May be it is related to Bursa filings last week that show founders disposing their shares.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3147907

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3147909

Focusing on Litrak alone may risks missing out the bigger picture. There have been talks about a highway trust.

https://www.malaymail.com/news/malaysia/2020/08/29/tok-pa-govt-studying-proposal-to-set-up-highway-trust-body-in-malaysia-redu/1898404

http://www.sharetisfy.com/2020/08/highway-trust-is-probably-way-to-go.html

BTW did you get the 2020 Q3 GI book value by subtracting segment assets from segment liabilities? I refer to Note A14. The result is 7,141.964 - 4.498,799 = RM2,643 million.

Working in this way, the value of life insurance = 13,817.214 - 12,674.509 = RM1,143 million is actually smaller (though life insurance is valued at higher multiples in M&A)

I agree with you.

However, an acquirer normally pay a premium for controlling stake during M&A. The acquirer either believe they can turn around the acquisition target or there is synergy to be unlocked. Retail investors may not adopt this M&A mentality in valuation. Typical retail investors have shorter investment horizon. They want to see fast result and make quick bucks.

Fortunately, Allianz has increased the dividend payout since 2019 which makes long-term holding bearable. But on the flip side, does it mean the management returns excess capital to shareholders because they see less room for growth?

Hi Yu Wei, thanks for your input. The Am Invest report quoted PB of 0.6x, which has ignore the full convertibility of ICPS.

Including ICPS, the diluted net asset per share is RM11.64. PB on diluted basis = RM13.50/ RM11.64 = 1.16x.

But I agree it's still lower than all the M&A figures reported.

Any view on the AmBank and Affin Bank disposal?

AmBank may dispose AmGeneral & AmMetLife to shore up its capital following the RM2.83 billion settlement on IMDB.

https://www.thestar.com.my/business/business-news/2020/04/16/ammb-insu...

Reports also mention Affin Bank may dispose Axa Affin General and Axa Affin Life. But this was not news as it was reported back in 2019.

https://www.theedgemarkets.com/article/possible-insurance-jv-disposal-...

Allianz was mentioned as a potential suitor. I hope it won’t overpay. Any view on the opportunity and the realignment of insurance business landscape?

One brokerage report has quoted an average PB of 1.9X and 3.0X PB for local general and life insurer M&A. Another report uses a different set of multiples at 1.6X and 1.9X. Does anyone has past M&A PB multiples that we can use to value Allianz?

As of 2020Q4, Allianz has a book value of RM4,032 million Any idea what’s the split between general and life? I note that during FY2020 life has contributed higher gross written premium, but general has contributed higher PBT.

@PaulTsai, it's reassuring to learn from a regular road user that he expects busy traffic :)

@Zackmeiser, I'm not familiar with the company. Based on news it had other concessions that offer continuous support.

RM4 per share upon liquidation? That's highly unlikely. It represents RM4 * 532 million > RM2 billion, or about 8 to 10 years of annual profits! Note the largest asset on its balance sheet, the Highway Development Expenditure, is depreciated yearly such that it is zero by the time concessions end. Litrak is a company of dwindling asset (and debt too).

Are there any regular users of Litrak highways who could share their experience and outlook?

My impression of LDP is that certain sections could be packed at peak hours. But that was before Covid-19 pandemic. With the change in work culture and proliferation of online shopping today, how long would it take for LDP traffic to recover to pre-pandemic level? Or will it ever?

How about SPRINT? My impression is traffic was light. Would that change when the pandemic is over? What are the developments around those areas that could add/ subtract traffic?

There is precedence of toll concessions handed back to government. Below is produced from Google search.

“MTD Infra is the country's second largest toll concessionaire. Through its wholly-owned subsidiaries, MTD Prime Sdn Bhd (MTD Prime) and Metramac Corporation Sdn Bhd (Metramac), MTD Infra holds the concessions for the Kuala Lumpur-Karak Highway (KLK) and its extension, the East Coast Expressway Phase 1 (ECE 1), the East-West Link Expressway (East-West Link) and the Kuala Lumpur-Seremban Expressway (KL-Seremban).

Metramac Corporation Sdn Bhd was granted the concession on four toll roads in 1992 under a Replacement Concession Agreement signed with Datuk Bandar Kuala Lumpur. The four toll roads under the concession awarded to Metramac Corporation Sdn Bhd are Jalan Pahang, Jalan Cheras, East-West Link Expressway and the KL-Seremban Expressway. Tolling commenced on September 1991 for Jalan Cheras and on 1 August 1995 for Jalan Pahang, East-West Link and the KL-Seremban Expressways.

The toll concession of Jalan Cheras and Jalan Pahang were handed over to the Government on 14 September 2003 and 18 March 2004, respectively.”

Toll collection at Cheras was finally abolished in 2011. I’m not sure about the details, except that Cheras toll had massive jams regularly and was a hot political issue before toll abolishment.

https://www.thestar.com.my/news/nation/2011/05/16/toll-abolished-at-cheras-pjbound-plazas-of-metramac-highway

KYY said "Currently, KPS, Dominant and MNRB have dropped to almost the price levels as when I posted my buy recommendation articles." That means the "KYY's effects" have weaned off.

But if a stock is truly underrated, the market will discover its value sooner or later, with or without KYY. We can judge the quality of KYY's calls say 6 months later.

KYY has published five "underrated" stocks in less than 3 weeks which you can find in his blog.
http://koonyewyin.com/2021/03/

One thing good about KYY is he doesn't delete his posts. I've compiled the stock price performance since his publication. The measurement is based on closing price which is the commonly accepted way of measuring performance. After all, if a stock is truly underrated, we should expect closing price to trend higher in the future after its value is "discovered".

