Sunday 1 December 2013

Yield and Currency Diversification into Singtel

In recent weeks, we highlighted a number of equity investment opportunities. These included Daiman Development, Matrix Concepts and the Selangor water concessionaires of Gamuda, Puncak Niaga and Kumpulan Perangsang Selangor. We were also negative on China Stationery, HB Global, Asiasons, Blumont and LionGold. The stock performances of these companies are listed in the table below. Obviously we are not always right, at least in some cases, not yet.

Making money is great. But keeping the money you made is critical.

In capital markets where non-equity investments are less sophisticated, many of us would look at some risk diversification within our equity portfolio.

This is what we have decided to share this week.

Singapore Telekom (SingTel) is the largest listed company on the Singapore Exchange by market capitalization and 51.88% owned by Temasek Holdings, the investment arm of the Singapore Government.

It controls 47% market share of the island’s telco business.  It has diversified regionally into Indonesia, Philippines, Thailand, Bangladesh, India, Malaysia, Sri Lanka and Africa and now serves a total of 468 million mobile customers.

It is trading at a low valuation of less than 17 times price to earnings, much lower than all its smaller competitors in Singapore and Malaysia. We believe this reflects the weaker earnings for this financial year due to forex losses from the weaker currencies of Australia, India, Thailand and others relative to the Singapore dollar as well as operational challenges at Optus, its Australian operations.

Despite paying a competitive dividend yield, its dividend payout ratio is only 75% of the profit it makes. As a result, the Company is able to invest strongly in capital expenditure, amounting to 12.5% of its revenue each year.  This is an industry of rapid technological changes and to stay ahead, companies must be able to make huge investments.

For those who are more interested in a pure Singapore play, then the alternative is M1. Its earnings will grow as it is the first operator to offer nationwide 4G services and it is focused on the mobile business. At current prices, it offers a yield of 4.9%.

As a comparison, the yields for the very safe and large consumer companies listed on Bursa are in the range of 3.6% to 4.7%. These are companies like Nestle and British American Tobacco. These companies are extremely well managed with excellent track record on governance and transparency. Their earnings are very stable and are market leaders for their products.

SingTel is both a growth and defensive stock, pays a Sing dollar dividend yield of 4.5% and is trading at a reasonable valuation. SingTel is definitely worth a closer look for anyone looking to mitigate risks in their existing stock portfolio.

There is, however, no need to rush as it is a huge company and the stock is unlikely to go up by 10% like what happened to Daiman last week.

This article is published in the upcoming Edge.

Saturday 30 November 2013

Selangor salary hikes a right move

By Ho Kay Tat

The large salary increases proposed for Selangor state representatives have been opposed not only by Barisan Nasional (BN) leaders but also by certain members of  Pakatan Rakyat (PR)  which administers the country’s richest state.

Effective from Jan 1, 2014, the hikes will see monthly salaries for assemblymen nearly double from RM6,000 to RM11,250, and State Exco members triple from RM6,109 to RM20,250. The State Assembly Speaker’s salary will rise from RM6,109 to RM22,500 and deputy Speaker from RM3,327 to RM15,750. The Mentri Besar's salary will double from RM14,175 to RM29,250.

Coming soon on the heels of DBKL’s rate assessment debacle, naturally some would draw parallels. While we were against the DBKL rate assessment hike, we actually think the Selangor state salary increases are justified. One should note that on its own, an increase in salary or assessment rates for that matter, isn’t bad, but it must be justified.

We were against DBKL’s proposed 100-250% rate assessment hike as it has no merit. The authorities had justified it on an increase in property values, but any increase in rates should be based on operating costs and services provided to ratepayers. And in any case, we have shown that DBKL has been operating inefficiently, and it still has an operating surplus to cover costs.

In Selangor’s case, the question is whether the salary increases are justified.

There is little doubt the state has been run far more efficiently since 2008, when the present administration under Mentri Besar Tan Sri Khalid Ibrahim and his team took over. Since then, the state’s reserves have increased from RM400 million to RM2.7 billion.

For 2014, Selangor tabled a balanced budget of RM1.85 billion. It has a similar budget as DBKL, but serves a population 3.3 times and an area 33 times larger. On a per capita basis, it spends almost a quarter of what DBKL spends. Yet, it keeps its budget balanced, does not depend on federal government grants and does not regularly ask residents for more money.

If salary increases are justifiable, then the next question is the quantum.
Is a MB worth RM30,000 a month?

Yes, at least that. The MB is like a CEO of a large corporation, but in this case, an entire state with even larger financial and social responsibilities.

