Dear LouiseChoo, net DY = [DPS x (1-tax rate)]/MPS, in REIT a small portion of the dividend declared is exempted from tax but for simplicity just take 10% as the tax rate.

YTLREIT has been paying a gross dividend of 7.3 sen per share (DPS), net of tax DPS worked out to be around 7.3 sen x (1-10%) = 6.57 sen.

Divided 6.57 sen by the current share price of 9.15 sen per share, the net DY will be 7.18% [ 6.57/9.15 x100%]

In order for the business to sustain the dividend payment in the long run, its earning per share [EPS] must at least equal or greater than the DPS. Any undistributed earning will be reinvested for growth, either by acquisition or value enhancement exercise.

Technically, market price can move up if the business is able to generate sustainable earning growth. Earning growth can only be achieved with revenue growth or increase in profit margin or both.

In the case of YTLREIT, revenue & profit margin growth depends on room occupancy rate and increase in room rate. These can only happen if the demand for hotel rooms far outstrip the existing supply. It takes a few years to build up the available room capacity to meet increase in demand. The Deloitte’s latest Tourism and Hotel Market Outlook predicted an increase in demand for hotel rooms in the next few years.

Beside the recurring rental income, the investment properties' market value also appreciated over time [capital gain]. This can only realized upon disposal of the properties with cash proceeds.

Mulpha Hotel Investment Group P/L is the wholly owned subsi of Mulpha Australia Ltd which in turn 100% owned by Mulpha International Berhad. Not able to get the financial report of the Mulpha Hotel Investment Group P/L but from the segment report from Mulpha International, from FYE 2011 and 2012, beside the normal depreciation and amortization charges.

There were RM 63.9 mil and 58.9 mil impairment of property and equipment (PPE) charges respectively. Impairment charges were taken mainly due to lower market value of the PPE compared to book value.

If you compute the EBITDA (approximately to cash generated), Mulpha Hospitality segment EBITDA is RM 168.4 mil at the back of RM 431.1 mil of revenue. Whereas YTLREIT's FYE 2013 EBITDA is RM 50.1 mil at the back of RM 179.2 mil of revenue.

Prior to the impairment charges in FYEs 2011 and 2012, Mulpha hospitality segment were profitable and contributed around RM 20 mil each in FYE 2009 and 2010.

I anticipate YTLREIT Australia Hotels financial result should improve over the next few years.

Dear tonylim, this recommendation is written by icon. Just sharing my thought, no ill intention here.

Need to analyze more to determine its future potential.

Agreed with you that OFI is a good counter but valuation is on the high side. Limited room for capital gain. Dividend yield has come down. The best time to go in was in early 2012.

Years Dividend Earning Revenue Profit Margin P/E Multiple
Yield Growth Growth Growth Revaluation
31/3/2010 6.5% 27.0% 6.1% 2.2% 65.0%
31/3/2011 5.0% -29.9% 18.8% -2.9% 49.9%
31/3/2012 5.3% 50.4% 30.8% 2.9% -37.3%
31/3/2013 4.7% -2.4% 8.6% -0.2% 14.6%
31/3/2014(f) 3.1% 21.9% 6.4% 1.3% 53.5%

You can see that in 2012,dividend yield was 5.3%, despite high earning growth driven by historical growth in revenue and profit margin, its P/E multiple has drop by 37.3%.

Though its FY 03/14 is expected to be good, its DY has come down to 3.1%. Its current is driven by high P/E multiple revaluation which has far outstrip the growth in earning.

Will wait for the right opportunity to enter.

Dear ICON8888,ROE comprised on three parts. Net profit Margin, Net Assets Turnover and Equity Multiplier.

In term of net profit margin, its core business (exclude other operating income) profit before tax margin in 2013 is almost 30% as compared to 24% in 2012. If you look at the breakdown on cost of sales, there is a substantial drop of subcontracting costs. As a ratio to revenue, the drop was 7% (6.4% in 2013 and 13.9% in 2012).

The Group recognizes contract profits based on ‘percentage-of-completion method’. The stage of completion is measured by reference to the contract costs incurred to date to the estimated total costs for the contract.

There must be an over-provision of subcontracting costs in 2012 and when projects were completed in 2013,there is a reversal of these estimated costs.

The reasons for the improve margin over the years were three folds:
a> Increased order books,
b> Ability to invest in P&M for mechanization to improve productivity, evidence from its high capex right from 2011 to 2013.
c> Tight cost control measures with minimum incremental overhead costs.

Despite its lower dividend payout ratio from 42.8% in 2012 to 34.5% in 2013 and the extra cash were invested in quoted shares mainly in Malaysia, Hong Kong and Singapore.

The total shareholders' return in 2012 and 2013 were 15.2% (DY 1.6% & realized capital Gain 13.5%) and 26.8% (DY 3.2% & CG 23.6%). These were computed based on dividend income & capital gain over average AFS balance. These return was comparable to its core business but more risky. Going forward, i think it will be difficult to achieve these results.

