CASE STUDY - ULI, SCGM, OFI, SLP

Anyone know the growth of small cap fund introduced by all the unit trust?  From reading the Edge Weekly, it appears many fund managers own these few stocks, especially ULI.  A quick observation also tell us that the selldown volume is huge, last two days.  The average volume prior to the last two days, is only about one tenth of the volume.   RHB Asset Management denied that they are the one who sold them.  Conspiracy theorists romoured that the CIO left RHB, hence worry about the unit trust fund. Another conspiracy theorists said RHB is under SC investigation, which was again refuted by the asset management company.  Hope this is unike our MO1, who deny everything he was accused of, when every allegations were proven true.

Most of the said stocks has doubled their profits over last few years, and the price went up 300% to 500% in the same time.  Bravo to all unit trusts fund managers, finding these gems.  Hence, unit trusts did very well in the last two years (not 2016).  So, the tricky part now is, good, hold tight to these great companies or stocks.  That is what we called value investing.  However, one also noticed that the PEs of some of these counters has also doubled, well, great isn't it.  Questions is, if they earnings dropped, how are these funds gonna sell them?  There are not much liquidity?

On a technical perspective, purely by reading the RSI, 7-15, is way oversold.  Time to pick up some?  Is the fundamental of all these great stocks overvalued? Then how are we to explain why some China stocks traded in such a low PE of 2-3 times.  Or why Taiwanese stocks was previously traded at 4-5 times.  Is PE 20 is high? No if it can double its earnings in 3 years or so.  

Now we know why why small cap stocks commonly has lower PEs vs large cap stocks? Because of liquidity.  It can be move up many times is a short span of 18 months, but, the trick is how to sell or locked in profits if you hold a big percentage.  That is what we pay the fund managers for.  Fix it.

Sometime, it is out of the fund managers' control.  What happen, unit trust holders start panic selling, then the fund managers have to liquidate some of their holdings in that fund.  Hence, investing in unit trusts, has different risk as investing directly into a stock.  Fund managers may have trapped themselves in these stocks, unless, one is confident that all these stocks will have another 12 positive quarters in a row.

A FRIEND ASKED, WHAT DO YOU THINK OF FLB, FOCUS LUMBER?

Based on an hour of research, the stocks appear FUNDAMENTALLY good.  EV/EBITDA is less than 3 times.  ROIC is 30%. PE is single digit. MCap is RM174m and more than half, i.e. RM89m is cash and their average CAPEX last 3 years is less than RM5m.  DY, if they pay back RM15m like the last 2 years, is about 8% p.a.  Disregard the participation of NEW major shareholders, it looks not bad.  Maybe thats why Mr Tong Kooi Ong bought it.  But, one of the directors (Taiwanese) sold down, saying it was for personal reasons.  

DEBT OR GEARING

One major mistake admitted by Sunway Group founder, is growing too aggresively, hence, taking up a lot of debt by the Group.  He said, before the 1997 crisis in Malaysia, he can just pick up a phone to his bankers, they can easily gave him a clean line of up to RM400m (no charge at all).

If we do it today, I think he have to go through about 3-4 committees in the banks before a loan is approved (You will have management committee, risk committee, credit committee and executive committee, no name a few).  What's change?  A lot of trust and integrity are involved prior to 1997.  Its no longer so easy to raise debt.

Debt for corporate is a double edge sword.  If used effectively, it will help the company to grow faster and bigger.  Assuming, with shareholders fund of RM350m can raised up to RM350m debt or loan, is it good or bad?  If the money raised for an asset with EV/EBITDA of less than 8X and with growth potentials, I believe it is a GOOD DEBT.  I.e. the loan is used for AN INVESTMENT into productive assets with sustainable earnings and growth.  Isn't it what all value investors want?  OCK is one of them, of course there are many more out there.  OCK recently raised and expected to raise up to RM360m in debt for telco tower business.

To be continue.