Monday, May 25, 2009

Pacific Andes - Rationale for Divestment

I sold off my entire stake in Pacific Andes today, capping a three-year long investment which saw one round of capital injection; and which resulted in a significant 38% loss. Even though the Company had announced a decent set of full-year (FY) 2009 results, with net profit attributable to shareholders up 38% to HK$664 million, the nail in the coffin came with the announcement of a fresh rights issue, coming hot on the heels of a previous one in March 2007. The offer this time was a 1-for-1 rights issue at 15 cents per share (a 50% discount to the last closing price of 30.5 cents) with additional warrants attached (1 warrant for every 5 rights shares subscribed for, exercise price 23 cents). The rights were supposed to raise about S$228.6 million while the warrants could potential add another S$70.1 million to the Company's coffers.

So one might ask - why is this the "nail in the coffin" ? Presumably, if I had wanted to increase my stake in PAH, I could have done so at 18 cents back during March 2009, but hesitated from doing so. In fact, a cursory glance at PAH's business model and financials would not leave one surprised as to the timing or magnitude of the rights issue. While I had previously added more PAH back in 2008 at a price of 44 cents, I had failed to take into account the inherent business model flaws which would precipitate a full-scale rights issue, and apparently Management also "forgot" about the massive dilutive impact of such a fund-raising exercise on both earnings and (future) dividends per share. Some of the reasons for my divestment are stated below in point form for easy reading and reference.

1) Paid too high a valuation - This fact was apparent right from March 2006, when I first purchased the company at a high price of 81 cents (pre-rights). It was probably valued at around 8-9x historical PER at the time, and I had neglected the fact that it was in SCM and trading and was a high volume-based business, but more on that later. The rights shares issue back in March 2007 were offered at 52 cents, seemingly a juicy offer since my purchase price was a high 81 cents. In August 2007, I continued to purchase more at 61 cents to further average down my cost. This was till July 2008 when I added my last round of PAH at 44 cents, giving at least 8 good reasons for doing so. Since I could justify my purchase so succinctly, I could also figure out what I had omitted to make this such a glaring error. All my reasons and rationale had not accounted for the Balance Sheet weakness of PAH and its business model which I shall elaborate on later. Taking the FY 2009 net profit of HK$664 million, it's about S$132.8 million. Dividing this by 1.391 billion shares gives an EPS of about 9.54 Singapore cents. At the current price of 35.5 cents, the PER is about 3.72. This may seem undemanding at first but considering the dilutive effects of the rights issue, the share capital base will "expand" to 2.8 billion shares and EPS will be halved. Thus, it does not seem like such a bargain any longer.

2) Holding Company Effect - PAH suffers from this effect which means it derives most of its value from their investment in another company, namely China Fishery Group Limited (CFG), in which I am also vested. It holds a 64.1% stake in CFG and works closely with CFG in its SCM and Trading business. However, PAH itself does not have the hard assets which CFG has. This means that much of its valuation is derived from the valuation of CFG; and CFG is the main downstream revenue generator as it is the Company which catches the fish. Hence, PAH is involved in a very high volume-based business (not unlike Noble or Olam) in which net margins are very thin. In fact, it can be readily observed that PAH has a net margin of less than 10% based on FY 2009 results, while CFG has a net margin of 26% based on 1Q 2009 results.

3) Lack of Tangible Assets limits collateral for loans - The rationale for PAH to raise funds is to provide for working capital needs (see point 4 as well). Notice that the company had NOT managed to secure any funding through bank loans and the CEO commented that it was difficult to do so during this harsh credit crisis. Yet, a quick glance at CFG shows that CFG had recently (in 1Q 2009) obtained a US$60 million bank loan to finance its expansion into the South Pacific Ocean. The reason for this is the lack of tangible assets belonging to PAH which can be used as collateral for loans. Previously, PAH would have used shares in CFG as collateral to banks, but during this severe credit crunch, banks are more cautious when lending and would prefer tangible assets such as fishing vessels and inventory (such as fishmeal) as collateral, all of which are owned by CFG and not PAH.