If not for the poor 2.8% return on its FD and cash holding, its ROE could be better.

FYE 2013 and recent 2 quarters of FYE 06/14 showed a slowdown compared to previous years. Pintaras should not have problem to replenish its order books in view of the impending big ticket civil jobs on the pipeline, but whether there will be a margin compression due to price war in view of the excess capacity built up during the MRT and housing development boom.

Other than the margin, the net assets turnover and equity multiplier were hovering around 0.5 and 1.2 respectively.

If there is limited room for further organic growth or opportunities to diversify through accredit M&A in coming years. Pintaras management should seriously consider special dividend payout instead dabbling in the high risk stock market or keeping cash in the FD accounts which produce miserable below par return.

Yield curve is another indicator to reflect the health of a country economy.

a> A rising yield curve reflect an early stages of an economic expansion, generally it is bullish for stocks.
b> When the curve start to flatten, it's still relatively bullish for stocks due to economic growth momentum.
c> Finally when the curve inverts, its a sign you don't have much time left. You need to worry on recession, falling earning and risk of declining or even plunging.

If Market Cap to GDP is historically high, it indicates market value move too far ahead of fundamental.

When money if cheaper in future than you are paying right now. The yield curve has inverted. It's time to exit the market.

As an investor, you need to scan the environment and make the sensible decision to re-balance your portfolio.

http://invest-made-easy.blogspot.com/2013/07/using-yield-curve-to-predict-stock.html

http://asianbondsonline.adb.org/malaysia/data/marketwatch.php?code=government_bond_yields

We need to be more alert from now on, the next anniversary could be just around the corner 2017-18. After the 2008 crisis, almost every government on earth is trying to de-leverage and balance their budgets. That's why there is a currency war out there.

US is fortunately enough to be self-sufficient in energy and an huge pool of innovative enterprises. The next break through in technology could revolutionize and bring the global economy to the next level.

Let keep our fingers crossed and hope for the best.

I will never clear 100% of my equity position and hold cash. I will buy on weakness if the company fundamental is strong with good dividend payout ratio. Company with good free cash flow and low gearing, its share price is more stable.

Even in growth sector like oil & gas, construction, we need to benchmark and select the one with better upside potential with lower risk. In a downturn, company with credible reserve, strong recurring income with minimum bad debt provision history will survive.

If you are holding equity where P/E multiple is high purely based on news, then the wise things to do is to take profit and lock in your capital. Use OPM (Other People Monies)to take risk and wait for the fundamental to catch up.

At this juncture, the risk is much higher, we must keep sufficient bullets to reload the gun when situations like those in 1998 and 2008 present itself.

With so much liquidity in the system, market might stay buoyant and hover within a range for another few years. However, the upside is harder to come unless it is drive by real earning growth.

By then, if the economies of US, China, Japan and Europe still don't have a clear signal of steady growth, then we will really need to take more monies off the table.

Another good indicator is market capital to GDP ratio. In early 2012, the ratio is 156% and this showed that Malaysia stock market is trading at a 56% premium then. Since then, KLSE has went up another 300 plus point. In both end 1993 and 1996, this ratio has crossed 300%, and went down to 81% in 2008.

With domestic consumption on the downtrend due to higher inflation, BNM restriction on personal finance and mortgage financing. With export growth still in a anemic stage, the engine for growth is public and private investments. Malaysia government to take in more debts is limited, so only leave with private investment to sustain the momentum of GDP at 5%.

Don't forget Malaysia corporate debts already closed to 100% of GDP. If companies pushed their envelope further in the next few years. The cost of debts will definitely on the rise coupled with liquidity squeeze in the horizon.

Market Cap to GDP ratio currently could be closed to 200%, anymore rally will make the next correction steeper.

http://www.theglobaleconomy.com/Malaysia/Stock_market_capitalization/

In 1992, Index then was around 600 and has doubled to 1200 by end 1993. Drop back to 1000 in 1994 and hovering in the region of 1000 to 1200 till 1997. It went down all the way to below 300 points in less than a year.

Market recover in year 2000 and index went all the way close to 1500 in year 2007 before retreating back to 900 level in year 2008-09 during the global financial crisis. A 600 points drop.

Again KLSE has doubled from 900 to over 1800 point in a span of less than 5 years. Malaysia market P/E is already in the region 17.38 as of 4/4/2014.

If i were you, i would take precautionary measures to take some monies off the table (esp the high beta stocks)and retain the fundamentally strong companies. We cannot predict for sure when is the next downturn but it is clear that the strong rally in the past has stretched valuation.

One thing is quite clear, the tightening of liquidity in the coming years will definitely has an impact on market performance. How much is anybody guess, i reckon the correction should be at least 300-400 points.

