‘O&G counters are expensive and property stocks are worrying’

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KUALA LUMPUR: Local oil and gas (O&G) securities are expensive while property counters are “worrying” in view of the skyrocketing local property prices, said Tan Teng Boo, founder and managing director (MD) of Capital Dynamics Asset Management Sdn Bhd.

The outspoken local fund manager noted that overall, the local O&G sector carries more “sell” calls than “buy” ratings at the moment.

“The valuation [of O&G firms] is very rich [and the] profit margins they are earning are not sustainable. [With the] price they [investors] are paying and what they get in return, it doesn’t make sense,” Tan told The Edge Financial Daily in a recent interview.

However, he noted that Petronas Dagangan Bhd is a different counter compared with other O&G firms as “it is more of a marketing, retailing and distribution channel”.

Although he acknowledged that Petronas Dagangan’s valuation is slightly on the high side, he said the downstream O&G products retailer and marketer has done a good job in competing with O&G firms such as British Petroleum (BP), Royal Dutch Shell plc (Shell) and Esso.

iCapital.biz Bhd, a closed-end fund managed by Capital Dynamics, had 7,100 shares in Petronas Dagangan valued at RM171,536, as of June 25 this year. It sold 892,900 shares during the financial year ended May 31 last year, netting it RM23.33 million, according to its 2014 annual report.

“When the price [of Petronas Dagangan] becomes attractive again, we will definitely relook.”

Tan said local property prices are “worrying” and “by virtue of that property stocks should be worrying too”.

Bursa Malaysia, which has a price-to-earnings ratio of 17 times to 18 times, is also not attractive at the moment due to its high valuation, Tan said, noting that “we won’t be having so much cash otherwise”.

Asked about his top stock picks, he said “at this moment it’s hard to find a stock that is specifically attractive to us”, and added that the company would hold on to its RM250 million cash hoard for the time being.

“We need a little bit of patience and the day will come when there will be a lot of attractive stocks to be bought,” Tan said.

Apart from Petronas Dagangan, iCapital.biz owns 19 million shares (2.89%) and 3.48 million shares (2.75%) in Padini Holdings Bhd and Tong Herr Resources Bhd respectively.

“At the right price, we will take profit from Padini,” he said, noting that Tong Herr’s earnings have been going up.

On its fund’s performance, the net asset value (NAV) per share rose 2% from RM2.99 in June 1 last year to RM3.05 on May 31 this year. As at Oct 1, its NAV was at RM3.06.

In the same period, its fund’s market price rose 5% from RM2.40 to RM2.52 on the back of an increase of 5% in the FBM KLCI. Its counter climbed 0.41% to close at RM2.43 last Friday, with a market capitalisation of RM340.2 million.

On another note, Tan said he is not concerned about the substantial stake that City of London Investment Management Co Ltd owns in his company, which stands at 9.88% or 13.83 million shares according to iCapital.biz’s 2014 annual report.

“This is a free market. The most important thing is that as a fund manager we manage the funds to the best of our ability. They do their usual company visits like any other analysts will do,” he said, adding that while their stake is sizeable, the remaining 90% plus stake is also substantial, “so we have to make them [the majority] happy”.

As to a possible tie-up between European hedge fund Laxey Partner Ltd and City of London, Tan said “it’s very hard to tell if they are in collaboration or not”, adding that he had done a background check on the latter, but found nothing conclusive.

It is believed that Laxey Partner attempted to take over iCapital.biz in 2012 but failed to grab any seat on its board. It then ceased to be a substantial shareholder on Nov 21 last year after the failed bid.

 

This article first appeared in The Edge Financial Daily, on October 7, 2014.