Valuing Companies - A Simple Business Model Approach
Valuing a company isn't really as difficult as most people think, but neither is it easy ! It's one of those things where you have to exert some effort initially but once you get the momentum, it feels much easier as you go along. It's a little like rock-climbing, once you get over the initial difficulty, scaling the rest of the wall seems easier (though this analogy does not ring true for me, cos I have a fear of heights !).
Let's look at a company using a very simple business model approach. What this means is that we look at what a company is essentially doing (i.e. its industry), its core strategy, its target markets, potential customers, suppliers and stakeholders. From these aspects, it is already possible to eliminate the "potential" companies from the downright avoidable ones. What I can surmise from my limited investment experience is this: some industries just do not have the margins and are too competitive, lending credence to the fact that getting decent earnings growth is tough ! Even the best company is a sunset industry may not be making much profit, thus it may not qualify as a good investment using value investing screening criteria.
A few of the hot industries right now include oil and gas, palm oil (alternative fuels) and also properties ! The not-too-good sectors right now include China pharmaceuticals industry, plastics industry and semi-conductor industry. When I say "hot", it means popular but not necessarily a good investment because what is popular may not be profitable (take the dot.com boom as a good example). I shall attempt to elaborate below.
Oil and gas companies are enjoying the boom in the exploration of oil right now, and most companies in the sector are seeing high margins and high ROE. Palm Oil companies like Wilmar are also enjoying tremendous attention and are touted as the next big thing, which we will have to wait 2-3 years to see. Properties are in a boom cycle right now, and prices for private properties have been hitting stratospheric levels. When one looks at such industries, one inevitably feels like dumping their money in cos it seems so enticing !But wait, assessing each company within the industry is important too, because when it comes to value investing, the company must have a durable competitive advantage and sustainable growth based on recurring earnings. Next, assess the strategy for each company and see if this can ensure good growth in 3-5 years time. Sometimes, a little business sense is helpful here as companies may like to hype up their products/services to the public, and it is up to us laymen to decide if the CEOs and analysts can be trusted.
Just remember that some business models may work much better than others, from a simple common sense point of view. Just to take a rather glaring example, recently Rowsley went through a RTO with a China company Perfect Field which will guarantee a profit of S$300 million each year for FY 2008 through FY 2010. The company is currently only making about S$4 million a year, thus this would represent a 7500% increase in profits, in just ONE year. Call me a skeptic but which product in the world can give a company a 7500% increase in profits ? Even if the company could actually achieve this, is it sustainable ?
Another example I see of a strange business model is selling gemstones on TV, for the company on SGX called GEMS TV. Let's see, when was the last time my mum went shopping for jewelry through the TV.......*thinking*.....like so far none ! My wife, sister and mother love going to the physical shop to choose jewelry, and they have a whale of a time trying on this and that. If GEMS TV chooses to penetrate Asian markets, then they must see this as a big obstacle. Also, they are competing with traditional jewellers as well as TV Channels for advertising space, and this all adds up to higher COSTS. Over time, they would have to scale up their revenues significantly in order to recoup their investments. It would seem that the company is expanding into foreign markets too aggressively without building up their core earnings, and such over-extension can hurt profits in the long-run. The worst-case scenario would be for the company to overuse its cash, and not have enough sales to replenish it (slow cash conversion cycle). This could potentially be detrimental to the survival of the company.
I have highlighted 2 business models which I feel cannot work under current circumstances. Perhaps if the model was revamped or revised, it may stand some chance of being successful. Sometimes, when we are presented with a business proposition, we need to coolly evaluate it in the light of the competition, industry, expenses, revenues, customer base and cash flows. It may not be simple but it's not rocket science either !
OK, back to the not so hot industries. China pharma is undergoing a turbulent phase as the government insists on regulation. Asiapharm, C&O and Reyoung have thus not done as well as they should have (but Sihuan did put up a commendable set of results). Plastics and PCB industries are essentially too commoditized and companies like Jadason, Eucon, Fu Yu and Meiban will find it very tough to maintain margins and keep costs under control, as there are so many unlisted competitors giving them a run for their money. Chip and semicon industry is also too dependent on the IT industry, which is too volatile. Companies like Global Testing, UTAC and Chartered are not having it easy, and the capital intensive nature of the industry ensures that cash will always have to be used up for expansion/upgrading of facilities while margins remain razor-thin.
In summary, look at a company and its business model before deciding to invest. If it sounds too hyped up or downright weird, it may be good to go wash your face and come back with a clearer mind to analyze the situation. When things seem too good to be true, they are usually not (true).
Sunday, May 13, 2007
Friday, May 11, 2007
Ezra Holdings Limited - A Brief Review
Just a short, succinct review on Ezra Holdings. There has been not much significant newsflow this FY so far, apart from the listing of EOC Pte Ltd, 1H 2007 results release and their order of the 2 30,000 bhp Rolls-Royce AHTS. The company has been quietly and steadily building up their fleet of AHTS vessels, and the heavy accommodation barge and pipelay vessel are slated for delivery this FY as well. There was some concern from yours truly about Ezra's intention to order more vessels to beef up their fleet in preparation for FY 2009, as the company usually forecasts demand about 2 years in advance and places orders for vessels to cater to that demand.
There have been reports written of the buoyant oil and gas slowing down in FY 2009, as the supply of oil rigs and oil drilling vessels outstrips demand. This would surely adversely impact Keppel Corp and SemCorp Marine first, the effect will then cascade down to ship builders and oil and gas support vessels such as Labroy Marine, ASL Marine, Pan-United Marine, Ezra and probably even second liners like Jaya Holdings and CH Offshore. There is also some concern about AHTS over-supply by FY 2009 as I see many of Ezra's competitors such as Haliburton and Prosafe ordering AHTS vessels for future use. This is cause for concern as it means that charter rates will gradually decline after peaking in FY 2008. Also, a more pressing worry is that demand may taper off so much that part of Ezra's fleet lays idle as its AHTS will not be in use any more. Of course, this is the worst case scenario as we all know that oil exploration activities are still very much in demand in the world, and are slowly moving towards Asia and Australia as the oil fields in the Middle East start to dry up. Furthermore, as the supply of FSOs and FPSOs builds up, there will still be demand for support vessels to ferry equipment and personnel to/from the vessels and rigs.
