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How Greece Is Impacting The Financial Markets

From my perspective, the greater risk to investors is not their relative exposure to the country of Greece in their portfolios, but their relative exposure to other countries. I contend that international stocks, particularly within Europe and also including certain emerging markets, are an attractive asset class for risk-adjusted return potential over the intermediate- to long-term. Any pullbacks in international equity strategies (and European-based strategies in particular) as a result of the ongoing Greek drama, may present an attractive entry point, or re-entry point, for some investors. A lot of the volatility witnessed across global stock markets thus far in 2015 can be attributed to the ongoing soap opera involving Greece, the European Union and the International Monetary Fund. Greece, arguably the most notorious of the P.I.I.G.S. (Portugal, Italy, Ireland, Greece and Spain) countries, has been confronting a mountain of debt issues – currently estimated at 320 billion Euros – within the country for years. If that number is not staggering enough, consider these other economic statistics plaguing the country of Greece: Gross Domestic Product has fallen by 25% since 2010 A Debt-to-GDP ratio of 177% An unemployment Rate of 27% More than 20% of the Greek population is over the age of 65 – making it the world’s 5th oldest nation – and only 14% of the population is under the age of 15 (Data sources: BBC News, ECB, IMF, Green National Statistics Agency, Bloomberg.) With Greece in need of another bailout, or debt restructuring, to avoid defaulting on a significant repayment to the IMF at the end of June (and more to come thereafter), and Greece Prime Minister Tsipras opposing additional austerity measures (ex. pension cuts and potential increases to the age of retirement for these purposes in Greece) that may be a part of any new debt deal, many market participants are now bracing for the increased likelihood that Greece will leave the Euro – whether on their own or at the request of the EU. Germany, as the largest member of the EU, which Greece reportedly owes $56 billion alone, is showing signs of diminished interest in saving Greece again. This dubious view is shared elsewhere in Europe which suggests that this standoff may remain until the end of June deadline. While it is unknown if either party will blink first, or if the proverbial can will be kicked further down the road, we, at Hennion & Walsh, believe that it is appropriate for investors to consider the impact that a Greece exit from the Euro (now being referred to by many as the Grexit) would have on their portfolios and financial markets overall. Using a couple of the larger and more popular international equity exchange-traded funds below, including one Europe-specific strategy, as proxies, it would appear as though investors may not actually have that much exposure to Greece if they are investing in international equities through these types of product structures. FTSE Europe ETF (NYSEARCA: VGK ) has a 0.07% allocation to Greece as of May 31, 2015, according to Morningstar. iShares MSCI EAFE ETF (NYSEARCA: EFA ) has a 0.00% allocation to Greece as of May 31, 2015, according to Morningstar. From my perspective, the greater risk to investors is not their relative exposure to the country of Greece in their portfolios but rather their relative exposure to other countries that may be impacted by either a Greek default or a further extension of credit to this debt-burdened country. To this end, any funds “saved” by not allowing for any future Greece bailouts could be applied to additional quantitative easing measures or other economic stimulus programs within the Eurozone. It is worth noting that the fear of contagion throughout the Eurozone also adds to the volatility in the region each time a potential Grexit is in the headlines. I contend that international stocks, particularly within Europe and also including certain emerging markets, are an attractive asset class for risk-adjusted return potential over the intermediate-longer term. I would even suggest that having Greece ultimately leave the Euro would provide some certainty to international investors and relieve Europe of one of the anchors holding down their own economic recovery. Thus, any pullbacks in international equity strategies, European-based strategies in particular, as a result of the ongoing Greek drama may present an attractive entry point, or re-entry point, for some investors. Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program consistent with the investment theme discussed in this article. This post is for educational purposes only and should not be considered as a solicitation to purchase or sell any of the securities or investment themes mentioned. International investments have their own unique set of risks that should be understood before considering an investment. As a reminder, all investment decisions in our view should be made consistent with an investor’s financial goals, tolerance for risk and investment timeframe. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Tenaga Nasional – Brace For Explosive Growth Of This Under Covered Electric Utility

