For some investors, blue chips are the only companies which are worth picking up. They have had proven cash-generating ability, sustainable dividend yields, and also gone through some crises, and are a must in some portfolios. Whilst these may be true, however, the markets are largely efficient to the extent whereby blue chips are mostly fairly valued. There are hundreds of brokerages out there covering blue chips, and a million other investors out there which have their eyes on the companies, waiting to swoop in once some idea of inefficiency rears its head. As such, blue chips are likely to "market perform".
With these being largely true, value investors will tend to stray away from them. However, with the recent turmoil in the markets, some value seems to be emerging amidst the sell-down. Now, why should value investors stay away from them if their valuations have been beaten down? Only because of the notion that there are many other brokerage firms which are covering them, and thus a low likelihood that one would catch it when it is undervalued? I believe 2 main points actually disprove this idea for now.
1) fund redemption
There had been an increase in capital outflow from Singapore from mutual funds. This has led to a massive sell-down in equities. One can argue that the mutual funds are selling to the extent whereby the prices reflect the current financial turmoil, and that prices are reflecting the newsflows.
However, over 90% of trades a day are accountable by mutual funds (quoted from Pulses), so it is likely that massive sell-downs can be attributed to the large funds. So, if all the funds start to sell collectively, will there be any fund manager which would want to pick up stocks even though they are aware that value is compelling? It is highly unlikely that a fund manager would want to be caught catching a falling knife, especially so since their performances are tracked on a quarterly basis. Now, if all fund managers were to hold on to their holdings, would the markets be faring as badly? Probably not. But this is only likely to happen in an utopian world. This can be likened to the prisoner's dilemma, where few fund managers would want to dip their toes into the markets knowing well that other fund managers are still selling.
2) Other unforseen circumstances
One such example is margin calls. Let's all recall the performance of Keppel T&T over the past few months. It dropped from $4++ to <$1 at penny stock status in a matter of a few weeks, dropping 30+% compounded for 2 straight days. Reason? Fundamental change? Not really. A large shareholder (though not substantial enough to hit the 5% mark) was caught in a margin call and was forced to sell his holdings, resulting in the dramatic drop. It is currently trading at around 73 cents. Now, what on earth could have made a company lose 60% of its value over 2 days? Was the market valuing Keppel too highly before the drop? Or is the market valuing it too lowly after the drop? Mind you, Keppel T&T isn't exactly the kind of obscure stock where market inefficiencies might lie. It was a spin off from the Keppel conglomerate years back. Even though it has a low float, however, this is no reason for a huge discrepancy in the valuation in the space of 2 days. However, I have not seen its financials to be able to make a more informed stance on whether it is undervalued or not. Nonetheless, this is another prime example of how companies, even the better-known ones, can suffer from certain market inefficiencies.
Now, how can we know if a blue chip has been priced out of its fundamentals or not? One essential way is to look at how much of a fall that the markets have priced in. E.g. for property companies, this means taking a look at how much the markets are pricing in for a devaluation in the revalued net asset value. Now, if the markets have priced in too large of a fall (in your opinion), you might consider picking up the stock.
More importantly, blue chips are largely proven to have been consistent earners, and there is a high chance that earnings will go back on track after some hiccups here and there. Back to the definition of an undervalued stock again, which is to purchase stocks of a company when they are trading way below its intrinsic value. This intrinsic value is derived from its ability to generate earnings beyond the current 1-2 years, quite possibly even 5-10 years down the road. Now, blue chips have seldom fallen into this undervalued category, at least in my opinion. Was trying to bargain hunt for some blue chips but realised that the majority of them had been priced expensively, only until recently did it change. It does not mean that the small-to-mid cap stocks are the ones which are more likely to be priced inefficiently; the same can also happen to blue chip stocks, but only rarely, and possibly in bear markets like these.
The bottom line? No matter blue chip nor S-chip nor red chips, do your homework. True, blue chips can be covered by hundreds of brokerage firms around. But due to several reasons where value is emerging but nobody dares to purchase (factors as mentioned earlier), blue chips can still be hunting ground for value investors. Although the markets are efficient, there can still be opportunities abound. Information takes seconds to disseminate, but insight takes much longer.
Sunday, November 30, 2008
Sunday, November 23, 2008
Short-term view coupled with Long-term view
Got me thinking in this bear market about a short-term and long-term view. Value investors have the mantra: take a long-term view and purchase the stock when it is trading at a significant discount to the intrinsic value.
Not that there are any flaws with regards to this idea. But problem lies in that, for e.g., u apply a 10-yr DCF for a certain company and u arrive at say, $5. So, if you apply a significant MOS, say 50%, you should purchase it at $2.50. But as everyone might have been aware, this might have left you smarting with some losses at this moment of time. Simply because the markets are viewing it more bearishly say at $1.50, largely because of the fall in their short-term earnings.
