Buy stocks with low price-to-book ratio

A fortnight ago, we elaborated on four of the seven criteria used in stock selection. In this week's article, we continue with the remaining three criteria: B for Book Value, H for Health and M for Management.

THE book value of a company is an important indicator of a company’s value as it tells us what the owner’s cost of a company is. No owner would be willing to sell a healthy and growing company at below cost unless the company has problems that are not known by general public.

Normally, we use book value per share (total shareholders’ funds divided by the outstanding number of shares of a company) to compare with the current stock price.

Price-to-book ratio is computed by dividing the stock price by a company's book value per share. It gives us the number of times the current stock is selling above or below the book value.

A ratio of lower than one means the current stock price is trading at lower than its book value.

One of the selection criteria is to select stocks with lower price-to-book ratio.

Benjamin Graham in his book entitled Security Analysis said we should consider buying stocks with price-to-book of lower than 1.5x. The number 1.5x or below implies that the maximum price that we pay for a company should not exceed 50% of the owner’s cost.

Due to the implementation of new financial reporting standards, there have been a lot of write-downs and impairment on certain assets of listed companies.

As a result, we can safely say that the current book value of these companies should reflect the owner’s real cost.

The price-to-book ratio is also frequently used in valuing banking, finance and insurance companies. In most instances, it is quite difficult to search for financial institutions that are selling at below their book values. This is because the book value is mostly in cash.

Normally owners would not accept any value that is less than the book value. This explains why most analysts use the price-to-book ratio in valuing financial institutions.

H for Health refers to the financial health of a company. We use debt-to-equity ratio (D/E ratio) to determine the level of borrowings of a company.

It is computed by taking a company's total debts and dividing it by a company's total shareholders’ funds.

A lower ratio implies that the company is using less debt but more equity to fund its operations. Even though cost of borrowing is lower than cost of equity, most investment gurus prefer companies to use less debt.

It will be even better if we are able to find companies that are cash rich and have zero borrowings.

According to Graham, a good company should have a D/E ratio of less than 0.5x. It means that for every RM1 the owner puts into the company, the maximum amount that he should borrow is 50 sen.

The rationale is to look for companies with lower financial risk - lower borrowings mean companies pay less interest expenses and face lower bankruptcy risk.

M for Management refers to companies with high management quality. It is always very difficult to determine the management quality of a company.

Almost all investment gurus, like Graham, Philip Fisher and Warren Buffett say that the management quality is one of the most important factors in stock selection.

A good management should exhibit unquestionable management integrity and try their best to maximise shareholders’ wealth through high dividend payment and capital gains.

It is almost impossible for each listed company to consistently show high profit during all periods, especially in a weak economy.

However, a good management will make sure that they are able to perform better than their peers even in the toughest business environment.

The writer is a licensed investment adviser and managing partner of MRR Consulting.

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Government may relax cement prices too

PETALING JAYA: The cement industry may see some major price adjustments following the liberalisation of the steel industry on May 12.

Most players in the cement industry have voiced their concerns via the Cement & Concrete Association of Malaysia (CCAM), saying a price adjustment was necessary to combat the rising cost of raw materials and fuel.

CCAM had proposed an automatic price mechanism (APM) for the cement industry. The Government is reviewing that.

Under the proposed mechanism, cement manufacturers would have greater flexibility to pass on cost increases to customers as the mechanism takes into account production input costs.

Currently, the average price of cement in Peninsular Malaysia is about RM12 per 50kg bag, or RM217 to RM231 a tonne, depending on delivery destination.

Cement prices have remained unchanged from 1995 to mid-December 2006 at RM198 per tonne.

On Dec 22, 2006 the Government revised upward the price of cement by 3% to 10% due to strong lobbying by industry players.

But cement manufacturers say the cost of raw materials and fuel has since risen tremendously, especially this year.

There are about four or five major cement producers locally, commanding 10% to 41% market share each. Most of them are pushing for the APM to be reviewed sooner rather than later.

Lafarge Malayan Cement Bhd chief financial officer Yeoh Khoon Cheng said there was an urgent need to address the APM issue.

He said the ceiling price approved by the Government in 2006 had only partially offset the 40% increase in costs incurred by the industry since 1995.

“It’s not just about protecting our margins but the price adjustment is necessary so that cement players can continue to support the growth of the local construction industry,” he said.