But I digress. Back to the company proper, they had recently bought 21% of SGX-listed Nylect Technologies Limited (soon to be renamed Ezion Holdings Limited). Accordingly, EOC also has signed an agreement for services to be rendered to Nylect and this sets up the stage for a long-term partnership between the two companies. The fact that Ezra had bought into Nylect at 33.1 cents/share is also good assuming Nylect can scale up its business to become a player in the oil and gas industry. Equity accounting will ensure that any profits earned by Nylect be recognized as "share of profits from associated companies" on Ezra's consolidated Profit and Loss Account. It was a wise move to divest Uni-Bulk (they used to hold 30% of it) as it was loss-making, and to free up the cash to purchase a more worthwhile investment. Still, a lot hinges on the future performance of Nylect, and I dare not be too optimistic at this point till I see some good NUMBERS from Nylect.
Ok, well, so much for a SHORT summary. Today also saw Lloyd Investment becoming a substantial shareholder of Ezra with a 5.01% stake in the company. Normally, I don't really watch for funds buying into my companies, but I do take note of them in passing. The company should be announcing its EGM pretty soon for the approval of the bonus issue, which should see its issued share capital doubling from 289 million shares (after the share buy-back) to 578 million shares.
The listing of EOC also helps Ezra to raise US$43.3 million to fund its fleet expansion and for working capital. A closer reading of the announcement shows that the listing will only be complete close to the end of the year, as EOC is only listed on the OTC section of the Oslo Bourse. It will be moved to the Main Board by the end of the year, and Ezra plans to dividend out shares in EOC to shareholders such that its stake falls below 50%. Frankly, I think this is the first SGX listed company to dividend out shares in a company listed on a Norwegian bourse ! Key questions will be: how are they going to go about this, and how will shareholders obtain the shares ? Will they be held in trust by the brokerage, or by CDP ? Also, how will the shares be bought/sold ? Interesting questions to ponder about and we can either wait for further news from Management, or ask them during the EGM maybe ?
One final thought before I end off this post - are the 30,000 bhp AHTS in demand ? Ezra only orders vessels if it has firm charter contracts on hand for them, as assured by Mr. Chan Eng Yew whom I spoke to during the AGM. Thus, I assume that the 2 Rolls-Royce size AHTS have charter contracts waiting to be signed, because the company did not disclose any contract value. As the vessels are suited for deep sea oil exploration, I would say Ezra is forward looking as exploration is gradually shifting towards deep waters (I mentioned in an earlier post that Mr. Raymond Goh of Swiber Holdings Limited told me this). There is also some speculation that they may order one more 12,000 bhp vessel but this cannot be confirmed; and that Lionel Lee said in an interview that the company looks to capture another FPSO contract within the next 18 months (i.e. by the end of FY 2008). I am sincerely hoping that the company does not "over-stretch" themselves as they have now been thrust into the global league, and will thus compete with the major players. Somehow, competition can either make one stronger or weaker, and the tenacity of the Management to weather the challenges will show in its earnings, revenues and margins.
Good luck to all shareholders of Ezra, and have a great weekend !
Just a short, succinct review on Ezra Holdings. There has been not much significant newsflow this FY so far, apart from the listing of EOC Pte Ltd, 1H 2007 results release and their order of the 2 30,000 bhp Rolls-Royce AHTS. The company has been quietly and steadily building up their fleet of AHTS vessels, and the heavy accommodation barge and pipelay vessel are slated for delivery this FY as well. There was some concern from yours truly about Ezra's intention to order more vessels to beef up their fleet in preparation for FY 2009, as the company usually forecasts demand about 2 years in advance and places orders for vessels to cater to that demand.
There have been reports written of the buoyant oil and gas slowing down in FY 2009, as the supply of oil rigs and oil drilling vessels outstrips demand. This would surely adversely impact Keppel Corp and SemCorp Marine first, the effect will then cascade down to ship builders and oil and gas support vessels such as Labroy Marine, ASL Marine, Pan-United Marine, Ezra and probably even second liners like Jaya Holdings and CH Offshore. There is also some concern about AHTS over-supply by FY 2009 as I see many of Ezra's competitors such as Haliburton and Prosafe ordering AHTS vessels for future use. This is cause for concern as it means that charter rates will gradually decline after peaking in FY 2008. Also, a more pressing worry is that demand may taper off so much that part of Ezra's fleet lays idle as its AHTS will not be in use any more. Of course, this is the worst case scenario as we all know that oil exploration activities are still very much in demand in the world, and are slowly moving towards Asia and Australia as the oil fields in the Middle East start to dry up. Furthermore, as the supply of FSOs and FPSOs builds up, there will still be demand for support vessels to ferry equipment and personnel to/from the vessels and rigs.
But I digress. Back to the company proper, they had recently bought 21% of SGX-listed Nylect Technologies Limited (soon to be renamed Ezion Holdings Limited). Accordingly, EOC also has signed an agreement for services to be rendered to Nylect and this sets up the stage for a long-term partnership between the two companies. The fact that Ezra had bought into Nylect at 33.1 cents/share is also good assuming Nylect can scale up its business to become a player in the oil and gas industry. Equity accounting will ensure that any profits earned by Nylect be recognized as "share of profits from associated companies" on Ezra's consolidated Profit and Loss Account. It was a wise move to divest Uni-Bulk (they used to hold 30% of it) as it was loss-making, and to free up the cash to purchase a more worthwhile investment. Still, a lot hinges on the future performance of Nylect, and I dare not be too optimistic at this point till I see some good NUMBERS from Nylect.
Ok, well, so much for a SHORT summary. Today also saw Lloyd Investment becoming a substantial shareholder of Ezra with a 5.01% stake in the company. Normally, I don't really watch for funds buying into my companies, but I do take note of them in passing. The company should be announcing its EGM pretty soon for the approval of the bonus issue, which should see its issued share capital doubling from 289 million shares (after the share buy-back) to 578 million shares.
