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Stock investment analysis report
Economy of Malaysia
Malaysia is a growing and relatively open state-oriented market economy.
The state plays a significant but declining role in guiding economic activity
through macroeconomic plans. In 2007, the economy of Malaysia was
the 29th largest economy in the world by purchasing power parity with gross domestic
product for 2007 estimated to be $357.9 billion with a growth rate of 5% to 7%
since 2007 In 2009, the nominal GDP was US$191.4 billion, and the nominal
per capital GDP was US$6,761.
Malaysia economic data states that in 2008 fiscal GDP of Malaysia, as per
purchasing power parity, was $397.5 billion and GDP, as per official exchange
rate, and was $214.7 billion. Malaysian economic data has also revealed that
in same year real growth rate of Singapore GDP was 5.5 percent. Agricultural
sector of Malaysia contributed 9.7 percent of national GDP in 2008 and
industrial sector came up with 44.6 percent. Maximum contribution of 45.7
percent came from services sector. Economic data in Malaysia suggests that
in 2008 aggregate labor force in Malaysia was 11.2 million. Rate of
unemployment for that year was 3.7 percent. In 2008 investments made in
Malaysia amounted to 20.7 percent of its gross domestic product. As per
economic data for Malaysia rate of inflation in Malaysia in 2008 fiscal, with
respect to consumer prices was 5.8 percent. As per information from
Malaysia economic data major industrial products in that country are rubber
and oil palm processing and manufacturing, timber processing, light
manufacturing, petroleum production, electronics, agriculture processing, tin
mining and smelting, petroleum production and refining and logging.
As per Malaysia economic analysis emerging market over there have shown
to be steady and growth has been fast. Several plans have been
implemented to update agrarian economy towards manufacturing industry.
Malaysia receives different contribution from various sectors of economy.
Contribution of agricultural sector to Malaysia GDP in 2008 was 9.7 percent.
There was a contribution of 44.6 percent from industrial sector and 45.7
percent came from service sector in financial year 2008.
Economic analysis in Malaysia reveals that state policy of Malaysia focuses
on investment in export industries, which mainly comprise electronics goods,
investment in real estate sector, non tradable sectors and capital intensive
infrastructure. $15,700 has been estimated as Malaysia GDP per capita in
2008. Malaysia economy, now a developing multi-sector economy was
previously a mere raw materials producing one. Malaysia GDP as per
purchasing power parity was estimated to be $397.5 billion in 2008. Real
growth rate of Malaysia GDP of 2008 was approximately 5.5 percent. GDP as
per official exchange for 2008 was $214.7 billion. In financial year 2008, Asian
Development Bank (ADB) shows Malaysia GDP to be 5.7 percent. There is a
fiscal expansion in nation that has increased domestic income. Recession in
global economy has led to reduction of electronics export. These electronic
exports were major revenue earners for Malaysia. Early in 2001, Malaysia
had a global growth in economy because of silicon based products.
As per Malaysia economic analysis a good development for their economy
has been that value added production for has been taken charge of by Prime
Minister Abdullah. Investments were encouraged to be made in high
technology industries, medical technology and pharmaceuticals. For financial
stability, a number of macroeconomic policies have been implemented.
Economic problem that is faced by this south Asian nation, which is revealed
by in depth Malaysia economic analysis, is its dependency entirely on
electronic exports. Exports need to be diversified in various other sectors
including financial and service sector. Corporate bond market can be
established to promote private domestic investments. This way, current
account surplus can be curbed because of high foreign investments. Malaysia
made huge profits by exporting oil and gas and this has contributed greatly to
its economic development.
With the economy crisis affect amount of business in Malaysia industry. Such
as motor, the Motors Division experienced unprecedented market condition
as a result of the global financial crisis. The effects of the crisis were most
strongly felt in the developed markets like Australia and New Zealand which
saw their respective automotive industries posting negative growth.
Notwithstanding this, the Motors Division was able to benefit from its
presence in China where the market grew against the worldwide industry
downtrend, as well as in Malaysia where its earlier efforts to streamline and
restructure its operations enabled it to show positive results.
The Malaysian operations successfully consolidated the Hyundai distribution
business through the acquisition of the remaining interest in Oriental- Hyundai
from Oriental Holdings during the year under review. With the full range of
Hyundai vehicles under its umbrella, the Motors Division is well- positioned to
grow the Hyundai franchise when the market recovers.
The new Multi- Franchise Group, sime darby Auto ConneXion, performed well
and introduced new Alfa Romeo, Land Rover and Ford products in the
market. Auto Bavaria market the year under review with the launch of the first
BNW Premium Selection Centre in Malaysia as well as the opening of a new
4S centre in Kota Kinabalu , Sabah.