The results so far:

(1)
KPS "most underrated". Published on Mar 9 where closing price was RM0.93. In the subsequent days the highest closing reached was RM1.23 on Mar 15. The latest closing price (as of Mar 26) was RM0.96. Price has gone up 3% since initial publication.

(2)
Dominant "underrated". Published on Mar 12 where closing price was RM1.17. The subsequent days closing prices were never higher than RM1.17. The latest closing price (as of Mar 26) was RM0.945. Price has declined 19% since initial publication.

(3)
MNRB "underrated". Published on Mar 19 where closing price was RM1.42. The subsequent days closing prices were never higher than RM1.42. The latest closing price (as of Mar 26) was RM1.30. Price has declined 8% since initial publication.

(4)
OSK "underrated". Published on Mar 22 where closing price was RM0.98. In the subsequent days closing price trended upward. The latest closing price (as of Mar 26) was RM1.02. Price has gone up 4% since initial publication.

(5)
EUPE "underrated" is the latest publication on Mar 26. I shall follow how it develops.

To be fair to KYY, a few weeks is too short to judge the quality of his calls. We now have a sample of 5 stocks (forget about the Supermax incident) to judge KYY's performance 6 months later.

KYY has published five "underrated" stocks in less than 3 weeks which you can find in his blog.
http://koonyewyin.com/2021/03/

One thing good about KYY is he doesn't delete his posts. I've compiled the stock price performance since his publication. The measurement is based on closing price which is the commonly accepted way of measuring performance. After all, if a stock is truly underrated, we should expect closing price to trend higher in the future after its value is "discovered".

The results so far:

(1)
KPS "most underrated". Published on Mar 9 where closing price was RM0.93. In the subsequent days the highest closing reached was RM1.23 on Mar 15. The latest closing price (as of Mar 26) was RM0.96. Price has gone up 3% since initial publication.

(2)
Dominant "underrated". Published on Mar 12 where closing price was RM1.17. The subsequent days closing prices were never higher than RM1.17. The latest closing price (as of Mar 26) was RM0.945. Price has declined 19% since initial publication.

(3)
MNRB "underrated". Published on Mar 19 where closing price was RM1.42. The subsequent days closing prices were never higher than RM1.42. The latest closing price (as of Mar 26) was RM1.30. Price has declined 8% since initial publication.

(4)
OSK "underrated". Published on Mar 22 where closing price was RM0.98. In the subsequent days closing price trended upward. The latest closing price (as of Mar 26) was RM1.02. Price has gone up 4% since initial publication.

(5)
EUPE "underrated" is the latest publication on Mar 26. I shall follow how it develops.

To be fair to KYY, a few weeks is too short to judge the quality of his calls. We now have a sample of 5 stocks (forget about the Supermax incident) to judge KYY's performance 6 months later.

KYY has published five "underrated" stocks in less than 3 weeks which you can find in his blog.
http://koonyewyin.com/2021/03/

One thing good about KYY is he doesn't delete his posts. I've compiled the stock price performance since his publication. The measurement is based on closing price which is the commonly accepted way of measuring performance. After all, if a stock is truly underrated, we should expect closing price to trend higher in the future after its value is "discovered".

The results so far:

(1)
KPS "most underrated". Published on Mar 9 where closing price was RM0.93. In the subsequent days the highest closing reached was RM1.23 on Mar 15. The latest closing price (as of Mar 26) was RM0.96. Price has gone up 3% since initial publication.

(2)
Dominant "underrated". Published on Mar 12 where closing price was RM1.17. The subsequent days closing prices were never higher than RM1.17. The latest closing price (as of Mar 26) was RM0.945. Price has declined 19% since initial publication.

(3)
MNRB "underrated". Published on Mar 19 where closing price was RM1.42. The subsequent days closing prices were never higher than RM1.42. The latest closing price (as of Mar 26) was RM1.30. Price has declined 8% since initial publication.

(4)
OSK "underrated". Published on Mar 22 where closing price was RM0.98. In the subsequent days closing price trended upward. The latest closing price (as of Mar 26) was RM1.02. Price has gone up 4% since initial publication.

(5)
EUPE "underrated" is the latest publication on Mar 26. I shall follow how it develops.

To be fair to KYY, a few weeks is too short to judge the quality of his calls. We now have a sample of 5 stocks (forget about the Supermax incident) to judge KYY's performance 6 months later.

@Wijarati, highway maintenance alone in the post concession period cannot generate sufficient revenue. Maintenance expenses is in the order of RM20m a year (it was RM30m, RM25m, RM26m and RM15m from FY2017 to FY2020). Staff cost adds another RM27m per annum. Even with a 100% markup, the net profit generated will only be a fraction of current net profit at >RM200m annually. Litrak will need new projects/ businesses.

@Zackmeiser, my earlier comment is based on a very rough calculation too. A more refined calculation needs to look into the free cash flow generation. The annual cash flow from operation (CFO) declined slightly from RM383m in FY2017 to RM360m in FY2020 (lets ignore the pandemic period, where 9MFY2019 CFO was only RM105m).

Given that maintenance capex is minimal, I believe post pandemic the free cash flow (FCF) can revert to about RM350m per year. There is no more scheduled toll hike for LDP. Alternative routes and alternative transports may see its traffic volume (hence revenue) declines in coming years. But this could be offset by SPRINT, which until recent years have been loss making but now starting to make a small profit contribution.

Assume
(1) Cost of equity at 10%
(2) RM350m FCF per annum continues until FY2031, and with a bit more contribution from SPRINT before its concession ends too in 2031 and 2034

Subtracting the net debt of about RM120m, and divide by 533 million shares, the value per share is about RM4+, which is slightly higher than current price. Of course current price will be attractive if we know there is a good future beyond 2034, which right now is an unknown.

