AFFIN Bank-To Buy or Not To Buy its Rights

If you look at the price level of Affin Bank, you will notice that there is a huge price fall from its peak of RM 4.15 sometime in early February 2014. After moving in an erratic manner in February, it plunged to below RM 3.85 at the end of March. This represents a fall of 30 sen or  a serious 7.2%. In much of April, it found no traction and slipped yet to another low at RM 3.75 or another 10 sen fall, bringing the percentage loss to a loss of 9.6%.

Falling Price

By mid-May, the price of Affin has gone down to RM 3.65 and in early June, it just about straddled the RM 3.60 price level. At RM 3.60, Affin's percentage loss was 55 sen or a 13.3%. By the second week of June, it moved up slightly to RM 3.62 and RM 3.63.

Let us look at some of the reasons by the gravitational  pressure on this stock.

Investor confidence on the stock was dampened by the huge rights issue which will dilute market price when the new issue is listed. There are concerns that optimal values will not come on steam until 2017. TA Investment Bank (IB) has re-assessed the stock downwards putting it at RM 4.17 at its Top Price (TP) while Alliance IB stayed neutral with its TP at RM 4.25.

As these assessments were done two months ago,they may no longer hold true as even now the price of Affin has slumped down by another 20 sen to RM 3.63 since then (RM 3.85).

 Let's look at the rights issue.

It is now confirmed that for every 10 shares held on 12 June 2014, shareholders will get 3 rights issue at RM 2.76. That would mean a person with 1000 shares will only get 300 new shares. He will need to pay RM 828.

If the price is maintained at RM 3.65, then he may want to subscribe for an access amount of 700 shares. If he does so, then he would be paying RM 2,760 (RM 1,932 + 828= RM 2,760).

Given the dilution with another 30% new shares coming onto the market, there is  possibly a price shaving to be anticipated. It could cause the price to fell by another 30 sen.

This could mean a ex-price of  about RM 3.10-RM 3.20.

More than that could be a bonus.

PS: Ex-rights trading price of Affin today is RM 3.44.

If the price holds accordingly, after the OR has been traded then this could possibly be a benchmark for Affin ex-rights. It also represents a good opportunity for the OR to sell at a good price.

At the price of  RM 3.44 given the rights at RM 2.76, this could mean a ball-park gain of  0. 68 sen per share.

Malaysia: The Debt Stranglehold

Warning Bell

This article was written by a UK based economist,Sarah Fowler from Oxford Economic. It was carried in the Malaysia Insider today (9 June 2014)

In her article she sounded a warning call for Malaysia.

Let us read the premises and parameters of her economic analysis and judgment.

Sarah saw the Malaysian economy contracting and losing its global market share in key export sectors in the event it fails to tackle its high levels of public and rising external debts.

While the nation's shrinking current account surplus was not a major concern as it was expected to stay in excess in the next few years, there are worries over Malaysia's capital account due to rising external debt, which has shot up close to 40% of its gross domestic product (GDP) in recent years.

The country's public debt-to-GDP ratio has been hovering at an all-time high of more than 50% since 2010 because of large fiscal deficits incurred when an aggressive stimulus package was launched to bolster the country’s economy during the global financial crisis.

"Addressing the concerns would enable Malaysia to achieve a higher growth path, reaching a higher per capita income sooner. We expect the economy to grow by just more than 4% over the next five years but if the concerns were addressed growth could exceed 4.5%," she told The Malaysian Insider in an email.

Fowler produced a report on "Why Malaysia is now a more risky prospect than Indonesia" which was highlighted by global financial news site Bloomberg's columnist William Pasek last week. She based it on 17 indicators to develop a scorecard to assess emerging market vulnerability to external economic and financial shocks.

Among the indicators are capital inflows, external financing, the current account and budget balances, credit markets and the economy.

"Our scorecard assesses Malaysia as a more vulnerable economy than Indonesia, Thailand or India," she wrote.

Touching on external debt, Fowler had reported that non-foreign direct investment capital inflows averaged 6.6% of GDP a year between 2009 and 2012, the highest in their sample of 13 emerging markets and more than Indonesia's average of 2.2%.

"More than half of all portfolio investment in Malaysia went into debt securities between 2010 and 2012, up from close to a third between 2005 and 2009.”

She had also noted in her report that the short-term component of external debt was also increasing, which is risky as it requires repaying or rolling over earlier.

Short-term debt as a share of GDP reached 15.2% by the end of last year, up from 10% in 2007.

In contrast, India’s and Indonesia’s short-term debt accounted for less than 5% of their GDP.

On overall, external indebtedness in Malaysia is low relative to exports, which meant that funding the debt may not be a problem.

But Malaysia has an unusually open economy; exports are equivalent to more than 80% of GDP, lower only than in Singapore and Hong Kong.

On public debt, Fowler said although Putrajaya has reduced its fiscal deficit as a share of GDP from 6.5% in 2009 to 3% last year, there was a need to continue to manage the public finances carefully to trim the deficit further.

This, she said, could be done by broadening the tax revenue base in order to try and raise revenues.

"Public debt has risen in recent years and reducing this would be good because money that currently has to be spent paying the interest on the debt could be spent in more productive areas."

However, Fowler expects the public debt to GDP ratio to remain above 50% for the next five years, saying Indonesia’s, Thailand‘s and Korea's public debts amount to no more than a third of their respective GDP.

Fowler is not the first person to sound the alarm bells on Malaysia's economy.

In October last year, financial analyst Jesse Colombo warned that Malaysia's economic bubble will burst after China's economy takes a tumble and global and local interest rates continue to rise.

Writing in Forbes online magazine, Colombo said: "Malaysia’s bubble will most likely pop when China’s economic bubble pops and/or as global and local interest rates continue to rise, which are what caused the country’s credit and asset bubble in the first place.

"The resumption of the US Federal Reserve’s QE taper plans may put pressure on Malaysia’s financial markets in the near future. Malaysia’s rapidly deteriorating current account surplus due to weaker exports is another worrisome development.” – June 9, 2014.