Macroeconomic and industry analysis of Malaysia
link to the company
Highlight Key index—the year 2009
GDP growth rate
5.8%
increased by 0.6 per cent to
CPI
112.1
Labor cost in manufacture Increased by 0.9%
Unemployment rate
Increased by3.5%
Investment environment is stable
To have a look at the data given, the Malaysia macroeconomy, which is the
environment in which Sime Darby operate. Totally, the environment is not
bad.GDP growth rate is 5.8%, and the unemployment rate is increased by
3.5%, they are both normal level, which indicates that Malaysia`s society and
economy are stable.
CPI
The CPI of total sectors is increased by 0.6% to 112.1, there are 6 sectors in
Sime darby, they are Plantation, healthcare, industry, motor, property, Energy
&Utilities. we refer to the CONSUMER PRICE INDEX FOR MAIN GROUPS,
MALAYSIA, following is,
Sectors
health
Housing, Water, Electricity,
Gas & Other Fuels
% change Jan-Dec
2009/08
2.3
1.4
Those changes will influence the revenue in the future year 2010. Because
under the high rate of those, some consumers may choose the low-cost
healthcare unit or governmental hospital rather than Sime darby private
healthcare unit. And for housing, fuels changed, in the future, perhaps, less
consumers than before are going to buy cars and property such as
apartment. As if, our sales will decrease, many potential face to high cost of
house or car, they just may choose waiting.
Labor cost is increased
The index indicates all labor cost, as the total CPI increases, obviously, the
cost of living has been up, and as to that the labors need more capital to pay
for his or her essential daily cost. Base on the change, expenses of most
companies will be more than before, which affects the Sime Darby plantation
and industry more for which are need more labors than other sectors in the
company. Therefore, we predict the earning of the company will go down.
Key stock statistics
RM million
FYE Dec
EPS
ROE
P/E ratio
P/BOOK
VALUE
P/CASH FLOW
P/SALES
BETA VS KLSE
SHARES
2005 2006 2007 2008 2009
33.7
0.379
10.592
15.28 11.89 15.46 13.87 19.32
1.09
0.76
1.19
1.35
1.24
16.92 11.49 13.82 12.66 47.00
0.66 0.66 1.12 1.43 1.42
1.1450
6009.5
Ratio analysis
P/E ratio
Theoretically, a stock's P/E tells us how much investors are willing to pay per
dollar of earnings. Thus, for the year of 2005, 2006.2007,2008 and 2009, a
P/E ratio of 15.28, 11.89,15.46,13.87,19.32 suggests that investors in the
stock are willing to pay $15.28 ,$11.89, $15.46, $13.87, $19.32 for every $1
of earnings that the company generates respectively.
P/Book ratio
IfaP/B ratiois less than one, the shares are selling for less than the value of
the company's assets. From the year of 2005 to 2009 except 2006, the P/B
ratios are exceeding one. However , for the year of 2006, the P/B ratio is 0.76
which is less than one. It indicates that in the worst-case scenario
of bankruptcy, the company's assets will be sold off and the investor will still
make a profit. Failing bankruptcy, other investors would ideally see that the
book value was worth more than the stock and also buy in, pushing the price
up to match the book value.
P/ Cash flow ratio
The lower a stock's P/CF ratio, the better the value (the more undervalued).
From 2005 to 2009, the P/CF ratios are 16.92, 11.49, 13.82, 12.66 and 47.00
accordingly. These mean that investors think every $1 in cash flow generated
by the company is worth $16.92, $11.49, $13.82, $12.66, and $47.00.
P/Sales ratio
Much like P/E, the P/S number reflects the value placed on sales by the
market. The lower the P/S, the better the value, at least that's the
conventional wisdom. A lower P/S ratio is typically viewed as a better
investment primarily because the investor is paying less for each unit of
sales. The P/S ratio is increasing steadily from 2005 to 2009. This implies that
the value of the stock is getting worse as the investor is paying more for each
unit of sales.
Collect data and CAPM application
We choose data of the financial year Jan.2005-Dec 2009, from which we get
the historical weekly adjusted closing prices and KLSE weekly closing price to
calculate the beta, then the result of beta is 1.1450. That means there is a
strong positive relation between the company business and market. Since
subprime crisis happened in US, the world economic have been a recession
for several years that includes Malaysia certainly. So with that, we choose the
average of Malaysian t-bill rate from the year 2004-2009 as risk-free rate,
Rf=2.92%. CAPM, of which formula is E(p)=Rf + ß(Rm - Rf),we got the E(p) is
negative 0.36%.
The price is overvalue
This part, we introduce two statistics analysis technologies
1. Comparison between intrinsic value and current
market value
Refer to the annual repot 2009 of Sime Darby bhd. Net assets per share
attributable to ordinary equity holders of the Company (RM) or actual price is
RM 3.56. But now the current market price is RM 8.97, which is much more
than the common share price. So the stock of Sime Darby is overvalued now.