The listing of EOC also helps Ezra to raise US$43.3 million to fund its fleet expansion and for working capital. A closer reading of the announcement shows that the listing will only be complete close to the end of the year, as EOC is only listed on the OTC section of the Oslo Bourse. It will be moved to the Main Board by the end of the year, and Ezra plans to dividend out shares in EOC to shareholders such that its stake falls below 50%. Frankly, I think this is the first SGX listed company to dividend out shares in a company listed on a Norwegian bourse ! Key questions will be: how are they going to go about this, and how will shareholders obtain the shares ? Will they be held in trust by the brokerage, or by CDP ? Also, how will the shares be bought/sold ? Interesting questions to ponder about and we can either wait for further news from Management, or ask them during the EGM maybe ?
One final thought before I end off this post - are the 30,000 bhp AHTS in demand ? Ezra only orders vessels if it has firm charter contracts on hand for them, as assured by Mr. Chan Eng Yew whom I spoke to during the AGM. Thus, I assume that the 2 Rolls-Royce size AHTS have charter contracts waiting to be signed, because the company did not disclose any contract value. As the vessels are suited for deep sea oil exploration, I would say Ezra is forward looking as exploration is gradually shifting towards deep waters (I mentioned in an earlier post that Mr. Raymond Goh of Swiber Holdings Limited told me this). There is also some speculation that they may order one more 12,000 bhp vessel but this cannot be confirmed; and that Lionel Lee said in an interview that the company looks to capture another FPSO contract within the next 18 months (i.e. by the end of FY 2008). I am sincerely hoping that the company does not "over-stretch" themselves as they have now been thrust into the global league, and will thus compete with the major players. Somehow, competition can either make one stronger or weaker, and the tenacity of the Management to weather the challenges will show in its earnings, revenues and margins.
Good luck to all shareholders of Ezra, and have a great weekend !
Swiber - Sale and Leaseback
Swiber has announced the details of its sale and leaseback with R.S. Platou Finans Shipping A.S., a company which is domiciled in Norway and which specialises in offshore and marine related financing schemes. This is a follow up to the original announcement on March 28, 2007 which mentioned the sale and leaseback but did not provide the numbers.
The company's subsidiary Swiber Engineering Limited has signed 5 Memoranda of Understanding to sell 5 vessels (one pipelay barge and 4 AHTS) to various companies under R.S. Platou for a consideration of US$87.5 million. Since the book value of the 5 vessels is only US$58.4 million, Swiber will thus recognize an extraordinary gain of US$29.1 million in its books. As to when this gain will be recognized, I believe it is when the transaction has been substantially concluded (i.e. when the vessels have been built and delivered to the buyer, thus triggering the condition for the remainder of the payment). This gain will therefore be progressively recognized as the announcement states that the vessels will be delivered over a period of time, with the pipelay starting from July 2007.
A quick comparison with another listed company which had this arrangement is Ezra Holdings Limited, of which I am also vested. A quick check on the history shows that they had 2 such sale and leaseback deals. One was announced on July 19, 2006 and the deal was worth US$181.3 million, all conditions were essentially similar. The other announcement was made some time back in March 2005 and consisted of the sale and leaseback of 4 vessels. In both cases, an exceptional gain was recognized and the company was able to lighten its balance sheet, improve leverage and obtain cash for future vessel acquisitions.
Back to Swiber; this is the first in what will probably be a series of transactions aimed to securitize its vessels and to lighten its balance sheet in order to keep it asset-light. The immediate effects of this arrangement, from my point of view, is that Swiber gets the 10-20% downpayment in CASH for their working capital purposes. This is essentially the part of the deal which I like, the fact that cash is coming in first so that it can be deployed for other uses. The profit is exceptional in nature and thus will not affect valuations as it is non-recurring by nature. However, gearing can be reduced immediately with the inflow of cash and this means that the company can improve their Balance Sheet position. Also, as more deals and contracts come its way, the company will be able to use its improved cash flow position to pay off the bareboat charter expenses relating to the operating leases on its vessels which have been securitized. The S&L lasts about 7-8 years and there is typically a bargain purchase option to buy back the vessel at a nominal fee, after the usage of the vessels during this period. It is a win-win situation for both the lessor and the lessee. The lessor will get to enjoy recurring lease income for 7-8 years, while the lessee will free its balance sheet and obtain cash for deployment to expand its fleet.
The transaction also has financial effects such as increasing the NTA and EPS of the company. NTA will rise to US 21.18 cents as the company will recognize a cash inflow, but this is because it did not take into account operating lease expenses relating to the charter of the vessels, which would have a reducing effect on NTA (it states this as US cents 18.01). As for the increase in EPS, this is purely due to the exceptional profit and should not get shareholders too excited. One good thing I noted is that the company has no share options and no convertible debt in place, thus there will be no possible dilutive impact on EPS in future periods. As its share capital base is only 369 million shares, the exceptional gain adds about 11.91 Singapore cents to EPS (assuming exchange rate of US$1 to S$1.51).
An EGM has to be held and shareholder's approval sought for this as it constitutes a major transaction. It will be interesting to query Management more on the probable charter income from the vessels, and to ask how they will be deployed. Also, it is prudent at this stage to seek more clarification on the additional 10 vessels which are coming in FY 2007, and to ask if they will be financed in a similar fashion. At the same time, Management should make known its plans for the 2nd wave of vessel expansion, assuming buoyant conditions remain in the oil and gas sector.
All these announcements are coming fast and furious before the release of the 1Q 2007 results on Monday 14th May, 2007. Expect some price support in the near-term as the recently announced US$21.3 million contract has boosted Swiber's order book, as it is their first contract since the major Brunei Shell deal. Shareholders (such as myself) would keep our fingers crossed that they can clinch a major deal in Qatar or some other part of the Middle East.
Swiber has announced the details of its sale and leaseback with R.S. Platou Finans Shipping A.S., a company which is domiciled in Norway and which specialises in offshore and marine related financing schemes. This is a follow up to the original announcement on March 28, 2007 which mentioned the sale and leaseback but did not provide the numbers.
