Timing the Market: How To Profit in the Stock Market Using the Yield Curve, Technical Analysis, and Cultural Indicators

The traditional high yield stocks are consumer-related companies like BAT, JT International, Dutch Lady Milk Industries, Guinness Anchor, Berjaya Sports Toto and Amway. Ornasteel and DiGi are two fundamentally sound companies that also pay relatively good yields.

Ornasteel gives net yield of 6.3%
Ornasteel has a relatively generous dividend policy of minimum 50% gross payout. The company has declared 8.88 sen per share final net dividend for 2007, for which the ex-entitlement date is not yet fixed. That translates into net yield of 6.3% at the current share price of RM1.40.

Ornasteel is one of the largest flat steel producers in the country. The company completed expansion plans in April 2007, which raised annual production capacity to 624,000 tonnes from 444,000 tonnes.
Net profit grew by 11% in 2007 to RM79.7 million on the back of 38% expansion in revenue. Rising raw material costs (primarily hot-rolled coil), fuel and shipping costs are expected to weigh on profitability in the near to medium term — there is a lag time for selling prices to be gradually adjusted higher.

Hence, we are conservatively estimating flattish earnings growth for the year. However, Ornasteel’s underlying fundamentals are sound. The company has net cash of RM53.8 million at end-2007 while net tangible assets stood at RM1.81 per share. Plus, the stock is trading at only 6.6 times 2008 P/E, suggesting limited downside.

DiGi has been returning cash to shareholders
Mobile operator DiGi is shaping up to be another high yield stock. The company has returned significant amounts of cash to shareholders in the past two years. Including two rounds of capital repayments in 2005-2006, DiGi has paid out over RM2.9 billion in cash.

Dividends in 2007 totalled 108 sen per share, up from 80.5 sen per share in the previous year. Including special dividend of 73 sen per share, shareholders would earn net yield of 7.4% at the current share price of RM24.50. The final net dividend of 58 sen per share is yet to be paid.

Despite the high payout, DiGi’s balance sheet is still in net cash position — RM277 million at end-2007 — thanks to robust cash flow from operations. Its business has grown very strongly over the past few years on the back of successful marketing and brand-building initiatives. Net profit rose to RM1.06 billion in 2007, up from RM471 million in 2005.

The company forecasts revenue will expand in the high single digit this year while net profit will grow by roughly 5%.

Capital expenditure is also expected to rise — to between RM850 million and RM1.1 billion — with increased investment in 3G infrastructure. (It recently acquired 3G spectrum block from Time dotCom) But the company should still maintain a fairly high payout. We estimate dividend at about 120 sen apiece in 2008, which works out to a decent net yield of 4.9%.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser.

Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.