Friday, November 28, 2008

November 2008 Portfolio Summary and Review

November 2008 was similarly peppered with interesting developments in the financial and economic world, which saw once spectacular blue-chip institutions such as General Motors and Citigroup being brought to their knees as the credit crunch continues its devastating rampage. At the risk of sounding like an over-zealous newscaster, I will elaborate on the events of this month in the next paragraph, and will try to temper the tone of language in order to achieve a more sober address.

With Hong Kong, Japan and Germany officially in recession, it would just be a matter of time for the United States. This will probably culminate (and go down in history) as the first truly global recession and economic downturn. There are probably many books which will be written on this in the years to come, and the amount of wealth destruction has gone into the trillions of USD. So, if you are an individual (like myself) and feel that you are getting somewhat poorer, don’t fret because millions of others around the globe are probably in the same boat or doing much worse. Even billionaires and millionaires have been unable to escape unscathed as their wealth has fallen dramatically during such hard times. It is only with prudence, fortitude and determination that one can get through these unprecedented times.

The problems with USA auto-manufacturers rose this month as a result of a sharp drop in USA consumer confidence and spending, leading to the worst sales for auto manufacturers in at least 20 years. The 3 biggest car companies (located in Detroit), namely General Motors, Ford and Chrysler, petitioned for the Federal Reserve to extend financial assistance to them, or they may be bankrupt by June 2009 as a result of high cash burn and flagging sales. As of this writing, there was still no definitive solution to their woes, though President Obama has mentioned some form of aid package to be made available to them. Citigroup, the once vaunted financial institution, was on its knees as it laid off 50,000 staff worldwide and sought to raise more capital. You can read on Bloomberg or CNBC the steps taken to rescue Citigroup, and I shall not elaborate on it.

With all these nerve-racking developments, it is no wonder everyone is living in a climate of fear and trepidation. With the most recent news of political turmoil in Thailand and terrorist attacks in Mumbai, India, this really is NOT helping the already fragile economic situation. South-East Asia is set to destabilize further as confidence in the region erodes, and more funds pull their monies out for fear of further instability. Singapore and Hong Kong may benefit though, as they are seen to have stable economies with limited trouble, but in the near term the export-oriented nature of both countries would cause investors to remain cautious.

There was significant news regarding the companies I own, as five of them had released their financial results during the month. Since I had already covered this in a previous post, I will keep this short and only report other material news:-

1) Ezra Holdings Limited – Ezra announced yesterday that they would be reviewing their options for 5 MFSV ordered some times in 2007 and 2008, in view of the challenging global economic conditions. The first contract to be reviewed is a US$68 million one signed with Keppel Singmarine, and Keppel has affirmed that they are “in talks and discussions” to negotiate on the contracts by Lewek Shipping (a subsidiary of Ezra). Assuming all 5 options for MFSV are cancelled, Ezra stands to lose just the deposit and future contracted revenues (assuming charters had already been secured). In the near term however, the move is positive as it allows cash flow to be eased and for the company to remain more nimble to deal with current issues. I will raise this (and other issues) at the upcoming AGM in December 2008.

2) Boustead Holdings Limited - There was no news from Boustead for November 2008. Note that the ex-dividend date for the interim dividend of 1.5 Singapore cents per share is on December 1, 2008. I had done a review on Boustead’s 1H FY 2009 in a previous post.

3) Swiber Holdings Limited – There were no announcements from the Company for November 2008. Shareholders are still awaiting news on the EGM to approve the third wave of sale and leaseback for 5 vessels. I had done a quick review of Swiber’s 3Q 2008 results in a previous post.

4) Suntec REIT – Suntec REIT did not release further news for November 2008. I have included the dividend in my realized gains for this month’s portfolio summary.

5) Pacific Andes Holdings Limited - There was no news from PAH for November 2008 (other than the results announcement), other than director Bernie Cheng Shao Shiong buying up 400,000 shares over 4 days (including today) at a price of S$0.145.

6) China Fishery Group Limited - There was no news from CFG for November 2008, other than the results release which I had highlighted in a previous posting.

7) First Ship Lease Trust – There was no news from FSL Trust for November 2008. The dividend of 3.05 US cents per unit (converted at an exchange rate of 1.5287 to the USD) was received on November 28, 2008.

8) Tat Hong Holdings Limited – There was no significant news for the company for the month of November 2008, other than their 1H FY 2009 release of financial results. I had done an analysis of the Company in a previous post, and I had included the interim dividend of 3.5 Singapore cents per share in my realized gains for my November portfolio review.

Portfolio Comments

November 2008 was somewhat unchanged from October 2008 in terms of sentiment (still fragile) and valuations (still depressed and attractive for long-term accumulation). As at end October 2008, the STI was trading at 1,794.20; by the end of November 2008, it had dropped by 3.4% to 1,732.57. On a positive note, my portfolio improved from a total loss % of 41.8% as at end-October 2008 to just 34.5% as at end-November 2008, helped by the life blood of dividends during this protracted and prolonged bear market.

