It makes sense to follow the advice of those who are right more often than wrong. This is why stock-market participants the world over regularly parse regulatory filings from Berkshire Hathaway, the conglomerate run by Warren Buffett, one of the most successful investors and wealthiest people in the world. The disclosure of a stake increase or decrease usually triggers sufficient interest from other investors as to materially move the stock price. Case in point: Taiwan Semiconductor Manufacturing Co gained more than 10% immediately after Berkshire announced that it had bought US$4.1 billion (S$5.6 billion) worth of shares in the Taiwan-based chipmaker in mid-November.

Conversely, you can also profit by doing the opposite of those who are wrong more often than right. The truth is, too many market analysts and commentators have taken to modifying their narratives to fit market movements of the day, thereby offering little useful insights for investors. Notably, Buffett is a famous market contrarian. One of his most oft-repeated advice is to be “fearful when others are greedy, and greedy when others are fearful”.

As we wrote last week, sentiment for Malaysian stocks was bearish in the run-up to the 15th general election, underperforming US and regional markets (see “We expect long-dated bonds to outperform equities in the near term”, The Edge Singapore, Issue 1063, Nov 28). As uncertainties over the formation of Malaysia’s next government persisted after inconclusive results, some analysts called for investors to continue selling the market. No worries, as these analysts shall remain unnamed. But, it creates, we believe, the perfect setting to be the contrarian. We think much of the negative surprises would have already been priced into the market — hence making for an attractive risk-reward proposition. As such, we invested all of our cash in the Malaysian Portfolio. Some will be shorter-term trades than others, for obvious reasons.

Telekom Malaysia (TM) is, we believe, one of the most undervalued big-cap stocks that should be in any long-term-focused portfolio. The company has the most extensive highspeed broadband fibre-optic and submarine cable networks as well as cloud infrastructure and services in Malaysia. It therefore holds the clear advantage in the unfolding digital transformation process in the country.

The company reported 12.7% year-on-year revenue growth in the latest 3QFY2022 earnings results, underpinned by strong wholesale and enterprise business segments, while earnings before interest, taxes, depreciation and amortisation (Ebitda) rose 17.4% y-o-y. TM Wholesale was the biggest revenue growth contributor for the quarter, driven by higher domestic data and international digital demand from hyperscalers and global carriers in the region. Meanwhile, TM One, the enterprise and government sector arm, recorded double-digit growth on the back of rising demand for connectivity services. Unifi, too, saw healthy growth, adding 115,000 new subscribers, which boosted total fixed broadband subscriber base to about three million.

We expect to see continued demand growth for data services for the foreseeable future. Notably, operating margins have been trending higher over the past few years, with trailing 12-month Ebitda margin now at 38.6%, up from less than 30% in 2015. Currently, TM trades at forward enterprise value (EV)/Ebitda of roughly 4.8 times, which is some 37% lower than comparable valuations for its Asean peers. The company paid a dividend of 13 sen per share last year, translating into yields of about 2.4%.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/tongs-portfolio/allies-today-enemies-tomorrow-relative-prosperity-nation-drives-geopolitics?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Allies today, enemies tomorrow: Relative prosperity of a nation drives geopolitics and trade</a>

Meanwhile, our investments in Mega First Corp and RCE Capital are defensive picks. MFCB generates more than 80% of its profits from the sale of electricity from the Don Sahong hydropower plant in Laos, under a long-term power purchase agreement with the country’s state-owned utility. It receives a stable stream of cash flow denominated in US dollars, which means it is currently also benefiting from the strength of the greenback. The steady cash flow from operations has strengthened its balance sheet — paring net gearing to less than 11%, from a high of 44% in 2019.

The lending business of RCE Capital, mainly to civil servants, is also relatively low risk in nature. Civil servants have high job security, and monthly debt servicing payments are deducted from their salaries. Net profits have grown consistently each year since 2013. Valuations are modest, at a price-earnings ratio (PER) of just about 10 times. The company pays consistent dividends. Its shares will trade ex-entitlement for an upcoming dividend totalling 23 sen per share on Dec 16.