Of course, I may also err on the side of caution by assuming FCF is stagnant in the coming years. Who knows there might be marked increases in traffic and revenue from SPRINT, where Damansara LINK and Kerinchi Link still have one scheduled toll increase in 2022. But I have no clue about that.

@Zackmeiser,
I checked back historical records. It pays dividend semi-annually. It paid 25 cents every year from FY2016 to FY2020, but cut the distribution to 20 cents in FY2021 due to pandemic impact. Therefore I think your assumption of 4*10 cents = 40c per annum is overly optimistic. It is unlikely to happen before it pays down its Sukuk.

The outstanding Sukuk as of the end of FY21Q3, FY20 and FY19 are RM584m, RM781m and RM995m respectively. At a rate of about RM200m repayment every year, it will probably take another 3 years to fully repay the Sukuk. After that it could increase dividend payment by a large amount.

However, the future dividend has to be converted into present value. Depending on the cost of equity, the future contribution may not worth a lot in today’s money. For example, if the cost of equity is 10%, a dividend of 60 cents four years later is only worth 60/ 1.1^4 = 41 cent.

On that basis, the sum of dividends in the next 10 years, converted to current money, will not be sufficient to cover the share price today. There have to be some other contributions to make the stock at about RM4 today a worthwhile investment.

@kywoo, you can find the 2020 AGM Q&A in the following page.
https://www.hli.com.my/gm_current.php#

But Q&A for past AGM cannot be located. I agree the IR is poor. There are smaller companies which have done a far better job.

"Regarding market rumours of IOIPG getting involved in the vaccine distribution a few months ago, Dato’ Voon clarified that the company has no immediate plans to venture into other non-property related business." ~~ from analyst report

So much the rumours created to send share price from under RM1 to RM1.77 in 2 weeks.

Should get back to fundamentals. How will increased footfall contribute to the recovery? Potential catalyst from REIT listing a few years later?

I like companies with good fundamentals and management, conservatively managed and yet is on a growth path. Better still it is little noticed and illiquid so that the price suffers from a liquidity discount. While I don't understand this company as well as some of you here, Allianz seems to fit the bill.

I'm not bothered by a stock price that hardly moves as long as dividend is steady and growing. A stagnant share price offers me time to observe the business performance, and opportunity to top up/ exit during that period without suffering capital loss/ opportunity cost.

Eventually share price will follow a company performance, for better or worse.

Some retail investors may not be happy for being “misled” by those sell side analysts.

In this hour-long interview with Pankaj Kumar by Chuang Khoo Hsu, Pankaj explained the process and the dilemma faced by analysts, including by himself at one time (he has already retired from his professional investment career). He recounted the story where he was still remembered by the then CFO of Tanjung for being the only analyst making a sell call.

https://www.youtube.com/watch?v=HK5Y1khMdD8

He has posted a similar title in the TG  forum. I've commented there that it smells like recruiting members for his latest promotion.

The two tiny cap stocks will be easier to influence than Supermax where many big players are alongside, not to mention indirect impact from other glove stocks.

I read some endorsement comments here. Good luck to all those who knowingly engage in a game of the greater fool, trying to pass your ever more expensive tokens to the next fool.

Same title posted in Supermax forum. It smells like recruiting members for his latest promotion.

I think this is very smart move despite the ridicules by the various comments here. Given that Top Gloves has 120,000 shareholders, even a 0.1% recruitment rate is enough to send his two tiny cap  counters soaring.

Should not shed tears for his new recruits later. All are knowingly engaging in the game of the greater fool, trying to pass their ever more expensive tokens to the next fools.

@Starship2, as I've commented earlier, the main objective of free reports from sell side analysts are to encourage brokerage customers to trade. This is also the reason why the number of buy calls always out number sell calls given there are more potential buyers than potential sellers for stocks (as retail investors don't short sell based on sell recommendation)

Users who trade based only on analysts' TPs are engaging in gambling.

Hi pjseow, thanks for clarifying that the retained earning is just a balancing item for the difference between asset increase (from undistributed profits) and liabilities. Yes, I also agree that heavily indebted companies with weak balance sheet will suffer a valuation discount due to increased risk.

After HK listing Top Glove will probably have a war chest in the order of ~RM10 billion cash. It will be in a much stronger position to weather any potential storm. May be that warrant a slightly higher PE valuation as compared to the past? However, if the cash is not deployed in the next 1 to 2 years there will be a drag on its ROE, which may also correlate with a lower Price to Book ratio.

Nevertheless, I have no doubt the “safety factor” of Top Glove would have increased substantially after a successful HK listing. If a vicious price war breaks out the company is likely to be the last one standing, although shareholders will still suffer at least during the interim period. The best case scenario is for all players including the Chinese rivals to have an implicit understanding for measured expansion and not trying to undercut one another.

Thanks yuwei for the news. I share the link here. Ironically nowadays Najib has become the best opposition MP in my view.

https://www.freemalaysiatoday.com/category/nation/2021/03/14/why-are-premiums-high-when-accidents-thefts-are-down-asks-najib/

@Zackmeiser, my gut feeling is one should value based on a dividend discount model which runs until concession ends + liquidation value + a premium for the listed status which offers the possibility of new businesses/ projects.

Of course, the last part is a guesswork.

Yes, the concession still have about another decade to go. There is also the possibility of new projects before concession ends.

However even an investor with a short holding period of say 3 years still can't ignore the finite concession period. The institutional investors value the company based on discounted cash flow. They will not pay a premium for retail investors to exit 3 years from now by assuming company dividends can grow into perpetuity.