Competency can only prevail if there is competition threatening one survival. Malaysia is in dire need of a two-party system to keep politician on their toe.

In this regard, the current opposition parties need to be united under one banner not solely for the convenient of general election. They should demonstrate their commitment to common policies and objectives in all aspects.

The divergence of political agenda will not help their cause as an alternative choice, it merely showed their union is a marriage for convenient.

Latest update on Aussie Dollar strength..

Posted on 1st April 2014, by Moneycorp Dealer Team, Moneycorp

The Australian, Canadian and New Zealand dollars all had a good week, even if they could not match the pace of the South African rand. The Australian dollar strengthened by one and a half US cents and by one cent against sterling.

For once, the Aussie dollar was helped by Reserve Bank of Australia Governor Glenn Stevens, who gave a positive speech about Australia's economic prospects without once mentioning the "overvalued" dollar. It also received some assistance from Chinese Premier Li Keqiang, who offered an upbeat assessment of the Chinese economy. He said he was confident that growth would be in "a reasonable range" despite facing "difficulties and risks".

If one IQ is as high as Tesla who had invented the AC and had gone bankrupt, the logical deduction is that he could be a stubborn man on his own rigid assumptions. He could have burnt all available funds without producing promising commercially viable results subsequent to his previous success. High IQ people seldom listen and tolerate opinions contradict to their belief and conviction.

If you want to be successful and happy, understand your own strength and weaknesses. Learn to leverage on strength of others to alleviate your weaknesses. You cannot be master of everything, one must learn to communicate and listen to others for continuous improvement. You cannot blame anyone for your own downfall if you close your mind for new ideas.

Uncle Koon has done what he had said, transparent on his interests and openly admitted his shortcoming as a business man. If you still has doubt on his intention, i have nothing more to say.

The equity multiplier effect is mainly due to LLA arrangement for 99 years between FGV and Felda which in turn gave them the right to control over cost of fertiliser application and replanting of estates.

It will take time for them to drive improvements in its operational efficiency.

Thank you,Uncle Koon. will buy some first. Though profit margin of this counter not so good compared to other Plantation Counters, its equity multiplier is much better compared to others. I believe any uplift on CPO price will improve its ROE.

Uncle Koon, some selling pressure now on FGV. A lot of negative remarks. Still try to board the boat at low tide. Any recommendation on entry price based on technical analysis. Any comments from technical expert is welcome?

If i read Uncle Koon correctly, FGV fundamental performance is not his main concern here. His angle is based on uptrend in CPO price and upstream plantation players profitability is very sensitive to this.

So he is inviting you to go for a short ride on FGV to catch the wave before it comes. He already told you he has tried this trick before. Since majority of the retailers trade on momentum, why not?

Ok, Uncle Koon, "I will follow you". At least FGV dividend yield is around 3.4% at current market price.

YTL management has done their homework before investing in Australia.

In addition, it was reported that the Australian dollar has hit another four-month high as the prospect of a stable interest rate outlook continues to drive the currency higher.

If the Aussie dollar can maintain its strength, there will be a write back on the forex translation loss.

A recent study done by Deloitte on Australia Hotels

27 February 2014:

Hotel occupancy rates in Australia’s south east have hit record highs on the back of shifting
patterns of demand and a modest, albeit strengthened, near term supply pipeline.

Releasing Deloitte’s latest Tourism and Hotel Market Outlook, Deloitte Access Economics’ Lachlan Smirl said: “As the Australian economy transitions from a growth phase underpinned by resource sector construction to a more diversified one, travel patterns are gradually shifting away from the big mining states. At the same time, improved conditions for leisure travel – both inbound and domestic – are underwriting robust demand growth across several regions.

“These trends have been mirrored across our hotel markets, with Brisbane and Perth receding from their resource boom highs, and Sydney and Melbourne recording their highest occupancy rates in more than two decades.

Sydney and Melbourne, in particular, are recording their highest room occupancy rates in more than two decades, with city hotels nearing capacity several nights a week and demand predicted to increase, says Deloitte Access Economics’ latest Tourism and Hotel Market Outlook report.

Overall, Australian hotel demand is set to more than double available supply over the next three years, a situation that will only push room prices higher.

http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/news-research/Press%20releases/Simon%20Rushton/MR%20-%20Tourism%20%20Hotel%20Outlook%20-%20Hotels%20-%20February%202014.pdf

Have a look at the websites of the three Marriott Hotels bought by YTLReits. These hotels are quite strategically located.

http://www.marriott.com/hotels/travel/sydmc-sydney-harbour-marriott-hotel-at-circular-quay/
http://www.marriott.com/hotels/travel/bnedt-brisbane-marriott-hotel/
http://www.marriott.com/hotels/travel/melmc-melbourne-marriott-hotel/

Another interesting article on Australia tourism showing Asian tourists arrival from years 2000 to mid-2013. Australia govt is actively promoting tourism as its key industry for growth.

http://www.businessinsider.com.au/chart-the-stunning-rise-in-the-number-of-chinese-tourists-to-australia-2013-10

Some statistic update on Australia tourism industry in the coming years. These could translate into better performance for YTL Hotels in future.

