Answer)
The Malaysian Economy which is known to be a robust economy with supportive government reforms, talented workforce and newly developed infrastructure. The country has turned out to be an attractive investment destination for the not only domestic but international investors. So the Sya Suka Berada di Sini- ‘’ I Like it Here’’ phrase is quite suited for referring to Malaysian Stock Exchange.
- Money Market Investment
- Stock Market investment
Money Market Investment:
This region of investment opportunity is a risk less investment where the investors, invest their funds in highly liquid financial instruments of commercial banks primarily in Saving Bank Accounts, Fixed Deposits and other risk free products. Since these assets are backed by full faith of malaysian governments and commercial banks with high capital adequacy ratios and market capitalization, investment on money market instruments will yield low return for the investor owing to risk free nature of specified asset classes.
Stock Market/Equity Investment:
The very core definition of equity investments defines it as Risk Capital Investment where investor assumes the risk of losing their funds if the business fails. Here the investor invests his funds to own share capital of the company and becomes the shareholder and gets entitled to profit and dividend payments.Since equity investors assume primarily risk of losing their funds if the business fails, hence they require high return from the borrowing company.
The Best Alternative: Money Market or Equity Market?
The Portfolio Construction is not an overnight task. The portfolio manager have to understand the risk taking ability(in fair manner) and investment objectives of the client and after creating Investment Policy Statement, he can decide as which of the two investment options suits the investor.
However, here the lottery prize winner has declared that he understand the risk- return trade off and since the global equity market has turned out to be efficient where arbitrage profits are rare, thus in order to earn higher returns he is ready to invest in Equity Markets of Malaysia accepting the risk involved in such investment.
However, it would not be ideal to invest all the investment in equity market in high risk securities and thus our portfolio will constitiute some risk free money market assets along with equity market securities.
Benefits and Risk of Investment in Malaysia
Malaysian Economy is a newly industrialized economy where the stock exchange Bursa Malasyia, which was also known as Kualalumpur Stock Exchange is trading around 912 companies. With high GDP Prospects in coming years and reduced role of Malaysian Government, many business friendly reforms are being launched that is making Malaysia as Lucrative option for investors. However, with political risk and high current deficits in the Malaysian Budget Reports that gave rise to monetary policy risk, the investors need to scrutinize and apply the fundamentals of investments before choosing the best stock in Bursa Malaysia as only sound and rationale stock selection can help the investor achieve his objectives along with following principles of risk return trade off.
Portfolio Construction:
Our Stock Selection from Bursa Stock Exchange will be based on the objective of high return where the investor assumes the capability of accepting high risk, however following principles of portfolio construction our allocations will surely include some moeny market instruments where the investor can be assured of though low but assured returns from this investment class.
Following are the two money market instruments, which investor can consider in his portfolio:
i)Fixed Income/Government bond Securities/Treasury Bills:
These money market instrument generate risk free returns for the investor and face value of the security/government bond is assured to be paid at a definite future date known as maturity date.
Risk Evaluation: These securities are issued by Malaysian government hence are completely risk free and on account of that it offers low yield, generally 3% per annum.
Return Evaluation: These instruments are issued in multiple maturities, however, securities with maturity of less than 1 year are issued below face value and hence the investor is issued with the security at discounted value an dthe face value is paid at maturity date. For instance, if out of total available funds, if we purchase fixed income security of RM 10000 at RM 9708, investor on account of 3% annual yield will be paid RM 10000 on maturity date.
ii) Short Term Corporate Placement(STCP):
Now since we have chosen a completely risk free investment class for the investor, now the next step will be to offer a money market instrument with better return than Treasury Securities and Fixed Deposits that only offered return of 3% on per annum basis.
Considering the objective of good returns, Short Tern Corporate Placement will be a lucrative money market instrument for the investor to place his funds in STCP as it offers better returns and flexibility than a fixed deposit instrument.
Risk Evaluation : Although not risk free, these securities carry minimal risk as it is in the form of deposit with the licensed commercial bank itself.
Return Evaluation : The interests rates on STCP Placements are dependent on interbank rates for similar period of placement. STCP rates depends upon amount invested as large amounts carry better rates with them. Funds invested in STCP are placed for a fixed period of time and at agreed upfront rate.
Now since we have decided the two money market instruments that investor can consider as these will assure a fixed return to the investor considering their almost risk free nature, our portfolio construction process will now look for some of the best stock available in Bursa Malaysia. With just under 1000 companies, the Malaysian Exchange is one of the largest in Asia offering different equity investment choices to the investor.
British American Trading Company-Malaysia:
The company is traded on Buras Stock Exchnage under the ticker of BATO.Kl. The company is a tobacco company offering administrative services to it subsisdiaries which are primarily involved in manufacturing and sale of ciagrattes, pipe tobaccos and cigars.