The company's subsidiary Swiber Engineering Limited has signed 5 Memoranda of Understanding to sell 5 vessels (one pipelay barge and 4 AHTS) to various companies under R.S. Platou for a consideration of US$87.5 million. Since the book value of the 5 vessels is only US$58.4 million, Swiber will thus recognize an extraordinary gain of US$29.1 million in its books. As to when this gain will be recognized, I believe it is when the transaction has been substantially concluded (i.e. when the vessels have been built and delivered to the buyer, thus triggering the condition for the remainder of the payment). This gain will therefore be progressively recognized as the announcement states that the vessels will be delivered over a period of time, with the pipelay starting from July 2007.
A quick comparison with another listed company which had this arrangement is Ezra Holdings Limited, of which I am also vested. A quick check on the history shows that they had 2 such sale and leaseback deals. One was announced on July 19, 2006 and the deal was worth US$181.3 million, all conditions were essentially similar. The other announcement was made some time back in March 2005 and consisted of the sale and leaseback of 4 vessels. In both cases, an exceptional gain was recognized and the company was able to lighten its balance sheet, improve leverage and obtain cash for future vessel acquisitions.
Back to Swiber; this is the first in what will probably be a series of transactions aimed to securitize its vessels and to lighten its balance sheet in order to keep it asset-light. The immediate effects of this arrangement, from my point of view, is that Swiber gets the 10-20% downpayment in CASH for their working capital purposes. This is essentially the part of the deal which I like, the fact that cash is coming in first so that it can be deployed for other uses. The profit is exceptional in nature and thus will not affect valuations as it is non-recurring by nature. However, gearing can be reduced immediately with the inflow of cash and this means that the company can improve their Balance Sheet position. Also, as more deals and contracts come its way, the company will be able to use its improved cash flow position to pay off the bareboat charter expenses relating to the operating leases on its vessels which have been securitized. The S&L lasts about 7-8 years and there is typically a bargain purchase option to buy back the vessel at a nominal fee, after the usage of the vessels during this period. It is a win-win situation for both the lessor and the lessee. The lessor will get to enjoy recurring lease income for 7-8 years, while the lessee will free its balance sheet and obtain cash for deployment to expand its fleet.
The transaction also has financial effects such as increasing the NTA and EPS of the company. NTA will rise to US 21.18 cents as the company will recognize a cash inflow, but this is because it did not take into account operating lease expenses relating to the charter of the vessels, which would have a reducing effect on NTA (it states this as US cents 18.01). As for the increase in EPS, this is purely due to the exceptional profit and should not get shareholders too excited. One good thing I noted is that the company has no share options and no convertible debt in place, thus there will be no possible dilutive impact on EPS in future periods. As its share capital base is only 369 million shares, the exceptional gain adds about 11.91 Singapore cents to EPS (assuming exchange rate of US$1 to S$1.51).
An EGM has to be held and shareholder's approval sought for this as it constitutes a major transaction. It will be interesting to query Management more on the probable charter income from the vessels, and to ask how they will be deployed. Also, it is prudent at this stage to seek more clarification on the additional 10 vessels which are coming in FY 2007, and to ask if they will be financed in a similar fashion. At the same time, Management should make known its plans for the 2nd wave of vessel expansion, assuming buoyant conditions remain in the oil and gas sector.
All these announcements are coming fast and furious before the release of the 1Q 2007 results on Monday 14th May, 2007. Expect some price support in the near-term as the recently announced US$21.3 million contract has boosted Swiber's order book, as it is their first contract since the major Brunei Shell deal. Shareholders (such as myself) would keep our fingers crossed that they can clinch a major deal in Qatar or some other part of the Middle East.
Thursday, May 10, 2007
Portfolio Review and Objective Analysis
For those who do not know me, I will now attempt to give a preview of how I review my portfolio and analyze my investment decisions. As I did mention before, when I first started out it was just a tangle of messy thoughts, unfocused and impulsive. I did manage to make a lot of mistakes (fortunately, they were small ones !) before I started going down the path of value investing. Most of 2005 was a mumbo-jumbo of unworthy investment and trading decisions, and only in 2006 did I begin to seriously read up on investing, psychology, temperament and analysis.
Every half-monthly, I will do a review of the companies I own. Currently, my portfolio stands at 6 companies, and I usually like to keep at most 6-7 companies as I prefer a focused portfolio instead of one where I have 10-15 companies and I don't have the skill, time and energy to understand their businesses fully. Risk is lowered when you know your companies very well and the industries in which they operate. Diversification is for those who do not value companies, and is an effective protection against ignorance (according to Mr. Warren Buffett !).
A brief summary of my 6 investments are as follows:
Ezra - Bought in late 2005, oil and gas support industry
Boustead - Bought in late 2006, multi-industry though concentrates on wasterwater solutions, engineering solutions and industrial buildings
Swiber - Bought in early 2007, EPCIC services for oil and gas industry
Global Voice - Bought in early 2006, private fiber network solutions provider based in Europe
Suntec REIT - Bought since IPO days in Dec 2004, for steady dividend income (and I like to shop at Suntec haha)
Pacific Andes - Bought in early 2006, integrated processor of fish and fishmeal related products (and because I love fish too !)
These 6 companies form my core holdings since Feb 2007 after I divested myself of UTAC at a small profit, as I was not comfortable holding on to tech stocks as it did not fit my value investing criteria (incidentally, UTAC was bought based on a TA challenge from a friend, rather than using sound value investing techniques).
Periodically, the reader will get an update and review on the companies and how they are doing. Objective analysis is important to me, so comments are welcome if you think there is a flaw in my logical argument. Obviously, since I am vested it is virtually impossible to be 100% objective, but the attempt must still be made.
The next half-monthly review will be on May 15, 2007 Tuesday after market close. Swiber will be releasing their 1Q 2007 results on May 14, 2007 after market close. My next posting will probably elaborate more into how I evaluate past mistakes and learn from them in order not to repeat them again. This will be useful to the reader who may also have made several investment mistakes in his investing lifetime to date.
For those who do not know me, I will now attempt to give a preview of how I review my portfolio and analyze my investment decisions. As I did mention before, when I first started out it was just a tangle of messy thoughts, unfocused and impulsive. I did manage to make a lot of mistakes (fortunately, they were small ones !) before I started going down the path of value investing. Most of 2005 was a mumbo-jumbo of unworthy investment and trading decisions, and only in 2006 did I begin to seriously read up on investing, psychology, temperament and analysis.