@pjseow, FY21 and FY22 profits not distributed as dividends will be retained, primarily to fund future investments. If analysts have done their earnings projection properly, this retained earnings would have been responsible for their projected FY23 earning, which in turn is used to calculate the share price by applying a PE multiple.

Therefore adding the undistributed FY21 and FY22 profits will be like double counting. It’s for the same reason that in the typical PE valuation, the retained earning from last year is not added to the PE valuation.

Hi Ben, thanks for sharing the article by Pankaj C Kumar. This is a very good article.

I actually read the article three times to make sure I fully understand his points. I’m not concerned about the (mis)statement on earning downgrade. What I found useful is Prakaj has pointed out common valuation mistakes committed by analysts. More importantly, he has also provided a valuation approach which I will work out here.

Pankaj’s valuation approach is simple and yet practical. Basically he assumes by FY23 earnings will revert to normal. He therefore applies the historical mean PE of 20 times to FY23 forecasted EPS. After that, by adding expected dividend for FY21 and FY22 to the earlier value, we get the current "fair value" for Top Glove.

I try to improve on his approach by adding two modification.

First, I assume the HK listing will be completed by May-Jun as expected by Top Glove, thereby adding additional shares of 1,495 million to existing 8,015 million, making a total of 9,510 million shares. For simplicity, I shall assume dividend and earning dilution to kick in only from FY22. (Note: the HK IPO is expected to raise RM7.77 billion based on RM5.2 IPO price used by Top Glove for illustration purpose. However, I expect the extra capital raised will have little contribution to FY23 revenue as existing cash flow is more than sufficient to support expansion until then.)

Second, I will convert FY22 dividend and FY23 PE to present value by using the 8.5% cost of equity assumed by Prakaj. I agree with him that it will be cheaper to use debt capital which only costs 3% plus. However by raising a lot of cash in HK, the resulting cash balance will be sufficient to cover at least the RM10 billion Capex planned until FY25. Hence the assumption of of 100% equity capital and the higher discount rate at 8.5%.

With the above modifications, the components of Top Glove value will be
(A) Dividend per share for remaining of FY21.
Expected FY21 net profit = RM10,695 million
Expected FY21 EPS = RM10,695 million/ 8,015 million shares = RM1.334
Expected FY21 DPS = 70% * RM1.334 = RM0.934
Remaining FY21 DPS to be paid = RM0.934 – RM0.165 = RM0.769

(B) Dividend per share for FY22
Expected FY22 net profit = RM4,145 million
Expected FY22 EPS = RM4,145 million/ 9,510 million shares = RM0.436
Expected FY22 DPS = 50% * RM0.436 = RM0.218
Present Value of FY21 DPS = RM0.218 / 1.085 = RM0.201

(C) Value based on 20 times of FY23 Earning
Expected FY23 net profit = RM2,496 million
Expected FY23 EPS = RM2,496 million/ 9,510 million shares = RM0.262
“Fair Value” based on 20 times historical mean PE = 20 * RM0.262 = RM5.249
Present value = RM5.249 / (1.085)^2 = RM4.459

Summing up the three components, the current value = A + B + C = RM0.769 + RM0.201 + RM4.459 = RM5.43. I'm a bit surprise to find the result is quite close to current share price at RM5.20

Of course, the above valuation changes as assumptions change. For example, if vaccine resistant virus is established and gain dominance in the coming months, a PE multiplier higher than the historical mean of 20 times will be warranted.

On the other hand, we also have to watch for sign of looming competition and its impact on margin, especially due to Chinese competition. Currently analysts assume FY23 net margin is about 20% (= RM2,496m net profit/ RM12,524m revenue). This is actually much higher than the 6% to 12% net margin achieved between FY11 to FY19. In a price war scenario, the net margin could easily revert to say 10%. Even if PE remains at 20 times, the PV for FY23 share value will be halved to RM2.237. Adding back the dividends, the present value is only RM3.21.

This might not be a valid outcome. However I like to consider all possible valuation approach and assumptions out there to make sure all considerations are covered.

Hi Yuwei, I got your point. I too agree that a buisness with safe and steadily growing profitability offers a more sound investment. As an outsider I'm just mystified by how Berkshire did it. Thanks for your sharing!

Hi Ben, thanks for another great contribution. I agree with your criticisms on the analysts' work.

I actually made a similar comment in your article on Supermax last week. The question then was why Supermax price continued to slide despite most analysts’ buy calls. I postulated that the market dominated by institutions simply doesn’t trust analyst inputs.

https://klse.i3investor.com/blogs/bursainvestments/2021-03-02-story-h1541975241-Supermax_Trading_at_Forward_PE_of_3_3_While_Sitting_on_RM3_56_Billion_C.jsp

Sell side analysts are known for adjusting their TPs to stay not far off from the current market price. If the market price has dropped by say 20% since the last quarterly report, they may adjust their TP down by roughly 20% in the current quarter while still maintaining their buy/ hold calls.

The valuation assumptions and calculations are reversed engineered accordingly. It happened last year when the price was on the way up, and it happened this year again when the price was on the way down.

Moreover, analysts also need the “safety in number”. Not only their TPs are usually not far off from market price, but also not far off from one another. There is no reward for being a hero. The odd one out is usually hammered. As you've commented, Affin Hwang analyst was ridiculed in July last year when it put up a TP of around RM60 (RM20 after split-adjusted), and a bull case of RM110 (RM37 split-adjusted)!

https://www.theedgemarkets.com/article/top-gloves-fair-value-could-surpass-rm110-affin-hwang-says

If the Affin analyst was forgiven, the same cannot be said of the JP Morgan analyst who went the other extreme by assigning the infamous RM3.50 target price in Dec last year.

https://www.theedgemarkets.com/article/jp-morgan-pegs-these-glove-makers-fair-value-half-their-market-price-says-supernormal-cycle

With such experiences, the analysts have good (personal) reasons to maintain buy calls with TP’s just a few notches higher than the market price. What they did not do well is to cover their tracks in their valuation work, as you’ve rightly highlighted. But such a mistake is common in the rush for time. Analysts often have to churn out multiple reports overnight during reporting seasons.

