Tong’s Value Investing Portfolio: Bought Oceancash after prices retraced

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SHARES on the Bursa Malaysia traded broadly lower last week. Investors are understandably cautious on the potential upside from hereon in view of disappointing earnings for 2014 and expected headwinds amid rich valuations.

The FBM KLCI closed at 1,807 last Friday, down 14 points from the previous week. Nonetheless, the benchmark index remains just 4.7% off its all-time high of 1,896 reached in July 2014.

In short, even as earnings growth was being progressively pared back through the past few quarters, stock prices have been more resilient. What this means is that the broader market is now trading at higher price-earnings valuations.

Notable developments include the European Central Bank’s plan to kick off its bond buying programme this week, to the tune of 60 billion euros a month. In anticipation of a successful QE, it also raised forecasts for growth and inflation in the eurozone. China, on the other hand, lowered its growth target as the country transitions from an economy that is heavily dependent on investments and export to one that is more consumer-oriented.

Whilst external developments will influence sentiment and daily gyrations in the local market, the sustainable catalyst for higher stock prices must, ultimately, come from corporate earnings growth. So far, we are not seeing that yet.

Total value of my portfolio was down 0.63% last week, marginally better than the benchmark index’s 0.78% decline. This pares my portfolio’s total returns since inception to 6.9%. I continue to outperform FBM KLCI, which has fallen by 1.2% over the same period.

Selective stock picking remains the key to making profits in this market. Going forward, I will review some of InsiderAsia’s previous stock recommendations for buying opportunities.

tvip_oceancash-pacificI acquired 34,800 shares in Oceancash Pacific (Fundamental: 1.4/3; Valuation: 0.6/3) at an average price of 28.7 sen apiece. Followers of this column will recall that I bought this stock back in October 2014 (for 30 sen per share) — after it was recommended by InsiderAsia — and took profit when its share price hit 41 sen in November.

I still like the company for its stable earnings growth and stronghold in a niche market with improving margins and productivity gains over time. It has a large target market.

The company manufactures and exports resonated and thermoplastic felts, noise and carpet underlays that function as heat and sound insulators. It also manufactures non-woven products, which are the key ingredients in baby diapers and sanitary cloth products.

Whilst the barriers to entry to manufacture these products are low, Oceancash has significant competitive advantage in having established long relationships with its major customers.   

Revenue grew 6% to RM72.8 million in 2014. Net profit, however, was lower due, mainly, to one-off loss on disposal of machinery amounting to RM1.72 million. Adjusting for this, Oceancash’s net profit would be higher at RM6.63 million compared with RM6.50 million in 2013.

In the current year, the company will start a new production line in Indonesia for felt and transfer an existing line to Bangkok. This is aimed at the expanding automobile and property markets in those countries as well as to improve cost efficiency.

With the acquisition, my portfolio is now about 51% invested.


This article first appeared in The Edge Malaysia Weekly, on March 9 - 15, 2015.