Even after having tripled, the proposed new monthly salaries of RM20,000 for Selangor  exco members are still less than that of top management in the corporate sector.

If CEOs and top management of  reasonably large corporations can make anywhere between RM1.0 million to RM3.0 million a year why shouldn’t the Prime Minister and his deputy, Federal Ministers and the MBs and State Excos of some of our larger states be similarly remunerated?

But beyond numbers, there is a strong argument for higher salaries for politicians. In any organisation, we must pay to attract talent. In governments and organisations of power, this becomes even more critical as we need politicians of all divides (both ruling and opposition) to be bright, noble and honest.

Politicians must be paid a decent salary to support their family, and so that they need not depend on “side incomes” for support. This is an essential first step in any developing country moving up the ranks and trying to weed out corruption. Pay the politicians well to attract talent, and reduce the temptation for corruption. It is also something which Singapore has adopted much earlier and has worked out well.

In Malaysia, we have for populist reasons not adopted that model of remuneration to show that our politicians and top civil servants do not serve for monetary returns but as a national service.

Yet we know many of them live lifestyles beyond what their salaries can buy.  

Why have that charade and hypocrisy? No one believes it anyway.

Pay our elected representatives, State Excos, MBs, Ministers well. Benchmark their remuneration to, say, 20% below what positions of similar responsibilities fetch in the private sector. The 20% is the national service discount .

On top of that, put them on KPIs like GDP growth and budgetary discipline targets.  Reward them with a bonus when they achieve their targets.  Dock their pay when they fail.

To assuage the critics, Khalid should set such KPIs for himself and his State Exco for 2014.  And hopefully, other states and even the Federal Government will follow suit.

This article is published in the upcoming Edge.

Friday 29 November 2013

DBKL – It’s about responsible spending

Last week, we contrasted the budgets of Dewan Bandaraya Kuala Lumpur (DBKL) and the State of Selangor. The general conclusion was that given the two have relatively same revenue base, Selangor was spending its income much more efficiently than DBKL. This is because despite the fact that Selangor is far larger (in terms of number of residents or land area), it has a smaller operating budget.

Some people were unhappy and challenged my analysis on the basis that running a State is different from running a municipality. I acknowledge this fact. Indeed, comparative analysis is never absolute. No two municipalities have exactly the same mandate, requirements and expectations.

This week, I compare the budgets of DBKL with the municipality of Penang Island and Ipoh, as shown below.

The conclusions are the same. DBKL spends 3 times more than Penang Island and 5 times more than Ipoh in terms of operating expenditure per person.

In terms of land area, DBKL spends 9 times more than Penang Island and 34 times more than Ipoh per square km. Note that the budgets for Penang Island and Ipoh are not the latest, but it will not change the conclusion.

Are these cities totally comparable? No.

Kuala Lumpur is the capital city of the country and it deserves more attention and care. But we have also not taken into consideration that KL has a development budget of almost RM800 million while the other cities are operating on RM16million. So, perhaps this is more than sufficient to offset the difference in status of the cities.
Let me now move to the second area of misunderstanding, that assessments should be based on property valuations.

DBKL as a municipality operates on a budget, based on what it needs to meet the demands and expectations of its residents. The people have the right to expect that DBKL will be responsible, accountable and prudent in spending their money.

So, the first requirement is to question the budget. Is the budgeted amount fair and reasonable? This is why we have written extensively on this topic.

Once the total expenditure amount is agreed or acceptable to the people, then the next question is how to share the costs of running DBKL. A fair methodology used in most cities is to correlate the budgeted expenditure with the amount of assessment to be collected from each residence based on a percentage of the value of their property.

How does this work in practice? Say the total property value in City X is $10,000 million. The City’s budgeted expenditure is $80 million. Then, each resident will pay the equivalent of 0.8% of the property value.

Now, assuming the total property values in City X doubled to $20,000 million. If we allow the rate of 0.8% to remain constant, then the City will have a $160 million budget to spend. But this should not be allowed. It will only encourage wastages and inefficiencies. In any case, the gains in property values are taxed indirectly through RPGT and income taxes on rentals.

Instead, the right approach is to first decide what is a reasonable budget for City X. Say it is raised from $80 million to $100 million.  Then, the assessment rate will be reduced to 0.5% of the property value of $20,000 million.

I like to add that the above methodology on property assessments is the most common form applied, as far as I am aware.

I hope I have sufficiently clarified and put to bed the main assertions I have made, namely, DBKL needs to be more efficient and transparent in the way it spends and revenue collection should not be tied to property values.