Summary The company benefits from the growth of electricity consumption in Malaysia which is set to double in the next 15 years. Tenaga is going to increase its total capacity by 30% by the end of 2017. The regulatory landscape in Malaysia does not set any hurdles for coal fired power plants, unlike in much of the developed world. Often times opportunities lie where people tend not to look. While the current stock market valuation makes it more and more difficult to find solid companies at great prices with compelling outlooks, there are still gold nuggets to be found if one dwells deeply into the fringe areas of the market, which are poorly covered and exactly where the greatest opportunities lie in the first place. Tenaga Nasional Berhad ( OTCPK:TNABY ) is the largest electric utility company in Malaysia with about $29.7 billion in assets and total installed capacity of roughly 13,000 MW (14,000 MW if Manjung 4, which went online in April this year, is included). About 93% of the capacity is made up of coal and gas fired power plants and the remaining 7% is hydro power. The majority stake in the company is owned by the Malaysian state, as the future success of the company is of strategic importance for the South-East Asian country. The expansion of the total generation capacity is vital for the country’s economic progress. First, let’s take a look at the macro view of the Malaysian electricity market and the TNB’s position in it. Usually foreign equities trade with an inherent discount compared to companies in the U.S. and Europe with a similar asset base. This is true for TNB as well, as investors perceive higher risk considering the geographic region and the potential for political turmoil. Although as I will argue later in this article, Malaysia provides more stability for a primarily coal/gas based utility than the Unites States. Whether the perceived risks are realistic or not doesn’t matter for the stock market as the discount can stem just from the sentiment only. A researching arm of The Economist ranked Malaysia among the countries with very low risk of social unrest, while neighboring Thailand, Indonesia and Philippines received medium to high risk status. This goes to prove that one can not make generalizations about a country just because the media may portray the region as unstable. Now that we have established that the Malaysian social situation is stable enough for the utility business, it’s time to take a look at the long-term trends that provide the necessary top-down framework for the bull thesis. First, the electricity consumption per capita has been growing at a fast pace – up roughly 50% in the past 15 years as can be seen from the chart below. (click to enlarge) And another chart to complement the previous one, showing new peaks in consumption year over year. (click to enlarge) Source: Quarterly report The future outlook is positive and the growth in electricity consumption will go hand in hand with the expanding GDP of South-East Asian countries. The Economic Planning Unit (EPU) of Malaysia is projecting the current consumption of roughly 125,000 GWh to reach 315,000 GWh by 2030, essentially doubling over the coming 15 years. To reach the goal and keep up with the growing demand, the only viable option is to build more base capacity – coal and gas. The same analysis, which is based on EPU’s data, is predicting the electricity mix to remain roughly the same in face of this rapid growth. Projections of consumption and the share of electricity production per fuel type Source: Electricity energy outlook in Malaysia While many have called the political actions of the U.S government “War on Coal” and the carbon legislation is definitely pushing the electricity production to alternatives, TNB does not have this problem as Malaysia’s leadership is aware that the only way to keep up with the consumption is to aggressively invest in base power plants. These aligned goals of the Malaysian government and TNB provide a fertile ground for future growth without worries for potential regulatory scrutiny. And as gas and coal remain the goal (no pun intended), all that remains for TNB to do is to stay on the course and reap the benefits by expanding capacity – pretty straight forward. Below is a summary of TNB’s generating mix by fuel type. The Fuel Mix Source: Latest Quarterly Report The bear market in the energy sector has benefited TNB as the historically low natural gas and coal prices have brought down the input costs. With no substantial shift in the fundamentals (supply/demand imbalance induced glut is here to stay) in sight, TNB will be seeing its benefits in the form of higher margins. Even the first half of the financial year 2015 already saw a substantial improvement in EBITDA margins compared to the same period last year, up from 27.5% to 37.1%. The takeaway here is that if the primary energy prices remain