4) No clear objective for Fund-Raising - Most companies which issue rights have some specific objective in mind. Capitaland and its REITS CCT and CMT raised funds to pay down debts and to act as "pre-emptive" capital for M&A opportunities (or so they claim). Other companies raise funds to (presumably) capture opportunities for expansion and growth as there are many assets out there selling at distressed levels. Such cash is vital for taking advantage of opportunities. PAH only said that the cash was to be used for working capital, which I assumed to be for normal operating expenses and for daily use. This implies that the Company was short on cash for the normal operations of the Company, and did not have a specific objective for the cash, which makes the fund-raising all the more suspicious. It is CFG which has the clear growth strategy, with its elongation of vessels, deployment of vessels to the South Pacific, as well as introduction of ITQ. Therefore, it can be clearly seen that CFG's business model is very different from PAH as it has high net margins, high cash generation ability and has clearer scope for expansion.

5) Lack of Catalysts for Growth - As mentioned before, much of PAH's "growth" can be attributed to its 64.1% stake in CFG; hence its "value" hinges upon the value of CFG. This in itself is a very risky proposition for investment as the Company itself has no objective, clearly-derived value for which one can make a value proposition. Its SCM business can be likened to a commodity business as SCM models are essentially the same, are volume-driven and suffer from thin margins. This fact, coupled with the lack of tangible assets and the Company's excessively high gearing, made for a poor investment choice.

Unfortunately for me, I had to learn from this mistake the hard way - by taking a substantial loss by selling at 34 cents per share. But this mistake actually offers me better insights as to how to value a company, what to avoid, things to watch out for and more facets to consider when assessing if a company is suitable for long-term investment. The cash call was a timely reminder to me that this mistake had been made 3 years ago, and finally the time has come to divest of this mistake before it became a full-blown debacle. The opportunity cost of NOT divesting can sometimes be greater than the actual financial loss from divesting sooner (rather than later). Because of my reluctance to take a larger loss on this earlier (Oct 2008 through March 2009), I also omitted the chances to recycle the cash to other more promising companies like Boustead and Tat Hong. Thus, my mistake is two-fold and I feel mortified.

Moving forward, I will seek out more opportunities to purchase under-valued companies at attractive prices and a decent margin of safety; and will pay special attention to Balance Sheets and business models, as well as the fact that the companies I own are supposed to provide me with money (through dividends) and NOT keep asking me to pump in money instead ! I shall endeavour to pick myself up from this mistake, dust myself off and move on. I treat this as a good (though painful) learning experience, and promise not to make a similar mistake in future.

Note: This realized loss will be reflected in my May 2009 portfolio review as an offset against realized gains (currently standing at S$12.8K) and I shall cease all coverage of Pacific Andes from now on. Readers can access archives for PAH but all further updates shall be confined to CFG (which I still own).

39 comments:

Simon said...

hi musicwhiz,

a few things i would like to say.

i think buying something too high a price is not a good reason to sell....in fact, it shouldn't even be a reason for u to sell...

one more reason u quoted was pacific andes lack tangible assets for collateral for loans. if u look at it in another way, pacific andes is already 90% geared anyway, isin't that quite high enough already? i.e. i don't think it really needs more tangible assets to act as collateral. it's the gearing level that matters.

and i remember u said buying pacific andes becos it is in an industry with high barriers of entry. i think that's a very strong reason to hold on to a stock. so whatever happen to that?

and u keep mentioning the dilutive effect of the rights and warrants issue for pacific andes. isn't each ordinary share entitled to the same rights and warrants? i mean, u mentioned EPS will be halved, but then u get double the number of shares (and at a discounted price too). it will be dilutive only if u don't subscribe to it. so i can't see this as dilutive. and it will only be dilutive if the additional shares are placed out to somebody else and not u, like in the case of ezra.

and i agree with u that the objective they give for fund-raising is vague as well, but isin't that the norm? i think some of ezra's reasons for fundraising were for acquisition, from 5-50%. capex is 10-70, paying debt is 10-50. is that any much more helpful at all? i definitely don't think so. the range is so wide, it's almost redundant.

u know what? i think this rights and warrants issuance is actually a good thing! if it is successful, it greatly reduces their debt, their gearing ratio from 90% to something like 40-50%.

all in all, i think yr reasons for disposing the stock is weak. if u think abt it, the prospects for this company after the rights and warrants issue is a lot brighter going forward than it was last yr or even 2 yrs ago. so all the more u shouldn't be selling. i think it was a bit irrational on yr part to sell so quickly without considering the full effects of the rights and warrants issue.

musicwhiz said...

Hi Simon,

I read your comment with some amusement, I must say. Let me tackle the issues.