Every half-monthly, I will do a review of the companies I own. Currently, my portfolio stands at 6 companies, and I usually like to keep at most 6-7 companies as I prefer a focused portfolio instead of one where I have 10-15 companies and I don't have the skill, time and energy to understand their businesses fully. Risk is lowered when you know your companies very well and the industries in which they operate. Diversification is for those who do not value companies, and is an effective protection against ignorance (according to Mr. Warren Buffett !).
A brief summary of my 6 investments are as follows:
Ezra - Bought in late 2005, oil and gas support industry
Boustead - Bought in late 2006, multi-industry though concentrates on wasterwater solutions, engineering solutions and industrial buildings
Swiber - Bought in early 2007, EPCIC services for oil and gas industry
Global Voice - Bought in early 2006, private fiber network solutions provider based in Europe
Suntec REIT - Bought since IPO days in Dec 2004, for steady dividend income (and I like to shop at Suntec haha)
Pacific Andes - Bought in early 2006, integrated processor of fish and fishmeal related products (and because I love fish too !)
These 6 companies form my core holdings since Feb 2007 after I divested myself of UTAC at a small profit, as I was not comfortable holding on to tech stocks as it did not fit my value investing criteria (incidentally, UTAC was bought based on a TA challenge from a friend, rather than using sound value investing techniques).
Periodically, the reader will get an update and review on the companies and how they are doing. Objective analysis is important to me, so comments are welcome if you think there is a flaw in my logical argument. Obviously, since I am vested it is virtually impossible to be 100% objective, but the attempt must still be made.
The next half-monthly review will be on May 15, 2007 Tuesday after market close. Swiber will be releasing their 1Q 2007 results on May 14, 2007 after market close. My next posting will probably elaborate more into how I evaluate past mistakes and learn from them in order not to repeat them again. This will be useful to the reader who may also have made several investment mistakes in his investing lifetime to date.
Wednesday, May 09, 2007
Brief Updates for my Companies
Below are some updates on the companies I am holding, as well as a brief write-up on my thoughts and views.
Below are some updates on the companies I am holding, as well as a brief write-up on my thoughts and views.
- Swiber Holdings Limited - They announced a new LOA after market close today, to perform installations for platforms and pipelines for an Indonesia customer. The LOA is valued at US$21.3 million and work is expected to be completed by Oct 31, 2007 for the pipelines, and Nov 30, 2007 for the platforms. This would indicate that essentially all the revenues from this project would be recognized in FY 2007. Applying a 30% NP margin gives a profit of about US$6.39 million, which would probably be recognized progressively in the coming months. I view this contract as positive as it builds upon Swiber's recent Brunei Shell deal. As I had written in a previous post, the Chairman is committed to building the company up and is under-taking measures to build the business and raising the company's profile.
- Global Voice Group Limited - Also renamed "EUNetworks", they announced today that they have concluded an agreement with UNet. The details in the announcement are usually pretty technical but it's a good move forward as this means that GV has clinched 6 deals within 3 months. As a result, there has been heavy buying recently and the share price has rallied to a new all-time high of 23 cents. Assuming the compay can turn in a net profit in its upcoming 1H 2007 results (due August 2007), I would see further upside to the price. The main reason for the lagging price is because GV's operations are in Europe, which is not very visible to the average Singaporean. There has also been talk of listing GV on another bourse but this is all very preliminary.
- Ezra Holdings Limited - The company performed their very first share-buyback today, buying back 3,000,000 shares at $5.60 each. This will reduce the issued share capital from 292 million shares to 289 million shares. From the way I see it, Management is taking the oppotunity to enhance shareholder value by buying back its own shares as its price dips to the $5.55-$5.65 level. Even though some may feel that Ezra is fully valued (and I do agree), there are other potential catalysts which may force a re-rating of this high growth company. I may be doing a separate posting on Ezra once they firm up more details of the company's strategy.
The corporate results announcements are coming in fast and furious ! I expect results releases soon for Boustead, Swiber and Pacific Andes. I will be posting reviews of any pertinent results releases as they are made available.
Monday, May 07, 2007
The Greater Fool Theory
To carry on the theme of value investing, we now come to the famous (now more likely labelled "notorious" !) theory called the greater fool theory. What exactly is this theory and how does it apply to investing ?
Simply put, the greater fool theory states that somewhere in the world, there is someone who is a big enough idiot to want to buy something from you at an even higher price than what you bought it for. So if what you bought is considered expensive, then that person is willing to buy it over even more expensively. Either he is very dumb (hence, greater FOOL) or he is very rich. Either way, the vicious cycle is doomed to continue because the person who bought it more expensively will choose to unload it to the next unsuspecting victim at an even loftier price. This cycle goes on and on until, finally, the greatest fool is the one left standing with an (almost) worthless item at which he paid exorbitant prices for, and which he is unable to unload to any more unsuspecting "victims".
So that's the background, but how does it apply to investing ? Well, in most bull markets as well as bubbles, traders, gamblers and speculators chase up certain stocks to fantastically high prices, with the hope of unloading it at even more fantastic prices to someone else. In essence, the Greater Fool theory is a case of "buy high, sell higher"; which violates the basic principle in investing which states that we should "buy low, sell high".
Note that when I say "low" and "high", I am talking in terms of valuation, not absolute price. Most traders pile on the penny stocks because they seem cheap in comparison to blue chips; but that's only looking at absolute prices. Some of these seemingly "cheap" stocks actually have little to no earnings, and most are in the red; thus justifying their penny status. Companies with solid foundations like DBS, SPH, UOB and other blue chips are able to hold their own and justify trading at PERs which reflect their earnings and growth. In contrast, companies with no earnings seem to be perpetually issuing rights and doing share placements in order to raise ever more funds which eventually end up being sucked into one BIG BLACK HOLE (I won't name such companies, but the discerning reader should be able to tell which are the ones).
Thus, people who buy high in order to sell higher run the risk of ending up being the greatest fool, especially when the party is over. Recall Benjamin Graham's margin of safety which states that stocks should be purchased at a discount to their intrinsic value, in order to give an investor a safety "moat", such that even if he is proven wrong, his loss is minimal. By buying a stock as it is zooming up, we are ignoring the principle of margin of safety and are entering the realm of speculation which is akin to gambling. Warren Buffett further asserts that the dumbest reason to buy a stock is because it is GOING UP !