The natural response might be to average down your cost, some might say. If the MOS was applied, the losses might not have been huge at this moment of time, and all you need to do is to dollar-cost average your way down. But, let's be a little realistic here. We're retail investors. How deep are your pockets? you've got $200,000 more? $1 million more? There's going to be an extent to which you can average your way down.
How now? Do we still stick to this principle? Of course! But, we need to understand that the fundamentals do change with the macroenvironment. Do we apply a larger MOS? You could. But what I think could work better is to find out how much of earnings downgrade the market is factoring in. The ways to do this will not be covered for now, but a simply suggestion(but highly inaccurate) could be to predict the earnings next year and apply a suitable PER. Most importantly, the concept lies in that one should know what this short-term price, that the market values the security currently, means. This will help to limit your downside, probably, and after you've factored in some earnings downgrades, back to the principle, do apply a MOS as well.
Now, the difficulty in this lies in that earnings cannot be predicted so easily. If it could, we would have all been rich. There are probably 2 ways to do so:
1) refer to analyst estimates and consensus estimates
2) look at how the company has been performing previously in crises, and predict the earnings from there.
I try not to use 1), not because of overconfidence that I'll predict better than the analysts, but only because they tend to try to be accurate, but value investing is all about being roughly accurate, because it is indeed very tough to be highly accurate. When you try to do that, chances are that you might make mistakes somewhere by failing to account for itsy-bitsy pieces of information. For now, I've been trying to apply the 2nd methodology. Of course, companies change with time. The $5 stock I mentioned could be much more robust now than in previous crises, possibly because of a regional franchise, or larger sources of revenue. But the macroenvironment could be different based on the previous crises (i.e. Sars and Asian Financial Crises). That's where the MOS comes in handy.
Now, how much of earnings downgrade to factor in will alter your pick-up price. Then, the question comes. What if you've factored in too much an earnings downgrade, or too high a MOS? You could miss picking up the stock because of that. I can't answer this question, but for myself, what I do is to make a reasonable earnings downgrade, and apply a smaller than usual MOS only because you have subconsciously applied an MOS when you did your earnings downgrade. Will this method work? I'm not sure. Try calling me in a few years time to see if I've moved to a larger bungalow or mansion. But worth trying? Maybe.
Not that there are any flaws with regards to this idea. But problem lies in that, for e.g., u apply a 10-yr DCF for a certain company and u arrive at say, $5. So, if you apply a significant MOS, say 50%, you should purchase it at $2.50. But as everyone might have been aware, this might have left you smarting with some losses at this moment of time. Simply because the markets are viewing it more bearishly say at $1.50, largely because of the fall in their short-term earnings.
The natural response might be to average down your cost, some might say. If the MOS was applied, the losses might not have been huge at this moment of time, and all you need to do is to dollar-cost average your way down. But, let's be a little realistic here. We're retail investors. How deep are your pockets? you've got $200,000 more? $1 million more? There's going to be an extent to which you can average your way down.
How now? Do we still stick to this principle? Of course! But, we need to understand that the fundamentals do change with the macroenvironment. Do we apply a larger MOS? You could. But what I think could work better is to find out how much of earnings downgrade the market is factoring in. The ways to do this will not be covered for now, but a simply suggestion(but highly inaccurate) could be to predict the earnings next year and apply a suitable PER. Most importantly, the concept lies in that one should know what this short-term price, that the market values the security currently, means. This will help to limit your downside, probably, and after you've factored in some earnings downgrades, back to the principle, do apply a MOS as well.
Now, the difficulty in this lies in that earnings cannot be predicted so easily. If it could, we would have all been rich. There are probably 2 ways to do so:
1) refer to analyst estimates and consensus estimates
2) look at how the company has been performing previously in crises, and predict the earnings from there.
I try not to use 1), not because of overconfidence that I'll predict better than the analysts, but only because they tend to try to be accurate, but value investing is all about being roughly accurate, because it is indeed very tough to be highly accurate. When you try to do that, chances are that you might make mistakes somewhere by failing to account for itsy-bitsy pieces of information. For now, I've been trying to apply the 2nd methodology. Of course, companies change with time. The $5 stock I mentioned could be much more robust now than in previous crises, possibly because of a regional franchise, or larger sources of revenue. But the macroenvironment could be different based on the previous crises (i.e. Sars and Asian Financial Crises). That's where the MOS comes in handy.
Now, how much of earnings downgrade to factor in will alter your pick-up price. Then, the question comes. What if you've factored in too much an earnings downgrade, or too high a MOS? You could miss picking up the stock because of that. I can't answer this question, but for myself, what I do is to make a reasonable earnings downgrade, and apply a smaller than usual MOS only because you have subconsciously applied an MOS when you did your earnings downgrade. Will this method work? I'm not sure. Try calling me in a few years time to see if I've moved to a larger bungalow or mansion. But worth trying? Maybe.