1) There is always a fair price to pay, even for a good company, to maintain margin of safety. In March 2006, I had not even digested the content of Intelligent Investor; thus was not equipped with enough knowledge to understand valuation well enough. Though subsequent purchases did bring down the cost, the damage was already done. If you had bought SGX at $17 or Keppel Corp at $15, that would have been an over-priced purchase, no matter how good the company is. That is why I say it is one of the reasons for divestment - simply put, I bought it too high !

2) I don't quite understand your statement on collateral. Think of it this way - CFG has the assets to act as collateral, but PAH does not, therefore banks do not lend to it and it has to raise money through rights or else face cash flow problems. Yes the gearing was high to begin with but borrowings need to be re-financed (that's the key word). CFG can refinance because of tangible assets, but can PAH do so ?

3) I think I should repeat that PAH gets most of its valuation from its 64.1% stake in CFG, and it is CFG who truly has the high barriers to entry as it is the one which owns the VOA, vessels and fishmeal plants. I think we should not confuse PAH with CFG as they own different types of assets.

4) Hey at least Ezra gave a rough breakdown of what it wants to use the cash for ! I knew someone would bring up Ezra and if you compare, PAH had amongst the most vague reasons compared to companies like Ezra and even CCT/CMT and Keppel Land. If you don't even have enough cash for working capital, that's not good news cos it means in time to come, there could be another cash call.

5) The rights are going to massively dilute earnings, even if you subscribe to your proportionate amount to keep your stake in the company constant. And this is assuming you wish to cough up cash to pump into the company that says it does not have enough cash for normal opex. Earnings will be diluted and so will dividends in future, so I am thinking a little more long-term and not just the short term issue of lowering their debt (assuming it does). The free float will become something like 2.8 billion shares, so what will each share be worth ? The better companies are the ones who don't massively increase their issued share capital, thus making each share practically worthless.

6) The prospects may be bright - for CFG, not PAH. PAH will always be doing the trading/SCM bit for the entire PAIH Group, and continue to "enjoy" such low margins compared to CFG's superior margins. Coupled with the warrants, this means a potential additional cash call as investors have to pay 23c per warrant in order to exercise it ! This requires a lot of upfront payment by shareholders - without guarantee that they will even declare a dividend ! If you ask me, that's not a good value proposition. By simple comparison to Boustead alone, that company has returned so much cash to shareholders since I was vested in 2006.

And by the way, I had the whole weekend to consider the financials, rights and warrants issue. I have also spent most of these 3 years thinking about PAH and CFG, as well as their business model(s). Saying that such a decision was arrived "irrationally" is being a little too presumptuous. Such decisions require careful consideration and I have adequate justifications for doing what I do. It's ok if you don't agree with the reasons, but at least respect that it was neither hasty nor impulsive.

Thanks,
Musicwhiz

Jeremy Ow Tai Pang said...

Hi, I agree with MW on his reasons to divest this investment. I think of it more on simple term. If a company keeps on raising cash frequently without improving its earnings per share and ROE for a long enough period of time (at least 5 years can already see the effect of the business model), it is suggestive that the business is cash hungry and has low earnings margin. This kind of business is not worth any second consideration at all. It has already failed the test to be one of profitability. Simple figures like EPS and ROE over a period of time (more than 5 years) can already tell a lot about the profitability of a company. I think Buffett is even stricter on these two figures. EPS has to have compounded annual growth of 20% or more for at least 10 years and ROE has to be consistently high at 20% and above for at least 10 years to even consider taking a closer look at the business. Just my two cents worth anyway.......:-)

Schweinchen said...

Life is such that at times we will just have to rationalize to ourselves why we ended up on buying high and selling low. The important point is to be able to move on. Good Luck!

musicwhiz said...

Hi Jeremy,

Thanks for your views. I appreciate the comments. As it is, it's hard for an investor to get it right all the time, and I humbly admit I am still learning as I go along. Hopefully I won't spend all my life learning ! :P

Cheers,
Musicwhiz

musicwhiz said...

Hi Schweinchen,

It's all part of learning and understanding the process of investing. Moving on may not be as easy as it sounds, but if one wishes to be an investor in equities, then it must be part of the tasks which one must be prepared to do. I've personally witnessed cases where uncles I know of have held on to investments for 20-25 years, all the time being "under-water" and the Company not paying a dividend. The capital could be better recycled elsewhere, so this represents an opportunity cost.

Thanks,
Musicwhiz

Akatsuki said...

Hi Mz, could you summarise the lessons you learnt from buying PAH? Easier for me to understand. Maybe a few sentences will do? lol :] thks

Mike Dirnt said...

