As toll concessionaires such as MTD Capital Bhd and PLUS Expressways Bhd are among the companies in the midst of being taken private, industry observers said investors would have to look for new defensive stocks in the market.
Defensive stocks are those that belong to companies that tend to remain stable under difficult economic conditions. These companies do better in difficult times because demand for their products or services does not decrease as dramatically as it may in other sectors.
“Following the privatisation exercises of MTD Cap and PLUS, the only pure toll concessionaire listed on Bursa Malaysia is Litrak (Lingkaran Trans Kota Holdings Bhd), and it is not surprising that the latter may also eventually be privatised, given the revamp of toll concessions recently,” an industry observer said.
In the gaming sector, Berjaya Sports Toto Bhd (BToto) is the only listed numbers forecast operator (NFO) on the local bourse currently, following the privatisation of Tanjong plc last year. Tanjong’s gaming arm, Pan Malaysian Pools Sdn Bhd, is currently up for sale.
In December last year, there was also talk that a privatisation of BToto could be in the offing. The NFO then announced that it had held preliminary talks within the company on a possible corporate exercise which might result in the entry of a strategic investor.
Should a privatisation in BToto go through, Multi-Purpose Holdings Bhd (MPHB) would emerge as the only listed NFO play on Bursa Malaysia.
MPHB recently announced that it would acquire the remaining 49% stake in Magnum Holdings Sdn Bhd that it did not own.
Magnum, another NFO company, was privatised by MPHB and its strategic partner CVC Asia Pacific Ltd about three years ago.
With the completion of the acquisition, industry observers said MPHB’s core business will be gaming and centred around the old Magnum, although it also has stockbroking, insurance and property businesses.
An industry observer said, in the past, there were quite a number of defensive stocks listed on the bourse, but over the years, some of the traditionally defensive stocks have either been taken private or become less defensive counters as they embarked on businesses that result in less steady cash flows.
“Traditionally, companies with concession-related businesses tend to be defensive, namely toll concessionaires and utilities players. However, there are fewer listed companies with concession businesses currently, among them being Malaysia Airports Holdings Bhd and Tenaga Nasional Bhd,” the industry observer said.
One analyst said although MMC Corp Bhd is also a utilities player, its diverse businesses make the stock less defensive. Back in 2007, MMC had privatised Malakoff Bhd, which was then the country’s largest independent power producer.
The analyst said with rising food prices, food producers are no longer seen as defensive players, as the ability to fully pass on cost increases and protect margins may be at risk.
“Further, water companies have also become less defensive over the years, due to the problems that have arisen involving the assets, especially in Selangor,” he said.
The analyst said a year earlier most property companies could also be seen as defensive counters, as they were trading well below historical book values and at single-digit earnings multiples. While property is cyclical, the analyst noted that the severe undervaluation of most property stocks last year presented minimal downside risks, but ample upside for investors in an asset reflation scenario.
“However, most property stocks have since been re-rated, following the increase in property prices and mergers and acquisition activity within the sector,” he said.
Late last year, a flurry of merger and acquisition activity was announced, sparked by UEM Land Holdings Bhd’s acquisition of Sunrise Bhd in November. This was followed by the proposed merger between Malaysian Resources Corp Bhd and IJM Land Bhd, which has since been aborted, and the merger of Sunway Holdings Bhd and its subsidiary Sunway City Bhd.
Meanwhile, AP Land Bhd is the latest target of a privatisation exercise. Last month, the Low family proposed to privatise the property company by offering 45 sen, or 0.43 times its book value of RM1.05.
Dijaya Corp Bhd, Malton Bhd, MK Land Holdings Bhd and Metro Kajang Holdings Bhd are among the property companies that are still trading below book value.
Dijaya closed at RM1.08 last Friday, compared with its book value of RM1.90 as at Sept 30, 2010. Malton last traded at 71.5 sen, 45% below its book value of RM1.29. At 40.5 sen, MK Land is trading at 0.47 times its book value of 86 sen, while Metro Kajang, at RM1.91, is trading at 0.68 times its book value of RM2.80.
Interestingly, conglomerates such as IOI Corp Bhd and Boustead Holdings Bhd also privatised their property arms over the last few years, as did WCT Engineering Bhd and Eastern and Oriental Bhd.
Although commodity prices fluctuate, the analyst said palm oil players have also emerged as a new group of defensive players, given the high prices of crude palm oil (CPO) currently.
“CPO players have very high margins, since prices are hovering above RM3,500 a tonne while costs are still at around RM1,200 to RM1,400 per tonne,” the analyst said.
The three-month forward delivery CPO futures contract recently traded at a three-year high of RM3,967 a tonne, but eased to RM3,683 a tonne last Friday, tracking the downturn in soybean oil prices.
“Even if CPO prices slide, the cushion is very large. As long as prices stay above RM2,600 a tonne, planters earn a 50% margin. If prices hold above RM3,300 or RM3,400 a tonne, margins are 60% and the profit per tonne is significant at RM2,000”, said the analyst.
In recent years, real estate investment trusts (REITs) have also come to be seen as defensive stocks, as REITs lock in their rental yields and tenures, and revise their rental rates every few years. Thanks to more favourable tax incentives, the industry has grown significantly since the first REIT, Axis REIT, was listed in 2005.
However, the analyst also cautioned that not all REITs are defensive in nature, as their underlying property assets could be subject to external conditions beyond their control. A rise in the supply of office space, for instance, could depress yields and occupancy rates when leases run out.
An iconic building or highly popular shopping mall, like Sunway Pyramid under Sunway REIT, for instance, would be in a better position to raise rent, attract more tenants and expand its net lettable area, said the analyst. He advised investors to look carefully at a REIT’s underlying assets before investing for the longer term. - by Yong Yen Nie, theedgemalaysia.com
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