InsiderAsia’s model portfolio - 436

Global stocks ended a volatile 2Q on a high note. US stocks, in particular, stringed together several days of gains for one of its best weekly performances in recent months. The Dow Jones Industrial Average closed well above the 12,000-point level in June, after falling below this psychological level earlier in the month. The closely-watched bellwether index ended the first half with a 7.2% gain, extending the rally that started more than two years back.

Gains on Wall Street boosted confidence in other key markets. Benchmark indices n key markets in the region finished the week in positive territories.

After being buffeted by worries over a possible Greece sovereign debt default and its contagion effect on the rest of the eurozone in the previous weeks, investors cheered the passage of a fresh five-year austerity programme by the embattled country’s parliament last week. There had been concerns that the austerity package would fail to win approval in view of the rising opposition and widespread street protests against the harsh measures.

The bill’s passage will now allow the European Union and International Monetary Fund (IMF) to release the next tranche of bailout funding, thus averting a default. It also paves the way for discussions on a second bailout package needed to tide Greece over beyond 2012.

Adding to the improved outlook, major holders of Greek bonds including German and French banks and insurers are moving closer to a voluntary rollover for their maturing debts. Participation from the private sector in the next rescue package will make the bailout more politically palatable for other members of the eurozone.

Positive progress on the Greek debt crisis will bring relief to investors, fearful of the impact of a disorderly default. Whilst many believe that some kind of debt restructuring is still needed, last week’s progress would buy governments time to work out a comprehensive solution.

With a potential eurozone debt crisis averted, we expect investors will now turn to the global economic outlook.

Growth expectations for the global economy have, undoubtedly, taken a turn for the worse by the end of 2Q. The US recovery is struggling to sustain momentum amid stubbornly high unemployment and a weak housing market. At the same time, Europe is seeing signs of a slowdown, due to both austerity measures undertaken at home and slowing demand from emerging markets. Rising inflation has forced governments in emerging countries, including China and India, to tighten policies and cool their rapid pace of growth.

Nevertheless, stock prices by and large have stayed relatively resilient — despite the downshift in growth expectations. This underscores the belief that the current slowdown is temporary and that growth momentum will pick up pace in the later part of the year.

Case in point, Japan’s industrial production rebounded strongly in May, supporting expectations that economic activities will expand as the country recovers from the earthquake-tsunami disasters and starts reconstruction works.

Market analysts will be sieving through economic data over the next few months for evidence to support this view. If true, stocks could rally anew after the current phase of consolidation. On the other hand, any shortfall would result in further downgrades to the growth outlook and could lead to more intense selling pressure.

A key market support has been corporate earnings, which have held up well, so far. In this respect, the upcoming 2Q results season as well as management outlook and guidance will provide some leads for the markets.

In other developments, crude oil prices have recovered from the brief fall following the International Energy Agency’s (IEA) decision to release 60 million barrels of government-held strategic oil reserves into the market last week. Crude oil futures traded on the New York Mercantile Exchange rebounded to near US$95 (RM285) per barrel, boosted, in part, by a report of falling US stockpiles. High crude oil prices remain a major concern for governments, fuelling inflation and are a threat to the global economic recovery.

FBM KLCI hits all-time high
On the home front, sentiment on Bursa strengthened in line with gains in the global markets. The FBM KLCI traded higher and closed at a fresh all-time high of 1582.9 points last Friday.

Having said that, the gains were highly selective and limited, primarily, to big-cap index heavyweight stocks. Stock price movements for the broader market were more ambivalent.

The relatively thin market volume underscores a lack of conviction for the majority of investors, including a lack of participation from retail investors. Daily on-market trading volume averaged less than 904 million shares, a decline from the daily average of about 920 million shares traded in the immediate preceding week. This, despite the volume boost from two new listings last week, that of MSM Malaysia and Eversendai.

Shares in MSM, the sugar refining and distribution arm for Felda, enjoyed strong support from the investing community. The stock hit an intra-day high of RM5.04 on its debut and closed at RM4.98 last Friday, well above its IPO price of RM3.50 and RM3.38, for institutional and retail investors, respectively.

On the other hand, the performance for Eversendai was more subdued. The stock traded as high as RM1.82 last Friday morning but closed lower at RM1.72 — just above its IPO price of RM1.70 for institutional investors. IPO for retail investors was priced at a small discount at RM1.62.

Portfolio review
Our model portfolio under-performed the benchmark index last week. Total market value for our basket of 17 stocks was up 0.83% at RM576,180, compared with the FBM KLCI’s 1.17% gain.

Ten stocks in our portfolio closed higher for the week while six ended in the red and one other traded unchanged.

Including our large cash reserves totalling RM147,433, for which no interest income is imputed, our total portfolio value was up by a lesser 0.66% at RM723,613. Our cash holding is fairly substantial, accounting for roughly 20% of our total portfolio value, primarily, for prudence’s sake.

Some of the notable gainers last week were CIMB (+2.9%), Media Chinese International (+2.5%) and BSDREIT (+2.1%). At the other end, Pantech (-1.6%) and MYEG Services (-2.1%) were among the big losers for the week.

Last week’s gains lifted our model portfolio’s cumulative returns since inception to 352.3% on our initial capital of just RM160,000. We continue to outperform the FBM KLCI, which was up by about 144.7% over the same period, by some distance.

Our total profits are very substantial at RM563,613, of which RM359,558 has already been realised from previous sales of shares. We kept our model portfolio unchanged.

HELP’s 2QFY11 earnings lower than expected
HELP’s results for 2QFYOct11 were below expectations due to several one-off factors. Revenue for the quarter rose 1.3% year-on-year to RM31.4 million. However, pre-tax profit was flattish, gaining just 0.5% to RM10.2 million while net profit declined 6.7% to RM6.5 million.

For 1HFY11, revenue rose 2.2% to RM55.7 million, while pre-tax profit increased 3.1% to RM14.3 million and net profit dipped 1.7% to RM9.2 million. This accounted for 40% of our earlier full-year net profit forecast of RM22.8 million.

The relatively weak results in 2QFY11 were due to several one-off factors locally and overseas, as well as higher personnel costs. For instance, on the local front, the shifting of HELP-ICT from the Klang campus to Fraser Business Park in Kuala Lumpur was delayed from January to April due to delay in handing over by the developer.

Most of the issues in Vietnam (due to government regulations) and Fraser Business Park (due to the delay in its campus shifting exercise) have been rectified and will be reflected in the next two quarters.

Fully operational since April, the Fraser Business Park campus on Jalan Sungei Besi in Kuala Lumpur is occupied by HELP-ICT. We understand its degrees in Vietnam have been audited and approved, and the partner, Vietnam National University, should be able to undertake enrolment in 2H11, after missing out on the first half of the year.

Going forward, cost pressures, especially for personnel expenses, will also continue to rise as HELP prepares to upgrade itself to a full university status from university college at present. Apart from a full-fledged university campus, some of the other requirements include a lower staff-to-student ratio and a higher number of teachers with PhD qualification. These issues as well as costs associated with its new campus in Subang 2, may dampen earnings growth in the next one to two years.

Nonetheless, we continue to like HELP’s strong business model and brand name, which has helped to expand its student population base, extend its presence overseas and increase the appeal of its own degrees.