What this post strives to tell the reader is this: do your homework, analyze rationally and invest objectively. Never chase hot tips and unfounded rumours in order to "make a quick buck". Most times, you end up losing your pants or half your shirt !
To carry on the theme of value investing, we now come to the famous (now more likely labelled "notorious" !) theory called the greater fool theory. What exactly is this theory and how does it apply to investing ?
Simply put, the greater fool theory states that somewhere in the world, there is someone who is a big enough idiot to want to buy something from you at an even higher price than what you bought it for. So if what you bought is considered expensive, then that person is willing to buy it over even more expensively. Either he is very dumb (hence, greater FOOL) or he is very rich. Either way, the vicious cycle is doomed to continue because the person who bought it more expensively will choose to unload it to the next unsuspecting victim at an even loftier price. This cycle goes on and on until, finally, the greatest fool is the one left standing with an (almost) worthless item at which he paid exorbitant prices for, and which he is unable to unload to any more unsuspecting "victims".
So that's the background, but how does it apply to investing ? Well, in most bull markets as well as bubbles, traders, gamblers and speculators chase up certain stocks to fantastically high prices, with the hope of unloading it at even more fantastic prices to someone else. In essence, the Greater Fool theory is a case of "buy high, sell higher"; which violates the basic principle in investing which states that we should "buy low, sell high".
Note that when I say "low" and "high", I am talking in terms of valuation, not absolute price. Most traders pile on the penny stocks because they seem cheap in comparison to blue chips; but that's only looking at absolute prices. Some of these seemingly "cheap" stocks actually have little to no earnings, and most are in the red; thus justifying their penny status. Companies with solid foundations like DBS, SPH, UOB and other blue chips are able to hold their own and justify trading at PERs which reflect their earnings and growth. In contrast, companies with no earnings seem to be perpetually issuing rights and doing share placements in order to raise ever more funds which eventually end up being sucked into one BIG BLACK HOLE (I won't name such companies, but the discerning reader should be able to tell which are the ones).
Thus, people who buy high in order to sell higher run the risk of ending up being the greatest fool, especially when the party is over. Recall Benjamin Graham's margin of safety which states that stocks should be purchased at a discount to their intrinsic value, in order to give an investor a safety "moat", such that even if he is proven wrong, his loss is minimal. By buying a stock as it is zooming up, we are ignoring the principle of margin of safety and are entering the realm of speculation which is akin to gambling. Warren Buffett further asserts that the dumbest reason to buy a stock is because it is GOING UP !
What this post strives to tell the reader is this: do your homework, analyze rationally and invest objectively. Never chase hot tips and unfounded rumours in order to "make a quick buck". Most times, you end up losing your pants or half your shirt !
Sunday, May 06, 2007
The problem with human psychology
One of the most difficult aspects of investing is conquering one's own psychology. What I mean when I say this is that as humans, emotions fill our lives and no one can truly say he invests without emotion. If you are capable of laughing, smiling, crying and feeling anger, then all this will also translate into emotional behaviour when you invest.
Trust me when I say that I've had my fair share of "mood swings" when I first started out investing in Dec 2004. From greed to fear to anger to disbelief to annoyance to denial, almost the entire gamut of emotions was felt by yours truly before I turned to value investing for an answer. Thus, don't blame yourself if you are new to investing and feel like it's an emotional roller-coaster ride. It's NORMAL ! What one can and must eventually do, though, is to master your emotions to the extent that they do not affect your rational decision-making process, in order to achieve success in investing.
I highly recommend "The 7 Deadly Sins of Investing" written by Maury Fertig of which I have purchased a copy. This covers the 7 sins of envy, vanity, lust, greed, anger, gluttony and sloth which affects all investors. You can find this book at any major book-store. I will now attempt to touch on some aspects of these emotional "sins" and to use my own experience to elaborate on them.
Greed - The most common emotion during a bull market. Greed can turn people into irrational "monsters" and it can really make one lose focus and direction. As Warren Buffett says so succinctly, all it takes is a lot of effortless money to make one lose all rationality. When I say this I mean buying on momentum (momentum investing), or getting easy money through contra trading. One must be cautioned that making money on contra during a bull market is a no-brainer, and this may make one get too carried away and he increasingly increases his bets as he buys on the way up. This will continue to a point when the counter itself is over-inflated, and it collapses in on its own weight much like a dying star collapses into a black hole. Don't treat the stock market as a casino, treat each purchase of a stock as if you were buying the entire business. Understand each business thoroughly before you commit to a purchase, and don't let greed blind you to an investment which may look sound but is priced expensively (as is mostly the case during a bull market).
Fear - On the flip side, fear is what causes people to "buy high, sell low". Fear is present only when people do not understand what they are doing, or when they do not know how to properly value a company. This occurs quite frequently for companies which go through RTO or reverse takeovers. They issue a gazillion amount of shares to the purchaser and in turn acquire a new business which becomes their new core business. In the process, existing shareholders undergo MASSIVE dilution and most of them end up clueless as to what the real value of the company is. Needless to say, panic selling usually occurs. This has happened to a few companies of late in the SGX, of which I will NOT name. Fear also causes people to irrationally dump shares in good companies because of weird and obscure factors like "oh BB selling", "oh funds are selling" or maybe "oh no my friends are selling !". Please remember that all these events do NOT change the underlying fundamentals of the business, so why should you as s shareholder be an eager beaver and dump your shares along with the crowd ? If you follow the crowd all the time, then you will be destined to share the same fate as the crowd most of the time.
Denial - This is one emotion which is seldom touched on. Denial occurs when people simply can't believe they made a wrong move, a bad trade or omitted to buy a good investment. I was in denial for quite some time when I failed to purchase Olam at $1.40, Pan-United Marine at $1.30 and Amtek at $0.55. Take it as a learning experience and evaluate why the mistake was made. The natural reaction is to feel angry and to admonish yourself for being "silly". The truly silly thing to do would be to buy the very same stock that you failed to buy just because its price was going up like crazy ! My advice: Stay cool, rationalize, compute the intrinsic value, assign a PER and obtain a fair value. If the market price is higher than fair value, let it go. Remember: A value investor should have infinite patience to wait for the right opportunity to come knocking. When that happens, he acts on it immediately and without hesitation.