Hi MW,

i respect your decision and reasons for the divestment of PAH. as for me, im planning to subscribe to the rights and even apply for excess shares hopefully

i kind of disagree with you on buying SGX and Keppel when they were at high prices(on hindsight).It could have been a good price should the price go higher? Yes no doubt those high prices were expensive valuation, but one shouldnt be putting all the money in these stocks at one go.Its better to reserve some money if ever these great stocks can become cheaper.Through averaging, one can bring down the buy price substantially lower.Thats my strategy

Sometimes its not about buying at the lowest potential price or with a good margin of safety possible.But its really about how deep our pocket can go :P

Kay said...

Hi MW and all,

I think the issue with high price is more of an issue if it's overvalued. Price is relative and valuation is more objective. FYI, SGX at $17 was trading at a trailing P/E ratio of 36x so any investor worth his salt should know that this counter was irrationally overvalued at that point of time.

It will be a mistake to purchase SGX and Keppel at high prices assuming that at these high prices, these counters are overvalued by the irrationally optimistic bull market even if these counters are fantastic businesses. The counters for such businesses must at least be fairly valued before one consider buying in as the market may recognize the sound fundamentals of a business and refuse to let it be undervalued. If one realize his folly of purchasing such an overvalued counter early enough, he should be able to get out early enough without sustaining too much of a loss of capital. However, if one only realize this after quite some time, it will perhaps be better to hang on to the counter if the underlying business is excellent as over time, the share price will reflect the increasing value of the business although your capital gains will be eroded due to a high entry price.

IMHO, one should sell a counter only if the fundamentals have deteriorated. If one's entry price is too overvalued for a counter with a fantastic fundamentals, it may be prudent to just hang on to it despite of the mistake of purchasing at an overvalued price since the business has a high chance of growing with time and the market will value the counter higher subsequently.

Regards,
Kay

Cheng said...

"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." --Warren Buffett

The entry price of an investment is the most important. More important than your sell price because it protects your downside, to a certain extent. You don't want to be overpaying for a stock even though fundamentals are excellent.

You want your risk to be low. Even though the potential upside may vary, you wont lose much.

"Heads I win, tails I dont lose much." Mohnish Pabrai

My 2cents worth on price.

Cheng

Jeremy Ow Tai Pang said...

Hi all,
I agree with Cheng that purchase price is very important. An investor should buy in at the lowest price possible below the intrinsic value of a fundamnetally excellent company. Having this mindset will mean the investor has to be extremely patient and disciplined to wait for such attractive prices to come by. When such rare opportunities arrive, the investor should invest very heavily thinking that such rare chances seldom come by except once every blue moon. The lower the price one invest below the intrinsic value, the better the margin of safety should an investor made a wrong judgment on the company, and the better the rate of return should an investor made the right judgment on the future economics of the company.

My two cents worth again......:-)

Simon said...

ok. i went overboard for saying yr sale was irrational. that was uncalled for and i apologise.

but i still don't quite understand how it's going to be dilutive if u subscribe to all the rights and warrants allocated to you. in the first place, eps will half, but u get twice the number of shares. it will only be dilutive if they issue rights to pay off their debt, since the cost of debt may be cheaper than the cost of capital of the rights. but they didn't say they r repaying or refinancing any debt (unlike ezra's case), moreover they have stopped paying dividends (to compensate the low price of the rights), which drastically reduce the cost of capital.

in fact, the cash is raised for working capital purposes. after some thought, i realise this is not vague at all. yes, they r lacking normal opex or working capital, but lacking it to take them a step further to expand their business, not because they r in trouble. and u r able to tell they r not in trouble from their p&l and bs. the money will increase their working capital, which is a fantastic thing in an scm business. as u said, pah is just like olam or noble, the larger the working capital they have, the bigger the volume their business will be, and volume is everything for scm businesses.
yes, rights issue will dilute the ROE, but if they put the cash raised from the rights issue into a compelling business with good returns, it will go back up again.

so i feel im still getting quite a decent return for the money i put in to subscribe the rights if they continue to be in the scm business, which is still doing well as u can see from their results. of course it would be better if they can issue the rights at a better time where the share price is a lot higher and hence perhaps able to continue paying dividends, but i think it's a small price to pay if the low gearing keeps their bank happy to continue lending them loads of money, and at the same time boosting their working capital in a business that still gives decent returns. but of course, if dividends is very important to you, then i guess u won't be happy. and if u think the business model is not that great after all, then we will leave it as that.

so...at first glance, it may look real bad; issuing rights at low price, no dividends, raising cash for so-called 'working capital', being forced to put more money into a company where u already have an unrealised loss of 40% etc..., but if u dwell deeper, it's not a bad deal at all. hence, i thought u sold yr stake too quickly.