Lafarge would face a tough time this year if the price adjustment was delayed or shelved, he said, adding: “If the APM is not addressed, our margins and bottom line would be significantly affected.”

Other cement players, who declined to be named, echoed the sentiment.

”The cement industry is having a tough time controlling costs, especially this year. We, together with others in the industry, will continue to push for a revision of the current ceiling price and for the proposed implementation of the APM,” a manufacturer said.

The 2006 price increase was hardly enough to offset the increase in the costs of raw materials such as fuel and electricity, he added.

In a report dated May 15, Aseambankers Research said it remained unsure if a ceiling price hike would precede the proposed APM implementation.

Since the Government announced its move to liberalise the local steel industry on May 9, cement-related stocks have started to appreciate on expectation the sector would be the next to be liberalised.

Shares in Gopeng Bhd and Lafarge have gained 8% and 7% respectively since the announcement, while Tasek Corp has appreciated 3%.

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Fuel subsidy revamp on the cards

The rising costs of fuel have put more pressure on the Government to come up with a fair and efficient solution to ease the burden of the rakyat and relieve the strain on its coffers.

ALL eyes are on the Government's struggle to find a more equitable and efficient solution to the prickly issue of fuel subsidies.

This year's fuel subsidy is expected to hit a whopping RM45bil – even higher than the annual allocation of RM40bil under the Ninth Malaysia Plan – based on oil prices of between US$100 and US$120 a barrel.

Of the total, subsidies for petrol, diesel and natural gas will be RM18bil, tax foregone RM7bil and the national oil company's gas subsidy RM20mil.

Oil price is currently trading above US$120 per barrel. Goldman Sachs recently predicted that oil prices could hit US$200 a barrel within two years.

The Government is said to be looking at two-tier pricing for petrol and diesel, with subsidies going to deserving consumers especially those in the lower-income groups and priority industries/sectors such as public transportation and agriculture/fishery.

Domestic Trade and Consumer Affairs Minister Datuk Shahrir Samad has been pretty vocal on the issue as evidenced by the many news reports on the various proposals that are being considered.

These include replacing the current grades of petroleum with two new grades, RON 95 and RON 99, whereby the latter grade targeted at high-end vehicles would not be subsidised as much as the former, the use of the MyKad and even the introduction of a new card for more efficient subsidy allocation in fuel purchase.

To show that the Government means business, Shahrir has announced that a decision on new diesel prices could be out as early as next month followed by a revamp of the petrol subsidy scheme. The news is welcomed by those who view the current subsidy scheme as an inefficient way to allocate resources but received with apprehension by the public as many see it as adding to their financial burden.

“From the way things are going, it looks like a restructuring of fuel subsidies is inevitable. It is just a matter of time,” an industry expert said.

He reckoned that the unsubsidised market price of petrol should be about RM3.10 per litre and diesel at RM2.70 per litre.

With the current spiral in food prices, inflation and slowdown in the global economy, many feel the time may not be right for any reduction in fuel subsidy as the rakyat, especially the lower-income group would suffer.

This makes it even more imperative for the Government to come up with a solution that will benefit all involved if a restructuring of fuel subsidies takes place.

An economist believes a revamp of the fuel subsidy scheme may not be such a bad thing if the Government is able to implement a system that is:-

·efficient by ensuring that the subsidies are targeted at the right group of people namely the lower-income groups;

·equitable in that the quantum will not result in additional burden for the people especially the targeted groups;

• able to curb/reduce leakages;

• practical and consumer friendly and

• secure, easy to implement and manage

“The Government has been under more pressure over the fuel subsidy issue recently as rising costs have eroded the people's income and its own funds.

“This has also opened many people's eyes to the abuses the current scheme is subjected to resulting in a waste of resources,” the economist said.

The bone of contention is the fact that the blanket subsidy scheme currently benefits everyone in the same quantum – even those who are extremely rich.

According to an article in China Press quoting sources from the Road Transport Department, there are 30 rich men in the country who own 100 to 700 cars each for collection purposes. About 78,000 drivers each have five cars, while 1,589 drivers possess 10 cars each.

“It does not look like these people need fuel subsidies or any subsidies for that matter but they are still benefiting from the current scheme,” the economist said.

The current scheme also encourages wastage and leakages in the form of foreigners such as Singaporeans and Thais buying fuel at subsidised prices as well as smuggling of the commodity by unscrupulous traders.

An example of leakages in the scheme is the diesel subsidy for local fishermen.

