KYY

How to use margin finance effectively


Unless you have the necessary experience, you should not use margin finance to invest. I will show you with facts and figures to demonstrate how I use margin finance effectively.

Based on my golden rule for share selection which is the company must report 2 consecutive quarters of increasing profit, I selected Dayang.    

Dayang is the largest maintenance contractor in this region where Petronas has discovered a total of 163 oil fields and 216 gas fields. Dayang has 3 small competitors namely Carimin, Uzma and Petra Energy.   

Dayang’s core business: One of the earliest and most experienced providers of integrated services to the oil and gas industry, Dayang is involved in the provision of maintenance services, fabrication operations, hook-up and commissioning and chartering of marine vessels.

Dayang’s Strength: Since its inception more than 25 years ago, Dayang has built an impressive track record for innovation, quality, skills and expertise.

Off shore oil rig: If you Google you can see that the average price for offshore oil-drilling rigs is approximately US $650 million.

Mini floating city: Offshore rigs vary in the specific type and layout, but they’re often like mini floating cities, with all of the amenities needed to live and work out on the ocean. No matter where the oil rig is located, it operates 24 hours a day, seven days a week no matter what the weather is like. 

If you google you can see there are very few oil rigs maintenance contractors in this region where Petronas has all its oil rigs. Dayang, Carimin, Uzma and Petra Energy are oil rig maintenance contractors. Dayang is the biggest and has very few competitors.  

Dayang is not a building and maintenance contractor. Master Builders Association Malaysia (MBAM) has a total of 117,000 registered members. I was the secretary General for 9 years when I was still active in the contracting industry which is a very competitive business. That is why there are so few really successful listed contractors in the stock market. By comparison, there are only 4 oil rig maintenance contractors, namely Dayang, Carimin, Uzma and Petra Energy. That is why they, especially Dayang have very good profit growth prospect which is the most powerful catalyst for moving share price as shown by the price chart below.       

In Dayang’s 2018 annual report Page 164 shows that on 29 March 2019 Koon Yew Yin has a total of 15 million shares. At that time the price was Rm 1.40 per share. The market value of my holdings was 15 million X Rm 1.4 = Rm 21 million. Assuming my margin loan was 50%, the net value of my holdings of Dayang was Rm 10.5 million. 

Currently I have a total of 20 million Dayang shares and the closing price is Rm 2.15. The market value of my current holdings is 20 million X Rm 2.15 = Rm 43 million. Assuming my margin loan is 50%, the net value of my holdings is Rm 21.5 million. That means I made Rm 21.5 million – Rm 10.5 million = Rm 11 million profit or more than 100% in about 6 months. 

Beside Dayang I also have Carimin and Uzma. 

How I managed to make more than 100% in 6 months? 

As the share price went up my collateral value also went up in tandem and I could borrow more margin finance to buy more Dayang shares. Margin call will be when Dayang share price drops more than 10%. I am not afraid to use the maximum of 50% to buy Dayang. The price chart shows the price has not dropped more than 10% during corrections.  

Today I bought some Dayang. I will continue to buy more Dayang tomorrow because the price has gone up today and my collateral value has also gone up in tandem. 

Since I already have bought Dayang at cheaper prices, I am not afraid to buy at the current highest price because my average price is still much cheaper than the current price. Even if I have to sell to meet margin call, I will still make money. 

This is a very useful lesson for all investors. I just like to share with you my long experience. I am not asking you to buy to support the price. Remember, whether you buy or sell, it will not make any difference because the daily traded volume is always more than 10 million shares.