Handicapping Malaysia's Growth
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We are a few months in front of potentially important elections in Malaysia, where the ruling UNMO party is facing a serious threat to its 50+ year dominance. The pressure from this is not lost on sitting Prime Minister NajibRazak who has made a number of moves to undercut many of the rallying issues of opposition leader Anwar Ibrahim. The most recent announcement was the repeal of a colonial-era law curbing free speech. The same government earlier this year revoked a draconian law allowing detention without trial and eased public assembly rules in an overhaul of strict security laws. Najib’s coalition certainly needed to make these and other economic reforms, especially after suffering its worst electoral performance ever in 2008 after leading Malaysia since its independence in 1957.
The recent spate of large IPOs and public infrastructure spending has played well politically in a country where there is a deep divide politically between Malays and other ethnicities.
Looking at the macroeconomic picture, Malaysia’s exports rebounded in May, growing more than economists estimated after falling for two months, allowing the central bank to keep interest rates unchanged, even as Europe’s debt crisis threatens demand. Malaysia’s palm oil exports in the first 15 days of July fell 21.3 percent from the same period in June, which could be worrying, as palm oil and mineral fuels account for 82 percent of Malaysia’s trade surplus and prices hover near RM3,000 ($950USD) per ton.
Malaysia’s imports rose 16.24 percent in May from a year earlier. The trade surplus narrowed to 4.6 billion ringgit ($1.5 billion) from 7.51 billion ringgit in April.
But soybean oil prices continue to rise and palm oil should move in sympathy. As oil prices continue to recover after the 2nd quarter massacre, it should put a firm bid under palm oil prices and the KLCI Bursa Malaysia Index, tracked closely by the iShares MCSI Malaysia Index ETF (NYSEMKT: EWM). That said, I’d like to begin running down some of the major companies that make up the index, similar to previous posts on Singapore.
Industrial Oxygen Incorporated SdnBhd (MK:IOI): Commonly referred to as IOI, this is one of Malaysia's biggest conglomerates and is involved in energy production up and down the supply chain. IOI Corp., which now has RM3 billion ($951 million) in cash reserves, is looking to expand its plantations in Indonesia. Especially after the very successful IPOs of both Golden Agri Resources and Felda Global Ventures (MK:FGV) this year. IOI is using Citigroup (NYSE: C), HSBC Holdings (NYSE: HBC), Mitsubishi UFJ Securities Holdings Co, and Morgan Stanley to arrange meetings with bond investors. They held one in Singapore in May.
Their palm oil portfolio is considered to be in its prime right now, so yields are as good as they will ever be. Growth, therefore, is limited without acquisition and expansion. They, like many in the industry, are planning for massive growth in the use of oil palm as both food and energy to mitigate marginal increases in energy demand. Development of new plantations takes a minimum of three years.
Recently, IOI raised RM1.88 billion (~$600 million US) in a 10 year bond sale at 4.375% (S&P rating BBB+). A good deal of this money is being used to finance property in Singapore, where the property market looks to have hit a short-term peak, but also where S-REITs have been steadily returning double digits for a few years now. The worry is that ZIRP has created a short-term property bubble in Singapore, which is hard to gauge given the strong economic growth and capital attraction.
As expected with an aging plantation portfolio, profits are flat to negative. Their plantation segment profit decreased by 11% to RM303.2 million for Q3 FY2012 year over year. The lower profit was due to lower FFB (free-fruit bunches) production as well as higher costs of production. Overall, IOI reported a pre-tax profit of RM659.3 million for Q3 FY2012, down 16% over 2011, mostly due to a retrenchment of palm oil prices after spiking in 2011. Their property division was a source of strength. IOI is currently trading at 16.9 times future earnings and paying a 2.4% dividend.
Malayan Banking Bhd. (MK:MAY): Maybank is the largest bank and financial group in Malaysia, having large interests in Islamic banking as well. The group is the biggest stock broker in Thailand and the Philippines and second largest in the fast-growing Indonesian market. It is their goal to become the biggest stock broker in ASEAN.
By assets, Maybank is the 4th largest bank in ASEAN behind Singapore’s three biggest banks and the largest Islamic bank in the region, with US$143 billion (RM429 billion) in assets. That said, however, it is still HSBC that dominates the Islamic bond market with a 35% share, ahead of both Maybank (10%) and CIMB group (9%). Sukuk sales in Malaysia have been off in 2012 due to worries over how the election will alter the financial landscape.
As Maybank's recently completed the $1.79 billion acquisition of the services and investment broking group, Kim Eng, the merged entity is expected to launch derivative products and future options broking in across ASEAN and Hong Kongwithin two years. Maybank’s net 1st quarter profit rose 18% on stronger loan growth, with the first full quarter with Kim Eng integrated into the results. Net profit came in at RM1.35 billion, compared with RM1.14 billion in the same quarter a year ago. Revenue rose year over year by almost 30 percent to RM6.7 billion.
Thailand is the next commercial banking market on both Maybank and CIMB Group’s radar for commercial banking services. As part of the plan to integrate financial services and standardize banking procedures and regulations across ASEAN by 2015, the larger commercial banks are also looking to expand into the less developed countries like Laos and Myanmar.
Maybank is listed in Malaysia and carries a long-term stable outlook from Fitch and S&P on an A- rating. They are currently trading at a future multiple of 13.3, carrying a 7.7% dividend yield according to Bloomberg.
The KLCI Bursa Malaysia Index has trailed other ASEAN indexes so far in 2012, as GDP growth has been steady, if unspectacular, at around 4.5% Malaysia’s economy is going through a restructuring of state-owned-enterprises as it adjusts to needing to import more energy. But, the underlying fundamentals of Malaysia’s economy are sound, as they are very well insulated from Europe’s problems.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.