Simon said...

and on the subject of dilution, i know we have been reading a lot of reports about companies issuing rights and how analyst say it's 'massively dilutive' etc. i think this gives everybody the impression that every rights issue is massively dilutive.

but u have to see the context. if it's a reit trading at a yield of 10-20%, issuing rights to pay of debt that cost only 5%, that's dilutive. or a reit issuing rights at a price of 40% below rnav to buy a property at market price, that's dilutive. or a property developer issuing rights at a price that is like 40% below rnav, and raising the cash to pay off revaluation losses in order to prevent banks from withdrawing its credit line, that's dilutive.
but if rights is issued to raise working capital to expand a business that is still profitable in the current environment, i think it's a good deal.

musicwhiz said...

Hi Akat,

If you just look at the main reasons for the divestment (in bold), I think that will provide a good summary.

Cheers !
Musicwhiz

musicwhiz said...

Hi Mike Dirnt,

Thanks for your comments, I visit your blog occasionally as well.

I think Cheng, Kay and Jeremy have made their points about purchasing at high valuations and how much more risky it can be. Of course, the argument is that you can average down eventually; but the damage may already be done if your very first purchase was too high and does not give enough margin of safety.

Well, deep pockets are important of course but it's not critical to have deep pockets as long as one purchases conservatively and carefully. Of course, this is easier said than done and usually one only knows on hindsight !

Regards,
Musicwhiz

musicwhiz said...

Hi Kay,

You are not wrong in your views about purchasing fundamentally sound companies. However, the big question is how do we value a company based on current and future prospects ? That's the wild card and the difficult part about investing. On hindsight, even the sturdy dot.com companies were trading at ridiculous valuations at the height of the dot.com bubble, and buying into them close to the peak meant that you would still own a wonderful company, but not at a fair price at all !

So to put things in perspective, your potential return is correlated to your entry price and how much margin of safety you had. For PAH, I did not have sufficient margin of safety regrettably. Even though one can argue that the business is fine, I would still have had to wait a considerable time just to break even on my over-priced purchase.

And there's always the case of opportunity cost as I may as well deploy the capital to where it can generate better returns over time.

Thanks,
Musicwhiz

musicwhiz said...

Hi Cheng,

Yep, agree with your points brought up. My purchase of PAH was in early 2006 and sadly I had not read up much on valuations and refined my process of company selection; so I admit this was a mistake.

Hopefully, my future choices would be able to generate better returns.

I am also of the view that as lay investors, it's hard to get it 100% correct. There are bound to be mistakes here and there but my aim is to keep the mistakes small and manageable.

Cheers,
Musicwhiz

musicwhiz said...

Hi Jeremy Ow,

True, as investors we should be patient and wait for good prices which comes rarely. On hindsight, the period from Oct 2008 till April 2009 produced fantastic prices and shares were trading at distressed valuations. Some companies were even trading below their net cash per share !

Of course, the problem is lack of capital to fully grab all these juicy opportunities. For myself, I allocated as much as I could (I had to leave some as emergency funds) and am satisfied with my purchases during this turbulent period.

Regards,
Musicwhiz

musicwhiz said...

Hi Simon,

Thanks for articulating your thoughts.

Maybe I should clarify that rights issue will severely dilute EPS and dividend per share (DPS) and not your proportional interest in the Company assuming you take up all your entitlements. My issue is with the dilution in EPS which will take some time to catch up. Moreover, the share base will be expanded to 2 billion+ shares, which is a very large float and will diminish the value of each share.

As for your point on raising funds for opex/capex, my view is that a company should use borrowed funds to grow their business to the extent of having healthy op cash flows. In the first place, we should question why Management has to resort to rights issue ? Op cash flow should be healthy enough to cover opex and working capital. The Company was vague in expressing how it wanted to use the cash. If it was for potential M&A, maybe that's a good reason. But remember CFG is the Company owning vessels, VOA and fishmeal plants; so it's more logical if CFG raised funds for M&A rather than PAH. The reasons given were explicitly for working capital purposes, which makes me uncomfortable.

In addition, SCM business is typically low margin, high volume. For a low margin business, volume drives profits but this means that any change in expenses can have a drastic effect on profitability and cash flows. To me, this is risky.

