Wednesday 20 November 2013

Update: Matrix Concepts

Since our highlight on Matrix Concepts (Matrix) on 10 Oct 2013 in “The Good, The Bad, The Ugly”, share price has risen by 13% to hit a high (since listing) of RM3.24 on 19 Nov 2013. 

The company declared a third interim single tier dividend of 5 sen per share and special single tier dividend of 5 sen per share on 19 Nov 2013. The ex-dividend date for Matrix is 27 Dec 2013. DPS declared post listing amounts to 17 sen per share and based on our estimate the company should deliver DPS of 23 sen for the full year (40% dividend payout ratio) giving a yield of close to 7%. 

To read more about the company and its latest 9M results, go to 

Tuesday 19 November 2013

A good and safe bet

In the upcoming issue of The Edge is an article on a Bursa Malaysia listed company that I would invest for my children.

The underlying assets are excellent and will gain values over time, much faster than inflation or bond yield. The Management is conservative and has a good track record. The Company is cash-rich and can easily withstand any economic slowdown. Operating costs are prudently managed.

Yet, it is trading at a very cheap valuation. There is no imminent competitive risk to the Company.

It is one of the few cases where you can invest and sleep soundly.

Saturday 16 November 2013

DBKL’s 200% assessment hike is not right

The latest angst among property-owners in Kuala Lumpur is Dewan Bandaraya (DBKL)’s proposed sharp increase in property assessment taxes.

The proposed assessment tax increases – by between 100% and 250% according to various reports – is the latest measure to hit the property sector and comes on the heels of higher real property gains tax and other measures announced in the recent Budget.

With the rising cost of living in Kuala Lumpur and an increasingly squeezed middle-class, this adds further to the burden of the public. For those renting properties, be prepared to pay higher rents as landlords pass these additional costs down.

The authorities have justified the hike in assessment rates on the rise in property prices. But that should not be the reason for such a hefty rise.

Property prices in Kuala Lumpur are already high and out of reach for many today. That is why the government is trying to create more affordable housing under PR1MA and various schemes, and had imposed the property cooling measures to reduce speculation and prices.

Raising the assessment tax will have the opposite effect.

Let me argue why the reasons for raising assessment rates are flawed.

While the amount of assessment taxes is tied to the value of real estate, I believe the rate it increases should not be tied to an appreciation of property values. It should, instead, be linked to the costs DBKL incurs in providing its services.

As a municipality, DBKL should aim to balance its own budget and manage its costs. It must generate enough revenue to cover the costs of providing services to Kuala Lumpur residents.

And in doing so, it must be able to provide essential services efficiently and at the lowest costs possible. There must be little or no room for corruption, inefficiency and wastages. This must be the overriding priority.
In other words, the impetus for any rate hike should be the costs to cover DBKL’s spending, rather than just because property prices have increased.  
With this in mind, let us look at DBKL’s finances.

DBKL’s annual reports are not posted on its website. What we do have are the annual budget speeches by the mayor, from which we can glean some financial information.

For 2013, DBKL has budgeted total expenditure of RM2.19 billion, up 15.3% from RM1.9 billion in 2012. Of this amount, RM1.406 billion is for management or operating expenses while the remaining RM782.6 million is for development expenditure.  

For management expenses, the three biggest cost items are emoluments (RM386.7 million), overtime payments (RM55.4 million) and supplies and services (RM908.7 million).

On the revenue side, DBKL expects total revenue of RM1.62 billion in 2013, up 11.1% from RM1.46 billion in 2012. It should be noted that DBKL’s spending growth is outpacing revenue.

Of this amount, RM880.8 million or 54% will come from assessment taxes, an 8.6% increase over the RM810.5 million achieved in 2012. Other major revenue sources include payments of building control (RM270 million), housing rental and service charges (RM71.3 million) and licencing (RM53.9 million).

With revenues at RM1.62 billion and expenditure at RM2.18 billion, does this then imply a deficit of some RM560 million that DBKL needs to address?

This is not the case, as revenue already covers management or operating costs. In fact there is an operating surplus of over RM200 million, which is used to partly fund development expenditure.

Development expenditure, on the other hand, is largely funded by the federal government and leftover operating surpluses, as it has been for a very long time.

For 2013, DBKL expects to receive RM414.7 million in federal government funding. This will be in the form of RM300.5 million under the federal government’s allocation for the 10thMalaysia Plan and RM114.2 million from various government grants.
Of course, one could argue that since DBKL operates with a deficit, it should raise assessment taxes and other forms of revenue to balance the overall budget.
This should not be the case.

This is because apart from assessment and other municipal taxes, residents of Kuala Lumpur also pay hefty corporate and personal income taxes to the federal coffers. These taxes are used by the federal government for development and operating expenditure for the whole country. The federal development expenditure is apportioned to the various states, municipalities and ministries.

In other words, the development budget of DBKL is funded by the development budget of the country for which residents of Kuala Lumpur already pay corporate and personal income taxes.

In conclusion, higher property prices alone should not be the reason to raise assessment taxes. I believe as long as DBKL’s operating costs are adequately covered by revenue, there should be no reason to increase assessment taxes, certainly not in the quantum that has been proposed.

Just as the federal government is reigning in on spending, DBKL and other municipalities should also do the same, and ensure the taxes we pay are spent transparently and responsibly.   

It is not right to keep going back to the people for more money.

Thursday 14 November 2013

Is Iskandar Malaysia overpriced?

Every conversation about Iskandar Malaysia (IM) revolves around three related topics. One, the launch price for residential properties and land prices have doubled in the past two years. Two, the huge supply of completed residential units that will come into the market in the next two to four years from projects launched in the past two years. And lastly, what is the impact of the cooling measures announced in the recent Budget and other specific measures contemplated by the State Government.         

Although we have also seen a major push to create economic activities and jobs, these new developments cannot rely on domestic take up alone.

Can the current prices and demand for properties in IM be sustained? We believe it depends on the following two questions. 1) Is the IM growth story secular or cyclical? and 2) Can IM be an integral suburb of Singapore? Will workers in Singapore (Singaporeans or Malaysians) make IM their home?
 Read the answer to the question in The Edge this week.

Tuesday 12 November 2013

The saga of Asiasons, Blumont and LionGold continues

AmFraser, a stockbroking company in Singapore and a subsidiary of AMMB, may have lost between SGD70million to SGD80million from the trading losses of its clients arising from the collapse of the stock prices of the above three companies.  We expect other stockbroking companies to report similar losses soon.

I will keep you updated on the winners and losers. Read more about it in tomorrow's The Edge Financial Daily and The Edge this Saturday.