Tourism Australia will spend a record $200 million on advertising again in 2013, much of it in China.

Federal Government figures released today show Australia had 6.3 million international visitors in 2012, with visitors from China continuing to increase at almost 20 per cent a year.

Last year around 700,000 Chinese tourists flocked to Australian shores, splashing more than $4 billion across the economy. But within six years it is hoped that spend will be closer to $20 billion.

In total, visitors from Asian countries spent almost $30 billion across the local economy during 2012-13.

Tourism Australia's Andrew McEvoy says it is important to understand the needs of Chinese tourists.

"The Chinese consumer is the highest spending consumer we get," he said.
"They spend on average over $7,000 each.
"It means that you don't have to get mass volume. You get good volume with great yield."

Editor of Vogue China Angelica Cheung says over the past few years the rise of the rich and the middle class in China has led to the appetite for luxury holidays, products and experiences taking off.

Its revenue can hardly cover the operating cost before interest charges.

Let's look at MAS financial position as at 31/12/13, debt to equity 2.95 (RM 11.4 b/RM 4b). Net operating cash flow in FYE 12/13 was negative RM 855 million.

MAS have raised around RM 5b mainly from right issues RM 3b and RM 2b from fresh borrowings. Its cash balance as of last year end reported at RM 3.7b; MAS operating expenses for previous year Q3 and Q4 were RM 3.8b and RM 3.9b respectively. Its working capital is also in the negative region of RM 1.6b.

Now, let ask yourself this question. Even without the current dilemma, how much longer can MAS stay afloat?

MAS operating cash flow is in the negative region and its cash holding is depleting fast. It is a matter time it will need fresh borrowings or equity injection.

As reported on 26/3/14 by Bloomberg, MAS is liable to pay millions in damages even if plane not found. Family members could claim as much as USD175,000 (RM578,000) for every passenger aboard MH370 even if the Malaysia Airlines jet is not located.

Airlines are liable under the Montreal Convention of 1999, an international treaty that covers air travel, to pay damages for every passenger killed or injured in an accident, even if the cause cannot be established.

As there were 227 passengers on board MH370, Malaysia Airlines' liability could come close to USD40m. But if an airline is found to be guilty of negligence, its liability can be much higher. The cap of about USD175,000 in damages per passenger as stipulated in the treaty may no longer apply in this scenario, as family members of the affected passengers may sue and demand much higher compensation.

I will not touch this share with a ten foot pole.

Dear talking, thanks for your reply. Correct me if I am wrong, my understanding is that all brokers must adhere to the SMF ratio set by Bursa. The current ratio may not be 150%, the latest I know is 130%.

If any of their client account’s SMF ratio breached this due to deterioration of collateral value and failed to regularize within the stipulated time, the broker will face penalty from Bursa. Naturally, the brokers would like to play safe, work around the rule and at the same time not upsetting their clients by telling them I will discount 20% of your collateral market value.

WRONG. ALL BANK INTEREST RATE PA SAME AND VARY AS PER YOUR FACILITY LIMIT LOH. BORROWING LIMIT FOR CASH IS 2X& QUOTED SHARES 1.5X. LATEST RATE FROM RHB BANK LOH!

2X or 1.5X of quoted shares is the end result after they consider all the risk profile. It means the same thing, for example 1.5X means if you give blue chips as collateral. Without discounting of your share collateral, your SMF ratio is 167% (2.5/1.5). Most probably they will discount your blue chips by say 90% and arrived at SMF ratio of 150%.

If the current Bursa SMF ratio is 130%, then they will make margin call at 150% which is much earlier than the 130% set by Bursa. This is the margin of safety they give themselves should the market collapse.

"You to scout around for Broker that gives you better value for your shares collateral."

WRONG. ALL BANK INTEREST RATE PA SAME AND VARY AS PER YOUR FACILITY LIMIT LOH. BORROWING LIMIT FOR CASH IS 2X& QUOTED SHARES 1.5X. LATEST RATE FROM RHB BANK LOH!

I do not know whether you have check with other broker whether they can offer you same facility limit with the similar but less share collateral.


"Total loans outstanding = outstanding purchases contracts, interest charges, debit notes and rollover fees less cash deposit less credit notes less credit interest from the cash deposit (if any)."

FORMULA VERY WRONG. ROLLOVER FEE IS ZERO PER QUARTER FOR FTSE TOP 100 INDEX. NO DEBIT NOTE AND INTEREST CHARGES AND THE LESS STUFFF!

