Rabu, 11 Jun 2008

Market Talk 11, June 2008

  1. Brace yourselves by public's incessant dissatisfaction?
  2. Sime Darby perils?
Hi yall,

The KLCI touches the low of 1,215 points on Jun 5th, recently but rallied back to 1,250 points (Jun 6th) the very next day. Today, it is hoovering at 1,235 point (Jun 11th)s. Technically it should poised to maintained the momentum at these levels for a longer while, looking at prolong period for a base formation. In other words a dull and lull market [1,200-1,250].

Some light readings…
Brace yourselves by public's incessant dissatisfaction?
Despite the still positive picture in terms of improving domestic liquidity and strengthening RM, many are bound for a period of ambiguity for an indefinite period. Apart from politics, impacts from the recent subsidy restructuring may be more than meets the eye. As such, corporate results over the next few quarters could show signs of underachieving hence the potential downward bias to earnings forecasts. Following the downgrade in research houses earnings estimate after the 1Q08 results for 2008 and 2009 revised figures in view of having to incorporate lower margins all round post the subsidy restructuring announcement. The impact? Consenses has it that a lower growth from targeted for 2008 by about 8 to 9% but 2009 is higher at 8 to10 % from better prospects for Tenaga and a lower 2008 base.

Meanwhile, after the shockingly narrow victory by BN in March, many were betting on how long AAB can stay in power. Its June now and he has actually reinforced his position. Talk about political suicide, the government had the might to raise petrol prices barely 4 months into a new shaky political landscape. That took guts, I tell you.

We can argue forever on how we have wasted and frittered away our oil revenues for the past decades ... but AAB is himself faced with a US$130 oil per barrel, not the past people in charge.

When assessing Malaysian stocks, a lot of weight has to be put on the political relationships and status. Unfortunately politics is a big part of local business, who dares to say no to that. Even the government will admit that the above statement is true.
Does it matter if AAB lasts till next year? Not really.
What if there is a change, will the market receive the new BN leader positively? Not really because the public needs to see a total change in the DNA of BN, not the heads.
What if Anwar stands for a by election and wins? Status quo.
What if Anwar wins and gets substantive defections to form new government? Stocks will fall and then rebound well quickly.

My feeling is the opposition is not ready to form government yet. Anwar is ready but DAP-PAS are not. They are still at loggerheads at the respective state levels and in private.

Can Anwar govern with a shaky DAP-PAS alliance? Yes he can.
Will he want to risk it now? Maybe not.
What would be the best plan of action? Let opposition rule the 5 states, and have increased checks and balances (like now), wait for the next election to comprehensively win and rule.
Why wouldn't Anwar want a new government now? Its a no win situation: your own backyard is not solid enough; the current government has to face up to very high subsidy; implement unpopular cutbacks; deal with food and other inflationary matters - why take up the reins at such a difficult time, why not let the current government grapple with the bad stuff.

How are foreign funds viewing the current landscape - they applaud the subsidy cut; they applaud the hike in electricity as both will make for a more competitive Malaysia over the longer term; they are pleased and surprised that the government had the guts to take such unpopular moves; they think AAB will last till year end at least before passing the baton.

How they view Anwar? Generally positive as he says the right things. If he does what he says, we should see even more funds considering Malaysia. Do you know how much funds totally bypass Malaysia owing to inherent political, human rights and discriminative policies that goes against the "conditions & guidelines" of a lot of international funds.

Can Anwar make good of his promise to lower petrol prices if he gets into power? Yes, even I can do that. We used to subsidise 60% of price of petrol. Just implement a graduated tax, much like the windfall tax on Petronas. For example: oil price below US$40 40%tax, US$41-60 50% tax, US$61-80 60% tax, above US$81 75% tax. Many think it will always be more than cover the subsidy.

Petronas will say that they need the funds for reinvestment,... please see how much revenue have been taken for the past 30 years and look at the reinvestment, and check how we have to let go of the subsidy - how wonderful and effective had the reinvestment been? Most of the drilling around Malaysia are JV’s anyway, the higher the price of oil, the more willing will the Shells and Exxons be to put up more capital investment, just sit back and take the ride Mr. Petronas. We are in this kind of uncertainty with the oil subsidy probably because we did not put in a graduated tax scale on oil revenues. Now, we have windfall taxes on CPO and IPP, which I think is correct, but why not on Petronas' revenue for the past 10 years. It cost probably less than US$20 to produce and transport, at US$70 or US$90... its way way supernormal profits already, don't talk about US$130.

Step down, don't step down, not THE issue ... we see more checks and balances, just keep improving, but its not enough as one can easily conclude from the public's incessant dissatisfaction over transparency, oil revenue, mis-allocation of resources, cost of living issues, tolls, ... to name a few.


Sime Darby perils?
What is RM120m to Sime Darby? Not much if the losses was due to normal operating conditions. If Sime Darby lost that much due to futures trading, that's another thing. But the whispers are pretty detail, which makes it hard not to think that there is some truth in it.

Sime Darby prides itself on high professionalism. That would be a dent. That would probably trigger a mini sell-down, not much, but still a sell-down. The stock was down by only 5 sen today, obviously it has not hit the fan yet. Or just waiting to be confirmed and reaffirm.

The whispers after market closing was quite serious. Apparently, Dato' Sabri Ahmad, the former Group Chief Executive of Golden Hope Plantations Berhad (now Sime Darby's Plantations Integration Advisor) has been asked to resign or face dismissal while Razidan Ghazalli, Golden Hope's former Director of Finance (now Sime Darby's Group Financial Officer) was dismissed over the purported RM120million pre-merger paper losses incurred by Golden Hope Plantations Berhad through futures trading.

To be fair, this was not Sime Darby's problem to start with, if the rumours were true. This happened in Golden Hope, while the merger activity was still on-going. Still, if true, heads must roll. Somehow if this happened in other GLCs, (most of them anyway), it would be hard to see anyone resign or being sacked. Now if only we can get all GLCs to act with the same professionalism as Sime Darby.

There will be mistakes, failures in oversight - a proper and professional firm will do the proper thing after substantive inquiry. Now Sime Darby will have to report the matter transparently and come clean to maintain the professionalism standards set. The fact that a blog like mine can get the information first does not bode well. Maybe, Mr. P Gunasegaram will have to work his magic now.

Btw, who was doing the due diligence? Considering that the mega merger took so long, you'd think the due diligence would have been thorough, no? Was there advisors? But, what do we know…



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