Saturday, November 22, 2008
Cash
Recently, found myself looking for companies where valuations were distressed enough for me to take a second look. However, in the midst of looking at them, I realised that I might have been straying away from good businesses and looking at valuations only. However compelling, one should always make it a point to buy only when the companies are looking at, and selling for a song. Shall treat this as a reminder, keeping true to my resolve.
Thinking about the nature of some businesses recently since the start of the week, and how they can bring in the cash for the company. Realised that it might be wise to steer clear of companies which generally depend on contracts for their businesses. Firstly, contract bidding is something which might result in inconsistent margins. Secondly, and probably the most important point, is that cash doesn't come in until after stages. Talked about KingsmenC some time back, but realised that they lie in this 2nd category. After awarding of contracts, they start their work. But payment is received only after certain stages of the project are completed. Now, this only means that the cash has to be invested first, i.e. u can be working for the entire year and only see ur money coming in at the end of the year. How's that for cash? High profits with low cash received, mostly in accounts receivables, Enron-style. During times when contracts keep coming in, the cash might keep coming in too. But when contracts dry up, u're faced with a dearth of cash. Profitable? Might be, but this lack of cash visibility might keep some investors like myself away. It's unlike the kind of business where you immediately see your cash coming in(e.g. I don't think you buy your shirts on contract, but that's just only one example). So, these companies might have high leverage so as to continue on their projects first. When contracts dry up, debts still have to be repaid.
Let's take this simple analogy. Today, I just made some "money" on the markets, because the prices have risen(akin to winning of contracts). Now, if one does not sell away the shares, the "money" is still in the markets(akin to profits in accounts receivables), although the reason and whether you should sell or not is another issue for another day. So, if you "earn profits" in the markets in this way, your profits are techinically not yours, you can't take the money out to invest in other shares to earn more money(akin to lack of cash visibility to reinvest), or repay your housing loan(akin to the business not having the profits in cash to repay debt). What's more, your profits might not remain profits anymore as the price might drop below cost anytime(akin to customers defaulting on payment). Hope this helps.
Now then, what's the way to avoid this happening? Sadly, most of the time, that happens to be the nature of the business, there isn't much that you can do about it. If you can understand and handle it, stay vested. If not, you might want to steer clear.
Anyhow, shall only update more frequently and writing up more in one week's time after everything at hand now is over. Shall look at some property companies if possible and talk about them. Seems like property companies do fall in the abovementioned category, but there are some exceptions. Would really love to hear comments regarding this;)
Thinking about the nature of some businesses recently since the start of the week, and how they can bring in the cash for the company. Realised that it might be wise to steer clear of companies which generally depend on contracts for their businesses. Firstly, contract bidding is something which might result in inconsistent margins. Secondly, and probably the most important point, is that cash doesn't come in until after stages. Talked about KingsmenC some time back, but realised that they lie in this 2nd category. After awarding of contracts, they start their work. But payment is received only after certain stages of the project are completed. Now, this only means that the cash has to be invested first, i.e. u can be working for the entire year and only see ur money coming in at the end of the year. How's that for cash? High profits with low cash received, mostly in accounts receivables, Enron-style. During times when contracts keep coming in, the cash might keep coming in too. But when contracts dry up, u're faced with a dearth of cash. Profitable? Might be, but this lack of cash visibility might keep some investors like myself away. It's unlike the kind of business where you immediately see your cash coming in(e.g. I don't think you buy your shirts on contract, but that's just only one example). So, these companies might have high leverage so as to continue on their projects first. When contracts dry up, debts still have to be repaid.
Let's take this simple analogy. Today, I just made some "money" on the markets, because the prices have risen(akin to winning of contracts). Now, if one does not sell away the shares, the "money" is still in the markets(akin to profits in accounts receivables), although the reason and whether you should sell or not is another issue for another day. So, if you "earn profits" in the markets in this way, your profits are techinically not yours, you can't take the money out to invest in other shares to earn more money(akin to lack of cash visibility to reinvest), or repay your housing loan(akin to the business not having the profits in cash to repay debt). What's more, your profits might not remain profits anymore as the price might drop below cost anytime(akin to customers defaulting on payment). Hope this helps.
Now then, what's the way to avoid this happening? Sadly, most of the time, that happens to be the nature of the business, there isn't much that you can do about it. If you can understand and handle it, stay vested. If not, you might want to steer clear.