However, their valuation mistakes cut both ways. I’ll take the RHB report you highlighted as an example.

You’ve rightly pointed out that the analyst overlooked 2 quarters of earnings for FY21. Given the cash flow for FY21 was estimated at around RM10 billion, it means he missed out about RM5 billion for Top Glove. Divided by about 8 billion shares, an extra 60+ sens should have been added to the latest TP of RM6.8, making the TP close to RM7.5.

However if you look at the DCF valuation table, the analyst assumed only an annual CAPEX of RM500 million. But Top Glove press release has stated that it “has earmarked RM10 billion for CAPEX over the next 5 years from FY2021 to FY2025”.

In other words, between FY2021 to FY2025, the analyst has underestimated an investment cost of close to RM 7 billion. Converting to present value that was about RM6 billion or about 75 sen per share. These two errors that roughly cancel out one another. The "corrected" TP ends up about 10 sen lower or RM6.7.

But I won’t blame the sell side analysts. This is the industry norm. The is also not restricted to Malaysia. The reason that sell side analysts exist is for brokerages to get their clients to do more trading and generate more commission revenue.

Wonder why the number of buy calls always far outweigh the number of sell call? Besides not offending their investment banking clients (i.e. companies under coverage like Top Glove here), it’s far easier to get more people to trade with buy recommendation than sell recommendation.

That’s why I am cautious when quoting/ using analyst figures when doing my own valuation.

Hi Yuwei. GEICO is often hailed as the success story in auto insurance according to the folklore of value investing.

Are there any lessons that Malaysian motor insurers especially Allianz can learn from GEICO, though we may be constrained by a smaller market size?

@freedomfund, thank you for taking the time to share your thoughts. Your inputs have given me a fresh and useful perspective when I read those company reports. I've truly benefited!

@freedomfund, thanks for your valuable inputs. I've learned a lot from you!

Considering the business fundamentals, management quality and valuations of the different insurers listed in different markets, which insurance stocks would you accumulate, besides the AIA stock you already own in HKEX?

Do you feel that insurance stocks are under/ over/ fairly valued as compared to the general market or financial sector stocks?

@untong, thanks for your clarification and the relevant links. Yes, the AGM Q&A will be a good source of information. I'll read up first. Much appreciate!

Yes, Takaful Malaysia management has a long record of disposing their shares granted, which does not send a good signal to shareholders.

@freedomfund, I believe Takaful Malaysia high PB ratio has to be compared against its high ROE at over 20% currently (used to be above 30% a few years ago). While Public Bank is priced at "only" PB 1.8X, its ROE is just above 10%. The ROE for banks has been declining for years given they need to hold more capital under Basel III.

Since you’ve been in the insurance industry for many years, can I seek your opinion on how the competitiveness and profitability of life insurers in Malaysia, in particular Allianz Malaysia which is also listed. How does it compare against AIA and others?

I read that AIA has done very well in recent years because mainland China clients sign up with AIA Hong Kong as a means to transfer wealth out of the mainland. The other stellar performer in HKEX is Ping An Insurance. Wonder if you have any view on them too?

Hi untong and yuwei, thank both of you for the explanation.

Can anyone elaborate on why insurers prefer motor insurance on the basis of cash flow? My personal experience is I pay up front premium for both motor and fire insurances on annual basis. Won't the cash flow for both types of insurance be quite similar to the GI?

I also looked up the ISM Insurance Services Malaysia 2019 Yearbook. I wonder why fire insurance has a much lower net claimed incurred ratio at 27.6% than motor at 70.1% (page 18). Does it mean fire insurance offers better margin? Or does fire insurance incur higher expenses in commission and management fee?

Building on papayashot’s question, I also wonder in the long run will Allianz be stuck in the low growth conventional insurance business. According to the ISM yearbook, general takaful GWP grew 18.8% in 2019 (albeit from a low base), but general insurance shrunk by 0.8% (refer page 15 and 21). New business contribution of Family Takaful grew 25% in 2019 (page 11).

Will the greater growth prospect compensate for the limitation on takaful players as highlighted earlier? How easy and likely for Allianz to apply for a takaful license?

Hi Yu Wei. Thanks for your reply.

It’s good that you highlighted that NPAR/ ILP policy acquisition cost is front loaded. Will IFRS 17 require the cost to be apportioned over the policy lifetime, like how profit recognition has to be distributed?

You’ve also highlighted that Allianz Life Insurance has grown its New Business Value by 250% from 2015 to 2019. I’ve crossed check the annual reports. Allianz first published NBV in 2015. The NBV over the 5 years amounts to about RM900 million.

Even factoring in policy surrender, could I say that conservatively there is still an embedded value of say RM800 million from just last 5 years alone? That is like RM 800m / (177m + 169m) = RM2.3 value per share created by life insurance over the period?

Is there a way to estimate the existing capital level of an insurance company, so that we can determine how much it is above the 130% minimum Capital Adequacy Ratio? And from there determine much new business it could write without increasing its retained earnings?

I still don’t understand why LPI has RM 2,075m of equity for RM 2,168m of contract liabilities, which means RM1 of equity for RM1 of contract liabilities. At the other extreme, STMB has RM1,542m equity for RM9,224m contract liabilities, or RM1 of equity for RM6 of contract liabilities.

What does this discrepancy tell us about their differences?

As a comparison, the capital ratio of Malaysian banks are closer to one another. For example, the CET1 ratio of Malaysian banks only differ by a few percentage points only.