There were no further purchases made this month as market prices of the companies I own did not fall to the lows seen during October 2008. If such opportunities present themselves again in the coming months, I will not hesitate to increase my position and to average down further.

My next portfolio review will be on Wednesday, December 31, 2008 after market close, and will include a special year-end review and commentary (similar to year-end 2007).

Wednesday, November 26, 2008

Boustead - 1H FY 2009 Financial Review and Analysis

Boustead had released their 1H FY 2009 results on November 14, 2008. At first glance, it looked as if the Group had done quite terribly, as net profit due to shareholders was down 41.6% for 1H 2009 compared with 1H 2008. On closer inspection however, it seems that the reason for the apparent decline was because of exceptionals which had been recognized in 1H 2008. Stripping this out, net profit attributable to shareholders would have increased by 30.2% for 1H 2009 to S$15.2 million, implying that core net profit for 1H 2008 stood at S$11.7 million. More will be elaborated on in the following sections.

Profit and Loss Analysis (Note: All numbers used are for 1H 2009 and 1H 2008, not 2Q 2009 and 2Q 2008)

Revenues increased very slightly from S$206.2 million to S$210.5 million, up 2.1%. The good news is that cost of goods sold fell 0.8% in the same period, thus Boustead saw its 1H 2009 gross profit margin improve to 31.4% from 29.4% in the previous corresponding period. Other operating income fell 64.1% due to the absence of exceptionals in 1H 2008 (gain on disposal of assets held for sale). In addition, there was also a gain of S$6.1 million from the sale of a leasehold property and S$1.9 million in a tax write-back. Stripping all these out, net profit attributable to shareholders would have increased 30.2% as mentioned above. Net margin based on net attributable core net profit is 7.2% for 1H 2009, versus just 5.6% for 1H 2008.

Administrative expenses increased quite a bit, by 29% mainly due to increased head count. FF Wong had mentioned before in interviews that the main problem with getting more contracts of higher value was to attract suitable talent to be in charge of such projects. As a result, the Company has gone on a recruitment drive to bring in people of caliber to oversee these new projects. This would explain the increase in head count, which may also herald more projects in future as the Group now has the human resource to manage such projects which are of a larger scale.

Financing costs were also somewhat higher at S$851K, though the magnitude of the increase is dwarfed by the % increase. I suspect this could be due to short-term project financing using bank loans, of which rates have risen due to the high LIBOR rates as a result of the credit crunch. This is a short-term phenomenon which is unlikely to persist.

An interim dividend of 1.5 cents per share was declared and is payable on December 18, 2008. At today’s closing price of 66 cents (November 18, 2008 when this analysis was done), this represents a dividend yield of 2.27%.

Balance Sheet Review

Trade receivables have increased slightly from S$98 million to S$111 million, probably also a result of the ongoing credit crisis which makes payments from debtors slower. It could also be a result of progress billings which have yet to be collected as Boustead takes on more higher-value contracts. Properties held for sale has increased by about S$7.4 million as Boustead had announced purchasing a S$6.7 million property in the UK, most likely for investment purposes. Contract work-in-progress nearly doubled to S$24.1 million from six months ago, which demonstrates that the Group had started on more projects as announced in their press release.

Current ratio stood at 1.58 for Sep 30, 2008, compared to 1.68 for 1H 2008. This was mainly due to the decrease in cash of 21.4% from S$165.3 million to S$129.9 million (to be elaborated on further in the Cash Flow Statement review). It was partially offset by the increase in trade receivables and contract work-in-progress, resulting in current assets increasing to S$328.6 million. Current liabilities had increased to S$207.8 million due mainly to the increase in trade and other payables to S$174.2 million.

Cash Flow Statement Analysis (Note: numbers used are for 1H 2009 and 1H 2008)

Cash inflows from operating activities was just S$1.5 million for 1H 2009, compared to a very healthy S$18.7 million for 1H 2008. There are several reasons for this: lower net profit recognized during the period, an increase in work in progress implying cash outflows, an increase in receivables and also an increase in properties held for sale. All these are considered negative working capital and are cash outflows. This was partially mitigated by the increase in trade payables, while payment of income taxes came up to a hefty S$9.5 million (S$8.7 million for 1H 2008 even though net profit was higher). This was probably due to non-deductible items in the Group’s tax computation for 1H 2009.

Cash flows from investing activities decreased by S$13.3 million for 1H 2009, compared to just S$1.6 million for 1H 2008. This was attributable to the following: purchase of additional stake in GBI Realty thereby increasing Boustead’s ownership from 30% to 40% (this cost them S$3.4 million), a loan to associated company worth S$6.3 million as well as purchase of fixed assets worth S$8.7 million. Though 1H 2008 saw purchases of fixed assets hitting S$9.5 million, this was offset by a one-off cash inflow from the disposal of assets held for sale of S$10.2 million.