I think your view on banks lending PAH money if their gearing is low is a little flawed (excuse me for saying this). Banks lend base on Balance Sheet strength and presence of collateral, and not because a company has low gearing or because it raised monies through rights or selling more shares. Banks have their own interests to look out for and they need to be able to justify the loan and that the interest can be serviced. That's why they look at Cash Flow Statement and Balance Sheet and less on P&L Statement. PAH was unable to refinance their short-term debt, which was why they resorted to the rights issue. One must question if they were unable to get cheap financing, or they were unable to get the banks to lend based on cash crunch within the business. Either way, it does not make for a good situation as their gearing was high to begin with.

As for your point on REITs, the revaluation "loss" is a paper loss but banks require top up on collateral to continue the loan and not trigger a default. It's more of a technical breach rather than a lack of cash flows; so REITs raise money to ensure they can top up the balance. Whether or not they can secure new financing or roll over existing lines is based on their Balance SHeet strength too.

It's ok to think I sold my stake too quickly. :)

Ultimately, I have to be comfortable with my decision.

Cheers,
Musicwhiz

8percentpa said...

Hi MW

When you sell your stocks of P.Andes, what happen to the rights? Does it get pass on to the next owner? Or did you sell your rights and the stocks together?

musicwhiz said...

HI 8percentpa,

The shares were sold without any associated rights. The rights issue has yet to be approved in an SGM, and the CR date has not been fixed. Even then, only after XR will you get the rights, and the rights will only trade from a certain date onwards (nil-paid rights). The rights and mother share will trade separately under different counter names.

For more info on rights issues, you can check out the schedules for Keppel Land. Alternatively, my previous PAH posts also give details on the right issue for 2007 at 52c per share.

Cheers,
Musicwhiz

Createwealth8888 said...

Whatever course you decide upon, there is always someone to tell you that you are wrong. There are always difficulties arising which tempt you to believe that your critics are right. To map out a course of action and follow it to an end requires courage." - Ralph Waldo Emerson

Jeremy Ow Tai Pang said...

Hi, I agree with MW on the dilutive effects on EPS due to rights issue. When a company raises cash, it must be for very good reasons since they are diluting their shareholders' earnings. As such, cash should be mainly raised for growing the business so that EPS can see better growth in future due to expansion of business long term earnings.

Createwealth8888 said...

Case by case basis.

I realized that not all right issues are bad. By subscribing for the entitled rights at $5.42 (deep discount), it really helps me to reduce the cost of holding existing DBS shares by 15.6%, and valuating those new additional DBS share at fair value of $8.27. But, there is a slight drop in Dividend Yield of -0.4%. Not sure you still call it diluting effect?

Akatsuki said...

I must say, this is a very interesting place to learn about investment, espcially mistakes from MW lol. Anyway this is what ive learnt from this debate

1)*Ensure that you have a margin of safety when buying into a company, never buy too high.

2)Take note of companies with low margins, those below 10% , low ROE low EPS and high gearing.Even though their business model and industry have high barrier to entry.

3)Also, companies with no tangible assets, this give raise to extra risks like not able to obtain loans in bad times.

4)Frown on companies which uses their investors $ via rights to fund operational requirements, this indicates poor cash flow and ill-confidence from banks in their business

*Qn: Mw if you were to go back in time (2006), how would you value PAH having aquried knowlegde these few years? Would you use DCF? Dividend Discount? Or value them via their NAV? To determine the IV for them????

JW said...

Hi MW,

as small time investors, I was thinking that one should master some basics of TA to use as well. Have yet to find time to consolidate this thinking into a blog post.

For example, for Pac Andes, I'm not sure if you have read Milamberz's post that the charts showed quite bullish, about to break up on the day you sold.

True, TA does not take into fundamentals of the company, but to me, it gives a good idea on when to sell, and increases the probability of minimising your losses in the short run. This is a lesson I learned. But do bear in mind I'm still new in this game.

One example I personally did was to buy NOL 2 days back at 1.36, which was nicely sitting on 2 support lines, and showing an ascending triangle next. It rose. Fundamentally, NOL is a not a bad company, of which my lame reason (mainly) is that it is a blue chip. It would be a long term investment, and I'm happy to get at this price because I had no opportunity funds when it was 90 cents.

Just my 2 cts.

musicwhiz said...

Hi Createwealth8888,

Thanks, I take that advice to heart. It's true that you cannot please everyone. As long as I feel comfortable with my decision, I should be fine.

Cheers,
Musicwhiz

musicwhiz said...

