US Consumer Prices Jump?

 

US consumer prices climbed in April by the most since 2009. The consumer price index (CPI) increased 0.8% from the prior month, reflecting gains in nearly every major category and a sign burgeoning demand is giving companies latitude to pass on higher costs. Excluding the volatile food and energy components, the so-called core CPI rose 0.9% from March.

The gain in the overall CPI was twice as much as the highest projection in a Bloomberg survey of economists. Sharp increases were reported in prices for motor vehicles, transportation services, and hotel stays as businesses hardest hit by the pandemic reopen more broadly and vaccinated Americans resume social activities and travel.

Treasuries fell on the inflation surprise, with the 10-year yield touching 1.66%, while S&P 500 futures remained lower. The annual CPI figure surged to 4.2%, the most since 2008. Primarily, because of base effect.

While Federal Reserve (Fed) officials and economists acknowledge the temporary boost, it is unclear whether a more durable pickup in inflationary pressures is underway against a backdrop of soaring commodities costs, trillions of dollars in government economic stimulus, and incipient signs of higher labour costs.

The core CPI measure, which was also biased higher by the base effect, rose 3% from 12 months ago. That was the largest since 1996. For the last year the annual core inflation metric had held below 2%.

While challenging for producers, swelling consumer demand has also given firms more confidence that they will be able to pass along some of the new costs. If sustained, the production bottlenecks could pose a risk of an acceleration in consumer inflation.

“Cost-push” factors and imported inflation will drive consumer prices in Malaysia. It is best to implement pre-emptive measures to contain any potential rise in CPI. Supply-side improvements and demand containment strategies are needed to stave off the worst-case possibilities taking shape in the near future.

 

Reference:

1. US consumer prices jump most since 2009, outpacing estimates, 12 May 2021, The Edge

Toll Highways into a Highway Trust?

 

Gamuda Bhd has confirmed it is currently in talks with the Government to sell its 4 highway concessions to a private highway trust.

The value? Probably an enterprise value of RM5.2 billion, paid through bond issuance, according to Kenanga Research. Investors have an annual return of 4-5% supported by cash flows from the tolls. No guarantee or support from the Government is required. Toll hikes are waived with extension of concession periods. This means road users will continue to pay the same amount but for a longer period.

The Government will not have a stake and as such there is no outlay required.

Gamuda Bhd however on 10^th of May, denied that its proposal to have four tolled highways acquired by a highway trust involved an enterprise value of RM5.2 billion. “The speculated enterprise value of RM5.2 billion for a highway trust proposal is incorrect,” Gamuda said

In the previous model of 2019, the Government acquired the concessions for RM6.2 billion. Also, it required a congestion charge which would reduce toll rates by 30% during non-peak hours and free travel during off peak hours.

From the Government’s point of view, they could save on RM5.3 billion of toll compensations (from the toll hike freeze) for the remaining concession period for the tolls through this initiative. This also benefitting Gamuda by raising private funding initiative (PFI) equity to jump-start its MRT 3 project, or partly fund its 10-year Penang South Islands (PSI) plans. Road users in addition would get to enjoy zero toll hikes too.

Sounds like a win-win idea? If this proposal be accepted, it opens doors for other existing toll concessionaires to sell matured highway and channel proceeds to new ventures.

In the U.S., the Highway Trust Fund (HTF) was established in 1956 to provide a more dependable source of funding from the federal government for the construction of the interstate highway system. The HTF is comprised of two constituent accounts:

·       The Highway Account, which is largely devoted to construction and maintenance of highways and bridges; and

·       The Mass Transit Account, which is used to make capital expenditures on buses, railways, subways, ferries, and other modes of public mass transit.