Why do insurance companies have a larger discrepancy? What does it imply in term of their future growth potential, dividend payout, risk and other considerations?

Thank you.

Both STMB and MNRB are takaful insurers. Yet they have different levels of equity. For each amount of contract liabilities, MNRB has more equity than Allianz. But STMB has less equity. What could be the reasons?

LPI and Tune Protect have more equity to support each dollar of contract liabilities. Do general insurers need more equity? What could be the reasons.

Besides, LPI also seems to be very conservative. RM1 of equity supports only RM1 to RM1.3 of contract liabilities. Can this mean LPI has more room to declare higher dividend payout in the future?

I find a large discrepancy of this ratio among the insurers.

Allianz - between 3.7 and 4.0 (2014 to 2020)
STMB - declining from 9.7 to 6.0 (2014 to 2020)
MNRB - declining from 3.6 to 2.6 (2016 to 2020)
Manulife - increasing from 4.4 to 5.0 (2015 to 2020)
LPI - between 1.0 to 1.3 (2015 to 2020)
Tune Protect - between 2.2 and 2.9 (2015 to 2020)

I will now cut my original message down into a few summarized comments, and try post again. Basically, after reading your input, I have worked out the ratio of contract liabilities to equity for different insurers (data extracted from the Balance Sheet).

I assume contract liabilities represent size of business. I want to know how much equity will be needed to support a certain size of insurance business.

Hi Yu Wei. I want to continue above conversation. However, this i3 forum system does not accept my posting beyond a few sentences long. I've sent a message to your i3 Messenger. Please kindly take a look. Thanks.

Hi Ben, thank you for your reply.

Actually I just wanted to make a general comment on the sentiment in this forum, where people assume that by listing in “advanced” markets the Malaysian glove stocks could enjoy better valuation. I know given your knowledge you won’t fall for such simplistic assumptions.

This brings me to another sentiment in the forum. Some people believe that glove stock price is down because Bursa has been “manipulated”. My gut feeling is given RSS is limited to only 4%, short selling forces alone and whatever “propaganda machine” they have could not possibly have "pressed" the market down by so much and for so long. Timing wise, RSS only resumed on 1 Jan 2021, but the glove stock price downtrend has already started in Oct 2020.

In fact “downward manipulation” forces, if exist, are far weaker than the “upward manipulation” forces. Almost every analyst, except one or two odd fellows, has issued and maintained buy calls since last year. To me, if the advocacy to sell is manipulation, the advocacy to buy should also be seen as manipulation. Right now the buy calls still far outweigh the sell or even hold calls.

Just to be clear, I know you didn’t say it’s manipulated (just that the market price seems irrational). My opinion above is actually directed against some voices in this forum who blame the decline on manipulative forces.

This leads me to your central idea that given the huge cash pile, the multiple buy calls, the consensus view on the enormous profit for at least in 2021, the market valuation at a forward PE of 3.3X seems ridiculous.

While I don’t have a firm opinion on this, I would interpret this as in aggregate, the market (which is dominated by institutions instead of retail investors) doesn’t trust the analysts. After all, it’s well known that analysts often behave like a dog wagging its tail. Analysts adjust their TPs so that they don’t stray too far from the market price. The proof is while almost all analysts still maintain their buy calls, they have gradually slashed their TPs as stock prices decline. Most just make sure their TPs are 20% to 30% higher than current market prices. If analysts adjust their TPs in order to suit the market price trend, then their inputs to those TPs (projected revenue, margin ...) will be under suspect too.

The same kind of skepticism could be extended to Frost & Sullivan research, including the ASP projection we referred to in Top Glove valuation. After all, Frost & Sullivan is often engaged by companies seeking IPO, and I’ve never read an industry projection from them that undermines the IPO exercise.

Therefore, while the forward PE is at a seemingly ridiculous 3.3X, the market (again, driven by institution fund managers) has heavily discounted it. It doesn’t mean I believe the market is right. It is just how I see the market operates right now.

However, as I always believe, if one is a long-term value investor, and if one believes the company is really undervalued, one should actually welcome any irrational market prices. Over time, the market price will follow the company's earnings growth and dividends.

So, if one is confident that own valuation is right and the market is wrong, just sit back and wait for a few more quarters. The coming quarters will deliver the verdict.

Ben, thanks for your info. I would like to digest your numbers when I have time.

I just want to highlight that the Hong Kong stock market, where TG wants to list, doesn’t necessarily give a higher valuation, especially after IPO sentiment has receded. There are more than a hundred companies listed in both mainland China (A share) and Hong Kong (H share). Every single one of them is sold at a discount in HK. Many of them at half the price or even less. Big-name companies like Sinopec and SMIC are traded in HK at only 1/3 of their prices in mainland China!

http://www.aastocks.com/en/stocks/market/ah.aspx?sort=5&order=1&filter=3

Such deep discounts are not only restricted to mainland Chinese companies. I know profitable, dividend-paying companies with reasonable management being valued at close to their net cash level. The intuitional investors in Hong Kong could be very demanding and ruthless.

I also want to respond to MrInvestorOr’s comment. Many established exchanges are also manipulated, in fact even worse than Bursa.

