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Disclaimer: This is not investment advice nor is it a recommendation to invest in the stock. This is purely for educational purposes and a case study for you to learn the research skills that come with it.
Here’s the proof from Rakuten
I initially invested in Dayang Enterprise Holdings Berhad (Dayang) in July 2021 when the share price was hovering around RM1.39 per share. In September 2023, I made about 32% in profits from Dayang after holding for 2 years.
I am not here to tell you to invest in Dayang as I believe that providing you with the tools to analyse the company is more important than giving you stock picks. If anything, we should all avoid getting stock picks or investment advice from so-called investment gurus or any other person.
As you can see, 2 years is a long holding period for anyone in this day and age. However, I firmly believe in the medium and long-term investment principles. Short-term is just too volatile for an ordinary person on the street.
I have tried short-term trading before and only about 95% of traders make money. I only managed to make consistent profits after doing it for 6 months during the pandemic, and even then, the money was not that much.
These types of articles I am writing are ultimately for you to gather and hone your research skills in investments and companies.
I will provide the step-by-step research I have done back then to invest in Dayang and hopefully, you can take it as an example for you to conduct your research in other companies.
#1: Because of the pandemic, I looked at the valuations of Dayang which were undervalued in 2021
My overall investment thesis back then was simple. Look at companies that have low valuations, namely, the price-to-earnings ratio. Price-to-earnings ratio measures how much the share price is trading to the earnings/profits per share of the company.
The lower the PE ratio, the more potential it has to be undervalued. This is a double-edged sword, as a low PE might also mean that investors are negative on the company, and hence, were selling down the stock.
In the Malaysian market, companies normally trade around 15 times the PE ratio. I set a threshold of below 10 times to determine which stocks in the market were trading below that level.
There were a couple of stocks I invested in (I will leave those companies for another day), and Dayang was attractive at around 6 to 8 times.
This was the first step that I took to identify Dayang but subsequent analyses on Dayang solidified my decision.
#2: Examine the past financial performance of Dayang before the pandemic
My analysis is simple. Most companies suffered during the pandemic so it makes sense that they will not do well. I aimed to determine whether did Dayang well before the pandemic.
Generally, yes. Dayang is mainly related to the oil & gas industry, where it provides marine services to oil & gas companies. Revenue grew by 35.1% and 11.4% in 2018 (RM939 million) and 2019 (RM1.0 billion) respectively, before declining by 30% in 2020.
There is an interesting observation here that we need to take into account. From 2015 to 2017, the oil & gas industry suffered due to low crude oil prices. OPEC was reducing prices to try to kill off the shale oil industry in the U.S. It makes sense then that Dayang’s revenue would have declined from RM876 million in 2014 to RM695 million in 2017.
There are two factors that I liked about Dayang’s financial performance with this trend in mind:
- Revenue recovered in 2018 and 2019 in line with higher crude oil prices. It shows that it has the market position to recover in line with the market. Some companies with their weak position take a while to recuperate back.
- Dayang still generated positive operating cash flow despite the declining revenue. I like that Dayang’s operations were strong enough to still generate positive cash flow. Case in point, 2017 saw negative profits of RM153 million but it still generated positive operating cash flow of RM169 million.
#3: In 2021, I thought that crude oil prices will recover further in 2022
Since Dayang’s operations are so intertwined with the oil & gas industry, I analysed that crude oil prices will eventually recover in 2021 and 2022 from their lows in 2020.
During the pandemic, crude oil prices crashed to US$22.7 in March 2020 from US$58.2 in January 2020. By July 2021, prices have recovered back to US$76.33 which was an indication that the oil & gas market is on a recovery path.
Since prices are ultimately determined by global demand (the more people buy crude oil prices, the higher the prices will be) in 2021, I looked at the global economic growth projections by the International Monetary Fund and found that they were projecting a rebound in 2021 and strong growth in 2022 and 2023.
While Dayang was making losses in 2020 and 2021, I thought that it would only be a matter of time in 2022 and 2023 that it would revert to normal due to higher crude oil prices.
In 2022, unexpectedly, the war between Russia and Ukraine erupted, and that pushed crude oil prices much higher to US$130. Of course, this was good for Dayang and I decided to keep holding it as I projected that Dayang would benefit even more.
#4: I looked at Dayang’s competitive position and liked it
This is subjective, I have to admit. What I did is that I went and read Dayang’s business from its annual report and I gathered that it has quite a strong market position in Sarawak’s oil & gas industry.
Notably, it services two big customers which are Petronas and Shell. Based on this subjective interpretation, I thought that Dayang had strong catalysts for a rebound and recovery.
From a more analytical side, I liked that Dayang had much higher profit margins compared to its other competitors in the market.
In 2019, Dayang registered a profit margin of 10.8% compared to Petra Energy (10.8%) and Bumi Armada (1.8%).
#5: I looked at its technical indicators first before investing
Since I got the fundamentals down already and decided that it could recover strongly in the future, I looked for an entry point into Dayang.
I used the Bollinger Band (you don’t have to know what it is), and saw that there was an uptrend from the beginning of the year where the band widened. After that, from March to June 2021, I saw the band narrowing and the price stabilising around RM1.35 to RM1.50. Hence, that’s when I decided to enter around that range into Dayang.
The above points detail my research into Dayang in 2021 and how I managed to make 32% profit on it after 2 years. It was a lot of work reading up on all the fundamentals of the company and determining whether it can recover in 2022. However, they can all be summarized into the following steps:
- Search for companies that have low PE ratios. Anything below 15.0 times can be considered undervalued but to be safe, search for below 10 times.
- If it’s undervalued, it doesn’t necessarily mean that it’s a good stock. Evaluate the companies’ 5-year financial performance and make sure that its revenue and profits have grown substantially. That’s how we can tell whether it has done well historically.
Find a main factor that can lead to the company’s recovery. This is not easy. For Dayang, I determined that its close linkages to the oil & gas industry and indirectly, oil prices will play a big