If you put in cash, they will pay you a nominal interest income. Maybe you are use to put in quoted shares as collateral.

"Please take note that “acceptable share collateral” means brokers might not accept certain stock due to;
a> broker has too many of the particular stock, or

Try to put in collateral that they don’t accept during margin call.

Dear talkking, i have said upfront that i will try my best to explain the share margin financing. I have not used margin financing for quite a while, Bursa could have change the rules on the ratio requirement but the principle remain the same.

Since you are an expert in this area, why don't you share with us your practical experience in this area based on the latest development. I think fusing79 will appreciate your generosity.

Dear fusing79, I will try my best to explain the share margin financing arrangement.

Bursa rules stated clearly that broker must ensure client share margin of financing ratio (“SMF”) to be equal or higher than 150% at all time.

SMF ratio = Total Equities/Total loans outstanding

Total equities = discounted shares collateral value.
You to scout around for Broker that gives you better value for your shares collateral.

Total loans outstanding = outstanding purchases contracts, interest charges, debit notes and rollover fees less cash deposit less credit notes less credit interest from the cash deposit (if any).

When your SMF ratio falls below 150%, a margin call will be initiated by the broker and you will be given 3 trading days to rectify the SMF ratio.

Failing which the broker will take step to sell the shares held as collateral in the margin account. You can either top up your SMF with cash or additional ‘acceptable’ shares collateral to bring the SMF ratio above 150%.

Please take note that “acceptable share collateral” means brokers might not accept certain stock due to;
a> broker has too many of the particular stock, or
b> internal policies prohibit giving value to a particular stock as the listed company could be a major shareholder of the broker, or
c> the particular stock is listed under PN4 or PN17, or
d> it could be also due to the broker’s policy not to give value to derivatives (for example “warrants”).

For simplicity, assuming you open an SMF account with a broker and place a cash deposit of RM 100,000. You purchase 250,000 shares of company A at RM 1 per share. If the broker only accept 80% of the collateral market value, then the total equities will be 250,000 shares x RM 1.00 x 80% = RM 200,000.
Total loans outstanding will be RM 150,000 (RM 250,000 – RM 100,000).
SMF ratio = RM 200,000/RM 150,000 = 133%

Result = SMF Ratio is below 150%, therefore margin call is issued.

You will have 3 market days to rectify your position.

If it is a one way bet, we cannot argue with Uncle Koon on leveraging to multiply return. Mathematically it is correct, it depend on your risk appetite. If you can borrow at 4.6% p.a. and the investment target can consistently give an annual dividend yield of 6.6%. You will have a clear advantage of 2% per annum. Couple with potential capital gain due to sustainable earning growth, the return can be even better. Bear in mind that market volatility will come into play irrespective of the business fundamental; leveraging is a double edge sword and it can cut both ways. Just make sure you can react fast or able to sustain the bleeding if thing goes ugly. Look before you leap.

Moreover, though YTL is holding RM 13.9 billion cash & cash equivalent, it has also RM 33.44 billion borrowings. The net borrowings has increased by RM 3.2 billion (19.6% increased) compare to previous year quarter ended 31/12/12.

At the current scenario, it cannot increase its dividend payout ratio from its earning as these are unrealized profit (fair value adjustment of investment properties).

If you read the 2nd Quarter result ended 31/12/13, it clearly stated the 230% improvement of the PBT mainly come from property investment & development segment. The bulk of the improvement mainly come from fair value gain on investment properties held by Starhill Global REIT. A new subsidiary consolidated during the current financial year.

It is an unrealized gain from revaluation of investment properties and will be realized only if they are being disposed. In other words, can see but cannot touch. If you take this off, no much improvement on the profit.

Agreed with you, however the average P/E of Malaysia market is already above 17, very close the historical height of 18. Mudajaya has not been moving in a big way.

Recently i am taking some risk investing in HS H Share ETF 2828 at HK 95. It is an ETF fund listed in HK with P/E slight above 7, it give dividend yield of around 2.6% with potential upside. I think the Chinese government have the financial muscle and the intention to fixed and reform the economy. Even Goldman Sachs also commented and pick HK ETF as undervalue investment. I also notice quite a number of local unit trust fund with oversea exposure pick this up as part of their investment portfolio.

Like you said, not possible to find the perfect girl and has to rely 30% on gut feeling. Having said that, we have to be careful not to place everything in one go if you are in doubt. Unlike Mr Koon, who is the Ultra-High-Net-Worth-Individual, he can take more risk.

With India General election coming soon, nothing will move within a year if there is a change in government. The present coalition government headed by Congress already there for two terms, chances of a change is very real.

In Malaysia, 3 sectors with growth prospect are Oil & Gas, Construction and Plantation. It is a matter of which stock has the high potential. I has place my bet on the Oil & Gas (Coastal Contract - previously recommended by Mr Koon) and Plantation (IJM Plantation) and i am looking for a niche player in the construction sector and Mudajaya fit the bill. I will buy in small quantities first and accumulate more on weakness. Mudajaya should perform better once it secured big ticket local job.