2. Application of PEG ratio
The PEG ratio is a valuation metric for determining the relative trade-off
between the price of a stock, the earnings generated per share, and the
company's expected growth. In general, the P/E ratio is higher for a company
with a higher growth rate. Thus using just the P/E ratio would make highgrowth companies overvalued relative to others. It is assumed that by dividing
the P/E ratio by the earnings growth rate, the resulting ratio is better for
comparing companies with different growth rates.
Here, we use the average of five year 2005-2009 EPS growth rate as the
expected EPS rate of the year 2010, g=7.52%, P/E ratio of 2009 is 19.32,
following is the formula
we get PEG ratio is 2.57.
The result is greater than 1, and we assume the expected EPS growth rate is
equal to the average of last five year EPS growth rate, from previous part that
analyze the 2010 economic will be worse than five years before, then the
growth rate for 2010 will be less than before. So we can conclude the PEG
ratio for 2010 is at least 2.57. Under the theory of PEG ratio, the result 2.57 is
greater than 1, so we can determine that the Sime Darby stock is overvalued
now. As our prediction, even in the year 2010, the stock will be overvalued,
too.
3. Phenomenon analysis
The following chart was Sime Darby market price per share from the year
2005 to 2009.
Why is it overvalued? Last part, we just determine that by theories. Now let`s
analyze I think Sime Darby is one of the biggest companies in Malaysia, and
it`s well diversifiable company with six sectors, which are Plantation,
healthcare, industry, motor, property, Energy and Utilities. At the beginning of
the year 2005, it was a boom in the world, especially in south of Asia, so
stock in every country is become more popular than before, many people
start to concentrate to stock, bond and the like. And beside that, the year
2008 there will be an Olympic sport meeting held in Beijing city. As to that,
countries around China are sensitivity to the huge sport meeting affection.
Base on that, many people who have not invested in stock market invested
their capital to the stock market; they have much confidence that the price will
be increase in the future. Back to Sime Darby stock, Sime Darby invested
much in China, such as property, motor retail and so on. So as a investor, he
or she would think over the contribution of that, Sime Darby would be
considered as a potential stock. Then the price of Sime Darby before 2008
was always increasing. That could be overvalued too much, from the year
2008 to 2009, the stock price went down, but it was also overvalued, but less
than that before the year 2008. In the future year 2010, the Sime Darby stock
price will be going down or toward to the intrinsic value.
Recommendation
Don't imagine Sime Darby stock will push up, everything is possible, but Sime
Darby. It is an overvalued stock, now it is passing through a adjusted period
(go down to intrinsic value). Return to all market in Malaysia, since the beta is
1.1450, which tells us it has a strong positive relation with the market. Then
we can analyze the market and the economy, then base the relationship
between this stock and market, as is know to us from the economy and
industry analysis part, securities past through the bull market 2007-2008, then
in 2009, with the influence of US subprime crisis, Malaysia and global
economy went into recession, the expected return rate for the market will be
less than the average of the past five years, certainly, that effects confidence
of most investors, I forecast there will be many stock investors who hold Sime
Darby stock will sell the stock at lower price at the beginning of the year 2010.
Until then with the recession, the stock price will decrease at least 0.36%
(from CAPM), because there is a large pace to decrease as other analysts
think. Concluding that because of the recession, reducing the confidence of
investors, then most of them choose selling or reducing holding, therefore, for
the short-term investors, I suggest u strongly to sell. And for the long-term, it`s
better to reduce holding.
Comparison:
Sarawak plantation.Bhd.
Company name
Stock price
Market capitalization
Market
Stock code
sector
Recommendation
Sarawak plantation.Bhd.
Rm 2.11
RM593.60 million
Main market
5135.KL
Plantation
Buy
Key statistics table
Beta
0.78
Number of shares 280.00 million
P/E ratio
15.05
Book value per
RM 1.79
share
CAPM
0.69%
Sarawak plantation got a same sector plantation as Sime Darby. As following
is a table to compare the two stocks.
Sime Darby
Beta
1.1450
P/E ratio 19.32
CAPM
-0.36%
PEG ratio 2.57
Sarawak plantation
0.78
15.05(better)
0.69%(better)
15.05/7.52=2.00(better)
From the table, using last several analyses, we can conclude that Sarawak
plantation stock will be increase, you can invest this stock to gain more than
holding Sime Darby.
Conclusion and announcement
After a series of analyzes, which are economic and industry analyze, ratio
analyze, beta and CAPM application analyze, PEG ratio analyze and
comparison intrinsic value and current market price, we reach to a
conclusion, which is sell or reduce holding. Beside that, an announcement to
every investor that this report is just a reference, we won`t be responsible for
any loss which is cause by our report. At last, to every investor, good luck and
have a nice stock journey