Anyhow, shall only update more frequently and writing up more in one week's time after everything at hand now is over. Shall look at some property companies if possible and talk about them. Seems like property companies do fall in the abovementioned category, but there are some exceptions. Would really love to hear comments regarding this;)
Sunday, November 16, 2008
2nd Chance Properties on Business Times
Didn't catch this article on the day itself. Shall post it here for all to read. The exact link is here: http://www.propertyguru.com.sg/news/2008/11/1457/second-chance-an-undiscovered-property-play
Nov 14, 2008 - The Business Times
R Sivanithy
ONE of the more interesting corporate developments over the past few weeks may have gone unnoticed by most investors - an offer to listed retail-cum-property group Second Chance Properties (SCP) to buy the company's entire property portfolio.
While some companies might have jumped at the chance of a large cash windfall (something all shareholders would surely welcome because it would mean a big payout), what's interesting about it is that SCP on Wednesday announced that it had decided to reject the offer. The reason? It doesn't need the money!
'We have been accumulating properties since 1999 at attractive prices and have managed to build up a sizeable portfolio,' said SCP's chief executive Mohamed Salleh in an interview with BT. 'All our core businesses are doing well, our gearing is low and the offer, which was unsolicited in the first place, was not attractive so I didn't want to waste the company's time pursuing it.'
SCP on Oct 20 disclosed that it had been approached by an international property consulting firm on behalf of an unnamed client who was interested in buying SCP's entire property portfolio for an undisclosed sum.
As at June 30, SCP owned 42 properties valued at $118 million, of which 39 are spread throughout Singapore and three are in Kuala Lumpur.
The Singapore portfolio comprises mainly shop units in shopping malls in the Orchard Road area and in HDB hubs. Net rental per year is about $7.5 million.
'We have very low gearing and all our properties are tenanted with leases of 2-3 years that provide a steady rental stream,' said Mr Mohamed Salleh.
'Even with the downturn, we've found that demand for retail premises is high so there's no problem finding tenants. Of course if things get much worse, we may have to accept lower rentals, maybe 10 per cent. But for now, there is still plenty of demand.'
SCP this week reported a 22.4 per cent increase in its first quarter revenues to $19.2 million. Net profit was down 2.8 per cent to $5.4 million. The company has proposed an interim cash dividend of 2.5 cents per share and is also proposing a share buyback scheme.
'We want to do a buyback because our shares have fallen to a large discount to our NTA (net tangible assets) of 30.4 cents,' said Mr Mohamed Salleh. SCP's shares yesterday traded at 20 cents, a 34 per cent discount to NTA and indicating a dividend yield of 12 per cent.
If SCP presents an attractive investment story, why has its shares languished from lack of attention? One reason is a misplaced perception - despite the company's name - that it is mainly a retail company specialising in female Islamic apparel.
This, in turn, has led to an absence of adequate research coverage by broking houses which tend to view the firm as a retail play - with all the associated slow-growth connotations that accompany the sector.
Truth is, although SCP counts the retail sector as one of its core businesses, it should also be viewed as offering decent property exposure. In fact, it may be one of the local market's undiscovered - and possibly undervalued - property plays.
Nov 14, 2008 - The Business Times
R Sivanithy
ONE of the more interesting corporate developments over the past few weeks may have gone unnoticed by most investors - an offer to listed retail-cum-property group Second Chance Properties (SCP) to buy the company's entire property portfolio.
While some companies might have jumped at the chance of a large cash windfall (something all shareholders would surely welcome because it would mean a big payout), what's interesting about it is that SCP on Wednesday announced that it had decided to reject the offer. The reason? It doesn't need the money!
'We have been accumulating properties since 1999 at attractive prices and have managed to build up a sizeable portfolio,' said SCP's chief executive Mohamed Salleh in an interview with BT. 'All our core businesses are doing well, our gearing is low and the offer, which was unsolicited in the first place, was not attractive so I didn't want to waste the company's time pursuing it.'
SCP on Oct 20 disclosed that it had been approached by an international property consulting firm on behalf of an unnamed client who was interested in buying SCP's entire property portfolio for an undisclosed sum.
As at June 30, SCP owned 42 properties valued at $118 million, of which 39 are spread throughout Singapore and three are in Kuala Lumpur.
The Singapore portfolio comprises mainly shop units in shopping malls in the Orchard Road area and in HDB hubs. Net rental per year is about $7.5 million.
'We have very low gearing and all our properties are tenanted with leases of 2-3 years that provide a steady rental stream,' said Mr Mohamed Salleh.
'Even with the downturn, we've found that demand for retail premises is high so there's no problem finding tenants. Of course if things get much worse, we may have to accept lower rentals, maybe 10 per cent. But for now, there is still plenty of demand.'
SCP this week reported a 22.4 per cent increase in its first quarter revenues to $19.2 million. Net profit was down 2.8 per cent to $5.4 million. The company has proposed an interim cash dividend of 2.5 cents per share and is also proposing a share buyback scheme.