Based on its balance sheet strength in last quarter ended 31/12/13, it still can pick up RM 500 million debt with ease.

Forex exposure of a company can be unrealized gain/(loss):

a> Invested in a foreign country and having an investment costs to be translated into home currency. This give rise to unrealized forex gain/(loss), which is the gain for Mudajaya. It will be a realized gain/(loss) upon disposal of the investment.

b> Secured a loan in foreign currency, in this case, there will be a valuation forex gain/(loss) before the loan is due for repayment. This is also an unrealized gain/(loss)till expiry of the loan.

Those forex exposure that required hedging is the transaction gain/(loss), for example if Mudajaya needs to pay China equipment supplier in USD in 3 months time. They can buy forward the USD-INR exchange rate now before it is due for payment.

When company allocate capital (shareholder fund + borrowings)to invest in business. As an investor, we need to know the key drivers for profit, the quality of its assets, use of trade credit and equity multiplier effect.

If management cannot find suitable investment target for its excess fund, it should be pay back to shareholder in the form of dividends. Investing in a foreign associate with huge cost overrun, high interest rate, and risk of forex translation (though not critical) will definitely have a drag of future return on equity. The net investment cost in its Indian associate is RM 630 mil (RM 862 – 225 unrealized forex loss – RM 7 mil pre-acq loss) and form 38% of the total assets value. Whether the ROE can match the current 25% ROE is questionable (RM 862 x 25% = RM 215 million per annum). Moreover, its cost of investment of its 26% associates is still climbing.

Another area of concerned is its receivables in FYE 31/12/12 comprised of RM 128 mil of contra properties. Instead of getting paid with cash, its customers pay in kind. The contra value of these properties (did not disclose the type of properties) may deteriorate upon disposal.

Up till FYE 31/12/12, it has been using internal fund for its investment but this scenario has changed in its 31/12/13 quarter. It has pick up a total borrowings of RM 27 million. With lower order book and fast disappearing cash pile. It will need to borrow more in future to finance working capital and any future capex requirement.

Icon8888, one of my holding for quite a while is UCHITEC (avg price 1.15). Company strong in R&D with pioneer status approved recently. It manages its capex well and paid around 70% of its earning as dividend.

Strong customer focus, previously produce IC board for coffee makers and recently venture into IC for Biotech equipment.

At current price of 1.36, its dividend yield has dropped to slightly above 7%, previously double digit. ROE above 20%. Take a look if you are interested. Potential for growth once it increases its market shares in the biotech sphere.

Mr Koon, as per the article published above. It stated that "The power plant is expected to make profit contribution to Mudajaya to the tune of some RM70mil per year upon the full commissioning of the power plant."

If that is the case, a one year delay in commissioning the plant will translate into a loss of profit amounting to RM 269 mil (RM 70*100/26). The annual write off of the power plant development costs will increase (a combination of cost escalation and reduce billing period due to delay.

A 1% increased in interest rate due to poor BB- rating on the estimated RM 1.5 b loans will translate into RM 15 mil extra interest charged after completion of construction period. Reserve Bank of India just announced an increase of OPR by 0.25% to 8%. Company with good rating will normally get long term loan at 10% in India. Power Gen power plant may have to pay around 12% p.a., just a guess.

Indian Rupee has weakened 15% against USD, if we assumed the same rate against the ringgit. Mudajaya equity investment of RM 862 million to-date could have a forex translation loss of RM 129 million. The reported unrealized loss against the equity as at 31-12-12 was RM 225 mil (26%).

The loss of profits due to delay, higher annual capex charged due to cost escalation, higher interest cost due to poor rating and forex translation loss (if rupee were to weaken further) will a drag on Mudajaya return on investment. Hopefully the cost escalation is already at its tail end.

Thanks Mr Koon for the enlightenment, so the power off take is lock in and if the state cannot resolve the mis-matched of power generation and transmission capacities issue. The power tariff rate of the new proposed power plant will be lower as the state not able to sell the excess power supply to other states. Noted...

So what left will be the interest rate risk due to the low ICRA BB- rating and commissioning of the plant which will delay and resulted in delay and cost escalation.

One of the comment put up in the ICRA rating report:
"Moreover, the project is also exposed to technology risks given the limited track record of the vendors with respect to boiler, turbine, generator (BTG) and balance of plant (BOP) in Indian conditions till date."

The equipment suppliers from China may be facing technical hiccup to balance the various equipment to meet the India Conditions.

Since Shareholders are footing the extra cost with equity, i think the lenders will not compliant much as the risk of default is moderate.

The project most likely will be able to meet the Debt Service Coverage Ratio [Annual EBITDA/(debt repayment + Interests)]. The only impact will be the return on investment due to cost overrun.

