HI ALL, PHILIP HERE, WITH SOME GRAVE ADVICE ON INVESTING USING MARGIN. NOTE THE WORD INVESTING, VERSUS TRADING. AND A NEW INVESTMENT ON GKENT.
For most people who dont have enough cash, they believe that investing on margin is a wonderful thing. It is FAR from wonderful, it can be a treacherous method of playing with fire... if you do not know what you are doing.
Here are the salient points, using my broker MAYBANK as an example.
IF YOU INVEST WITH CASH, MAYBANK CHARGES YOU 0.1% BROKERAGE FEES, OR MINIMUM PER TRANSACTION OF RM8.
This is a wonderful way of investing, as you use what cash you have, and nothing more. Here you only have to consider one thing, how much is the stamp duty (some stocks have none), how much is the clearance fees and extra costs, and what is the minimum amount you need to have to invest in a stock to reduce these transactional costs (in this case, minimum should be RM8000, anything less would not be efficient).
To be fair, this is still better than the old days when you had to go through remisiers who would charge 0.6% per transaction (or more) depending on who you talk to. With the low rates for own cash investment, basically it comes down to your stock picking skill ( and dividends) to bring you across.
The most important point to learn here is fractional costs is the DEVIL! The more you trade, the more fractional costs you incur, the more fractional costs you incur the more damage you do to your financial base which is your capital. More importantly, holding multiple stocks with small positions also cause a lot of other fractional costs in terms of the brokerage fees for handling your dividends that you get.
Imagine if you have 30 stocks with 5K exposure each, yes you have 150K worth of stocks, but when you receive your dividends, you will notice a lot of fractional costs. 5K at 3% dividend is around RM150. Add in the Maybank dividend interest and payment fee of RM5.83, duplicate of dividend tax voucher of RM5.30, the SST charges from the new enactments, stamp duty, etc etc etc, you will quickly realize your 3% dividend is no longer that wonderful.
I paraphrase the words of Monish Prabai,
Now, if you start investing with margin, the stakes are upped much, much higher.
IF YOU INVEST WITH MARGIN, MAYBANK CHARGES YOU 0.42% per transaction, OR A MINIMUM PER TRANSACTION OF RM12.
On top of this additional cost, you need to plan around the yearly interest rate charged by the bank (margin can be addictive, good luck telling yourself you wont be using it throughout the year), which is Base Rate (BR) 3.2% + 3.65% = 6.9%.
Basically, what I am trying to tell you is, you need to be able to plan your investing strategy behind a yearly cost wall of 6.9% + 0.42% (of initial purchase + 0.42% (of exit purchase) + stamping fees + processing fees before you see a dime of money.
You need to be able to earn 8% return per annum on your investments to break even on the leverage, and you need to average 14.15% return per year over passive index investing (aka EPF, ASB, FIXED DEPOSIT all return at least 4.25% - 7% ) for it to be worth your time doing active investing using risky leverage.
At a minimum margin financing of RM50,000, you need to average a return of RM4K yearly to pay off Maybank, and at least 7K to be on par with EPF and better than FIX DEPOSIT! These are the costs you need to understand before applying leverage.
The returns can be quite exciting, BUT YOU HAVE TO KNOW WHAT YOU ARE DOING!
Now, having said that, how can one invest safely using margin?
I have recently begun to try out margin financing again, as ever since I have started posting up my thoughts and investment concepts online, I have been blessed with many stock ideas and investment proposed by I3 investing community. So many ideas, so little money! Lately a lot of very good companies have come under my view, all from kind information scuttlebutted from you my dear I3 people. Companies which I believe have very good room to grow in the long run, and have a wonderful moat.
With that in mind,
I put up a small amount of my legacy portfolio using margin exposure, with a RM1 million exposure. Why so small an amount of margin you may wonder? This is because of another method in which Maybank can earn money from you. For any unitilized margin given out above RM250,000, there is a 1% commitment fee which is based on the daily unutilized portion of the drawing limit and charged monthly.
SO, DOES MAYBANK ALWAYS WIN?
I have used my excess cash and full margin to take a 1M share position in GKENT (at a average purchase price of RM1.12) yesterday after the announcement of results. I have to thank a few young commenters for that piece of wonderful stock tip, making this the 6th stock I am investing in Bursa in the past 10 years. (I continue to monitor my NASDAQ stock STNE closely).
How do I protect myself and my MARGIN INVESTMENT?
Firstly, understand the company financials GKENT. If you look closely, buying it at today's figures, I am paying 630 million for a company that has a book value of RM500 million. However, it is a very cash rich company, to the tune of 260 million - 60 million debt = 200 million in CASH. What this means is if I buy over the whole company for 630 million, I still have cash in the bank of 200 million, meaning I am actually buying the company for 430 million, or RM0.77 per share.