Data from the Domestic Trade and Consumer Affairs Ministry showed that the rise in the sale of diesel to local fishermen did not commensurate with the volume of fish caught thus indicating the existence of smuggling activities.

In addition, the Anti-Corruption Agency is currently probing a suspected misuse of subsidised diesel for fishermen which amount to 18 million litres per month in Sabah.

“The leakages will be more widespread the larger the difference between the market and subsidised prices,” the economist said.

Nevertheless, a hue and cry is to be expected whatever the outcome.

As an industry observer puts it: “In this case it is impossible to please everyone. The Government will need to strike the right balance on this complicated issue.”

Perhaps the restructuring of the fuel subsidy scheme could then be followed by a long-term plan to reduce the country's dependence on oil.

Malaysian Institute of Economic Research executive director Prof Datuk Dr Mohd Ariff Abdul Kareem stressed the urgency of looking for alternative sources of energy and technology that would help reduce fuel consumption.

“It is also important to liberalise trade and break down any monopolies that can drive up prices,” he said.

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Many e-commerce tools readily available for SMEs to boost profits

KUALA LUMPUR: Small and medium enterprises (SMEs) can create an online presence and boost profits – without spending a sen.

Industry professionals said the expansion of businesses into e-commerce could be achieved by using available free products such as those from Google and eBay.

Chiica Consultations education specialist Chris Chan said SMEs need to change their perception and realise it is now the time to take their business online.

“We need to convince people to take the first step. There are too many people who say 'I can’t do it',” she said.

Xtrain CEO Bikesh Lakhmichand said some were afraid of information and communication technologies (ICT), either because they did not understand it or because they thought it was too expensive.

Industry professionals: (From left) Chan, Oh, Neowave Internet marketing specialist Ethan Chong and Bikesh will be among the speakers for the MIRC e-SMEs Week event.

“There is readily available freeware which you can use. The big boys (companies) are already doing this (going online). We are trying to get the small boys to do it too. Work with Google and eBay product lines. They don’t cost much, or in some cases, anything at all,” he said.

Bikesh said the only thing that SMEs needed to invest in was time – to learn about e-business and maintain their online system after they had set it up.

“You either hire someone who knows (e-business) or train existing staff,” he said.

Neowave business development director Adrian Oh concurred, saying the challenge faced by SMEs was to get someone to run the e-business aspect.

“If they want to see results, they will need to learn or hire. They will need to be consistent, otherwise it will just die off,” he said.

To learn more, the MCA ICT Resource Centre (MIRC) is organising an e-SMEs Week at Wisma MCA, Jalan Ampang, here, from Tuesday to Thursday.

Among the highlights are MIRC e-enablement workshops, IT training programmes, showcases and e-business talks.

Chan, Bikesh and Oh will be among the speakers at the event, which is free to the public.

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KL the wireless online metropolitan

WITH the launch of the Kuala Lumpur wireless metropolitan project at the City Hall headquarters yesterday, the entire capital city will be covered by a wireless broadband access network in the near future.

This means that if you are in KL, you will not need to patronise certain cafes or pay for Internet services to go wireless.

Everyone in the city will be able to use the service, which runs at 512kb per second, for free over the next two years.

The service is based on WiMAX 2.3 Giga Hertz. Kuala Lumpur is among one of the first cities in the world to use this technology.

The project was jointly launched by Federal Territories Minister Datuk Seri Zulhasnan Rafique and KL Mayor Datuk Ab Hakim Borhan.

The city-wide project involves the Kuala Lumpur City Hall (DBKL), Malaysian Communication and Multimedia Commission (MCMC), Synapse Technologies Sdn Bhd and Packet One Networks (M) Sdn Bhd.

It involves two parts. The first is to make the city wireless with the collaboration of Packet One Networks while the second part is to have the city's own portal www.kul.com.my managed by Synapse Technologies.

The first phase of the project will see 1,500 Wi-Fi zones installed by end of this year at the commercial areas, offices, DBKL public housings and PPR flats, DBKL community centres and public areas.

Focus will be given to the KLCC and Golden Triangle where the World Congress IT 2008 will be held this Sunday.

A total of 200 Wi-Fi zones had been installed around the KLCC, concentrating on hotels, DBKL main offices and PPR flats.

Subsequent phases will see 2,000 more Wi-Fi zones installed to cover the whole of the Klang Valley by end of next year.