Treat the market as a place for buying companies cheap and selling them when they become expensive. Mr. Market has mood swings and they should NOT affect you as an investor, as you yourself should be truly aware of your companies and how they function. The market is there to serve you, not to instruct you.
Good luck to all !
One of the most difficult aspects of investing is conquering one's own psychology. What I mean when I say this is that as humans, emotions fill our lives and no one can truly say he invests without emotion. If you are capable of laughing, smiling, crying and feeling anger, then all this will also translate into emotional behaviour when you invest.
Trust me when I say that I've had my fair share of "mood swings" when I first started out investing in Dec 2004. From greed to fear to anger to disbelief to annoyance to denial, almost the entire gamut of emotions was felt by yours truly before I turned to value investing for an answer. Thus, don't blame yourself if you are new to investing and feel like it's an emotional roller-coaster ride. It's NORMAL ! What one can and must eventually do, though, is to master your emotions to the extent that they do not affect your rational decision-making process, in order to achieve success in investing.
I highly recommend "The 7 Deadly Sins of Investing" written by Maury Fertig of which I have purchased a copy. This covers the 7 sins of envy, vanity, lust, greed, anger, gluttony and sloth which affects all investors. You can find this book at any major book-store. I will now attempt to touch on some aspects of these emotional "sins" and to use my own experience to elaborate on them.
Greed - The most common emotion during a bull market. Greed can turn people into irrational "monsters" and it can really make one lose focus and direction. As Warren Buffett says so succinctly, all it takes is a lot of effortless money to make one lose all rationality. When I say this I mean buying on momentum (momentum investing), or getting easy money through contra trading. One must be cautioned that making money on contra during a bull market is a no-brainer, and this may make one get too carried away and he increasingly increases his bets as he buys on the way up. This will continue to a point when the counter itself is over-inflated, and it collapses in on its own weight much like a dying star collapses into a black hole. Don't treat the stock market as a casino, treat each purchase of a stock as if you were buying the entire business. Understand each business thoroughly before you commit to a purchase, and don't let greed blind you to an investment which may look sound but is priced expensively (as is mostly the case during a bull market).
Fear - On the flip side, fear is what causes people to "buy high, sell low". Fear is present only when people do not understand what they are doing, or when they do not know how to properly value a company. This occurs quite frequently for companies which go through RTO or reverse takeovers. They issue a gazillion amount of shares to the purchaser and in turn acquire a new business which becomes their new core business. In the process, existing shareholders undergo MASSIVE dilution and most of them end up clueless as to what the real value of the company is. Needless to say, panic selling usually occurs. This has happened to a few companies of late in the SGX, of which I will NOT name. Fear also causes people to irrationally dump shares in good companies because of weird and obscure factors like "oh BB selling", "oh funds are selling" or maybe "oh no my friends are selling !". Please remember that all these events do NOT change the underlying fundamentals of the business, so why should you as s shareholder be an eager beaver and dump your shares along with the crowd ? If you follow the crowd all the time, then you will be destined to share the same fate as the crowd most of the time.
Denial - This is one emotion which is seldom touched on. Denial occurs when people simply can't believe they made a wrong move, a bad trade or omitted to buy a good investment. I was in denial for quite some time when I failed to purchase Olam at $1.40, Pan-United Marine at $1.30 and Amtek at $0.55. Take it as a learning experience and evaluate why the mistake was made. The natural reaction is to feel angry and to admonish yourself for being "silly". The truly silly thing to do would be to buy the very same stock that you failed to buy just because its price was going up like crazy ! My advice: Stay cool, rationalize, compute the intrinsic value, assign a PER and obtain a fair value. If the market price is higher than fair value, let it go. Remember: A value investor should have infinite patience to wait for the right opportunity to come knocking. When that happens, he acts on it immediately and without hesitation.
Treat the market as a place for buying companies cheap and selling them when they become expensive. Mr. Market has mood swings and they should NOT affect you as an investor, as you yourself should be truly aware of your companies and how they function. The market is there to serve you, not to instruct you.
Good luck to all !
Swiber - Attending the AGM
After attending the Swiber AGM, below are my thoughts. Please note that I also made a similar posting on Sharejunction under the "Swiber" thread. I am merey re-posting for the sake of those who do not visit SJ.
1) There were queries on the O&G industry and how it can sustain the EPCIC activities. Basically, Mr. Goh mentioned that most of the exploration for offshore is still carried out in shallow waters (about 90%) and for Middle East, it is 100% shallow water. He sees deep water (currently 10% of the market) as the future and should it become more popular, Swiber will attempt to diversify into this market. But currently, he has a team of very experienced senior Mgt to develop the business. The new vessels planned in the second wave of fleet expansion are also part of the plan to stay ahead and to offer a better suite of services to customers. From what I gathered, they seem to be already planning a third wave of vessel acquisitions depending on the demand for their EPCIC services and the number of contracts they can secure.
2) I was assured that all vessel orders come with firm charter contracts, and that 14 vessels were slated for delivery this year, thus it will boost their fleet and allow for better marine support services. Since their business targets a niche market, there is healthy demand for their vessels to support the EPCIC services which they offer, and as mentioned in their Annual Report, marine support will only take up about 30% of their revenue pie, with EPCIC constituting the bulk of it.
3) More details of the S&L will be announced in due course, as Mr. Goh said that regulatory requirements have to be followed and when the deal is more firmed up, shareholders will naturally be informed through an announcement in SGXNet.
4) Mr. Goh himself is making many trips to the Middle East in order to negotiate for a potential deal and to build up his network and contacts. The BD dept has 3 staff including himself which are focused on building their competencies and reputation in parts of Asia which they have not secured a foothold yet.
5) Mr. Goh also mentioned that most competitors were located in the USA (4 of them), one in Japan and another somewhere else (can't recall !), but basically Swiber is the only Asian company doing EPCIC to be offered a major contract from Shell. Thus, the USA companies who are already in Asia face little or no competition from Asian competitors so far, but their cost structure is much higher as they do not have a RO or permanent establishment here. This would give Swiber a cost-competitive advantage, plus the Brunei Shell deal has cemented their reputation as one of the "bigger" players.
