MEGB retracted - Greater Safety of Margin?

One stock in my portfolio is MEGB.

Today, after news on Monday (10/11) that Insider Asia's model portfolio I follow acquired shares at 20k shares at RM2.39 I felt more confident on my long-term pick. But then today, it dropped further to RM 2.34 with news that a foreign fund had sold 174million of its shares last week - http://www.theedgemalaysia.com/business/180065-fmr-llc-disposes-of-174m-masterskill-shares.html

That may have caused some panic understandably and some have sold off in a panic.

Here's where I quote Buffet on being a contrarion investor - Be fearful when others are greedy and greedy when others are fearful!

As such, this retraction gives a bigger margin of safety f0r retail investors (yes, you and me!) to jump in. Yes, there is a concern that FMR LLC may know something we know but that will be pure speculation. The IPO was priced at RM3.80 which was way too much to begin with! Let's examine why I like it and its downsides:

Why I like it?

I like it because it's my two favourite industries - Healthcare and Education. If you don't know already - Masterskill Education Group Berhad (MEGB) provides higher education and training in nursing and allied health sciences and you can see they are quite well advertised everywhere!

They are also undervalued in terms of PER compared to its other Malaysian Education stocks - Help and SEGI.

Being a top down investor, let me first explain what's so great about these two sectors and why I believe besides its defensive nature (low volatility), I believe there's growth:

Healthcare - With a growing, ageing population (living longer than ever to add!), there will be a need for better healthcare provision around the world. As such, there is a growing demand for healthcare professionals to cater to that need.

Education - Its an Asian thing to have a good education for our children so there will be demand to send children to higher education no matter the price! On top of that Masterskill's courses tend to have a higher margin than say HELP's or SEGI's because of the nature of their courses offered.

Potential Downside

PTPTN loans - There's a problem collecting these low (to no!) interest loans from graduates and these loans provide funding for most of MEGB's students. This was widely reported 4Q2010 resulting in the drop of its share most of that quarter.

But, no worries for help is on the way as the tax department, IRB announced this year that they will automatically be deducting the monies owed as soon as these graduated students start working with the help of legislative enactments/amendments.

The number of students currently affected - awaiting for their funding from the government are only 2% and are in Kuching. So it's overblown, some research houses have said.

Heavy Gearing? - A friend of mine mentioned they are heavily geared. I'll be honest. I took a glance here - http://www.masterskill.edu.my/MASTERSKILL%20WEBSITE/masterskill/investor/IR_financial.php

and first glance, it looks okay. But I will need to take a closer look.

Uncertainty for its intake of students - This is linked to the PTPTN loans but I remember a research house indicating that MEGB is a top ranked institution and it would be one of the last to get its funding cut/reduced. Also, I reiterate I am confident on these two sectors.

Fundamentals/Growth/Profits - The IPO was to generae funds to purchase and construct new buildings and expands it existing campus so the growth prospect is there.

In the last 3 financial years MEGB has a Pre-tax profits of - 56.485, 80.058, 112.289 for 2007-2009. So that's a good track record of profits! It's margin in % has steadily been around 40%!

That's quite a few thumbs up!

The only concern is the gearing which I will look our when the 2010 Financial Year Report is out. Might acquire more from my small position I have on it at the moment. I am holding this for the long term- Given my past mistakes, I need to discipline myself and learn to hold longer!

Well, that's all for me. Remember to do some of your own research before you take a plunge!

Are you a student with MEGB or investor who would like to add their 2 cents? Leave a comment below.

Disclosure: Yes, Joe does own shares in MEGB and shall not trade in it for the next 3 days.

Update 16/11- As for the end of the week - MEGB has dropped to RM2.20 - I say, still a good margin of safety to dip in.

Risky Move - Contra Trading

No, No.. Cool game but we're talking about Contra Trading larr....

Contra? You mean that uber awesome tv game we used to play as kids!

I'm afraid not! I am referring to how I made a contra sell the last few days.

Let me explain:

Contra trading is when you purchase and sell stocks by not putting the actual money down. Online brokers give you 3 days from the day you purchased it (known as T+3) to put the money down for the purchase (including brokerage fees).

If not, they will force sell it on (T+4) for you and charge you for any losses made. But the upside is if it did go up within those 4 days, you profit.

What happened for me was I have been eyeing Masterskill Education Sdn Bhd (Ticker: MESB - http://www.bloomberg.com/apps/quote?ticker=MASEG:MK). It has been a stock I already have a small holding of it and have been eyeing since it had dropped to an all-time low of RM 2.03 since its IPO debut last year or RM3.80. I was thinking of increasing my holdings believing in Education and how undervalued it is to its peers (HELP and SEGI) but also took into account the concern over PTPTN loans funding its students were in trouble.

So, I bought 6 additional lots at RM2.12 on Monday for long term holdings but for research purposes I thought I would let it force-sell to see what will happen given it rocketed up to RM2.40+ the next few days.

Eventually, Friday (T+4) came and I got a call around 9am from CIMBiTrade inquiring whether had I paid for the stocks and they would force-sell it by noon if I don't force-sell it myself.

I did do so and sold them at RM 2.44 to make a quick tidy but small profit of RM 100+ (yes, force-selling does incur brokerage charges)

Ok, the reason why I relate all this to you is to give a very real example but NOT to say yes you WILL make money contra trading. Most contra traders actually lose money!

By saying I will buy at RM2.12, I have to pay within 3 days. If I don't, up or down, I pay for brokerage fees and any losses! Noone can really tell if a stock will go up in 3-4 days. While MEGB was deeply undervalued, it could have plunged further or what is stopping a plunging stock from plunging further (think: winding up, fraud, etc)

If you're banking on some news like say a takeover, some takeovers don't happen for whatever reason, the price plunges, and you're stuck with a stock with a loss!

Let's go through all the risks involved:

1) If the stock plunges, you have to pay for all the losses not made back by the broker's force sell.

2) If the stock is suspended (it can happen) or suddenly for whatever reason de-listed, you can't sell, you still owe the bank RM X which you have promised to pay legally. This may incur high interest rates until you can pay it off on top of the losses/profits made later from the sale.

3) You may have no control on how much to sell (but in my case, I did because the bank gave me until lunch time to force sell it myself.. I am not sure how often this is the case)

4) Brokerage fees will kill you in the wrong run! Day trading or Contra trading - You will incur lots of brokerage fees! Take my example - you would think 600*(2.44-2.12) = RM 192 profit! Nope - Brokerage fees (including stamp duty) was 56.67 - So I only made RM 135.33 (30% of my profit loss because of brokerage). In the long run, you will have more misses than hits (especially learning this risky play) and you will feel the impact of brokerage fees.

The only benefit I can think of is:

1) No model required to pay down the cost of the shares but see downside no 2)! Ie: Leverage

The biggest assumption running here is everything goes well between your purchase and the trade of your stock.

To end, again I do not endorse this move and I did so with MEGB because a) it was a stock I was willing to hold for long term and b) decided to try this for this blog's research. In the long run, brokerage fees will kill you.

If there are any contra traders reading this, please share any tips or correct me if I have made a mistake somewhere.

While researching for this post, I came across this link:

http://guanyu9.blogspot.com/2010/03/brokers-fight-for-right-to-contra-trade.html - read the comments - contra trading takes up 50% of the trading volume in Singapore and your comment practice among brokers apparently.

Full Disclosure : Joe does own shares in MEGB and will not trade for the next 3 days in MEGB.