Sounds like a good deal? It gets better. For the price I paid, I am also getting 3.5 cents DIVIDEND next month. meaning for my investment of 1.12, I get back 3.1% dividend yield IMMEDIATELY, which is great (discount on my purchase price!). Historically, GKENT get between 7 cents to 9 cents dividend a year, which gives me a yield of around 6% at RM1.12 price. This goes a long way in paying off that margin loan that I was getting from Maybank (6.9% remember?).
This year as we all know is a bad year for GKENT, with a drop in revenue from 616 million (and net profit of 124 million), to a low of 430 million (and a net profit of 84 million). However is the drop fairly priced? Did it lose money this year? Has GKENT ever had a losing quarter? The answer is definitely NO. I believe it is very very oversold. The general selling panic last year in May after elections has caused it to drop from a high of RM4 to a low of RM1.12 presents a wonderful buying opportunity of a stock that has been unfairly punished due to the unknowns of a changing government (but unchanging business fundamentals).
Consider this, when the change of government happen, everyone is betting on a change of business opportunity. OPCOM WAS PUSHED up from 0.43 to 0.9, but dropped to 63 cents. eden went up from 9 cents to 31 cents, thriven went up from 15 cents to 43 cents. SO WHAT? the stock market is a popularity contest in the short term, but in the long term it is a weighing machine. Politically motivated stocks will never do well in the long run.
Now, GKENT has also suffered a big drop from RM4 all the way down to 82 cents. But since then, it has been on the comeback trail, going all the way up to 1.12 on 25th march 2019. What has changed? basically nothing much. The business is still solid, it is still paying you 6% dividend a year even in a horrible challenging year, it is still very profitable (average net profit margin of 19%), it is still doing 15% return on equity. Did I mention they are only paying 46% of their net profits as dividends? still more room to grow!
However most importantly, the government has realized, that even though they want to practise transparency, they still have to go through to best companies to complete its projects. So in the end they still award the job to the best performing company (which has ALWAYS PULLED THROUGH AND HANDED OVER PROJECTS)
i.e. IT HAS TO GO THROUGH A SPECIALIST COMPANY, GEORGE KENT ( since 1938)
GKENT is one of the few Malaysian companies that is highly qualified to do LRT projects. It's water metering business is of a world standard, it exports to 40 countries internationally. It does projects in many countries. Its core capabilities in rail transportation, water infrastructure and hospitals make it a specialist company that LGE has no choice but to award to. Yes GKENT did a good job in Penang as well with the WTP works.
And awarded it has. Let me paraphrase:
Resilient Water Meter Business Water meter orders continue to be strong. (new water meter wins in singapore and hong kong)
The Group had in the year under review won the Public Utilities Board of Singapore’s (PUB) tender to deliver 110,000 meters over six months beginning February 2019. This is the 4th consecutive win by George Kent to supply water meters to PUB since 2012. The Group is actively investing substantial resources to expand its strong base of over 40 countries around the world to broaden its income base.
* this is not much, but still high margin, rough estimate for DN15 PSM-T meters is around RM200 each, so we are looking at around 20+ million income, with 20% margins, not to bad. in all I am hoping for at least 140 million in metering revenue for FY2020.
Construction Business Fundamentals Intact (renegotiated and accepted the LRT project)
On 25 January 2019, MRCB George Kent Sdn Bhd ("JV Co") signed the biggest turnkey contract the new Government has issued at RM11.8 billion. The JV Co has the necessary experience to deliver the project as both JV partners have actively participated in past rail projects in the country.
* having said that this is a fixed price contract, which is usually very dangerous for companies as delays and cost overruns are borne by the supplier instead of the client VO. But I have faith in GKent. Personally the only reason why I believe the original LRT3 costs were so high at 31 billion was due to some kickbacks and agreements to pay for the project. If done properly and done well, based on international benchmarks (world bank estimates are 39M usd per km in europe, and 17m usd per km in china for metro), at 40 km for lrt3 we are looking at 1.6 billion usd costs, or around 8 billion ringgit cost. at 11.8 billion, it is still very doable if no corruption is involved. (LGE monitor closely). I'm assuming with the new contractuals from PDP to FPC we are looking at higher net profit for the cost absorbtion. assuming instead of 6%, they are going for 10% net margins, we are looking for around 1.18 billion net profit to be split between MRCB and GKENT. If GKENT performs and completes on time, this result will give GKENT 600 million in new earnings over the ensuing years, the entire market cap right now.
I am happy with the renegotiation. This shows no favouritism from the new government, and is the biggest project awarded by the new PH government to a so called BN crony company. Moat companies will always find a way.
The Group is also continuing with the construction of the two Government hospital projects of over RM500 million in contract value. This one is for the projects in putrajaya and selangor previously. So there is big orderbook for the coming years.
For me I see all the downsides behind me, and all the upsides in front of me. Yes taking margin loan is very dangerous, but if George Kent is paying me 6% a year rental to wait and see how it performs? I dont mind waiting at all.
My StoneRaider™ TP? RM3 in 3 years and 3 months. Plus 6% dividend a year.
I hope you learned something new and interesting today,