Published November 19, 2008

KL moves could dent support for opposition

Petrol, rice prices, night toll rates cut; highway documents declassified

By S JAYASANKARAN
IN KUALA LUMPUR

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The Malaysian government announced a series of populist measures on Monday and yesterday that are likely to be welcomed by the public and further erode the chances of the opposition wooing enough defectors from the ruling National Front coalition to form the next government.

Clearer picture: All highway operators except Maju have agreed to have their deals revealed for public inspection

On Monday, Domestic Trade and Consumer Affairs Minister Shahrir Samad announced a 7 per cent reduction in the price of petrol to RM2 (S$0.85) a litre. The price of lower-quality rice was also reduced, by 5-10 per cent. And a request by bus operators to raise fares 100 per cent was denied. Finally, toll rates will drop 10 per cent for drivers who use major highways between midnight and 7am.

In addition, the government has agreed to a long-standing request by the opposition and special interest groups that concession agreements with highway operators be declassified.

Works Minister Mohamad Zin Mohamad said yesterday that all operators except Maju Holdings have agreed to have their contracts revealed for public inspection. Maju operates a dedicated highway between Kuala Lumpur and Putrajaya, Malaysia's administrative capital.

The moves illustrate the government's growing awareness that public disquiet can no longer be dismissed as it once was. Public anger over rising fuel and food prices was a major reason for the National Front's sharp electoral reversal in the March 8 general election.

Meanwhile, the declassification of highway documents signals a government move towards greater transparency. Previously, it claimed the agreements were official secrets, amid claims that many of the contracts were lopsided in favour of the contractor and therefore against public interest.

Economists will not be dismayed by the reduction in petrol prices, as it will have no impact on the budget deficit. On the contrary, Mr Shahrir said that at RM2 a litre, the government is no longer subsidising petrol and, in fact, is taxing the public to the tune of an estimated RM10 billion a year if global oil prices stay around US$55 a barrel. This explains how an extra RM7 billion of spending in the 2009 Budget will be financed.

Malaysian pump prices are still the cheapest in the region. Malaysians pay US$0.53 a litre, while Sri Lankans pay US$1.02 and the Chinese pay US$0.70.

On the declassification of highway agreements, Mr Mohamad Zin said this will happen no later than Jan 1, 2009 and is proceeding because all highway operators except Maju have agreed to disclosure. He said he is unsure whether Maju refused to comply or has simply been tardy with its reply.

Published November 19, 2008

Portman sale nets Noble A$118m profit

By WINSTON CHAI

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COMMODITIES supply chain manager Noble Group's fourth-quarter earnings will be boosted by a A$117.7 million profit (S$116.2m million) from the sale of its stake in an Australian investment.

However, the company's stock continues to head south as the cheer from its strong quarterly results fades and concerns set in over its longer-term profitability.

Noble yesterday said in a regulatory filing that it has sold its interest in Portman Limited to Cliffs Asia-Pacific, a subsidiary of US-based Cleveland Cliffs. The initial purchase price of the Portman shares was A$26.4 million.

The gain from this sale will be recognised in the fourth quarter ending Dec 31, it said.

The company did not disclose its shareholding in Portman but said that it no longer owns any shares in the Australian firm following the divestment.

The positive news was marred by a mauling of Noble shares during yesterday's trade, with its stock dipping 9.8 per cent to $0.87 after Merrill Lynch downgraded its rating from 'buy' to 'underperform'.

Last week, Noble had announced a 145 per cent jump in Q3 profit to US$148.8 million. However, concerns over its long-term growth potential continues to dampen investor sentiment.

'We estimate that the company will see earnings growth slow by 4Q and then an earnings decline to be reported in 1Q09. Earnings recovery would be much later than that, in our view. Therefore, we expect a depressed share price for the next six months,' Merrill analyst Chong Han Lim said.

Shares of another commodities play - Olam International - also took a clobbering yesterday.

Olam's stock suffered its biggest drop in the last two weeks, dipping 13.1 per cent to close at $1.06 with analysts sticking to their negative ratings on the company.

The company had reported a 62 per cent jump in first-quarter net profit to $14.9 million last Friday.

This resulted in a short-lived rally on Monday, but brokerages such as CIMB maintained their 'underperform' rating on Olam. The credit crunch, unstable commodities markets, and weaknesses in industrial raw materials such as cotton and wool were cited as the major factors which could dent future performance.

Published November 19, 2008

Are bank stocks looking cheap?

By CONRAD TAN

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HOW much lower can bank stocks go? That turns out to be surprisingly difficult to answer.

Savvy investors have all but given up on trying to base their buying decisions on traditional measures such as the historical price-earnings ratio.

Wisely too - in the current environment, judging whether to buy a bank by measuring its share price relative to its past profits seems absurd, now that the outlook for earnings is decidedly gloomy as the economy slides into recession.

Looking at the forward price-earnings ratio, which compares a company's stock price with its expected future earnings, seems a better idea, except that the measure is only as reliable as the underlying estimates of future profits. Banks' profits - already hard to forecast correctly when times were good - are exceptionally difficult to predict right now, amid volatile financial markets and rapidly changing economic forecasts.

Similarly, the dividend yield, which measures the return an investor can expect to receive in dividends as a proportion of the current share price, assumes that dividend payouts will continue to be as generous. These are difficult times and banks could well justify cutting future dividends.

Guessing game

So some investors have taken instead to trying to guess how much further the share prices are likely to fall so that they can jump in at the bottom.

For that, the book value per share - a measure of what a company's assets, less its liabilities, are worth on its books - seems a sensible floor, though the stock price may sometimes fall even below this. During the Asian financial crisis, bank shares were at times trading at just over half their estimated book value. Still, the book value seems a reasonable gauge of the fundamental value of a company, below which it may become attractive to predators.

Analysts' estimates show Singapore-listed banks are already trading at around 0.8-1.2 times their book value per share. But here again there is a note of caution. In a recent report, Morgan Stanley analysts Matthew Wilson and Anil Agarwal suggested that even the book value may be overstating the value of banks' assets in the current crisis.

That's because book value also includes goodwill - the excess value recorded separately as an intangible asset when a company pays more than the market price for another firm's assets in an acquisition.

Goodwill on books

As economic growth slows to a crawl and stock markets continue to be pummelled, at least part of that goodwill - usually inflated during good times as companies pay high prices for acquisitions - is likely to be written off, which means that banks' book values, not just their earnings, could shrink further.

By Morgan Stanley's estimates, nine major banks operating in Asia-Pacific have more than a quarter of their book value made up of goodwill. The nine include DBS Group, as well as Standard Chartered Bank, HSBC and Maybank.

OCBC Bank and United Overseas Bank aren't among the nine, but neither are they far behind - goodwill makes up more than a fifth of their book value, according to Morgan Stanley. Other analysts, such as Leng Seng Choon of DMG & Partners Securities, have produced similar estimates for the difference between the Singapore-listed banks' book values and their net tangible assets, which exclude goodwill and other intangibles.

'We see some risk of impairment at year-end and see no fundamental reason why investors should pay a multiple on goodwill at this stage,' said the Morgan Stanley analysts. Quite so.

If they are right, and banks do start to write down the value of goodwill on their books - a move which by accounting rules cannot be reversed later - bank stocks may not look so cheap after all and the floor offered by book value may feel rather hollow.