One thing for sure, the delay in commissioning will surely reduce the power plant total earning over the concession period as it includes construction time.

Just for your information, i found out that 1 crore equal to 10 million rupee. Hope the above information will be useful. I will try to find out more to assess the impact on return on investment of this power plant. Hopefully it is still positive and my concern is the near term implication of its cash flow after operating costs, interest payment and debt repayment should the off take is not that strong in the early years.

This will require shareholders to pump in more money to sustain operation. Right now Mudajaya last quarter result already showed some borrowings in its balance sheet.

There was a rating done by INCRA on Oct 2012 and has reaffirmed the [ICRA]BB- (pronounced ICRA double B minus) rating assigned to the long term fund based facilities of Rs. 1024.11 crores and the long term non-fund based facilities of Rs. 255 crores of RKM Powergen Private Limited (RKMPPL). The outlook on the long term rating is Stable.

ICRA’s rating is constrained by project execution risks, including risks of cost and time overrun, which are inherent to large sized green-field power projects. This is also reflected in delays in the implementation of both phases of 1430 MW domestic coal based thermal power plant being set up by RKMPPL at Uchpinda, Chhattisgarh largely because of land compensation-related issues which however have been resolved now. ICRA also takes note of the funding risks arising out of increase in the project cost for phase-1 from Rs.1487.5 crores (Rs. 4.25 crores/MW) to Rs.2066.86 crores (Rs.5.90 crores/MW) and as cost escalation is also expected in Phase-2 owing to time delay, open forex positions and increase in customs duty.

Further, the rating factors in the relatively early stage of implementation of the ancillary infrastructure and lack of experience of the promoter group in executing projects of this scale, which is partly mitigated by the presence of experienced team. Moreover, the project is also exposed to technology risks given the limited track record of the vendors with respect to boiler, turbine, generator (BTG) and balance of plant (BOP) in Indian conditions till date.

The rating factors in the fuel supply risks arising due to the early stage of development of the coal block and also as the coal linkage is limited by the growing coal demand-supply imbalance in the country. RKMPPL has tied up approx 37.5% of the net capacity through a cost-plus PPA with the Chhattisgarh State Electricity Board (CSEB) and arrangements are in place for the sale of approx 700 MW through a long term PPA with PTC India Limited (PTC). ICRA notes that PTC has not yet entered into firm back-to-back long term sale arrangements for the contracted 700 MW which increases the off-take risks.

The rating however draws comfort from the receipt of permits required for both phases of the project and debt tie-up for the cost overruns in phase-1 (1*350 MW) which also includes deferment of COD to October, 2013 from May, 2012 and deferment of debt repayment.

ICRA also takes note of the substantial infusion of equity funds by the promoters, with infusion of Rs. 1435.71 crores out of the total requirement of Rs. 1734.34 crores, which includes the equity portion of the cost overrun for phase-1; however the equity requirement is expected to increase owing to the expected cost overrun for phase-2 of the project.

Company Profile RKM Powergen Private Limited is an SPV promoted by the Chennai based R.K. Powergen Group (74% holding) and the Malaysia based Mudajaya Group (26% holding) for the development of a 1430 domestic coal based thermal power project at Chhattisgarh in 2 phases (Phase 1 of 350 MW (1 x 350) and Phase 2 of 1080 MW (3 x 360)). The equity to be infused by Mudajaya Group would be at a substantial premium such that the proportion of actual equity to be contributed towards the project cost would be in the ratio of 26:74 with the latter denoting Mudajaya Group’s contribution. R.K. Powergen Group operates a 20 MW biomass based power plant in Karnataka while the Mudajaya Group is largely engaged in EPC works for various sectors including roads, water, power (civil works) etc. The total project cost of Rs. 7233 crore (increased from Rs. 6653 crores due to cost overruns in phase-1; the cost overrun for phase-2 is yet to be ascertained) is being funded through debt of Rs. 5499 crores and equity of Rs. 1734 crores.

I have read the latest news from one of the leading business papers from India "The Economic Times" concerning power producers in Chhattisgarh.

I thought this piece of news is relevant for those who wish to know the status of RKM Power Gen-Mudajaya Coal fired plant in India.

Inadequate transmission network troubles power producers in Chhattisgarh

By Mitul Thakkar, ET Bureau | 3 Jan, 2014, 04.12PM IS

NEW DELHI: Power project developers in Chhattisgarh fear lower profits because of a lack of adequate transmission network that limits their ability to sell surplus electricity out of the state.

Besides state utilities, private power producers such as KSK Energy, Jindal Steel & Power, RKM Powergen and Bhaskar Group are commissioning new projects in Chhattisgarh which will more than double the state's electricity generation capacity in the next couple of years from close to 9,500 mw now. Transmission network in the state, however, is not expanding at the same pace.