Cash outflows from financing activities was mainly due to the payment of the final dividend of S$18.1 million. Other than this, there was some repayment of bank loans amounting to about S$2.5 million. The net result was a net decrease in cash or 1H 2009 of S$33.9 million, with Boustead having an ending cash balance of S$127.4 million.

The project nature of most of their contracts means that cash inflows can be lumpy, and the increase in contract work in progress should be testament to that. For 2H 2009, the sale of property by GBI Realty of S$200 million will put more cash into the Company, and more operating cash inflows are expected in 2H 2009 as well with the commencement of the Libyan wastewater project (for Salcon) and the Al Marj Project as well (for Boustead Infrastructures).

Analysis of Revenues by Business Division

Please see Tables 1 and 2 below for more details and remarks:-

Discussion of Prospects (by Division) and Future Outlook

For the energy-related engineering division, I would expect contract flow to slow considerably as oil and gas prices have slumped from a high of US$147 per barrel to just US$54 per barrel as of this writing. This would affect their downstream and upstream oil and gas services as the Company reported that growth may be moderated.

For Salcon, Mr. FF Wong had in an earlier interview mentioned that a new R&D initiative was being tested in a Chinese textile company, but there was no news of whether the technology is effective and can give the company a sustainable competitive advantage. It will be good if Management (including CEO Mr. Yeo Ker Kuang) can update shareholders on the progress of this initiative, as it could mean that Salcon would be able to make use of the technology to scale up its earnings and margins. Lagan Construction had also filed a claim against Salcon but this is not expected to be material and would not impact FY 2009 results too much.

For the real estate division, it would be good if Boustead Projects can keep the contracts flowing into FY 2010 as well. The last contract announcement for this division was on July 9, 2008 for a S$67 million contract to design a semi-conductor facility. It has been more than 4 months without news of any contracts being clinched. This could be partly due to their order books being full and the division being unable to take on further projects. If you note for FY 2008, the 3Q 2008 (Oct to Dec 2007 period) also saw no contracts being announced for Boustead Projects. Contracts only began flowing in rapidly from March 2008 onwards (close to tail end of FY 2008 and beginning of FY 2009). Thus, I believe contract flow should resume by late FY 2009 when their current order books are depleted, but it is hoped that the Group can take on more projects in order to grow this division further, instead of being constrained by capacity. With the increase in head count, it is hoped that they will be better equipped for larger and more complex projects. The press release was deliberately vague on the prospects for real estate but with the current credit crisis affecting the property market as well, I believe Boustead should experience a slowdown in contract flow. However, their reputation as a specialist contractor and their niche focus on high-end industrial buildings with state of the art technology and facilities should give them an edge.

Also note that the Al Marj project under Boustead Infrastructures Pte Ltd is proceeding, albeit slowly. More revenues are expected to be recognized in 2H FY 2009 as well as FY 2010. Boustead has taken a 65% stake in this project which is worth S$300 million.

Geo-Spatial technology is expected to continue to receive firm demand but the weakening of the AUD will have some impact on profits moving forward. Still, this division is a cash cow and Boustead should hold on tightly to it for the long-term as growth is slow but steady.

In light of the continuing financial and economic crisis, this has thrown up juicy opportunities for Boustead to consider as potential M&A targets. Management is actively seeking out potential candidates and had already rejected one during their FY 2008 announcement as it was deemed not attractive enough (even though S$1 million was spent on the due diligence !). I am hopeful that the Group can source for an eventually find a worthwhile investment target which will match the stringent criteria set by Mr. FF Wong.

The Group is in a net cash position and has a healthy order book as well as operating cash inflows. Based on the above, I am confident the Group can deliver a strong FY 2009 come results announcement in May 2009, and I am also expecting a decent final dividend to boot.

Note: There will be NO detailed analysis for 3Q 2009 results, unless there are material developments within the company which are worth discussing or mentioning.

Monday, November 24, 2008

Ten Habits of Successful Value Investors (Adapted)

This post is a timely reminder on value investing principles amid the worst credit crunch in 8 decades ! Apparently, the news just can't get any worse (or can it ?), and no prizes for guessing that someone will pop up every day to say "hey the worst ain't over yet". It is during such times that sticking to an investment philosophy helps to keep one focused and in tune with his financial objectives. Below are 10 habits of value investors (highlighted and summarized, along with my own personal commentaries) adapted from the book "Value Investing for Dummies" by Peter J. Sander and Janet Haley (1st Ed.). Note that the second edition came out just after I bought the first one, so just my luck ! If someone has their hands on the 2nd (updated) edition, perhaps you can help point out if there are any changes to this section.

1) Do the Due Diligence

There is no substitute for hard work and nitty-gritty research, and every aspiring value investor has to get down on his knees and do the field work himself. Avoid relying too much on analysts or others who purport to have a view on a company or industry - best to do the legwork yourself to give yourself the required assurance.