6) Overall, Mr. Goh expressed much optimism going forward as he believes the company is guided by a very capable and competent team who have the right strategic vision and plan to propel the company to greater heights. Most of the mgt team are from countries as diverse as Australia, France and New Zealand and they bring with them a wealth of experience. The sheerleg barge idea (on order for FY 2008) incidentally came from one of the Mgt team who is a non-Asian (sorry I can't recall who it is !).
7) Personally, I remain cautiously optimistic about the company's prospects. So far, they haven't clinched any major or minor projects after the announcement of the Brunei Shell deal and it would be premature of them to rest on their laurels after achieving one very significant success. Deal flow is important for the company and establishing offices in countries with prospects is equally important. In this aspect, Mr. Goh has 15 years of experience and he knows many industry veterans, so perhaps we can look forward to good news to come.
8) Note that on May 8, 2007, the 6-month moratorium for Pre-IPO shareholders ends and if the price goes down significantly, I see this as an opportunity to buy more of the company. Personally, I am vested at $1.01 and will not increase my position unless it dips below my buy price as I prefer to average down instead of averaging up.
9) The company should be releasing its 1Q 2007 results pretty soon. I do not expect a vast improvement over 1Q 2006 as I noted that most of the Indian LOI only begin in April-May 2007 which is in the 2Q 2007, and their order book carried forward from FY 2006 is about US$25 million, of which I do not know how many % will be recognized in 1Q 2007. Even then, their NP margin may not be as high as for FY 2005 because they may still be chartering vessels from 3rd parties as their own vessels are not ready yet. Thus, I feel we can only see significant improvement in margins and earnings once the rest of the LOI kick in and once the 14 new vessels come online.
More postings will be done on my investments in future, with my focus on value investing techniques. Readers should have a basic understanding of value investing by reading up on Warren Buffett and Benjamin Graham as I will not delve into details regarding the terminology used. Have a great week ahead ! Comments are welcome.
After attending the Swiber AGM, below are my thoughts. Please note that I also made a similar posting on Sharejunction under the "Swiber" thread. I am merey re-posting for the sake of those who do not visit SJ.
1) There were queries on the O&G industry and how it can sustain the EPCIC activities. Basically, Mr. Goh mentioned that most of the exploration for offshore is still carried out in shallow waters (about 90%) and for Middle East, it is 100% shallow water. He sees deep water (currently 10% of the market) as the future and should it become more popular, Swiber will attempt to diversify into this market. But currently, he has a team of very experienced senior Mgt to develop the business. The new vessels planned in the second wave of fleet expansion are also part of the plan to stay ahead and to offer a better suite of services to customers. From what I gathered, they seem to be already planning a third wave of vessel acquisitions depending on the demand for their EPCIC services and the number of contracts they can secure.
2) I was assured that all vessel orders come with firm charter contracts, and that 14 vessels were slated for delivery this year, thus it will boost their fleet and allow for better marine support services. Since their business targets a niche market, there is healthy demand for their vessels to support the EPCIC services which they offer, and as mentioned in their Annual Report, marine support will only take up about 30% of their revenue pie, with EPCIC constituting the bulk of it.
3) More details of the S&L will be announced in due course, as Mr. Goh said that regulatory requirements have to be followed and when the deal is more firmed up, shareholders will naturally be informed through an announcement in SGXNet.
4) Mr. Goh himself is making many trips to the Middle East in order to negotiate for a potential deal and to build up his network and contacts. The BD dept has 3 staff including himself which are focused on building their competencies and reputation in parts of Asia which they have not secured a foothold yet.
5) Mr. Goh also mentioned that most competitors were located in the USA (4 of them), one in Japan and another somewhere else (can't recall !), but basically Swiber is the only Asian company doing EPCIC to be offered a major contract from Shell. Thus, the USA companies who are already in Asia face little or no competition from Asian competitors so far, but their cost structure is much higher as they do not have a RO or permanent establishment here. This would give Swiber a cost-competitive advantage, plus the Brunei Shell deal has cemented their reputation as one of the "bigger" players.
6) Overall, Mr. Goh expressed much optimism going forward as he believes the company is guided by a very capable and competent team who have the right strategic vision and plan to propel the company to greater heights. Most of the mgt team are from countries as diverse as Australia, France and New Zealand and they bring with them a wealth of experience. The sheerleg barge idea (on order for FY 2008) incidentally came from one of the Mgt team who is a non-Asian (sorry I can't recall who it is !).
7) Personally, I remain cautiously optimistic about the company's prospects. So far, they haven't clinched any major or minor projects after the announcement of the Brunei Shell deal and it would be premature of them to rest on their laurels after achieving one very significant success. Deal flow is important for the company and establishing offices in countries with prospects is equally important. In this aspect, Mr. Goh has 15 years of experience and he knows many industry veterans, so perhaps we can look forward to good news to come.
8) Note that on May 8, 2007, the 6-month moratorium for Pre-IPO shareholders ends and if the price goes down significantly, I see this as an opportunity to buy more of the company. Personally, I am vested at $1.01 and will not increase my position unless it dips below my buy price as I prefer to average down instead of averaging up.
9) The company should be releasing its 1Q 2007 results pretty soon. I do not expect a vast improvement over 1Q 2006 as I noted that most of the Indian LOI only begin in April-May 2007 which is in the 2Q 2007, and their order book carried forward from FY 2006 is about US$25 million, of which I do not know how many % will be recognized in 1Q 2007. Even then, their NP margin may not be as high as for FY 2005 because they may still be chartering vessels from 3rd parties as their own vessels are not ready yet. Thus, I feel we can only see significant improvement in margins and earnings once the rest of the LOI kick in and once the 14 new vessels come online.
More postings will be done on my investments in future, with my focus on value investing techniques. Readers should have a basic understanding of value investing by reading up on Warren Buffett and Benjamin Graham as I will not delve into details regarding the terminology used. Have a great week ahead ! Comments are welcome.
Subscribe to:
Posts (Atom)