The Congressional Budget Office estimates that Highway Trust Fund tax revenue will total $43 billion in fiscal year 2020 (figure 1). Revenue from the federal excise tax on gasoline ($25.8 billion) and diesel fuel ($10.5 billion) accounts for 84 percent of the total. The remaining trust fund tax revenue comes from a sales tax on tractors and heavy trucks, an excise tax on tires for heavy vehicles, and an annual use tax on those vehicles. In addition to dedicated tax revenue, the trust fund receives a small amount of interest on trust fund reserves.

The current tax rates are 18.4 cents per gallon for gasoline and ethanol-blended fuels and 24.4 cents per gallon for diesel (0.1 cent of each tax is dedicated to the Leaking Underground Storage Tank Trust Fund). The tax rates on motor fuels have not changed since 1993 and thus have failed to keep pace with inflation. If tax rates had been indexed for inflation since 1993, the current tax on gasoline would be about 33 cents per gallon and the tax on diesel fuel would be about 44 cents per gallon. Although the current taxes on motor fuels (except for a residual tax of 4.3 cents per gallon) are set to expire at the end of September 2022, Congress has routinely extended the taxes in the past.

Why can’t we have a similar system to fund highways and rail projects?

 

Reference:

1.     Cheah Chor Sooi, Gamuda’s highway trust proposal may just be a viable idea, 10 May 2021, Focus Malaysia

2.     Emir Zainul, Gamuda confirms plan to sell four highway concessions to govt, 11 May 2021, The Edge

3.     Gamuda clarifies proposal on tolled highway trust, 10 May 2021, SunBiz

4.     The Highway Trust Fund Explained https://www.pgpf.org/

5.     What is the Highway Trust Fund, and how is it financed? Tax Policy Center

Bullish Outlook for Mr DIY?

Mr DIY unveiled that its 1Q FY2021 net profit almost doubled year-on-year to RM124.79 mil (1Q FY2020: RM58.46 mil) while its revenue rose 63% to RM870.18 mil (1Q FY2020: RM534.08 mil) on 30 April 2021.

The strong results were supported by higher average monthly sales per store, underpinned by recovering consumer spending and double-digit profit margin. It was also a result of positive contribution from new stores, where its store network increased from 628 in 1Q FY2020 to 788 in 1Q FY2021. The home improvement retailer’s store expansion plan is well on track with net new addition of 54 stores in 1Q 2021 versus the target of at least 175 stores in 2021.

AmInvestment Bank Research is bullish on Mr DIY’s future earnings outlook due to:

·       Unrivalled gross profit margins of about 43%;

·       Expansion into less urban areas;

·       Quick store breakeven periods (less than two years); and

·       Expected success of multi-store format

The research house is positive with Mr DIY outlets’ earnings but is cautious of the performances of Mr DOLLAR and Mr TOY (subsidiaries of Mr DIY) amid a possible re-tightening pandemic restriction in light of the recent spike in cases.

Mr DOLLAR is not making profits yet but the group believes that after it achieves a critical mass of stores, it can take advantage of economies of scale and has a higher leverage over suppliers. Similarly, Mr TOY’s mall outlets generally saw a weaker performance as compared to stand-alone stores. Given that the majority of Mr TOY outlets are located within malls, the segment saw reduced transaction volume and footfall in general.

The latest stock prices targeted by research houses are as follows:

Date	Open Price	Target Price	Upside	Source
3/5/2021	4.05	4.79	18.27%	HLIB
3/5/2021	4.05	4.48	10.62%	AmInvest

 

Not everyone has a positive view on the group. Asia Analytica, for example, thinks this pace of growth may not be sustainable given the fierce competitive outlook. This is mentioned in its report ‘Mr Don’t Invest Yet’ published in The Edge Malaysia (19 October 2020) before Mr DIY’s IPO.

In fact, Malaysia’s number of home improvement stores per million population is well ahead of Indonesia and Singapore, and on par with some of the developed economies like the UK (see chart).

What’s next?