2) Think Independently and Trust Yourself

Basically, avoid following the herd. The stampede can leave one bruised and somewhat crushed and it is never a good idea to behave in a lemming-like way. Make conclusions based on facts and objective data and do not be afraid to appear to deviate from common understanding. Sometimes views may be different purely because of a difference in time horizon (e.g. analysts are looking at a company with a 5-week view; but value investors use a 5-year view). Trusting yourself is a very important quality and having faith in one's ability is paramount in being successful in investing (and trust me naysayers jump at any chance to prove you wrong and shoot you down - people seem to enjoy the misfortune of others, especially so if they feel they are not alone in their misery).

3) Ignore the Market

This point cannot be over-emphasized. When you purchase shares, you are purchasing part-ownership of a company which sells products and services. The stock market is simply a venue for the transaction to be executed. We should thus ignore the noise and din the market is generating unless it is to our advantage to transact to own more of a piece of business.

4) Always Think Long-Term

This goes along with Point 3, ignore the market and focus on the long-term prospects of the businesses you own. Over time, compounding and the effects of dividends will serve your long-term financial goals well, provided you chose the right company of course !

5) Remember that You're Buying a Business

Think of buying shares in the company as if you would like to purchase the entire company. Know more about the company than others and be able to explain the company to a 4-year old (not that a 4-year old will ask, but you never know !). Keep a close watch on the company and keep track of the business, NOT the share price.

6) Always buy "on Sale"

Purchase shares of companies which are going on sale ! This means cheap valuations relative to the long-term growth prospects of the company. By buying cheap, we create greater margin of safety and provide more upside as compared to buying expensively.

7) Keep Emotion out of it

Rationality is important in evaluating potential investments, and emotions should be left at the door. One should purchase a company for its economic characteristics ("fundamentals") and not to be part of one big family (assuming you love the products it sells). Also, do not hesitate to admit mistakes as it can help one to learn and avoid them in future. Value investors have a rational system to determine when to sell in case facts or change or their original reason for owning the investment changes drastically. As humans, we can't be right 100% of the time, but it's how we cope with mistakes that make us a better person over time.

8) Invest to Meet Goals, not to earn Bragging Rights

Investing should be aimed at generating a decent return on your capital, and is a form of rational capital allocation to maximize returns over time. Some people tend to treat investing as a way to boast or brag about their achievements, and how their investment had reaped 20-50% in a bear market while others have "tanked". This is bad form and bad practice because the purpose of investing is not to show-off, but to ensure one can meet one's own long-term financial goals.

9) Swing Only at Good Pitches

This comes from Warren Buffett's baseball analogy. He is saying that as investors, we do NOT have to take every investment that comes along, only the very attractive ones. Thus, we can stand at the pitch all day and refuse to swing at all the balls that come our way, until we see a very good one coming ! This is akin to ignoring Mr. Market who throws all kinds of companies at all kinds of crazy prices - value investors need to sort through the heap to find the gems.

10) Keep your Antennae Up

This last point essentially means an investor always has to keep a lookout for good companies, and always needs to be aware of when attractive valuations may arise. This may not just include local companies, but it can be extended to include shares of companies trading in other countries as well, provided the investor understands the tax laws and operational aspects of the company in that country.

So that's a quick 10-point summary of some value investing habits one should adopt. It's a process of continuous learning and there are probably more habits to absorb than the 10 above, in order to make a good investor. I have not even included the behavioural finance aspects yet ! So let's all keep learning, stay humble and continue to share knowledge !

Tuesday, November 18, 2008

Tat Hong - Analysis of 1H FY 2009 Financials and Prospects

Below is my analysis of Tat Hong's financial statements as well as a discussion on their prospects in the next couple of years in light of the global financial crisis, which has so far thrown Singapore, Hong Kong and Japan into recession (in Asia). I will do the usual sectional analysis for Tat Hong but will keep it short in order to discuss more of the growth and cash flow aspects of the company in the coming years. I will also be posting a transcipt of an interview which CEO Mr. Roland Ng did with Reuters on October 7, 2008, in order to extract some sections to comment on.

Profit and Loss Analysis (note: numbers are for 1H 2009, not 2Q 2009)

Revenues increased 26% from S$298.3 million to S$375 million, as a result of all divisions growing their revenues by double digits. More on that later as I drill into the divisional analysis. Gross margins however, contracted by 1.7 percentage points from 38.5% in 1H 2008 to 36,8% in 1H 2009, as a result of higher COGS (an increase of 29%), therefore gross profit only increased by 20% from S$115 million to S$138.1 million.

Expenses for 1H 2009 were kept well under control, as evidenced by all categories of expenses increasing by less than the increase in revenues of 26%. Other operating expenses and finance costs only increased by 16% while share of profits of associates increased by 24%. However, moving forward, I would expect share of profits from associate (Yongmao) to fall as the tower crane rental division may take a temporary hit from the global economic crisis.

