P2P Funding Investment

Peer-To-Peer (P2P) financing is gaining momentum lately in Malaysia.  It is a web-based innovation that broadens the ability of entrepreneurs and small business owners to unlock capital from a pool of individual investors in small amounts and provides a quick turnaround time to obtain financing for their businesses, through an online digital platform.

The Securities Commission Malaysia (SC) announced the regulatory framework for P2P financing in 2016, and approved six P2P operators later in the year (Read more here).

According to the statistics from Funding Societies (Read more here), investors can earn upto 10 – 14% return p.a.  The tenure of each investment could range from 1 to 24 months.  The minimum investment amount is RM100.

At the current default rate of 1.64%, from total 3233 number of financing upto 26^th April 2018, the lending performance is on-par compared to Malaysia’s February 2018 non-performing-loan (NPL) percentage, which stood at 1.6% (Read more here).

The following graph shows the historical default on quarterly basis.  The default rate could go up as high as 2.31% on Q2-2016.  With the default rate ranging from 1.15% to 2.31%, and at an average return of 10% per annum, is the investment worthwhile?

Source: Funding Societies Malaysia

Let’s look at the expected return for a single investment.

Expected return, E(X)

= (positive return)*(positive return probability) + (negative return)*(default rate)

= (10%)(100% – 2.31%) + (-100%)(2.31%)

= 9.77% - 2.31%

= 7.46%

The expected return of 7.46% is still higher than the current average one-year fixed deposit rate of 4%.  Investors may wish to consider to allocate a small portion of their investment into P2P lending as part of their diversification.

Investors who are interested to invest in P2P lending could sign up using the following link

promo.fundingsocieties.com.my/referral?r=

Disclosure: The author will receive a one-time referral fee of RM50 for each new investor who sign-up via the above link AND invest at least RM1,000 (Read more here).  To learn more about P2P lending, please send your queries to engineering2finance@gmail.com

Logistic Related Stocks Initial Coverage III

Part I and II of “Logistic Related Stocks Initial Coverage” were published on 14-Mar-2018 (Read more here) and 24-Mar-2018 (Read more here).  Part I covered brief industry outlook and Part II covered stocks which classified under the “Integrated total logistics services” category.  This Part III analysis will cover the stocks classified under the “Express delivery service”.

Three stocks were identified under “Express delivery service” – Gdex, NationWide and Pos.  As usual, first cut screening will be done using “AlphaIndicator” (Read more here).  The results are as follows:

Company	Earnings	Fundamental	Relative Valuation	Risk	Price Momentum	Average
Gdex	3	10	1	7	5	5
NationWide	0	7	0	2	7	5
Pos	2	6	4	6	3	3

The average rating for all three companies were rather poor.  NationWide scored 0 in “Earnings” mainly because it has recorded negative net income for five consecutive year, coupled with deteriorating revenue and escalating operating expenses.  Thus, NationWide will be excluded from the subsequent analysis.

Next, Gdex and Pos will be screened using Beneish M-Score (Read more here).  The following table shows the M-Score results for both Gdex and Pos.

Company	Beneish M-Score
	2017	2016
Gdex	-2.51	-2.62
Pos	-2.17	-3.11

Both companies passed the Beneish M-Score test.  Thus, the potential financial manipulation risk is low.

As stated in Part I analysis, in order to ride on the growth of logistic and E-commerce industry, the company shall have the ability to fund additional capital expenditure (CAPEX).  The following table shows the financial strength of Gdex and Pos.

	Gdex	Pos
D/E Ratio	0.07	0.12
Interest Coverage Ratio	24.53	13.93
Net operating cash flow to Debt ratio	1.02	0.83
Cash flow per share (sen)	0.81	29.57
Current ratio	14.15	1.34
Altman’s Z-Score	42.58	3.18

Source: Dynaquest Sdn. Bhd. STOCKBASE platform.  See “Notes” at the end of this article for Copyrights details.