'We want to do a buyback because our shares have fallen to a large discount to our NTA (net tangible assets) of 30.4 cents,' said Mr Mohamed Salleh. SCP's shares yesterday traded at 20 cents, a 34 per cent discount to NTA and indicating a dividend yield of 12 per cent.
If SCP presents an attractive investment story, why has its shares languished from lack of attention? One reason is a misplaced perception - despite the company's name - that it is mainly a retail company specialising in female Islamic apparel.
This, in turn, has led to an absence of adequate research coverage by broking houses which tend to view the firm as a retail play - with all the associated slow-growth connotations that accompany the sector.
Truth is, although SCP counts the retail sector as one of its core businesses, it should also be viewed as offering decent property exposure. In fact, it may be one of the local market's undiscovered - and possibly undervalued - property plays.
Saturday, November 15, 2008
Red Flag alert?
2nd Chance posted its 1Q FY2009 results quite recently. Revenue and profits up by double-digit figures despite Hari Raya being in 1Q FY2008, which seems hearty considering the current climate. All 3 segments of business posted increases in profits, with the securities segment paper loss of $10 million charged to equity after 2nd Chance declared the near-term intention not to sell or purchase equities, thus classifying it under financial assets for sale.
Management kept to their promise, declaring an interim dividend of 2.5 cents, which at the price I bought, equates to about a 15% interim dividend yield, sticking to the declared dividend payments at which I could look forward to a total 20% yield. Sounds good, the market says, with the counter trading volume going up and trading price rising 7-8% compounded during Thur and Fri trading, bucking the overall downtrend. This came rather surprising to me as companies normally run up some time before the declaration of the dividends, so the markets must take the results and the sustained dividend yield as a positive for the share price to run up so sharply.
Time to rejoice? Not yet. Let's take a quick look at the financials.
1) There has been an increase of appoximately $16 million in short-term borrowings that are due in less than a year, which are backed by mortgages and assigment of rental proceeds. Assuming that of course the borrowings will not be repayed through the mortgages, how much of the rental proceeds can cover the short-term borrowings of $43 million? Rental proceeds at this moment are still little less than $1 million. Seems that the cash from operations is still healthy at around $4 million, but this amount is insufficient to cover the short-term loans, even if this $4 million is a quarterly figure and that retail businesses tend to pick up towards the start and end of the calendar year due to seasonal effects.
2) The dividend declared for this FY was 3.5 cents. At the current float, this amounts to around $10 million attributable to shareholders. However, the net cash at bank of around $1.6 million is largely financed by the additional $16 million short-term borrowings. Is it possible to sustain this high dividend distributions to shareholders without constant loans?
Agreed, one might argue that hey, 2nd Chance's gearing is at ~0.5X right now. This is relatively low compared to its peers. But it sure tweaks a few eyebrows to know that the current dividends are being sustained by borrowings from banks, even if the likelihood of securing loans is very high due to its low gearing.
3) medium term outlook has detoriated due to the political instability in Malaysia. Management has candidly revealed that the plans to expand to 100 stores in the next 5 years will have to slow down. Nonetheless, market share might improve as 2nd Chance has the financial resources to weather this slowdown more than the smaller fragmented retailers who do not have differentiated positioning. Furthermore, the business cycles of 2nd Chance tend to overlap i.e. gold prices are might continue going up as it is viewed as a safe store of value in tough times, so its gold business might see improved profits, although revenue might be another issue.
Nonetheless, 2nd Chance's boss, Mr Salleh, has proved to be relatively astute in investing in downturns, and has a large percentage holding of 2nd Chance shares. Looking on the bright side too, 2nd Chance recently requested for the mandate of shareholders to approve share buybacks. At this time, seems that the management might be finding shares at current valuations very attractive. Maybe the management knows something that we don't. Still, would seek clarifications before deciding on my next course of action.
Pays to look at your company's statements from time to time, to keep track of the latest ongoings and whether certain red flags are appearing or not. Shall wait and see.
Will try to look at Olam's very soon and post some comments regarding their recent set of statements. Traded slightly down due to management's warning for tough times ahead, despite posting a relatively good set of results. Will try to see how much the market is pricing in for a drop in commodities prices and post my verdict from there.
Management kept to their promise, declaring an interim dividend of 2.5 cents, which at the price I bought, equates to about a 15% interim dividend yield, sticking to the declared dividend payments at which I could look forward to a total 20% yield. Sounds good, the market says, with the counter trading volume going up and trading price rising 7-8% compounded during Thur and Fri trading, bucking the overall downtrend. This came rather surprising to me as companies normally run up some time before the declaration of the dividends, so the markets must take the results and the sustained dividend yield as a positive for the share price to run up so sharply.
Time to rejoice? Not yet. Let's take a quick look at the financials.