Net profit (attributable to shareholders) increased by 28% from S$40.2 million to S$51.3 million. Since earnings will be fairly stable and be driven more by rental income rather than sale of cranes, I will use a rough PER approach to ascertain the PER at this point in time. Using S$51.3 million and annualizing it, we get S$102.6 million. EPS is therefore 20.32 Singapore cents. At today's closing price of 56 Singapore cents per share, Mr. Market is valuing Tat Hong, the world's largest crane company by crawler crane fleet, at a mere 2.75 times projected FY 2009 PER.

Balance Sheet Review

PPE went up to S$370 million as a result of additions to their crane fleet, while inventories remained or less constant. As mentioned in the financial report, the increase in PPE was due to expansion of rental fleet to meet increased rental demand. In the interview below, Mr. Roland Ng mentions that Tat Hong will be moving towards a rental business model in order to generate recurring income and sustainable cash flows. Cash had decreased from S$75 million as at 6 months ago compared to S$47.7 million at present (Sep 30, 2008), and more will be elaborated on in the cash flow statement review. Non-current financial liabilities had increased from S$96.5 million to S$122 million, which was the result of the drawdown on financial leases to purchase plant and equipment.

Cash Flow Statement Review (note: all numbers are for 6M 2009 and 6M 2008 cash flows)

Cash flows from operating activities increased by S$43.1 million and this is very healthy. Most of the cash inflows was generated by through profits and working capital changes did not reduce this figure very much (based on the "indirect" method of cash flow statement preparation). For investing activities, S$34.1 million was spent to acquire more fixed assets as mentioned, for rental purposes in the coming periods. Thus, FCF amounts to S$8.9 million for 1H 2009, compared to a negative FCF of about S$3.6 million for 1H 2008.

Cash flows from investing activities was a negative S$43.9 million for 1H 2009 mainly due to said PPE purchases, as well as the acquisition of a subsidiary and shares in Yongmao (increase of their stake to 20%, thus Yongmao is now equity-accounted for as an associate).

For 1H 2009 financing activities, the net proceeds from bank loans came up to just S$3.3 million, while the net effect of finance lease obligations is a payment of S$700K. Most of the decrease in cash from this category came from the payment of dividends, as a result of healthy operating cash inflows. Note that 1H 2008's cash flows from financing looked so good mainly due to a share placement raising S$56.8 million.

Business Unit Analysis

Please refer to the table below for the breakdown of business units, and associated explanations:-

As can be seen, tower crane division is their new growth area, with revenues rising 2.5x and contributing to 3% of total revenues for 1H 2009, as compared to just 1.1% of revenues for 1H 2008. I would expect the sale of cranes and equipment division to contribute much less to revenues in future due to falling crane prices in this recessionary environment. Management intends to ramp up its rental market (more to be explained later) and since rentals can command gross margins of up to 60% and above, this bodes well for gross margins in future, even though total revenues may dip for a few quarters running.

Tat Hong Interview by Reuters

As promised, below please find the transcipt for the interview (in blue) of Mr. Roland Ng by Reuters. I have highlighted certain sections (in red) for further explanation.

Tat Hong says slowdown will hit 2010 profit

* Slowing economy will curb profits in 2010
* Will meet profit forecast of S$96m this year
* Eyeing rental acquisitions worth up to $50m

SINGAPORE - Singapore crane rental firm Tat Hong said turmoil in the global economy will hurt earnings in 2010, but that existing leasing agreements will help it meet this fiscal year's profit forecast.

'We cannot run away and be unaffected by the world financial crisis,' Tat Hong chief executive Roland Ng told Reuters in an interview on Tuesday. 'But our projects are for six to 18 months so for full year 2009, we will still do pretty well.'

The firm, which rents cranes in Southeast Asia and Australia, will achieve its three-year target of growing net profit by an average of 30 per cent a year to hit S$96 million (US$65.39 million) in the financial year ending March 2009, he said.

Mr Ng said demand for cranes will continue to be strong in the resources and infrastructure sectors, picking up the slack from slowing residential construction.

Singapore still has a pipeline of mega projects including the republic's two multi-billion-dollar integrated resorts, a $1.9 billion sports complex and the upgrading of its train network in the next few years. In Southeast Asia, Mr Ng said resources projects in Indonesia will also boost demand for building equipment.

But Tat Hong's distribution business, which involves the buying and selling of earth-moving equipment, will be affected as the sluggish economy weighs on consumers and demand for residential housing, he said.

He also said the firm is looking out for further acquisitions in Australia through 70 per cent-owned subsidiary Tutt Bryant . Tat Hong will focus on companies worth up to $50 million each.

Tutt Bryant earlier this year bought an Australian equipment hiring firm for A$3.4 million (US$2.39 million). 'We have a very good credit standing, so borrowing such amounts shouldn't be an issue,' he said. Mr Ng also plans to further boost Tat Hong's cash pile, which stood at $80.6 million end June, by reducing inventory in its distribution arm.

The operator of the world's largest fleet of crawler cranes reported $29.2 million profit in the first quarter which ended June 2008. 'When the market is bad, people don't buy - they rent,' Mr Ng said.