A total of RM60mil is being spent to make Kuala Lumpur wireless, with the DBKL Hall and MCMC contributing RM5mil each and Packet One picking up the balance tab of RM50mil.

According to Zulhasnan, the project is in line with the Klang Valley Broadband Push (KVBP) initiative undertaken by the MCMC that aimed at achieving 90% household broadband penetration in the Klang Valley by 2010.

“The government is committed to realise its vision to develop the country's ICT industry to make it at par with international standards,” Zulhasnan said.

“As such, apart from the KVBP, the government has also set up the Cabinet Committee for High-Speed Broadband under the National Broadband Plan and the MyICMS886 Strategy, which is to reach 50% household penetration in Malaysia by 2010,” he said.

Zulhasnan commended the local communication and multimedia industry for lifting the country's competitiveness in terms of the Networked Economy Index in the Global Information Technology Report 2007 published by the World Economic Forum and the French commerce research institute Insead.

Asked about the possibility of other local cities going wireless, Zulhasnan said the cost involved was high but that the government welcomed any private company willing to bear the cost for such projects.

According to Hakim, the effort to go wireless is in line with the objectives of Kuala Lumpur Structure Plan 2020 that aspired to make Kuala Lumpur a developed city by 2020.

“The Kuala Lumpur Wireless Metropolitan will also function as a super cyber highway that fosters closer ties between communities in the city and those in other parts of the world,” he said.

“We believe that the wireless feature will not only boost economic development, but also further enliven our tourism industry,” Hakim said.

He said that even the underprivileged in Kuala Lumpur will benefit from the efforts and therefore digital divide between urbanites can be shortened.

Packet One Networks chief executive officer Michael Lai said the company's priority was to establish as many Wi-Fi hotspots around Kuala Lumpur as possible, and that the company would provide an option for higher speed in the future.

Lai said that the company had absorbed the cost for free wireless access, setting up necessary infrastructure that included devices to convert the WiMAX spectrum for the Wi-Fi-enabled equipments widely used today.

According to Lai, the WiMAX technology comes with features of better potentials in terms of area coverage and line speed; it is said to be able to better support mobility, too.

To use the free wireless service, register as user at www.wirelesskl.com.

The portal www.kul.com.my will act as a one-stop information centre about all things in the city. It enhances the web presence of existing websites of government and private sectors, hence is expected to boost economic activity for Small Medium Enterprises.

It also acts as the branding tool for Kuala Lumpur, using broad-spectrum approach to direct almost all web traffic to the portal when users search under ‘Kuala Lumpur’’.

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Earnings Per Share (EPS)

	The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability. Calculated as: In the EPS calculation, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
	Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. For example, assume that a company has a net income of $25 million. If the company pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M). An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.

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SMEs: Create online presence without spending a sen

KUALA LUMPUR: Small and Medium Enterprises (SMEs) can create an online presence and boost profits without spending a sen.

Industry professionals said businesses could expand into e-commerce by using available free products such as those from Google and eBay.

Chiica Consultations education specialist Chris Chan said SMEs needed to change their perception and realise it was now the time to take their business online.

"We need to convince people to take the first step. There are too many people who say 'I can't do it'," she said.

Xtrain CEO Bikesh Lakhmichand said some are afraid of information and communication technology (ICT) either because they do not understand it, or because they think it is too expensive.

"There is readily available freeware which you can use. The big boys (companies) are already doing this (going online). We are trying to get the small boys to do it too.

"Work with Google and eBay product lines. They don't cost much, or in some cases, anything at all," he said.

Bikesh said the only thing which SMEs needed to invest in was time -- to learn about e-business and to maintain their online systems once they had set them up.

"You either hire someone who knows (e-business), or train existing staff (to do it)," he said.

Neowave business development director Adrian Oh concurred, saying the challenge faced by SMEs was to get someone to run the e-business aspects of their organisations.

"If they want to see results, they will need to learn or hire. They will need to be consistent, otherwise it will just die off," he said.

To learn more, the
MCA ICT Resource Centre (MIRC) is organising an
e-SMEs Week at Wisma MCA, Jalan Ampang, from May 13 to 15.

Among the highlights are the MIRC e-enablement workshops, IT training programmes, showcases and e-business talks.

Chan, Bikesh and Oh will be among the speakers at the event, which is free to the public.