Just to give some examples. In the US there is this perfectly legal scam called mini-tender offers. Syndicates would initiate offers that are received by blue-chip company shareholders through their brokers. Unsuspecting shareholders may accept the offers without reading the fine prints. Shareholders from Boeing, P&G, GE would have come across such scams before. The practice has continued for years without the US authorities cracking down.

https://www.businesswire.com/news/home/20200717005255/en/PG-Recommends-Stockholders-Reject-Mini-Tender-Offer-From-Mason-Bell-LLC

Hong Kong is even worse. Many stocks are manipulated by syndicates through repeated cycles of consolidation and splits. The below articles detail one of the more famous manipulation uncovered by an activist investor. The HK regulator only acted after being shamed into it.

https://www.businessinsider.com/activist-investor-david-webbs-enigma-network-causes-stock-fall-2017-6

https://webb-site.com/articles/enigma.asp


In HK the interest of intuitions (stock brokerages, IB, fund houses) always comes first. Retail investors are at a distant second. Despite the shortcoming of Bursa, the local stock exchange and regulator are much better in investor protection.

LDP concession ends in 2030 and SPRINT shortly after that. Rightfully they should look for and inject new projects so that the listed status doesn't go wasted. When asked during AGM the management said there was no plan yet. Perhaps they just wait and take orders from their largest shareholder Gamuda.

https://www.litrak.com.my/wp-content/uploads/2020/10/25th-AGM-Questions-Answers.pdf

Hi YuWei. Thank you for sharing. I learn something useful every time I visit this page!

We learn that Warren Buffett is successful not only because of his investment acumen, but also because he takes advantage of Berkshire Hathaway's free float. Could this not happen in Malaysia because the regulator is too restrictive?

I look up the Allianz analyst presentation you shared. 76.5% of the GI portfolio is in bonds and deposits. The life portfolio is even more conservative where equity accounts for just 8.6%. This seems to go against the maturity matching principle. Given that the liabilities of life policies lie far into the future, I thought there should be a higher weight of risk assets like equity. While equity is volatile in the short term, it offers better growth and inflation protection in the long term. Any idea why Allianz is so conservative (besides the need to meet the minimal regulatory requirements)?

Given that ROE might not be a reliable performance indicator, what are the say 3 to 5 key indicators that you will look at when measuring life insurers and general insurers?

Hi Ben, thanks for your reply again. I too would like to believe Tan Sri Lim is sincere he has bought a large number of shares with his own money. Perhaps he just miscalculated in the early euphoria when Top Glove almost overtook Maybank's top spot in KLCI, something I wish he had never said in the public. Anyway, this incident has cast doubt on my view of the company (as compared to say Harta)

Let’s get back to your DCF calculation. I’ve reproduced it and have a few comments.

You’ve basically adopted a Free Cash Flow to Firm method, but using projected profit to replace the projected cash flow. I too think this rough estimate is good enough to get an approximate value.

By using the assumed capacity, ASP and net margin from various sources, you’ve calculated the net profit as
CY2021: RM 12,503 million
CY2022: RM 5,943 million
CY2023: RM 3,097 million
CY2024: RM RM2,319 million
CY2025: RM 1,572 million
(I) The total net profit for first five years = RM25,434 million

I believe you’ve estimated the terminal value from Year 6 onwards as follow:
(II) Terminal value
= Year 5 net profit / (cost of capital – perpetual growth rate)
= RM1,572 million/ (7% - 5%)
= RM78,578 million

(III) Current net cash = RM 1,210 million

Enterprise value = (I) + (II) + (III) = RM 25,434m + RM 78,578m + RM 1,210m = RM 105,222 million (note: slightly different from yours by half a percent)
Divided by the share base of 8,015.659 million, the value per share = RM13.10
(I ignore the dilution effect of HK listing, which could have lowered the value).

However, there are a few points I want to highlight. First, the above calculation has missed the step of converting calculated values in (I) and (II) to present value by dividing them with the chosen cost of capital at 7% per annum.

Adding back the step, net present value (PV) of the first five years are
CY2021: RM 12,503 million/ (1 + 0.07) = RM 11,685 million
CY2022: RM 5,943 million/ (1 + 0.07)^2 = RM 5,191 million
CY2023: RM 3,097 million/ (1 + 0.07)^3 = RM 2,528 million
CY2024: RM 2,319 million/ (1 + 0.07)^4 = RM 1,769 million
CY2025: RM 1,572 million/ (1 + 0.07)^5 = RM 1,121 million
(I) The PV of net profit for the first five years = RM22,294 million

(II) Terminal value
= Year 6 net profit / (cost of capital – perpetual growth rate)
= Year 5 net profit * (1 + growth rate) / (cost of capital – perpetual growth rate)
= RM1,572 million * (1 + 5%) / (7% - 5%)
= RM82,507 million

The PV of terminal value = RM82,507 million/ (1 + 0.07)^5 = RM58,826 million.

By enterprise value = (I) + (II) + (III) = RM22,294m + RM58,826m + RM1,210m = RM82,330 million.
Value per share = RM10.3

The second point is terminal value is very sensitive to the cost of capital and perpetual growth rate used. In the above calculation, more than 70% of the value comes from the terminal value, which is determined by RM1,572 million * 1.05 / 2%.

If the denominator (cost of capital – perpetual growth rate) is 3% instead of 2%, the enterprise value will be RM60,550 million, and the per share value is RM7.6

If the denominator is even higher at 4% (instead of 2%), the enterprise value will be RM49,551 million, and per share value RM6.2.

Moreover, the chosen terminal growth rate of 5% is too high. It's a weakness in DCF calculation that it assumes growth into infinity. Therefore as a rule of thumb, the growth rate cannot be larger than the overall economic growth rate. Otherwise, the company will grow into a size larger than the overall economy, which is absurd.

A more reasonable approach is to assume after Year 5 (CY2025), Top Glove will enjoy another 5 years of high growth at 10% a year, and after that a perpetual growth of 3% (which is considered high; usually analysts only give 3% if they want to “bump” up their TP!)

Using this approach, the PV for the next 10 years is RM28,386 million. Adding the PV of terminal value RM33,131 million and net cash RM1,210 million, enterprise value is RM62,727 million. The value per share is RM7.8.