Note the following points (in red):-

1) Tat Hong has projects which stretch till 18 months from now and will provide good earnings and cash flows until at least mid 2010. This means that the company should at least be able to sustain a decent level of dividends until mid-2010. Their most recent dividend declared was an interim dividend of 3.5 cents per share, putting my dividend yield at 4.9% based on my purchase price of 71.5 cents.

2) Demand for cranes is expected to continue to be strong, in light of recent developments such as the new expressway costing S$5 billion announced by the Singapore Government to be built by 2013, the deferment of the Sports Hub to 2012, the releasing of more construction and infrastructure projects by the Government to boost the export-oriented economy of ours and public housing demand remaining firm. Many public sector projects had also been deferred in 2007 due to the glut (at the time) in construction projects (coupled with the IR). These can be progressively "released" to provide consistent demand for crane rentals and heavy equipment usage, of which Tat Hong is a beneficiary.

3) Tat Hong's sales division which deals with cranes and heavy equipment will be affected by lower prices and the sluggish economy. Thus, I already expect this division to contribute less in future to Tat Hong's total revenue. Since this division has a gross margin of only 20%, I think it is a wise idea for Tat Hong to shift more of the revenues to rental so as to improve overall gross margins.

4) Management is on the lookout for further acqusitions in the range of S$50 million through 70%-owned Tutt Bryant Group. With valuations around the world being so depressed, Tutt Bryant should be able to source for a juicy deal. I am confident they can find a good acquisition target similar to Caradel Hire or Bradshaw in order to boost revenues (and earnings).

5) Tat Hong's cash pile stood at S$47.2 million as at September 30, 2008. Most of the decrease came from the payment of dividends. With the strong recurring operating cash flows, and Management's intention to raise more cash through divestment of assets meant for its distribution arm, Tat Hong should be able to boost its cash hoard even further to reduce its gearing and possibly pay out a very decent dividend by FY 2009 year-end.

6) Mr. Roland Ng is speaking from experience when he says this. During recessions, companies rent cranes instead of buying them as the capex upfront for buying can be saved and conserved for rainy days. Rental affords more flexibility to companies, but of course Tat Hong enjoys a higher mark-up and gross margins of up to 60% in its crawler crane rental business. Over time, we should see the effects of this move in Tat Hong's improved gross margin.

Prospects and Future Direction

In addition to comments from the interview, below is also a list of other points which I wish to independently raise to illustrate Tat Hong's prospects and how the company will cope with the current crisis:-

a) China had, on Nov 5, 2008, announced that they will spend an additional RMB 5 trillion (about S$1 trillion) in the transport sector to build roads, waterways and ports. This is in addition to its previous announcement to inject RMB 2 trillion (about S$400 billion) to upgrade infrastructure between 2006 and 2020. These moves bode well for Tat Hong's Tower Crane division as revenues and rental rates will be boosted by such measures.

b) The rental businesses for Tat Hong are expected to remain relatively stable as demand for rental is still present. Thus, these divisions should not see a very large negative variance in revenues. Margins could possibly suffer temporarily though, which I will not be surprised at, unless crane supply continues to remain tight.

c) Australia will continue to spend on infrastructure projects so Tutt Bryant should see steady demand for its services, even though Tutt projected a slowdown in the next few quarters. I encourage readers to visit Tutt Bryant's website (sidebar on the right of my blog) to read more of their financials and plans. It's too troublesome to post everything here !

d) Acitivites in the Middle East are also expected to remain firm, and Tat Hong's global reach should help it to buffer against the downturn somewhat.

I will be doing full reviews of most of my companies only at half-year or full-year results release. Either that, or when there is a major development worth writing about. Please leave comments if you wish to, and we can have a discussion in the comments box. Anyone posting nonsense or insulting remarks will get instantly removed without further warnings.

Saturday, November 15, 2008

Corporate Results Announcements

As I have a serious lack of time, I will not be doing reviews for ALL my companies which have released results recently, but will just focus on one or two. I've realized that it takes a lot of effort to analyze and post all the analysis here on my blog, when actually one should be more concerned with the long-term prospects of the businesses rather than staying too focused on quarterly results. That is the domain of analysts, whose job is just to churn up reports based on short-term forecasts (yes, 1-year price targets are considered short-term !).

Tat Hong Holdings Limited

Tat Hong released their 1H FY 2009 results on November 12, 2008. Revenues for 2Q 2009 rose 15% but this was offset by higher COGS (increase of 20%), resulting in gross profit increase of only 5%. Profit for 2Q 2009 dipped 3% from 2Q 2008; but looking at half-yearly figures, net profit increased a decent 25%. The Company declared an interim dividend of 3.5 cents per share, payable on December 12, 2008. At my purchase price of 71.5 cents, this represents an interim yield of 4.9%. I will be doing a more detailed review of Tat Hong's financials and prospects in due course, as I have quite a bit to say about their various divisions and also for their regional prospects in the longer-term (up till FY 2012).