Fundamentals:
The company is currently trading RM 62.90 while the total market capitalization of RM18,011.23.
Rationale for Selecting the Stock:
i)High Dividend Yield:
Our decision to invest in BATO Malaysia is based on earning expectations and other fundamentals of the company. At first a high dividend yield of 4.4% and the payout ratio of 101, the company is indeed a lucrative stock to consider. Thus, Investor can be sure that even though he is going for equity investment he will be getting high returns for his investment and along with that a dividend yield of 4.4% which was even better than 3% Treasury Rates.
ii) The Impact of PE Ratio and EPS:
P/E Ratio is an important indicator of ratio of market price and earnings of the company. As like above methods, the intrinsic value of a company’s share can calculated by multiplying P/E Ratio with Earning per Share(EPS).
Value of Share = P/E Ratio* EPS
Thus, on the basis of this formula, we get the instrinsic value of : 22.59* 2.79 = RM 63.02
Thus, comparing the current price of RM 62.90, the stock seems undervalued which is again a source of investment in the shares of teh company. Further, the PE Ratio of the company and the Earning Per Share is well above the Industry Average.
iii) High Return on Investment and Return on Equity:
Another important consideration for the investors where they are concerned as how much return the company is generating on their equity funds. Analyzing the fundamentals of the company, the ROE and ROI of the company are way above than industry averages.
The Return on Investment of the Company is 102.12% while Return on Equity is 166.31% while the industry averages amount to 8.80 and 11.73% respectively.
iv)Pessimistic Future Estimates:
As per the recent market reports of various Financial Websites, the expected future price of the company is likely to increase to RM 75.5 in coming quarter although a decreasing trend is expected in third quarter where the stock price is expected to reach down at 71.3, the overall hold position is established in market consensus for British America Trading Company.
The Bottom Line:
High Dividend Yeild, High Dividend Payout, Stable Earnings and Optimsitic ROE and ROI Multiples makes the stock a real investment worth for the investor as despite of investment in equity of the company the fundamentals assur eus that stock will pay high return in contrast to risk involved of .50(Beta of the company).
FINANCIALS
Malayan Banking Berhad (MLYBY)
The biggest commercial bank in Malaysia with market capitalization of RM87,183.39. The Malayan Banking Berhad is a banking group engaged in commercial banking and the business of financial services. The subsidiaries of the company ar e also involved in the business of banking, investment banking, islamic banking, stock broking etc.
Fundamentals:
Currently, the stocks of the company are being at traded at RM 9.95.
Rationale for Selecting the Stocks:
i)High Dividend Yield:
The company at presents offer attractive dividend yield of 5.14%. Also high divided payout ratio of 70% is a solid reason for selecting the stock for the investors. Our contniued decision to include a high dividend yield payout stock is based on the objectives of the investor where although he is ready to take accomodate risk in his portfolio but higher returns accompanied with high dividend yield will further enhance his total return from investments in the stocks.
ii) High Risk compensated with High Returns and Expected Capital Accumulation:
The high Beta factor of the company amounting to 1.10 is well compensated with high expected capital accumulaton. The Market consensus expects the company to reach RM 15.6 in second quarter and 17.3 in third quarter. Thus holding the stock even for an year from now will provide return of 73.86% along with dividend yield of 5.5%.
The Bottom Line:
The high market capitalization of the Malayan Banka nd strong earning estimates along with jigh dividend yeild makes the stock of this company a ratioanle choice to be included in the portfolio
FINANCIALS
The Final Portfolio:
Our Final Portfolio will consist of two financial assets of Money Market and shares of Two Companies listed on Malaysian Stock Exchange. The decision to invest in Money Market Instruments were to earn a risk free assured return for the investor. However considering well compensated returns of equity market for their stock beta, our weightage of fund allocation will be inclined more towards equity investment. Following is the tentative asset allocation ratio in the portfolio:
British America Tobacco Company: 45%
MayBank: 35%
Short Term Corporat Notes: 15%
Treasury Bills: 5%
Works Cited
Hong Leon Bank. 22 October 2013 <http://www.hlb.com.my/hlm/hlm/hlmmpd.jsp?flag=hlmmpd>.
Kuepper, Justin. Investment in Malaysia from A to Z. 22 October 2013 <http://internationalinvest.about.com/od/globalmarkets101/a/Investment-In-Malaysia-From-A-To-Z.htm>.
Portin. "Risk Associated with Investments." Institute, CFA. Equity. Boston: Custom, 2011. 198-210.
Reuters. British American Tobacco Malaysia Bhd (BATO.KL). 22 October 2013. 22 October 2013 <British American Tobacco Malaysia Bhd (BATO.KL)>.
—. MALAYAN BANKING BERHAD (MBBM.KL). 22 October 2013. 22 October 2013 <http://in.reuters.com/finance/stocks/overview?symbol=MBBM.KL>.