Hi Jeremy Ow,

I am glad you agree with my views. However, I do know some people who make use of rights issues to significantly lower their cost. To them, it's a way to average down without incurring brokerage costs and usually at a price which is normally impossible to find.

However, I don't share the view that rights issues are good things, no matter how justified they are.

Cheers,
Musicwhiz

musicwhiz said...

Well Createwealth8888,

As I did mention, it's good if you view it as a way to decrease your average cost, and if you feel that the dilution in earnings and dividends is not too severe.

One must also have sufficiently deep pockets to fund the rights issue and maintain confidence in the business model of the Company to be able to go through with it.

For my case, I would rather deploy my capital elsewhere.

Thanks,
Musicwhiz

musicwhiz said...

Hi Akatsuki,

Thanks for visiting. In relation to the points you raised....

1) Yes, never buy too high. That said, it's one's subjective appraisal of a business which determines "high" or "low". This comes with some practice and mistakes, trust me haha !

2) You are right on this point. I guess I was too frivolous in my choice of companies back then in 2006.

3) I won't say PAH has no tangible assets, but the problem is the assets which can be used as collateral mostly belong to CFG. This is unique to PAH/CFG business model though, so you should study it on a case by case basis. There's no one size fits all for such cases, where collateral is concerned.

4) I think we should take note of the reasons for the rights issue, notwithstanding the fact that rights issue in general are bad for shareholders in my view. Some companies may do so to pay down debt, while others need to make "pre-emptive strikes" or have M&A targets. For PAH's case, it was stated as "working capital" which is much too vague and makes it sound like they did not manage their fund flows well. So it's the impression I get from the press release, that's all.

If I had the knowledge I had now back then in 2006, I may have just given PAH a total miss. That's what I did as well when my analysis passed over Olam. Olam may be doing well but huge gearing, constant M&A and very low profit margins make me uncomfortable owning a piece of the business.

Cheers,
Musicwhiz

musicwhiz said...

Hi JW,

I thank you for your suggestion, but this is after all a value investment blog. I have never used TA or any form of charting for my investment decisions, and feel that so far I am still surviving OK. While you may argue that it helps to minimize losses and maximize profits, I guess that's open to debate. If there are some people who can merge FA and TA together, good for them.

For me right now, I have no intention of embarking on TA at all.

Thanks,
Musicwhiz

JW said...

Hi MW,

I understand that this is a value investment blog. However, I feel that one should be flexible. My main reason is something related to your post on value traps. Why?

TA says that everything about the company can be seen from its charts. FA believes fundamentals can only be seen from the financial statements.

To me, both do make sense. TA's strongest case was in Enron, where chartists can see something was brewing while FA was still in the dark. Why not combine the best of both worlds?

In fact, fibo analysis and Elliot Wave Theory comes from Elliot, whom I remember (vaguely) is an accountant himself.

I think flexibility is very important. For me, I attempt to use FA to identify long term stocks and protect my route of retreat in case any TA goes wrong, and TA to maximise my gains with probability. Afterall, probability is how casinos and Sing Pools earn :D

I admire you a lot for the strict adherence to FA (instead of gambling like what most pple did), but I guess being mathematically inclined myself, I prefer to use charts to build on my FA decisions. :D

The other thing I admire is the no fear of further drops when buying when there's value. One great example is your purchase of swiber. I learned this the "hard" way recently, and it has since guided me rather well so far.

**Tell myself I must find the time to consolidate all these recent thoughts up and ask you for comments :D**

Simon said...

musicwhiz!

guess what? swiber announced a placement issue and i believe the reason was ........ *drum roll*.....
GENERAL WORKING CAPITAL PURPOSES!

sry. i can't help it but to poke fun at u sometimes. =)

so what say u? r u going to sell? u r sitting on some decent unrealised profits, so it's not too late.
swiber looks like a company which is "short on cash for the normal operations", making it "fund-raising all the more suspicious". =)

although u don't need to put more of yr money, it still raises suspicion isin't?

musicwhiz said...

Hi JW,

Thanks for your comments. However, I don't think either TA or FA can adequately prepare one for fraud cases. There's simply not much insurance or protection against lack of integrity.

Thanks too for explaining some jargon used in TA, but it's about as alien to me as Greek. :P

I guess if you feel comfy using a mixture of FA and TA, you should continue doing so. For myself, I feel very comfortable just relying on FA alone.

Cheers,
Musicwhiz

musicwhiz said...