at these low levels, the elevated margins are to be expected going forward. The Catalyst The company has been aggressively investing in its CapEx program and is on track to add 3,800 MW of capacity by the second half of 2017 – a 30% increase in total capacity . Given that the current capacity for Q2’15 (Dec-Feb) was roughly 13,000 MW (excluding the Manjung 4’s 1,000 MW that went online in mid April this year) and the total production was 27,197 GWh which generated a revenue of $2.86 billion (MYR/USD Exchange rate of 0.27), we can roughly estimate the impact that the extra 3,800 MW is going to have on revenues. The assumption is that the capacity utilization remains at similar levels and the revenue per unit stays roughly constant at $105 MWh ($0.105/kWh). The 30% increase in the total capacity will result in a roughly equal rise in the revenue, ceteris paribus, which translates into an extra $850 million per quarter or $3.4 billion per year. Of course, the main variable that will determine the margins and profitability is going to be fuel cost, but as stated before, the situation in the natural gas/LNG and coal markets is likely going to be a tailwind for the foreseeable future. What’s more, the current contracts allow for a tariff raise in the event of a drastic fuel cost rise as can be seen from the chart below. Tariff Breakdown Source: Q2 Report The key takeaway here is that the company is on track for massive top line growth, and given the nature of the utility business – secure revenues and long-term contracts – the bottom line margins are expected to remain at roughly the current levels, meaning that the 30% in capacity growth will show up in the EPS with minimal deviation. Below is a timeline for the projects currently under construction: (click to enlarge) Source: Company’s Presentation The Main Risks The main risk for foreign investors buying shares in the company is the exchange rate, which can either make or break the investment. The past 10 years have seen constant annual deficits that have brought the public debt to 52% of the GDP. Now this is not catastrophic, but in this case, the trend is not your friend, although the ratio has seem to have hit a plateau. Malaysia’s Debt/GDP (click to enlarge) Moreover, at this point it seems that the growth in GDP can outpace the debt. Historical GDP Growth (click to enlarge) Another risk associated with the investment would be the bursting of the bubble in China which would likely cause a contagion in the region – magnitude of which is unpredictable. Still, I believe that TNB’s fixed revenue streams will provide the necessary shelter, should this scenario come to life. The Valuation The recent quarters and semi-annual results are indicating that the year end EPS for FY 2015 is going to land somewhere around RM 1.5-1.6 (first half of the FY 2015 brought in RM 0.785 in net profits per share), which puts the P/E ratio at 8.5. Remember, that the revenue generated by the Manjung 4 unit, which went live in April, is not reflected in the current results, making the above estimates conservative. Assuming that the 30% revenue increase, that was discussed before, adds to the bottom line net profit with similar margins, the EPS for FY 2017 would be somewhere around RM 2, which translates to a forward P/E of 6.6 with the current stock price of RM 13.2. This puts the forward P/E at the absolute bottom of the historical range as can be seen from the graph below. Notice that for the calculations above, I used the original currency for the sake of simplicity. Dividend and Debt The company also pays a dividend and the official policy is to pay out 40%-60% of annual free cash flow (Cash Flow from Operations – Normalized CapEx). This means that the aggressive growth discussed before would not tamper the dividend as only the maintenance CapEx is accounted in the Free Cash Flow calculation. The growth CapEx is financed by debt. As of now, all of the large growth CapEx projects are already accounted for on the balance sheet. The net debt is currently at RM 21 billion ($5.7 billion), 99.6% of which is with fixed rates, protecting against any potential fluctuations in the interest rate, and for the coming few years, there are not many major payments due, except for the USD denominated loan this year as can be seen from the chart below. This payment is easily covered with the cash on the balance sheet (RM 10 billion). Debt due (click to enlarge) Source: 2014 Annual Report The Takeaway TNB’s business model offers great visibility of future revenues and the coming expansion of total capacity is going to act as a catalyst for revenue growth. This translates into a rare mix of stability and recurring revenues, while allowing for an explosive growth of roughly 30% over the coming 2 years. As discussed before, the forward P/E of 6.6 puts the ratio at an absolute bottom of the historical range, acting as a limit to the downside, providing a risk/reward profile that is greatly skewed to the upside. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Is It The Right Time For Homebuilder ETFs?

