Should UOA and Affin Bank be in the same portfolio?

[i4value]

If you know which stock will give the best return, you would be an idiot not to invest all your money into this one stock. The reality is that we cannot see the future so we hedge buy spreading our investments to several stocks. In other words, we have a stock portfolio.

But this works only if we have a diversified portfolio - the stocks in the portfolio are not correlated to one another. How do you select the stocks to achieve the diversity?

We know that if you have 2 bank stocks such as Bursa Affin bank and Maybank in the portfolio, it is not a diversified one. What if we have Affin and UOA Dev a Bursa property company? Will we then have a diversified portfolio?



The chart shows the ROE trends of Affin and UOA over the past 7 years. There is a 81% correlation between then. This mean if statistically that changes in Affin ROE can explain 2/3 of the changes in UOA ROE. This is significant

So is having Affin and UOA meant that it is not a diversified portfolio?

[weijian]

Hi i4value,

Correlation is not equal to causation. So unless we are able to definitively explain a causation between Affin and UOA, else the 0.81 correlation factor is not meaningful. Getting causation is not easy because confirmation bias is too prevalent.

Personally, I think everything is correlated, but the degree of causation is much less. One actually needs to look at autocorrelation and use multivariate analysis to calculate all the different factors. But then again, that only explains the maths but not the underlying cause-effect.

IMHO, the best diversification is probably geography and investing styles. If one already has a significant portion of their portfolio in different geographies, that is probably good enough. Or in terms of investing styles, looking at special situations like merger arbitrage, turnarounds etc and having a portion of these special situations in one's portfolio is good diversification as well.

Too much of good things, can't be bad. If I have 2 good bank stocks - conservative without bad governance and located in a growing GDP, why should one only invest in 1 of them as he/she "needs to diversify"?

[i4value]

The share price of Affin has gone up by about 25% since the start of the year from about RM 2.10 per share to as high as RM 2.69 per share. This is due to news about the Sarawak State government increasing its stake in the bank. Since there is no final announcement about the size of the stake and the price, I suspect this is a counter with many speculators.

To be transparent I invested in Affin years ago at an average price of RM 2.66 per share. Affin has not been a performing bank. The chart shows the ROA trends for 4 banks – Affin, CIMB, Maybank and Public (PBB). You can see that Affin delivered the worst returns.



I think that the entry of the Sarawak State government, may be a catalyst for improving performance that would result in a re-rating. If this happens, my purchase price of RM 2.66 may look very reasonable considering that the Book Value is in excess of RM 4.00 share.

Suddenly from being an idiot, I may yet turn out to be a genius.

[weijian]

I think that the entry of the Sarawak State government, may be a catalyst for improving performance that would result in a re-rating. If this happens, my purchase price of RM 2.66 may look very reasonable considering that the Book Value is in excess of RM 4.00 share.

Suddenly from being an idiot, I may yet turn out to be a genius.

hi i4value,
What are the underlying factors that compel you to "think that a re-rating by Mr Market" may occur? Is the Sarawak State government going to value-add via expertise or provide beneficial synergies (or otherwise unsavory known as related party transactions)?

Or you believe that the Sarawak State government would eventually "fight" with the other majority shareholders LTAT and Bank of East Asia for control, resulting in a bidding war that benefits minorities.

[i4value]

There are 2 possibilities with the entry of the Sarawak State govt. First is that they may think that the performance by the current management team is poor and change it. The other is the more likely is that they will allow the bank to finance a lot of the state projects or transfer the state funds from other banks to Affin so that Affin has more lending power. So the bank has more volume but with the same level of management.

There is unlikely to be a fight among the shareholders...if there is going to be a change in the shareholding, it would be from a willing buyer willing seller perspective

[weijian]

hi i4value,

Thanks for the insight. If it were Taib, the entry of the Sarawak State gov may probably be more bad than good. But with Abang Jo under helm, I reckon it would be better?

Looking at your earlier ROA chart, it is clear that PBB is a cut above the rest. So rather than banking on "reversion to the mean", would it be better to understand why PBB has better ROA? Maybank isn't doing too bad and I believe it is getting its share of state projects financing. But what about PBB?

Banks are highly leveraged entities. Might be better to pay up for better quality ROA than buying cheap lower quality ROA.

[i4value]

PBBank is going to be an interesting one now that its founder is no longer around. Its performance is due to is corporate culture and it remains to be seen whether this is sustainable without the founder

[weijian]

hi i4value,

Thanks for the insight. Would you be able to elaborate more on PBB's corporate culture that led to its outperformance?

What about Affin bank that led to its underperformance? (ie. low ROE). Is the ROE coming from low returns and/or high asset base?

[i4value]

There are anecdotal stories about how the PBB saves and "sting" compared to the other banks in Malaysia. People who join them from other banks often tell stories of the culture shock.

Affin has been an underperformer from many years. There is no one to blame except management when you have decades of such performance.

[weijian]

There are anecdotal stories about how the PBB saves and "sting" compared to the other banks in Malaysia. People who join them from other banks often tell stories of the culture shock.

Affin has been an underperformer from many years. There is no one to blame except management when you have decades of such performance.

Well, the Mgt was appointed by the BOD. And in general, the BOD is a reflection of the majority owners. On the Bursa market, has any companies with LTAT's ownership been a decent steward of capital and governance?

Irregularities worth millions uncovered at LTAT
https://themalaysianreserve.com/2019/09/...d-at-ltat/

AES scandal: Vets' Association wants govt to pay back the interest too
https://www.nst.com.my/news/nation/2018/...terest-too

LTAT CEO explains that all six LCS ships must be built together, RM6b bulk order purchase to save cost
https://www.malaymail.com/news/malaysia/...cost/22032

Maybe, anything that LTAT touches, should never be touched with a 10ft pole for any long term investor who are looking to compound their capital, unless you are able to align with politically connected fellows who are waiting for a bail-out.

There is a very good chance that LTAT will end up like Tabung Haji, the latter found to be using "creative accounting" practices and is actually insolvent.