Stock brokering has become a commodity business. Investors are only concern about low commission. Malaysia is still charging one of the highest commission rate compare to markets such as Singapore or Hong Kong.
However, over the past few years, there have been many consolidation among the stock brokers in Malaysia. Many have been integrated or partnered with a bank to improve its distribution network and cost structure. The latest being the merger between HwangDBS (HWANG:MK) and Affin Bank (AHB:MK).
Now with most of the consolidation done, there are only a few pure brokers left in Malaysia. Of them all, K&N Kenanga Holdings (KNK:MK) is the most significant player in the industry. The company started operations in 1973. It merged with Sarawak Securities in 2001 in an all shares deal which resulted in Cahya Mata Sarawak Bhd (CMS:MK), the largest conglomerate in Sawarak, becoming its largest shareholder. The company then go on to acquire Peninsula Securities in 2001 and ECM Libra in 2012, making it the largest independent investment bank and Malaysia’s top three brokerage house.
The sad news is even with these consolidation and its economic of scale in the business, Kenanga struggles to make a consistent profit. Its earnings have been volatile and it only managed to record a net profit of RM6.2 million for the year 2013. That is a return on equity of less than 1%.
Value In Action
The example of the stock brokering business in Malaysia illustrates one point. Even if you are the market leader in an industry, the long term economics of the business is still important to the survival of your business. With Kenanga not able to earn a decent ROE for its shareholders, it would be wise to ask if all the acquisition done by the company has added any value for its shareholders at all. Or will the company benefit more by selling itself to a bank?Join us on Facebook for more exciting updates and discussion about value investing. Submit your email address for important market updates and FREE case studies!We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded. The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and does not in any way represent those of his employer and other related entities. Stanley Lim do not own any shares in the companies mentioned above.