The continued expansion of Mr DIY could make it a potential candidate for the exclusive FBM KLCI league. This would place it among the 30 largest stocks on Bursa Malaysia in terms of market capitalisation. At RM25.36bil market cap as of April 15, Mr DIY is already larger than Supermax Corp Bhd, Telekom Malaysia Bhd and Kuala Lumpur Kepong Bhd, to name a few FBM KLCI constituents.

Disclaimer: We are not recommending any counter or share nor accept any liability or loss for the stock mentioned above.

 

Reference:

1.     Cheah Chor Sooi, Gravity-defying growth prospect beckons for Mr DIY Group, 3 May 2021, Focus Malaysia

2.     Ganeshwaran Kana, Bullish outlook for Mr DIY, 16 April 2021, The Star

3.     Harizah Kamel, Mr DIY to gain from potential FBM KLCI entry, 16 April 2021, The Malaysian Reserve

4.     Mr Don’t Invest Yet, 19 Oct 2020, The Edge Malaysia

 

 

 

 

CTOS: Will it Double in Value on Listing?

 

The last time a company sold so much of its equity through an IPO was when FGV Holdings Bhd sold 60% of its shares in 2012. And now CTOS is offering 50% of its total equity for sale to investors. The typical size of listing is only 25% of a company’s equity. So, why this pursuit of a large public spread?

Sources say that it was large funds like the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) who had nudged CTOS shareholders to consider an offering larger than 25% of equity. In the past several years, there has not been many large IPOs that could cater to the demand of large institutional funds like EPF and PNB. The reduced number of IPOs on the Main Market has also made it difficult for large institutions to find companies that are suitable for them to invest.

CTOS is expecting to raise about RM1.2 billion through 50% of its equity offered, driving the company’s post-IPO market capitalisation to RM2.4 billion.

Ganeshwaran Kana (8 May 2021), quoting sources, says CTOS may be valued at about 35 to 37 times, based on its price-to-earnings (PE) ratio. The other listed credit reporting companies around the world have a PE of around 50 times.

Big data and financial technology features make this company interesting and therefore likely to see a heavier demand. There are, so far, no exact comparable businesses among listed Malaysian companies that are like CTOS. But if you take technology stocks as examples, Greatech Technology Bhd and Pentamaster Corp Bhd have PE ratios of 61 times and 51 times, respectively.

In addition, the main shareholder of CTOS is Creador, the private equity firm who recently floated Mr DIY Group (M) Bhd on the Main Market. The market capitalisation of the group has doubled from RM10.98 billion on the first day of trading to over RM23 billion as of 12 May 2021.

The credit reporting industry has high barriers to entry and a key barrier is the access to credit profiles. CTOS has built this over three decades. The other CRAs in Malaysia are Experian, Credit Bureau Malaysia, FIS Data Reference, Dun & Bradstreet and CRIF Omesti. Malaysia’s credit reporting industry is still in its early stage. About a quarter of the Malaysian population don’t have credit scores. This may provide a great growth potential for the company. What do you think? Will CTOS double in value on listing, like Mr DIY?

Disclaimer: We are not recommending any counter or share nor accept any liability or loss for the stock mentioned above.

 

Reference:

1.     Joyce Goh, CTOS submits for IPO on Bursa Malaysia, eyes valuation of over RM2b — sources, 19 March 2021, The Edge

2.     Liz Lee, CTOS targets RM1.2 bil IPO in third quarter, sources say, 11 March 2021, The Edge

 

Malaysia’s Economy to Rebound in 2Q21?

RAM Rating Services (“RAM”) expects Malaysia’s economy to rebound in second quarter (2Q). And they have accounted for rise in Covid-19 injections and re-imposition of MCO 3 in their forecast.

RAM is maintaining GDP growth of 5.0 per cent for 2021.

Meanwhile, AMRO – the macroeconomic research office of ASEAN+3 – expects an upswing of 5.6% owing to a low base and the strong pick-up in global demand induced by vaccination programmes.