An improving economy and an impressive recovery in the housing market boosted the U.S. homebuilder sentiment in June to a nine-month high. The National Association of Home Builders (NAHB)/Wells Fargo housing market index rose five points from May to 59 in June, in line with the September 2014 reading. The September’s reading was the highest since Nov 2005. The sentiment also exceeded the market expectation of 56 points. Meanwhile, the report also showed that the index that measures sales expectations for the next six months jumped six points to 69 in June. Also, the index measuring buyer traffic increased five points to 44. Moreover, the report revealed that the three-month moving average indexes in the South, Northeast and West witnessed a healthy increase in June. Though the index declined in the Midwest to 54, the reading above 50 indicated that builders were still optimistic for the region. All of these data show that the housing market is set for a strong performance this year overcoming the negative impact of a harsh winter in the first quarter. The Chief Economist at NAHB David Crowe said that readings “are at their highest levels since the last quarter of 2005, indicating a growing optimism among builders that housing will continue to strengthen in the months ahead.” Impressive Housing Recovery Most of the major housing data that released in May were encouraging. While new home sales surged 6.8% in April, construction spending soared to a more than six-year high. Also, Pending Home Sales Index, which measures housing contract activity, gained 3.4% from the previous month to 112.4 in April, hitting its highest level since May 2006. Existing home sales were the only major housing data that failed to increase in April. However, it is speculated that existing home sales in 2015 may reach the highest level since 2006. Separately, a rise in home prices also signaled toward an increase in demand in the housing market. The S&P/Case-Shiller’s 20-City composite index, the leading measure of U.S. home prices, rose 5% year on year in March. Similarly, the 10-City composite index increased 4.7% year on year in March. Economic Improvement After the first-quarter slowdown, several indicators signaled that the economy is gradually gaining strength. According to the U.S. Labor Department, the U.S. economy created a total of 280,000 jobs in May, witnessing the largest job addition since December 2014. Though the unemployment rate marginally rose to 5.5% in May, the rate is expected to decline gradually to Fed’s target this year. Average hourly wages also saw an impressive year-on-year gain of 2.3%, indicating a strong recovery in labor market conditions. Moreover, factors including improving consumer confidence, low oil prices and the prevailing low rate environment have boosted the housing market in recent times. Despite the prospect of a rate hike this year, the outlook for the housing market remains positive for the year. Rising Rate Concerns The mortgage-finance company Freddie Mac reported that the average rate for a 30-year fixed mortgage climbed to an eight-month high of 4.04% for the week ending June 11 from 3.87% from the previous week. This represents the sharpest increase since 2013. However, increase in mortgage rates seems to have a negligible impact on housing as demand remained strong following the concern that rates will continue to move higher. Meanwhile, strong economic data indicates that the economy is back on track in the second quarter, leaving behind the first quarter contraction. This raised the possibility of a rise in interest rates, which have been near zero since the 2008 financial crisis. Analysts are expecting a possible rate hike in September or October this year, which may have a negative impact on the housing market. ETFs in Focus Homebuilder ETFs may see a boost in the near future on the back of a favorable economic environment. However, investors will closely watch the prospect of a rate hike this year and its impact on the housing market. In this scenario, we highlight two homebuilders ETFs that will remain on investors’ radar in the coming days. SPDR S&P Homebuilders ETF (NYSEARCA: XHB ) This fund provides exposure to 37 firms by tracking the S&P Homebuilders Select Industry Index. The fund is also quite popular with $1.7 billion in its asset base while it sees a solid volume of more than 4 million shares a day. None of the firms accounts for more than 3.72% of the total assets. Sector-wise, Homebuilding takes the top spot at about 33% share while Building Products, Homefurnishing Retail and Homefurnishings also have double-digit allocation. XHB charges a fee of 35 bps annually and has a Zacks Rank #3 (Hold) with a High risk outlook. The fund has returned 2.3% over the past three-month period and rose 6.7% this year. PowerShares Dynamic Building and Construction (NYSEARCA: PKB ) This product tracks the Dynamic Building & Construction Intellidex Index, holding 30 securities in its basket. The fund charges 63 bps in fees. Nearly 46% of the fund’s assets are allocated to the top 10 holdings. PKB has amassed $54.5 million in its asset base while it has an average daily volume of around 15,000 shares. The product has a Zacks Rank #3 with a High risk outlook. The ETF has returned 4.2% over the past three-month period and gained 11% in the year-to-date frame. Original Post