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Plantation REIT profit more than doubles in Q1

PETALING JAYA: Malaysia's only plantation real estate investment trust, Al-Hadharah Boustead REIT, yesterday reported a 111% jump in its net profit to RM16.7mil for the first quarter ended March 31.

In comparison, it recorded net profit of RM7.9mil in the previous corresponding period, Boustead REIT Managers Sdn Bhd said in a statement.

With CPO prices averaging at RM3,020 per tonne for the quarter under review, the fund had surpassed its reference price of RM1,500 per tonne and the previous corresponding quarter's RM1,904 per tonne.

Earnings per share rose as well to RM3.55 compared with RM1.99 previously.

The statement said the primary contributing factor for the strong performance was a direct impact of robust crude palm oil (CPO) prices, which contributed positively to higher performance-based rental income for the quarter under review.

Boustead REIT Managers chairman Tan Sri Lodin Wok Kamaruddin said: “With the full realisation of the injection of the Lepan Kabu plantation, our fund has delivered strong results for the first quarter.

“We are confident with the momentum in CPO prices, Malaysia’s only Islamic plantation REIT will continue to appeal to discerning investors.”

With CPO prices averaging at RM3,020 per tonne for the quarter under review, the fund had surpassed its reference price of RM1,500 per tonne and the previous corresponding quarter's RM1,904 per tonne, the statement added.

Meanwhile, Hektar REIT reported a lower first quarter net profit of RM8.7mil against RM11.2mil in the previous corresponding quarter while revenue fell to RM18.8mil from RM23.6mil.

In a statement yesterday, Hektar Asset Management Sdn Bhd said the net profit of RM8.7mil was 22% lower than the RM11.2mil achieved during the comparable period that comprised four months (December 2006 to March 2007).

For comparison purposes, if the net profit for December 2006 were excluded from the tabulation for the comparable period, the adjusted net profit would be RM8.2mil.

“Therefore, the net profit would be 6% higher than the adjusted RM8.2mil. The increase is mainly due to improvement in rental rates,” the statement added.

Accordingly, the revenue of RM23.6mil for the four months was also not a clean comparison with the first three months' revenue of RM18.8mil, it said.

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Malaysia’s March exports up 5.3% to RM51.57bil

KUALA LUMPUR: Malaysia’s exports in March rose 5.3% to RM51.57bil from a year ago, making its the highest export value recorded for the month of March.

According to the Malaysia External Trade Development Corporation (Matrade) on Tuesday, major product sectors which contributed to the higher exports were palm oil, crude petroleum, refined petroleum products, metal products and liquefied natural gas.

Electrical and electronic products accounted for RM17.53bil or 33.6% of total exports, palm oil exports (M4.69bil or 9.1%)and crude petroleum (M3.5b or 6.8%)

Matrade data showed exports to the United States fell to RM6.33bil compared with RM8.1bil a year ago, mainly due to a decline in electrical and electronic products.

“Imports rose 2.6% to RM43.59bil from RM42.46bil a year ago. The higher imports were mainly intermediate goods which rose 1.6%, capital goods by 20% while motor gasoline including aviation gas by 50.5%,” it said.

Based on the imports by end-use, intermediate goods accounted for RM31.39bil or 72% of total imports; capital goods (RM5.94bil or 13.6% of total imports) and consumption goods (RM2.46bil or 5.7% of total imports.

“A trade surplus of RM7.98bil was recorded in March 2008, making it the 125th consecutive month of monthly trade surplus since November 1997.

Mattrade said total trade in March 2008 amounted to RM95.16 billion, an increase of 4.1% from a year ago.

Total trade in the first quarter of 2008 was valued at RM276.56bil, up 8.4% from the first quarter of 2007. Exports increased by 9.8% to RM151.68bil, while imports grew by 6.7% to RM124.88bil, resulting in a trade surplus of RM26.8bil.

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Industronics seeks extension to submit audited accountsKUALA LUMPUR: Industronics Bhd is seeking a one-month extension from Bursa Malaysia Securitie

KUALA LUMPUR: Industronics Bhd is seeking a one-month extension from Bursa Malaysia Securities Bhd to submit its audited financial statements for the financial year ended Dec 31, 2007 which was due on or before April 30.

In a statement to Bursa Malaysia Tuesday, the company said it was not able to submit the statements as the external audit was still ongoing due to transaction testing procedures.

“The company is working closely with the auditors to finalise the audit expeditiously,” it said.

Industronics said it expected to submit its audited financial statements within one month from the date of the announcement.

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