront land. This may lead to a repricing of implied land values at Phase II (103 acres) of The Light, which should cost less than RM50psf to reclaim. Newsflow momentum is re-accelerating. The imminent debut of Light Collections II (GDV: RM260m) in November 2010 is highly anticipated. IJM Land is actively negotiating with anchor investors to pre-commit on its highly sought after waterfront retail mall (GFA: 1.0msf) at Phase II.

IJM Land is acquiring some 2,000 acres of converted development land at Canal City, adjacent to the mature Kota Kemuning township. The said land will be acquired for about RM5.00psf or RM436m, with the payment to be staggered over four years. IJM Land will acquire a 50% stake in the project, with KEURO holding the balance 50%. The entire township development is expected to generate a significant GDV of RM6.5bil over 10-15 years. Canal City is accessible via the existing Kota Kemuning township as well as via the Saujana Putra Interchange along the ELITE Highway.

IJM Land will spearhead the entire development of Canal City. It will be positioned as a medium-to-high end development, with maiden launches of the bread-and-butter terrace houses expected by 4Q11. The indicative pricing range is between RM300,000 and RM350,000/unit. The land is at the edge of Kota Kemuning and neighbours Putra Heights, Bandar Saujana Putra and Puchong. These are growth zones given affordable home prices in the area. The significance of this deal is its attractive pricing, sheer size and immediate development potential given a large residential catchment in the locality.



ANALYSIS
The key here is pricing. IJM Land suffers from low liquidity and hence its unable to realise a proper valuation for the counter. As the size of both companies are almost similar, IJM Corp could end up with the controlling stake with EPF coming in second. EPF being EPF will not mind not being the largest shareholder.

By doing the deal, IJM Corp will have an absolutely mega sized property counter with immense reach. Going on its own IJM Land will not be able to realise the deep value in its counter. But just like the UEM Land-Sunrise deal, how the new company will be run will be a big matter to resolve. That could be the deal breaker.

A probable deal should value IJM Land at 2.2x P/BV against MRCB's 2.4x, hence it should favour IJM Land should it happen. The deal should be strongly favoured by EPF as it will guarantee success almost for the Sg Buloh development. Let's face it, its 3x the size of the Petaling Jaya township, you cannot afford for this not to be a huge success in the planning, implementation and delivery chain.

Even without this deal, IJM Land has deep unrealised value since its P/BV is at just 1.7x when the average for the sector is 2.2. If not this deal, I believe some other value unlocking deal should be in the works, making IJM Land a safe buy.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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Why I Like Hevea Fiberboard

Hevea is principally engaged in the businesses of manufacturing and trading of particleboards and wood-related products and investment holding. The principal activities of the subsidiaries are manufacturing, trading and of ready-to assemble furniture, trading of particleboards and other panel boards.

Its 1Q2010 revenue was RM89.4m while the net profit was RM5.27m. This compared very favourably to the same quarter in 2009 which showed a loss of RM6.18m. The most recent figure would show that a net EPs of 6.34 sen, which if annualised will be 25.36 sen. You don't have to be brilliant to deduce the valuation when share price is around 70 sen only.

For the whole of 2008, the company recorded revenue of RM342m but only managed a mild profit of just RM895,000. For the whole of 2009 revenue dipped slightly to RM327m but they managed to register a strong net profit of RM19m or an EPS of 21.1 sen.

There has been the entry a a strong shrewd substantial shareholder in the company over the last 12 months, and there has been a significant improvement in the way they manage their funding, finances and expenses. Finance cost has dropped from RM15m in 2008 to RM11.9m in 2009.



NAV has edged up from RM1.78 to RM1.85 over the past 6 months alone. Although NAV is not a useful measure unless you are liquidating the company, the share price will start getting close to NAV once investors perceive that the assets are being used productively and are generating more than adequate profits.

Investors only shun high NAV stocks if the assets are not deployed profitably.

Its prospects are also tied to some ways to Evergreen Fiberboard, and the analysts have been recommending an explosion of earnings for Evergreen for their second quarter in the coming two weeks where most corporate earnings will be announced. We can expect a similar strong second quarter for Hevea.



Number of shares 90.4m and current market cap stands at just RM61m. Last year they earned Rm19m net profit, NAV at RM1.85, now who doesn't want to own this stock. Its recent high was RM0.75 which should be taken out soon in light of upcoming 2Q2010 results. I am looking at a target of RM1.00 by year end.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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