Hi Simon,

While I appreciate the humour, I think we should put things in perspective and not be too quick to point fingers. I will explain as follows:-

1) Swiber's net margin is 13.7% for 1Q 2009 against PAH's average margin of around 7-8%, and this is considering Swiber's use of third-party vessels; so in actuality margins could be much higher.

2) Swiber has a defined growth plan in terms of vessel fleet expansion and possible deals in the wind power industry, and also plans in future for developing the Equatorial Driller. PAH has no defined plans for expansion (all the expansion is focused on CFG, not PAH).

3) Swiber did a placement similar to Ezra, instead of a rights issue. While it can be argued that shareholders do not get a proportionate interest in the company and suffer dilution, one positive factor is that the shares could be taken up by strong hands (i.e. institutional investors) who have a better appreciation of Swiber's business, thus reaffirming confidence in the Company's growth prospects.

4) Comparing PAH and Swiber in terms of industry is like apples and oranges. Swiber is in the oil and gas industry and the recent firming of oil prices above US$66 per barrel (at the time of writing) means that more investments in E&P should take place once economy recovers in FY 2010. With such forward-looking prospects, companies such as Ezra and Swiber are placing out shares in order to facilitate expansion. Do note that these 2 companies have barriers to entry in terms of not just vessel fleet (high capex for competitors to emulate) but also expertise (in terms of trained personnel). By contrast, PAH is operating an SCM business which does not require trained technical personnel.

5) I would view Swiber' placement as more of a "pre-emptive fund raising" akin to Keppel Land and Capitaland rather than an "insufficient working capital" scenario as I have explained for PAH. This is because even in 1Q 2009, they had mentioned that they had sufficient funding for all vessels and their expansion plans are on track. Thus, this move could be a calculated way to reduce gearing and also inject more cash for potential growth activities.

So before you jump on a share placement which states "general working capital purposes", I do suggest you browse through the above points and facts in a rational way so as to note the difference between the 2 companies.

And to answer your question, no I do not intend to sell.

Regards,
Musicwhiz

Createwealth8888 said...

Trader does not understand Investor's mind and Investor does not understand Trader's mind. Both are right if they are making $ over their time frame, and the one not making $ is wrong. Looking at MW's portfolio, he is right as on 29 May 09. Cheers

musicwhiz said...

Hi Createwealth8888,

Yes you are right, I do not understand a trader's mindset. But then, as long as I have my philosophy and principles which can help me build wealth consistently, I should stick to them.

Cheers,
Musicwhiz

CK said...

Good day all.

I've been following musicwhiz's post for only like a month, but have found many good ideas, experiences and mistakes that will be useful.

I only bought the first stocks on April so I'm an amateur in value investing. I had been reading "The Intelligent Investor" since last year and I remember that inside the book, the best chapter to describe your action is Chapter 20 "Marin of Safety" as the Central Concept of Investment. The commentary on Chapter 20 by Jason Zweig had written this explanation by Bernstein:
"Suppose you act as though God is and [you] lead a life of virtue and abstinence, when in fact there is no God. You will have passed up some goodies in life, but there will be rewards as well. Now suppose you act as though God is not and spend a life of sin, selfishness, and lust when in fact God is. You may have fun and thrills during the relatively brief duration of your lifetime, but when the day of judgment rolls around you are in big trouble." Bernstein concludes with: "In making decisions under conditions of uncertainty, the consequences must dominate the probabilities. We never know the future."

One person's acceptable tolerance in mistake differs from another. Neither is right or wrong, as no one can predict the future. Value investing, as I remembered being mentioned, is a negative art. Following the concept may not make us filthy rich, but should have acceptable returns.

I must confess that I am still speculating, for my purchases are insufficiently being researched... It is going to be a long learning journey for me. Good to know that there are still quite a number of value investors in Singapore. As for TA, I always feel that the traders are another class of their own, neither investors nor speculators, for they have their own set of discipline and margin of safety. It all boils down to individual preferences.

Regards,
CK

musicwhiz said...

Hi CK,

Good points you brought up - one person's tolerance for error will definitely differ from someone else's, that's for sure ! Value investing doesn't say you cannot make mistakes (all humans are fallible), it simply attempts to keep the mistakes SMALL while ensuring the right companies more than cover up the losses from those small mistakes. I like to quote Peter Lynch on this when he says that getting "6 out of 10 right" is considered a very good result already. I am happy to admit my mistake and move on from it.

Wishing you all the best as well.

Musicwhiz