Even this value is highly sensitive to various other assumptions. By changing the cost of capital assumption especially we could get a vastly different result.

Ben, thank you for your response. I forgot to say earlier that I appreciate your effort in pulling the various information together for the benefit of readers. The info is useful, even though we seem to draw different conclusions on the merits of Top Glove management.

I agree the HK IPO price has not been settled. The investment bankers need to touch base with potential investors to work out a mutually acceptable price. There is always the happy possibility that TG share price in Bursa rebounds sharply above RM8 and somehow Top Glove successfully raises capital in HK close to that valuation.

However, based on Top Glove announcement to Bursa on 26 Feb, the company proposes “issuance of up to 1,495,000,000 new Top Glove Shares raising up to HKD14.95 billion (equivalent to approximately up to RM7.77 billion)”

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3133602

In other words, even if the market price remains sluggish around RM5, the management still plans to go ahead with the HK IPO at a price up to ~RM7,770m/ 1,495m = RM5.2. That is the stated price in their announcement. After spending a lot of money on the IPO, I doubt the management will abandon the IPO if they can get their stated price (unless they don't receive the necessary approvals)

As such, the management needs to answer why they spent up to RM1.4 billion of shareholder funds to buy back shares at higher prices earlier; and now issue billions of new shares at a lower price, grossly diluting their existing shareholders? Why buy high and sell low?

Of course, I understand the logic that a listing at HKEX could raise the company profile and facilitate future fundraising. But Top Glove management could still have gone for the HK IPO without the preceding drama of the most aggressive SBB in Bursa history, done at a much higher price. How does it benefit Top Glove long-term shareholders? I also fail to see how the high price drama earlier would impress future HK investors.

Now with hindsight, this entire exercise resembles a movement of funds. I’m not sure whether this is by plan or by accident. If it’s by plan, it means the Top Glove management has not been entirely truthful in the past since their aggressive SBB actions have created the impression of stock being undervalued. Only now they say they are willing to list at a much lower price. What is the message to new shareholders who bought at RM7, 8 or above based on management past SBB action?

If it’s by accident, Top Glove will need to brush up on its financial management skill.

Ben, I view the decision by Top Glove to list in HK as full of self-contradiction!

Top Glove bought back its share at a price up to RM8 in Sep last year. The signal sent by management then was Top Glove was undervalued at RM8.

Later Top Glove announced special dividends of up to 70% of profit, which means it will return billions of cash to shareholders. The signal sent by management is they are flush with cash and more cash is on the way in the coming quarters. The signal sent is, even after their RM10 billion Capex plan, they still have so much cash on hand that they decide tp return to shareholders.

Now they have finally submitted for HK Listing, right on the heel of Intco Medical. The news report that Top Glove plans wants to issue 1.5 billion new shares and raises up to RM7.7 billion. This works out to be a listing price up to roughly 7.7/1.5 = RM5.13 per share.

https://www.theedgemarkets.com/article/top-glove-plans-float-shares-hong-kong-raise-rm77-billion

Contradiction #1 – If RM8 is undervalued in Sep, why raise a massive amount of equity capital at RM5.13 less than 6 months later, and dilute the existing shareholders in the process?

Has the business fundamental turned so bad in 6 months such that what's worth more than RM8 in Sep last year worths less 2/3 now?

The impact is not confined to Top Glove shareholders. Recall last year, the Tropicana board, where Tan Sri Lim was the chairman and substantial shareholder, also bought Top Glove shares at a much higher price then (although Tan Sri abstained from the vote). Should Tropicana shareholders now wish that their board should have just applied for the HK IPO at a cheaper price?

Contradiction #2 – If Top Gloves could afford to pay back billions of special dividends to its Malaysian shareholders, why the decision to raise RM7.7 billion in HK? The net effect is while paying RM1 or so special dividend to Malaysian shareholders, at the same time dilute their equity by another 15% to 20%. Picking the left pocket to give to the right pocket?

To me this feels like either management incompetence, or lack of sincerity, or both!

At least the gung ho Intco Medical is very consistent with their message. They think they can become number 1 and they go all out for it by raising as much capital and expanding as fast as they can. Their shareholders who buy into them cannot complain later as they have been warned.

Closer to home, the no drama Hartalega management has provided a much better example of good corporate governance – no dramatic SBB or special dividends or foreign listing; just focus on the business and deliver results.

This incident has illustrated again why Top Glove suffers from a valuation discount while Hartalega enjoys a premium!

Thanks YuWei.

Does it mean that, due to the higher front-loading of profits and the lack of long-term risk surplus sharing, takaful operators' profits could be more volatile from year to year? My reasoning is during the good time when there is a lot of new business, profits may soar. However during the bad time, like during the Covid-19 lockdown, new business dries up yet takaful operators cannot derive much profit from existing policies. Is this the right reasoning?

But given takaful is based on risk/ surplus sharing, can I say takaful operators face a lower risk of blow-up due to underpricing? I'm not sure whether underpricing is a problem for the Malaysian insurance sector. I recalled reading GEICO nearly went bankrupt in the 1970s as the management then underestimated risks and underpriced products. Rightly or wrongly, this story has given me the impression that insurance is a black box business. Wrong actuarial assumptions could set off a time bomb for the future. Do you think such risk is present in Malaysian life or GI?

I'm also puzzled by the large disparity in ROE among the few listed insurers. Since 2012 STMB has managed to achieve ROE above 20% every year. ROE reached 32% - 33% in 2018-19. However, Allianz Malaysia is in the range of only 11% to 15%. LPI, which only offers GI, is just a few points higher. In your view, does STMB sustain its high ROE mostly because of the heavier front-loading of profits? Are there other reasons for the seeming outperformance?