Cover Story: The bubble of election-play stocks

This article first appeared in The Edge Malaysia Weekly, on October 2, 2017 - October 08, 2017.

With the coming GE14, politically related stocks have gained favour with investors

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WITH the 14th general election around the corner, some counters seem to be drawing more interest and performing better than others. There is nothing unusual about this as it had happened in the run-up to past elections.

These are stocks that are perceived to have a political flavour or have the potential to benefit from a good performance at the ballot box by the incumbents.

But without actual newsflow or a tangible improvement in earnings, the lofty pre-election valuations of such stocks tend to struggle after the ballots are cast. Once the hype passes, investors may come to realise that the rally was not supported by the companies’ fundamentals, and gradually their share prices come down.

For example, Utusan Melayu (Malaysia) Bhd saw its share price rise 30% between Jan 4, 2012, and March 29, 2012, a period of 44 days. Then it dropped from 91 sen to 58.5 sen just before the 13th general election was held on May 5, 2013.

The same trend was also seen in the run-up to the 12th general election, in 2007 and 2008. Utusan’s share price surged 38.9% between March 5, 2007, and July 25, 2007, to RM1.32. It later retracted to 97.2 sen, a drop of 26% in just 17 days.

The stock continued its downward trend until the end of 2008, losing 37.2% of its market value along the way.

Utusan’s largest shareholder is Umno, the biggest component party of Barisan Nasional, with a 49.77% stake. The group’s publications are the mouthpieces of the ruling coalition, especially in Peninsular Malaysia.

The pre-election rally also occurred this time round for Utusan. Between March 7 and April 27, its share price jumped 78% to its peak this year at 68.5 sen. The stock retracted by 42.3% to 39.5 sen last Friday.

Utusan has been in the red since 2012, when it recorded a net loss of RM16 million on the back of RM349.2 million in revenue. In the second quarter ended June 30, 2017 (2QFY2017), its net loss narrowed to RM10.7 million from RM16.3 million in the previous corresponding quarter.

Other companies that have had the effect of a pre-election rally include Petra Energy Bhd, KUB Malaysia Bhd, George Kent (M) Bhd, Fajarbaru Builder Group Bhd, Iris Corp Bhd, Thriven Global Bhd, Kumpulan Perangsang Selangor Bhd and Felda Global Ventures Holdings Bhd.

However, it cannot be said that all stocks that experienced a rally before an election fall after the polls. The fate of the company’s share price, whether it falls or soars, depends on the outcome of the election and the government’s policies.

For instance, Petra Energy’s share price continued to soar even after the 13th general election was held in May 2013. The stock rose 25.95% to RM1.30 from March 18, 2013, to May 3, 2013 — the last trading day before the election was held.

As BN — led for the first time by Prime Minister Datuk Seri Najib Razak — was returned with a mandate to continue governing the country, albeit with a smaller majority, Petra Energy’s share price continued to rise, reaching RM2.19 on July 18, 2013. The stock peaked at RM2.73 on June 19, 2014. The group’s largest shareholder is Tan Sri Bustari Yusuf with a 27.54% stake, followed by Wah Seong Corp Bhd (26.97%).

Lembaga Tabung Haji owned a 9.88% stake in Petra Energy and Datuk Mohamed Nizam Abdul Razak, 9.11%, as at April 3. Nizam is Najib’s younger brother.

The sustainable run of Petra Energy’s share price between March 2013 and June 2014 was because of big-ticket contracts, including the hook-up, commissioning and topside major maintenance services (2013-2018) awarded by Petronas Carigali Sdn Bhd.

Petra Energy has seen two rallies so far this year. The first was from Jan 31 to April 25 — the group’s share price rose 38.9% to RM1.25, before retreating 25.2% to settle at 93.5 sen on Aug 24.

Between then and last Tuesday, the stock has risen 20.86% to RM1.13. However, it fell 6.2% over the next two days to RM1.06. It traded unchanged last Friday.

Petra Energy reported a net loss of RM117.3 million in its financial year ended Dec 31, 2016 — the first full-year loss since it was listed in 2007. As at June 30, the group recorded a net profit of RM8.4 million.

Another company that rallied after a general election was My E.G. Services Bhd, which relies heavily on government contracts. Between May 2, 2013, and Dec 31, 2013, its share price surged 222.42% to 43.2 sen.

This time around, MyEG’s share price rose 102.22% to RM2.30 from July 25, 2016, to May 16, 2017. The stock has been hovering between RM1.96 and RM2.30 since then. It closed at RM2.05 last Friday.

While it could be good for investors to follow politically related stocks in the run-up to a general election to ride the rally — there is money to be made — they should remain vigilant and keep one eye on the exit.