1) There has been an increase of appoximately $16 million in short-term borrowings that are due in less than a year, which are backed by mortgages and assigment of rental proceeds. Assuming that of course the borrowings will not be repayed through the mortgages, how much of the rental proceeds can cover the short-term borrowings of $43 million? Rental proceeds at this moment are still little less than $1 million. Seems that the cash from operations is still healthy at around $4 million, but this amount is insufficient to cover the short-term loans, even if this $4 million is a quarterly figure and that retail businesses tend to pick up towards the start and end of the calendar year due to seasonal effects.
2) The dividend declared for this FY was 3.5 cents. At the current float, this amounts to around $10 million attributable to shareholders. However, the net cash at bank of around $1.6 million is largely financed by the additional $16 million short-term borrowings. Is it possible to sustain this high dividend distributions to shareholders without constant loans?
Agreed, one might argue that hey, 2nd Chance's gearing is at ~0.5X right now. This is relatively low compared to its peers. But it sure tweaks a few eyebrows to know that the current dividends are being sustained by borrowings from banks, even if the likelihood of securing loans is very high due to its low gearing.
3) medium term outlook has detoriated due to the political instability in Malaysia. Management has candidly revealed that the plans to expand to 100 stores in the next 5 years will have to slow down. Nonetheless, market share might improve as 2nd Chance has the financial resources to weather this slowdown more than the smaller fragmented retailers who do not have differentiated positioning. Furthermore, the business cycles of 2nd Chance tend to overlap i.e. gold prices are might continue going up as it is viewed as a safe store of value in tough times, so its gold business might see improved profits, although revenue might be another issue.
Nonetheless, 2nd Chance's boss, Mr Salleh, has proved to be relatively astute in investing in downturns, and has a large percentage holding of 2nd Chance shares. Looking on the bright side too, 2nd Chance recently requested for the mandate of shareholders to approve share buybacks. At this time, seems that the management might be finding shares at current valuations very attractive. Maybe the management knows something that we don't. Still, would seek clarifications before deciding on my next course of action.
Pays to look at your company's statements from time to time, to keep track of the latest ongoings and whether certain red flags are appearing or not. Shall wait and see.
Will try to look at Olam's very soon and post some comments regarding their recent set of statements. Traded slightly down due to management's warning for tough times ahead, despite posting a relatively good set of results. Will try to see how much the market is pricing in for a drop in commodities prices and post my verdict from there.
Thursday, November 13, 2008
Ho Bee update
Still busy, but took some time to briefly look at Ho Bee's financial statements for the 3rd quarter.
Revenue down 59%. Profits after taxation down 50.1%. Profits from operations down 47%. Cash flow from operating activities down 99%. Pretty dismal showing here.
Now the markets have already punished Ho Bee relatively badly here. It's currently about 80% down from its peak, trading at around 38.5 cents now. Let's take a look at how the markets have factored in the pricing for Ho Bee. Will not take a look at other parts of the financial statements for now.
Development projects up in FY2009 are The Coast, Paradise Island, Orange Grove Residences, Vertis and Quinterra. The accummulative book values( NOT revalued ) are at $1,259,427,000. Its investment properties stand at $303,432,000,along with its short-term receivables of $15,715,000 and cash in the bank of $94,523,000.
Ho Bee is a relatively highly geared firm, especially compared alongside the other developers, with debt-equity of around 1.45. Total liabilities, short-term and long-term, stand at $1,301,427,000.
The net position is as follows:
(Bk Value of invest prop + devt projs + short-term receivables + cash) -
(short-term and long-term liabilities + payables) =
( $303,432,000 + $1, 259,427,000 + $15,715,000 + $94,523,000 ) -
($1,301,427,000) =
$371,670,000.
The current no. of shares that Ho Bee has as issued share capital is 737,338,000, no Treasury Shares. Therefore, the current net of surpluses is:
$371,670,000 / 737,338,000 = $0.5041 / share.
The markets are now exchanging Ho Bee's shares at $0.385. The implied valuation net of surpluses is thus 737,338,000 * $0.385 = $283,875,130.
The markets are factoring in a write down of approximately ($0.5041-$0.385)/$0.5041 = 23.6% write-down in Ho Bee's assets.
Now, let's take a look at Ho Bee's current 8 residential projects. Out of these 8, 3 are yet to be sold out. Paradise Island's % sold-to-date is 96%, Turquoise 48% and Orange Grove Residences 92%, with the majority, save for Coral Island, yet to be recognised in the quarter.
Now, let's take a quick look at the quality of the portfolio. Out of the 8, 4 are Sentosa Cove, one Mount Sinai, Amber Gardens, Holland Road and Orange Grove Road. All high-end.
Now, with the current prices factoring in about 1/4 of Ho Bee's assets to be written off, it's unclear whether the stock is trading attractively or not. Downside COULD be limited to around 50%, i.e. $0.25/share. But the quality of the portfolio could limit this downside. Attractive? Anybody's guess.