Swiber Holdings Limited

3Q 2008 revenues surged 186.5%, while COGS increased an even heftier 247.3%, resulting in a 68.4% rise in gross profits. As a result of lower exceptional items for 3Q 2008, net profit fell 7.4% while profit attributable to shareholders fell 18.7% on quarter. For 9M 2008, profits increased a healthy 58.9% to US$47.1 million, and this already more than covers the entire FY 2007 profits. During bear markets, analysts love to focus on the negatives, and I am sure the "surprise drop" in profits of 18.7% on quarter will be mentioned many times. Putting things in perspective, the lumpy nature of contracts and the increase in headcount and administrative expenses as a result of business expansion into the region probably added quite a bit to Swiber's cost structure, as did the finance expenses on their bank loans and bonds. While this is not good for the company in the short-term, in the longer-term their asset-light strategy and their larger spread of vessels will help to snare them larger contracts which are hopefully long-term (e.g. is the CUEL 5-year contract for US$50 million per annum).

Their Balance Sheet is healthy with gearing at about 1.06 and current ratio >1, thus there is no immediate cause for worry as their debt is not due till FY 2011. Their cashflows from operating activities is also healthy at US$19 million for 3Q 2008, though the bulk of their cash inflows still came from the raising of more banks loans worth US$74 million. Still, there is probably more visibility now in terms of operating cash inflows, and the Company will take a more cautious stance towards expansion, and has put their deep-water plans on hold until oil prices firm up in future years. Prudence will see the company through these lean times, and they should emerge stronger and more ready for challenges by FY 2010. I will NOT be writing a detailed review on Swiber.

Using US$47.1 million at an exchange rate of 1.50 to the USD, EPS is about 16.76 Singapore cents per share for 9M. If annualized, EPS will be about 22.35 Singapore cents. At today's closing price of 61 cents, this values the company at a mere 2.73 times PER.

Pacific Andes (Holdings) Limited

Revenues for 2Q 2009 dipped 4% while gross profit dripped 12.6% due to higher fuel costs and also the supply chain management division getting disrupted due to the Olympic Games. Net profits decreased by 16% on quarter and about 16% for 1H 2009 too. However, due to PAH's increased stake in CFG, profits attributable to shareholders rose 18.5% on 1H FY 2009 compared to 1H FY 2008. Management has reported that fish product prices have risen 10-20% due to increased demand during the economic slowdown (hey, people still have to eat fish right ?). Due to the deployment of less fishing vessels to the North Pacific, they suffered a temporary drop in fishing volume which will be made up in 3Q 2009 (4Q 2008 for China Fishery).

Higher fuel costs were also cited as one of the reasons for the fall in profits, which was largely in line with what I expected. Fuel prices have since dropped to around US$56 per barrel and are likely to remain low for as long as the recession does not blow over. Thus, this should ease the gross margins for CFG's fishing division. Catalysts for profit growth in 2H FY 2009 will include measures taken by CFG to fish for more catch and also for deployment of their elongated vessels to the North and South Pacific. In CY 2009, higher total allowable catch (TAC) is also expected as fish supplies have remained healthy due to sustainable fishing practices. There will be NO further review from me for PAH's 1H FY 2009 results.

China Fishery Group Limited

Revenues for CFG were up 3% for 3Q 2008 and 8.4% for 9M 2008. However, net profit dipped by 28.1% on quarter due to the problems mentioned in PAH's review - higher fuel costs and deployment of vessels to defer catch volume till 4Q 2008. As a result of these, lower volumes of fish were caught even though prices had risen. Gross margin for 9M 2008 was high at 34%, while net margin was a respectable 22%. The Group managed an 11% rise in 9M net profit to US$78 million. Assuming oil prices remain at current levels, and CFG replenishes the fish which they had failed to catch in 3Q 2008, this means that annualized profits should hit about US$104 million. Using exchange rate of 1.50 to the USD, annualized EPS will be about 20 Singapore cents. Using closing price of 61 cents, FY 2008 PER is just about 3 times. Considering their revenues are consistent and recurring (unless the ocean runs out of fish !), this is a very low valuation for a good fishing company to trade at, which is one example of Mr. Market's mood swings.

Net cash from operating activities was a healthy +US$42 million for 3Q 2008, and +US$60.1 million for 9M 2008. Net increase in cash was US$23.2 million for 9M 2008 after factoring in acquisition of PPE and subsidiaries. Net gearing improved to 92.9% from 108.3% as at December 31, 2007. Prospects are decent for CFG as they are expanding their number of vessels and also elongating their existing ones to increase the fish hold capacity. When the ITQ is implemented in Peru in FY 2009, this should provide a further boost to prices as quality of catch will improve. I have also noted the Chairman Ng Joo Siang's plans to eventually branch out to catching krill by FY 2010 and hope that they can implement this as an additional revenue stream. I hope to get more updates on this at the next AGM. Meanwhile, I will provide no more further analysis on CFG until the FY 2008 results are out some time in Feb 2009.