"We will soon face a situation where evacuating electricity out of the state will be a challenge as the state commissions more generation capacities," said Shivraj Singh, chairman of state-owned Chhattisgarh State Power Holding Company. "Today, state utilities are selling 400 mw of power to other states and this will ramp up to 900 mw soon. There will be challenges as private producers too add generation capacities."

According to him, Power Grid Corporation was to provide grid connectivity to power projects based in the state. "I am not sure about the status of transmission network projects initiated by Power Grid Corporation. Power producers will not be able to attract good tariff in the absence of adequate evacuation capacities," he said.

By March 2014, Chhattisgarh will add 3,200 mw, which will increase the state's total generation capacity to more than 12,500 mw, but the capacity of transmission networks in the state by then will be just about 9,000 mw. It is projected to have 21,500 mw of generation capacity by March 2015. The lack of adequate transmission network is already hurting the state's ability to sell power on the spot market to outside consumers. According to power-trading platform Indian Energy Exchange, Chhattisgar witnessed power price going down to Rs 2.30 a unit in November from Rs 2.41 in October.

Commenting on the progress of transmission network, a top Power Grid Corporation official, requesting anonymity, said the company will be able to commission projects if it gets timely environmental clearances and land-usage permission. "We are not responsible for factors beyond our control."

The official said the company's projects in the state are "more or less" progressing as per schedule.

Jindal Steel & Power, which operates the country's first mega power project in the private sector near Raigarh in Chhattisgarh, is already facing limitations in selling power to other states. It is in the process of ramping up its generation capacity from 1,000 mw to 3,400 mw.

"There are new power-transmission lines under construction, which shall provide additional capacity of around 8,500 mw progressively by June 2015. It means Chhattisgarh will have transmission capacity of 16,500-17,500 mw against installed capacity of 21,500 mw in next two years," said a top executive at one of the private sector power producers in the state.

Just reported Australia last quarter GDP 0.8% exceeded the 0.7% expectation. Aussie dollar strengthen over the past 3 days. So there will be translation gain in the coming quarter result from YTL Reit. Couple with better operation result from Aussie Hotels, the PAT per unit will be closer to the targeted distribution per unit.

India has experience strong economic expansion from 2004 till 2009, due to the high interest rate charged by the local financial institution. A lot of corporate borrow foreign currency loans at much lower rate but suffered when the Rupee depreciate against USD and other currencies.

Most of these loans are due for repayment and banks in India are facing increasing non performing loans.

I won't be surprise if upon completion of the power plant, the consortium banks may reset the interest at higher rate if the power plant venture rating deteriorated.

The point i am trying to make here is, sometime company do make mistake in their investment decision and as a result their return suffered and affected the overall return on equity. The good thing about power plant compared to toll highway is it capacity off take is fast compared to toll highway where the traffic number needed to built up over time.

Mudajaya so far has used its internal funds for investment till recently. Its financial status has drop but still consider strong. Will see what is the final project costs of the power plant.

Just pulling your legs, Uncle Koon. No heart feeling..

Thank you Uncle Koon for your respond, managing and controlling capex is part of the investment decision which has future implication on ROE. Fortunately, Mudajaya has only 26% equity interest.

Despite all the above negative remarks on Mudajaya Power Plant, my assessment on MJC financial position is still solid like a rock but it will take a while for its net profit and ROE to surpass its past performance.

It is a good counter and will keep an eye to add this to my portfolio.

When there is a cost overrun, Bankers will not come in to fund the deficit unless you can convince them that the project still viable. Else shareholders will have to foot the escalated costs in the form of equity or zero interest advances.

Hence, the final project cost could be lower than the RM 11 b. If we work and based on the above premise, if the RM5b is the original costs, 30% equity shall be RM 1.5b, 26% equity interest mean Mudajaya foot in RM 390mil. Now the extra equity is $M 4.72 mil, if the Indian partner was to put in the 74%, the total escalation will be RM 1.82 b (RM 4.72+ 4.72*74/26.

A total of 36% more than the original estimate, hence close to USD 1,500 per kw (RM 5 b + RM 1.82b)/1440x1000.

I did a rough check on its 31/12/12 Balance Sheet on its investment in cost in its India JV with Powergen, the total cost of unquoted shares in India as at that date is RM 861 mil. If Mudajaya shareholding interest in the JV is 26%, then the total equity in the India JV will be RM 3.31b.

Base on my knowledge on infrastructure financing arrangement in India, assuming a debt equity structure of 30:70, the total project cost will be around RM 11.05b (RM3.31*100/30).

The project cost could have doubled from the original estimate of RM5b. Just a logical deduction. Correct me if i am wrong.

Another puzzle is, it the company is doing well. Why the former MD of Mudajaya Ng Ying Loong started selling some of his holding consecutively over three days when there is a uptrend on the price.