Both companies have low gearing, thus other ratios appear healthy as well.  One interesting note on Gdex is its high Altman’s Z-Score.  Although high Altman’s Z-Score is preferable, extremely high score may indicate that the stock price is currently overvalued because one of the component of the Z-score is using its market capitalization divided by liability (Read more here).    Gdex market capitalization as at 30 March 2018 was RM2.9 billion and was trading at a price to earnings (PE) of 90.36! 

Choosing a common valuation model for both Gdex and Pos is rather challenging.  Monte Carlo PE method may not be appropriate as Gdex is trading at very high PE for past several years and it is expected to trade at high PE range for next few years before the anticipated higher growth rate could be translated into earnings.  On the other hand, for Pos, the express delivery business only accounted about 33% of total Pos revenue.  Thus, the growth rate assignment that required in Monte Carlo PE method may not be a common factor for both companies.   Given that both companies’ decent financial strength position, a closer look into their dividend per share (DPS) pay-out and cash flow per share (CFPS) revealed that the cash level of both companies is sufficient to pay dividend for the foreseeable future and at the same time raising more funds for expansion.  See below chart and table for details:

	Gdex		Pos
	DPS^ (sen)	CFPS* (sen)	DPS^ (sen)	CFPS* (sen)
2015	0.23	3.27	13.1	47.93
2016	0.25	3.31	11.7	34.97
2017	0.25	0.81	10.7	29.57

^ Annual Report

* Dynaquest Sdn. Bhd. STOCKBASE platform.  See “Notes” at the end of this article for Copyrights details.

As such, a two-stage Dividend Discount Model (DDM) is recommended for the valuation method.  For the first three years from 2018 to 2020, a flat DPS is forecasted for both companies as part of the cash flow are expected to fund additional CAPEX.  The DPS is projected to grow at average 8% yearly to infinity by blending the historical and projected growth rate stated in Part I analysis (Read more here) for Gdex.  Meanwhile, a lower growth rate of 5% is chosen for Pos because only 33% of their revenue are derived from express delivery services.

One of the important parameters of DDM is the required rate of return, k.  It varies from people to people, depending whether the investors have the ability to diversify their portfolio or not (Read more here).  A common method to estimate k is using the Capital Asset Pricing Model (CAPM).  The following table shows the required rate of return, k for Gdex and Pos respectively.

	k	Β ~	Market Risk Premium ~~	Risk Free Rate ~~
Gdex	7.22%	1.10	2.88%	4.05%
Pos	7.36%	1.15	2.88%	4.05%

~             Infront Analytics on 30 March 2018

~~           Market Risk Premia on 30 March 2018

The above required rate of returns assumed that the investors are holding a well-diversified portfolio.  For retail investors that may not a have the capacity to maintain a well-diversified portfolio, a higher k is recommended.  In this analysis, k = 9% is selected.  The following table shows the price of Gdex and Pos using DDM and respective assumption.

	Price as at 30-Mar-2018	Price derived using DDM	k	g	DPS (sen)
Gdex	RM 0.525	RM 0.21	9%	8%	0.25
Pos	RM 3.53	RM 2.44	9%	5%	10.7

As at 30-Mar-2018, both Gdex and Pos are trading well above the price derived from DDM.  For GDex, one shall look for earning surprises from time to time to gauge their ability to translate the growth into earning.  Meanwhile, for Pos, investors shall monitor the management’s strategy to change the current business model, unleash the potential of their infrastructure and network.


Disclaimer:  The above analysis does not imply any buy or sell recommendation.  The author disclaims all liabilities arising from any use of the information contained in this article.

Disclosure: The author may have interest in the stocks of the companies in this article.

Notes:  The data are the property of Dynaquest Sdn. Bhd.  It is subject to Intellectual Property Rights and T&C.  Do not reproduce without the consent from Dynaquest Sdn. Bhd.  (The author has signed a “Data Sharing Agreement” with Dynaquest Sdn. Bhd., based on a “Data Sharing Fee”, to use the data from Dynaquest Sdn. Bhd.’s STOCKBASE platform in this blog.  The content of this blog in no way represents the views or opinions of Dynaquest Sdn. Bhd.)