Anyhow, but still, there's a likelihood that the markets will punish Ho Bee tomorrow for this dismal showing. But then again, which company hasn't been hit badly in terms of profits?
Revenue down 59%. Profits after taxation down 50.1%. Profits from operations down 47%. Cash flow from operating activities down 99%. Pretty dismal showing here.
Now the markets have already punished Ho Bee relatively badly here. It's currently about 80% down from its peak, trading at around 38.5 cents now. Let's take a look at how the markets have factored in the pricing for Ho Bee. Will not take a look at other parts of the financial statements for now.
Development projects up in FY2009 are The Coast, Paradise Island, Orange Grove Residences, Vertis and Quinterra. The accummulative book values( NOT revalued ) are at $1,259,427,000. Its investment properties stand at $303,432,000,along with its short-term receivables of $15,715,000 and cash in the bank of $94,523,000.
Ho Bee is a relatively highly geared firm, especially compared alongside the other developers, with debt-equity of around 1.45. Total liabilities, short-term and long-term, stand at $1,301,427,000.
The net position is as follows:
(Bk Value of invest prop + devt projs + short-term receivables + cash) -
(short-term and long-term liabilities + payables) =
( $303,432,000 + $1, 259,427,000 + $15,715,000 + $94,523,000 ) -
($1,301,427,000) =
$371,670,000.
The current no. of shares that Ho Bee has as issued share capital is 737,338,000, no Treasury Shares. Therefore, the current net of surpluses is:
$371,670,000 / 737,338,000 = $0.5041 / share.
The markets are now exchanging Ho Bee's shares at $0.385. The implied valuation net of surpluses is thus 737,338,000 * $0.385 = $283,875,130.
The markets are factoring in a write down of approximately ($0.5041-$0.385)/$0.5041 = 23.6% write-down in Ho Bee's assets.
Now, let's take a look at Ho Bee's current 8 residential projects. Out of these 8, 3 are yet to be sold out. Paradise Island's % sold-to-date is 96%, Turquoise 48% and Orange Grove Residences 92%, with the majority, save for Coral Island, yet to be recognised in the quarter.
Now, let's take a quick look at the quality of the portfolio. Out of the 8, 4 are Sentosa Cove, one Mount Sinai, Amber Gardens, Holland Road and Orange Grove Road. All high-end.
Now, with the current prices factoring in about 1/4 of Ho Bee's assets to be written off, it's unclear whether the stock is trading attractively or not. Downside COULD be limited to around 50%, i.e. $0.25/share. But the quality of the portfolio could limit this downside. Attractive? Anybody's guess.
Anyhow, but still, there's a likelihood that the markets will punish Ho Bee tomorrow for this dismal showing. But then again, which company hasn't been hit badly in terms of profits?
Wednesday, November 12, 2008
Great Singapore Sale
I must say, since my last update, the markets have gone on a wild ride. Valuations have become so depressed, that I could only stand at the sides and dip a bit of my toes in, only because I haven't had the capital to purchase much more than I would have wanted to.
This entry is only going to be a generic one, I've been so busy will only start updating regularly in a few week's time. Nonetheless, I managed to take out some time to analyse a few companies and pick up some shares, including Kepland at 1.45, Tat Hong at 0.385, Olam at 0.89, 2nd chc at 0.17. Those who have waited to "time" the market might have missed it's bottom at around 1,500 (might, because no one knows whether it has bottomed or not, and I am not interested in attempting to call for one). The point is that, do pick up any counters with significant margins of safety and do not hesitate when you see them.
Anyhow, would like to talk about a discussion I had one day with a friend. Were talking about some counters I had in mind but do not intend to purchase at the moment. One of these companies is C&G Industrials. It released its financial results quite recently, and on this grounds, I think it is trading at too ridiculous valuations. With about 560 million RMB in cash(about 100million SGD) at hand(in the bank), the cash per share is about 25cents. Now? it's changing hands at 6 cents. The maintenance capital expenditure is estimated at around 120 million RMB(based on past year experiences). So, if the company continues to expand at the rate it has been doing so far, and earns zero profits, we can safely assume that the company can stay solvent for 4 years plus. The management has released statements on scaling back of capital expenditure in the coming year and has just pulled out of one project. This can probably result in a cutback in cash burn rate. Attractive? maybe. I've not taken a look at the business of C&G, so I may not be in a position to make comments.
