The short position Saturday, 8 November 2014
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The short position Saturday, 8 November 2014
The short position
Saturday, 8 November 2014Risks and rewards in IFCA
OVER the last three weeks, the shares of IFCA MSC Bhd have shot up by 100%, on heavy daily trading volumes.
Its stellar rise is even more spectacular if one goes back five months ago. This was then a 10 sen-share that had no indication of any change in its fortunes.
But since August, things started heating up in the ACE Market listed company, with two big research houses initiating reports on IFCA, one writing an unrated report, while the other placing it on their buy list, with a target price that seems to keep rising.
No doubt, IFCA is posting some good quarterly earnings and has a promising story line.
But no one seems to be talking about the risks involved in a company like IFCA: It is trading at a lofty 30 times historical earnings, although this seems be buffered by the fact that its FY2014 numbers will look much better. But software companies operate in a highly competitive landscape. The ACE Market has a number of software companies that got listed with a bang only to struggle to maintain their profitability, largely due to competition, both in terms of product pricing as well as facing technologically superior competitors.
IFCA has also began to earn the bulk of its revenues from China. While that is commendable, one can tell from experience that China always proves to be a challenging market considering its many peculiarities.
While there are no indications that IFCA is a company that is going to face such problems, the point being made is that the risks involved in investing in a company like IFCA should be taken into account when assessing the attractiveness of this company. For example, in the past, there had been analysts who had called a buy on a company like Masterskill Education Group Bhd (MEGB), placing a target price of more than RM4 per share. The analysts had also then failed to sufficiently highlight the risks in MEGB.
Pressure on ringgit
Bank Negara kept its overnight policy rate unchanged last week, holding back its ammunition even as the ringgit continued to weaken against the strong US dollar.
At RM3.346 to the dollar yesterday, the local currency has dropped 1.7% in November and is currently down at its lowest point against the greenback since February.
The ringgit’s recent weakness, however, is not out of synch with its regional peers. Defending the ringgit, while other regional currencies are falling, is a futile and expensive business. The obvious beneficiary of a weaker ringgit is the export sector.
Ringgit denominated crude palm oil (CPO) prices, for example, are rising because the commodity, which competes against US dollar priced soyabeans, has become more attractive to foreign buyers.
But a cheaper currency makes imports more expensive. A weaker outlook also reduces the appeal for foreigners to own ringgit denominated bonds.
So how low can the ringgit go?
One thing is sure, however, the recent weakness of the ringgit is largely driven by external factors.
The Bank of Japan on Oct 31 dropped a bombshell by dramatically increasing the size of its quantitative easing programme that it has been conducting.
This sent Japanese stocks soaring and the yen plunging.
A cheaper yen, which had dropped to a seven-year low against the dollar this week, is already hurting South Korean carmakers. It is setting the stage for a looming currency war; the yen versus the won. It is a race to the bottom when countries devalue their currencies.
The question is, are we facing a new currency war?
Is PDZ getting a good deal?
PDZ Holdings Bhd is proposing to fork out RM656mil to set up a liquefied petroleum gas (LPG) production plant in Kazakhstan. That is clearly an ambitious plan and a significant change in direction in the shipping company. True, this new plan is not surprising – PDZ had seen the entry of new shareholders recently and had earlier also announced a plan to go into the oil and gas business by buying a stake in a local offshore support vessel provider. That deal failed to materialise. Will this new one see the light of day?
The more than half a billion ringgit ticket size for this deal does raise the question of who’s paying for this deal and what returns the company is going to get from it?
Tycoon Tan Sri Halim Saad is said to be closely linked to this deal – he is both speculated to be already a major shareholder of PDZ and on the verge of raising his stake as well as being linked to the partner in this new Kazakhstan deal for PDZ.
Indications are that he and parties associated with him, will actually be providing the bulk of the funding for the deal, which is being raised through the issuance of some debt papers as well as a massive rights issue.
What should minority shareholders of PDZ do? They could take comfort in the profit guarantee of US$50mil (RM160mil) for every year for five years by the party that PDZ is contracting with in this deal.
But one should also note that this profit guarantee only kicks in after PDZ forks out US$80mil to build the LPG plant and ensure that it is functioning well. This means that if PDZ uses the money but fails to build the plant up to the required specifications, it may not be entitled to the guarantee payments. Investors could also be guided by how another of Halim’s companies, namely Sumatec Resources Bhd, performs, considering that it also has operations in Kazakhstan, which carries a certain country risk.
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