All this sounds very promising, but Q1 results were weak and Q2 with MCO 3.0 is not expected to rebound strongly. Export markets – U.S., China – have improved significantly but that’s because they are well ahead of us in vaccination.

But if the Government were to do a more selective, targeted MCO and continue stimulus, then perhaps a better outcome could be realized.

AMRO is projecting 6.2% growth for 2022 with herd immunity in Malaysia and abroad achieved. Let’s hope that these “prophets” of “green shoots” may realize their forecasts.

 For me, a 4% growth in 2021 would still be great! Why? Although exports have improved significantly, domestic consumption is constrained. Sales are below by 20-30% compared to pre- pandemic levels—never mind about Hari Raya! Nevertheless, remain positive!

Reference:

1.     RAM Rating expects Malaysia’s economy to rebound in 2Q21, 7 May 2021, Malay Mail

2.     Malaysia is well-positioned for a strong vaccine-led recovery but ... 4 May 2021, Focus Malaysia

3.     Sulhi Khalid, Malaysia's GDP growth could dip to 4% on MCO 3.0, slow vaccination and Covid-19 resurgence — SERC, 7 May 2021, The Edge

What’s More Urgent Than Being in a Middle-Income Trap?

 

Paolo Casadio from HELP University and Professor Geoffrey Williams from Malaysia University of Science and Technology pointed out in their latest article – ‘The trap of the ‘middle-income trap’’ that among mature economists, the classification of countries into high-, middle- or low-income economies has no particular economic meaning and formally it is simply a way of deciding whether or not a country will be eligible for financial assistance from international agencies.

asiasociety.org

For 2021, the high-income economies are those with a Gross National Income (GNI) per person of US$12,536 (RM51,341), using a statistical calculator called the World Bank Atlas method which adjusts for exchange rates and purchasing power.

High-income status doesn’t tell us much about the level of development and, for example, some high-income economies, including the oil exporting countries of the Middle East, are classified as developing countries. It tells us nothing about how the high income was achieved and among the 83 high-income countries we find many oil-based economies with little or no manufacturing and financial services or high-tech industries touted as the future of growth.

The average income per person also tells us nothing about the distribution of income with massively wealthy elites and desperately poor masses in even the highest income countries. The US$12,536 limit is best viewed as a bureaucratic cut-off point, an achievement rather than a policy target.

The World Bank has projected Malaysia to join the club of high-income nations, but at a slower pace than its predecessors. For a vital and dynamic economy like Malaysia with historical growth close to five per cent, reaching this threshold is more a matter of time than a measure of extraordinary performance. Therefore, the authors pointed that focusing on high-income as a policy target is not only misleading, it can be a dangerous distraction from the more urgent underlying challenges in economic growth, development and distribution.  

The challenges, for example, the downward trend in growth rate for Malaysia, must be placed above the high-income target. Structural unemployment rises with slower rate of growth. Why? The economy has insufficient capacity to accommodate the flow of people entering the labour market. And with automation and substitution of workers due to the Fourth Industrial Revolution (IR4.0) this could get worse. Meanwhile, many college graduates are underemployed, suffering from low wages coupled with ever higher cost of living.

The second implication of lower potential growth is the further contraction of the fiscal space. When the government targets a fixed level of debt and deficit to GDP, lower growth constraints resources available for economic and social interventions.

We need to be more creative and innovative in our economy. We should move away from labour intensive investment to digital infrastructure. And skills upgrading on a continuous level to prepare the workforce for the new knowledge economy. Solve current issues including Covid-19 and political instability to attract more foreign investments. So, instead of focusing on a high-income target which will happen anyway, its best to resolve urgent concerns of the current lower underlying growth.

 

Reference:

1.     Paolo Casadio and Geoffrey Williams, The trap of the ‘middle-income trap’, 4 May 2021, Malay Mail

2.     Malaysia: On track for long-term growth, 20 March 2020, Standard Chartered

 

 

 

Selamat Hari Raya!