We also acquired shares in relatively attractively value consumer stock, CCK Consolidated Holdings. The company operates a fully integrated poultry business — from feed mill to breeder farms, hatchery, broiler and layer farms, and abattoir — primarily in the state of Sarawak. The downstream distribution network includes retail stores, supermarkets as well as wholesale outlets across Sarawak, Sabah and Indonesia (Jakarta and Pontianak). Fresh dressed chicken and chicken parts make up about 50% of its retail stores’ products, where about 70% of its customers are F&B operators.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/tongs-portfolio/business-cycles--successful-reinventions-and-those-fail?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Business cycles — successful reinventions and those that fail</a>

CCK’s revenue grew 21%-26% y-o-y in 1QFY2022/2QFY2022, and 36% in the latest quarter, 3QFY2022, bolstered by new store openings, contributions from new facilities related to frozen poultry products in Pontianak, as well as recovery in its school food services unit. The company’s latest venture, the diversification into prawn agriculture and processing — largely for export, including to Australia, Hong Kong, Japan, Dubai, Vietnam and Indonesia — also contributed to top-line growth. Its prawn factories are HACCP-certified and process both cook-and-peel and IQF prawns. Net profit margin recovered to between 5.3% and 5.6% in the last two quarters, as the hotel/restaurant/ café businesses rebounded with the easing of lockdown measures. Its trailing PER is only 10 times while dividend yield is around 1.8%.

We acquired two oil and gas-related stocks, Deleum and Velesto Energy, on expectations that oil prices would remain resilient in the near-medium term. The transition to green energy is happening, but it will take time. Meanwhile, this inevitable structural shift has resulted in years of underinvestment in the sector. Most oil producers, including those of US shale, have chosen instead to return cash to shareholders (through share buybacks and dividends).

Deleum’s income is derived mainly from its power and machinery, and oilfield services segments. The former involves supplying and providing maintenance services for gas turbines used in the oil and gas industry. Contribution from this segment is stable. The oilfield services segment involves providing well services for oil and gas upstream producers. The business was badly hurt during the pandemic, sinking into the red, but activities have recovered with economic reopening. The segment returned to profitability in 1HFY2022. Even during the worst of the pandemic, the company continued to generate positive free cash flow and paid dividends. Indeed, its cash pile grew. Net cash rose from RM20 million in 2016 to RM178 million (S$54.3 million) in 2QFY2022.

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Velesto owns and operates rigs used for oil and gas upstream drilling activities. As with Deleum’s oilfield services, revenue suffered during the pandemic — utilisation and charter rates fell — with activities severely curtailed. Positively, all signs point to operations improvement and we expect both utilisation and charter rates to trend upwards over the coming quarters.

Finally, we also acquired shares in Genting Malaysia, Berjaya Sports Toto and Magnum for an opportunistic trade. Uncertainties over which party would form government and policies battered the so-called “sin” sectors, including gaming and brewery. We were betting that the stocks would rebound — and they did, after Anwar Ibrahim was confirmed as the country’s 10th prime minister. However, the momentum fizzled out very quickly. With a coalition government instead of a unity government (consisting of all or all major parties in the legislature), we decided to call it a day and disposed of all three stocks. We will hold the proceeds in cash for now.

The Global Portfolio gained 5.7% for the week ended Nov 30. Chinese stocks rebounded after the government announced fresh initiatives to vaccinate its elderly, seen as a step towards eventual relaxation of its stringent zero-Covid measures. Earlier, stocks were battered as another surge in cases triggered more lockdowns — and public protests — across the country. The top gainers were Yihai International Holding (+28.0%), Li Ning Co (+15.3%) and Guangzhou Automobile Group Co (-8.8%). On the other hand, the iShares 20+ Year Treasury Bond ETF ended 0.5% lower. Total portfolio returns since inception were boosted to 23.5%, though we are still trailing the MSCI World Net Return Index’s 40.7% returns.

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Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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