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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%

CPI

increased by 0.6 per cent to 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

% change Jan-Dec 2009/08

health

2.3

Housing, Water, Electricity, Gas & Other Fuels

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

2005

2006

2007

2008

2009

EPS

33.7

0.379

ROE

10.592

P/E ratio

15.28

11.89

15.46

13.87

19.32

P/BOOK VALUE

1.09

0.76

1.19

1.35

1.24

P/CASH FLOW

16.92

11.49

13.82

12.66

47.00

P/SALES

0.66

0.66

1.12

1.43

1.42

BETA VS KLSE

1.1450

SHARES

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 high-growth 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

Sarawak plantation.Bhd.

Stock price

Rm 2.11

Market capitalization

RM593.60 million

Market

Main market

Stock code

5135.KL

sector

Plantation

Recommendation

Buy

Key statistics table

Beta

0.78

Number of shares

280.00 million

P/E ratio

15.05

Book value per share

RM 1.79

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

Sarawak plantation

Beta

1.1450

0.78

P/E ratio

19.32

15.05(better)

CAPM

-0.36%

0.69%(better)

PEG ratio

2.57

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

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