For 2nd Chance, a company that has posted 6 straight years of record profits, its profits had taken a turn for the worst recently due to its securities portfolio. As I had previously mentioned, one of my concerns was its increasing share in the portfolio. Sadly, the words have come back to haunt me, as they have to book a loss in the coming quarter due to its unrealised losses in securities. The market immediately punished 2nd Chance, dropping about 20% in one day of trading. Rational? I don't think so. It is an unrealised loss, and not loss in cash or its core businesses. The management have already provided guidance, that the securities portfolio will be limited and not added upon. The loss is only an accounting procedure for booking it into the P & L statement, and its profits will still provide the cash for its dividend payout. Thus the decision to pick up more at 0.17.
Some of the property stocks out there are trading at relatively ridiculous valuations of around 0.3X book, and around 0.5X RNAV. The market seems to be pricing in for a prolonged downturn in the property market. However, for those with a long-term point of view again, might want to look at some companies who have vested interests in other countries like Vietnam (where the PDI is rising at CAGR of around >10% and mean age around 40 years) and China. The long-term fundamentals are still intact, unless a war erupts.
Most importantly, we should look at companies where the earnings visibility can be projected far ahead. By this definition, I might be tempted to exclude the O & M sector (darlings of yesteryear) and the technology sector to a certain extent, but property companies might still tend to trend upwards due to demand for their assets in the long run. Cash is also important at this moment, so companies which are sitting on hoards of cash right now might survive, increase market share and thrive. An e.g. could be the change in the automotive industry landscape, with Toyota poised to overtake General Motors as the market leader, as the latter might face insolvency from high cash burning. Might be time to take a look at some market challengers, and if they are holding onto large amounts of cash compared to leaders who have been less prudent, keep a watchful eye.
Have a great day shopping on the Singapore Exchange. But compare the prices and do your homework before you open your wallet.
This entry is only going to be a generic one, I've been so busy will only start updating regularly in a few week's time. Nonetheless, I managed to take out some time to analyse a few companies and pick up some shares, including Kepland at 1.45, Tat Hong at 0.385, Olam at 0.89, 2nd chc at 0.17. Those who have waited to "time" the market might have missed it's bottom at around 1,500 (might, because no one knows whether it has bottomed or not, and I am not interested in attempting to call for one). The point is that, do pick up any counters with significant margins of safety and do not hesitate when you see them.
Anyhow, would like to talk about a discussion I had one day with a friend. Were talking about some counters I had in mind but do not intend to purchase at the moment. One of these companies is C&G Industrials. It released its financial results quite recently, and on this grounds, I think it is trading at too ridiculous valuations. With about 560 million RMB in cash(about 100million SGD) at hand(in the bank), the cash per share is about 25cents. Now? it's changing hands at 6 cents. The maintenance capital expenditure is estimated at around 120 million RMB(based on past year experiences). So, if the company continues to expand at the rate it has been doing so far, and earns zero profits, we can safely assume that the company can stay solvent for 4 years plus. The management has released statements on scaling back of capital expenditure in the coming year and has just pulled out of one project. This can probably result in a cutback in cash burn rate. Attractive? maybe. I've not taken a look at the business of C&G, so I may not be in a position to make comments.
For 2nd Chance, a company that has posted 6 straight years of record profits, its profits had taken a turn for the worst recently due to its securities portfolio. As I had previously mentioned, one of my concerns was its increasing share in the portfolio. Sadly, the words have come back to haunt me, as they have to book a loss in the coming quarter due to its unrealised losses in securities. The market immediately punished 2nd Chance, dropping about 20% in one day of trading. Rational? I don't think so. It is an unrealised loss, and not loss in cash or its core businesses. The management have already provided guidance, that the securities portfolio will be limited and not added upon. The loss is only an accounting procedure for booking it into the P & L statement, and its profits will still provide the cash for its dividend payout. Thus the decision to pick up more at 0.17.
Some of the property stocks out there are trading at relatively ridiculous valuations of around 0.3X book, and around 0.5X RNAV. The market seems to be pricing in for a prolonged downturn in the property market. However, for those with a long-term point of view again, might want to look at some companies who have vested interests in other countries like Vietnam (where the PDI is rising at CAGR of around >10% and mean age around 40 years) and China. The long-term fundamentals are still intact, unless a war erupts.
Most importantly, we should look at companies where the earnings visibility can be projected far ahead. By this definition, I might be tempted to exclude the O & M sector (darlings of yesteryear) and the technology sector to a certain extent, but property companies might still tend to trend upwards due to demand for their assets in the long run. Cash is also important at this moment, so companies which are sitting on hoards of cash right now might survive, increase market share and thrive. An e.g. could be the change in the automotive industry landscape, with Toyota poised to overtake General Motors as the market leader, as the latter might face insolvency from high cash burning. Might be time to take a look at some market challengers, and if they are holding onto large amounts of cash compared to leaders who have been less prudent, keep a watchful eye.
Have a great day shopping on the Singapore Exchange. But compare the prices and do your homework before you open your wallet.
Subscribe to:
Posts (Atom)