Boustead Singapore Limited

Boustead released a decent set of results today, underscoring their slow but steady growth in all divisions despite the economic downturn. Since I will be doing a more detailed review of Boustead's 1H FY 2009 results, I shall not say too much during this post. Suffice to say that the Company has grown all divisions decently, and has a net cash position of S$117.6 million. They have declared an interim dividend of 1.5 cents per share (a yield of 2.6 cents based on my purchase price) which is payable on December 18, 2008. On a comparative basis, after removing one-off items, net profit attributable to shareholders improved 30.2% to S$15.2 million.

One must note that the Company usually does better in 2H of the financial year and shows weaker financial results in 1H. Thus, due to their lumpy project nature of their revenues, it will not be wise to annualize their net profit to derive a valuation as it would be misleading. Also note that the sale of a leasehold property will net the Company another S$200 million in 2H 2009, and this should result in a very decent final dividend for FY 2009. I will be doing a detailed breakdown in a future post for Boustead, and discuss possible strategies which the Company may take to grow their top and bottom line.

Stay tuned for more posts coming on Investment Sins, as well as a continuation of the Behavioural Finance series. I am also planning a future "Your Money and Your Brain" series after reading the book by Jason Zweig, to draw out snippets to illustrate the fascinating relationship between money and our own brains.

Saturday, November 08, 2008

Predicting the Market Bottom - An Exercise in Futility ?

With the recent unprecedented volatility dogging the stock markets around the globe, and with the economic crisis fully under-way, more and more people have been congregating together to ask the mother of all stock market questions - where will the market bottom be ? To expand this question a little, it's actually a little more complex, being divided into events like "where will the bottom be", "when will it happen", "will there be another bottom" and the no-brainer "have we already missed the bottom and the boat has left" ?

Interestingly, there are no lack of experts and market analysts making predictions on the stock market, as they have been doing for the past few decades. The funny thing is that when retail investors jump in to offer their "psychic" views on what's going to be happen, then it gets truly hilarious. Everyone knows that market bottoms cannot be timed, yet people persist in trying. There is something perverse about human beings that likes to make simple things complex; and this is about one of the most complex things one can ever attempt to achieve. As mentioned, the stock market is a complex adaptive system, which means that there are a myriad of factors which determine how prices move on any given day, and thus far there is no predictable pattern for these random movements. Yet, almost everyone loves to chip in to try to predict what's going to happen next, and where the market is going to go. It's becoming a national pastime, akin to a game show, where people try to outdo and outsmart one another to be the first to "guess" the right answer. It strikes me as being silly and a waste of effort. Why ? Read on.....

The point of investing is to ensure one gets a fair return on his investment in sound companies over time. The purpose of a stock market is for companies to float their shares so as to raise funds for business expansion. Most people seem to have forgotten the two golden rules above, which is why the stock market has turned into a game, a contest and to some, a sort of battleground to test their wits and dexterity. I must emphasize that my view of the stock market is one whereby I can park my money in shares belonging to a good company which can grow steadily over the years, and eventually my stake in the company will be worth more by virtue of its business growth. This represents a way for the retail investor to grow his money in a slow and steady way. The problem is that many people are impatient for quick gains and thus engage in the speculative "game" of market timing, which ultimately results in futility as their efforts to discern patterns in stock prices usually end in failure.

Trying to pick a bottom in the stock market is the same as trying to guess when the top is here (in a bull market) so that you will know when to sell out all your shares and stay in 100% cash. There are a few flaws to this logic which many people do not notice:-

1) Assuming the bottom is coming (i.e. not here yet), how can one devise a way to properly anticipate this and be able time it exactly so that one can purchase shares at the bottom ?

2) Assuming the bottom has already past, many people will still be waiting for the bottom to arrive so that they can buy at lower prices; while the stock market may just march onwards and leave them in the cold;

3) The bottom for the stock index may not always signal a bottom for individual stock prices; so one who tracks the index closely looking for a bottom may fail to capture appropriate opportunities in individual securities as he too focused on the forest to notice the trees;

4) "Hindsight Investing", the bane of market timers, always results in one thinking that he will know exactly when to sell out and exactly when to buy back. I need not say too much more about this as I have often mentioned how silly a concept hindsight investing is.

5) Pattern-seeking human beings will always discern patterns in past data, clearly because they are available and not because they form any part of a larger picture of what's going to occur in the future. Correlation is not equal to causation; and what caused a market bottom in previous cycles may not always lead to one in the current cycle, as each economic crisis is different. So people who postulate based on past data are simply trying to anchor their expectations of the future based on information which may not be representative of what's currently going on.

The conclusion to all this rambling is that market timing is simply an exercise in futility, and my advice to readers would be to conveniently ignore the bunch of forecasters and analysts out there who are forever trying to predict the bottom. Time can be spent more constructively on sieving out good bargains in terms of corporate valuations in the current bearish environment instead of reading tons of commentaries by "experts" and "gurus" who think they know better. Thinking indepedently is one of the traits of a successful investor, but at the same time, be open to opinions about your companies which are objective and may be of value to your assessment of a company's potential.