China Fishery - Acquisition of 3 Purse Seine Vessels in Peru
China Fishery (CFG) is closely related to Pacific Andes (PAH) as it is a 28% owned entity, which will soon become a 63.9% owned entity of PAH once PAH completes its rights issue (see details in PAH's announcements). Thus, any news affecting CFG would directly impact PAH's prospects, and thus its valuations as well. In future, I will blog not just about news affecting PAH, but also give updates on CFG as well.
In this latest announcement, CFG acquires another 3 purse seine vessels for US$10.5 million. This expands its fish hold capacity (storage capacity for fish caught) by 692 square metres and the permits also allow CFG to fish in Peruvian waters. This increases CFG's fleet size to 26 vessels, after acquiring the previous 4 in a March 2007 announcement. These vessels are primarily used to catch Peruvian anchovy which is a key raw material used in fishmeal processing. As pointed out by a forum user on CNA forum, the prices of fishmeal are increasing as fishmeal becomes more scarce and valuable. Also, an article in TODAY online states that the incidences of fine-dining have also increased, thus increasing the demand for fresh fish. These 2 events portend well for CFG as they are able to generate better economies of scale by increasing their fleet size. Considering the vessels are valued at US$11.2 million by an independent valuer, this means that CFG got a US$0.7 million discount on the market value. The proceeds to fund the acquisition will come from the issue of the senior notes due 2013 by CFG, as well as internal funds.
This piece of news is positive as it will be earnings-accretive for CFG, and the earnings will also flow down to PAH once the acquisition of 63.9% of CFG is completed. In terms of valuation, I will do a more detailed valuation once the FY 2007 results are released for PAH. I am expecting an announcement from PAH tomorrow on its results as last year's results were released on May 23, 2006.
CSC Holdings - A Quick Analysis
CSC Holdings had announced a S$240 million contract win for the IR resort. Please get details from the company's website or SGXNet. Forums were abuzz with this new development as it seemed to affirm people's belief that the construction sector (which had been in the doldrums for the past few years) had finally woken up. Disclaimer: Construction is not within my circle of competence, but I am doing a simple valuation based on margins, PER and basic common sense.
CSC's profit for HY 2007 was about S$2.05 million out of a revenue of S$53.7 million, giving rise to a margin of 3.83% (after removing an exceptional gain on disposal of fixed assets amounting to S$3.092 million). Previously, for HY 2006, margins were even thinner at 2.64%. For simplicity sake, I will use a margin of about 3.83% for my future projection.
Assuming FY 2007's total revenue hit S$120 million, and that the contract adds S$240 million to its order book, this will bring its total revenues to about S$360 million. Applying the net margin % gives a net profit of about S$13.8 million. Thus, earnings per share is about 1.24 cents based on 1,112,392,000 shares. At today's closing price of 37.5 cents, this represents a forward PER of about 30 times. While I am not certain of the industry itself, all I can say is that 30 times forward PER is very demanding. If a PER of 15 was assigned, then the company should trade at about 19-20 cents at most. Investors who believe in the future potential of the company to secure more IR contracts may see a lowering of its prospective PER. Also, assuming it can raise margins past 5% (the sand ban may make this difficult), the forward PER may also be reduced.
Other qualitative factors are:
1) Does the company have any distinct advantage over other construction companies when it comes to bidding for projects ? What is its competitive advantage ? If it's cost leadership, then I must say it is hard to maintain when competition is so stiff for new projects.
2) The project clinched is for the IR which will be built by FY 2008. What happens next for the company ? I don't see much future earnings visibility to justify buying a part of this business, because most of the construction work in Singapore hinges upon the IRs. Once that is over, it is highly possible that the construction industry may slip back into the doldrums.
3) Management - are they clear and concise on their strategy for growing top and bottom line ? Shareholders should query management on how they intend to follow up on this contract. If there are no concrete plans, that would mean Management has no far-reaching goal for bringing the company to greater heights.
In view of the above factors, I will not be taking a stake in the business, no matter what price Mr. Market chooses to offer to me.
Tuesday, May 22, 2007
Monday, May 21, 2007
An Investment Journal - A Catalogue and Analysis of Investment Mistakes
As budding investors, we will surely, at some point in our lives, encounter instances whereby our analysis of a company was less than perfect. Our assumptions may have been wrong or flawed, the industry could have changed drastically over a period of time, or maybe an unanticipated legal or political change may have precipitated a drastic deterioration in fundamentals for your companies.
All these mistakes (some avoidable and some not) should be meticulously catalogued into a journal in order for us to reflect and to avoid making the same mistake twice. Personally, I have my investment journal saved as a Word document, which I periodically review to see the mistakes I have made.
An important thing for a value investor to do is to admit that he makes mistakes, instead of shying away from or covering them up. Being candid, honest and frank can help an investor to reflect upon his principles and to avoid costly mistakes in the future. Warren Buffett himself never avoids stating the mistakes that he has made for the past year to his shareholders in his Annual Shareholder's Letters. By being honest and open with yourself, you go through a learning process and emerge much clearer and confident. Hiding mistakes does not make them go away, in fact, they will most likely come back to haunt you when you least expect it.
Most mistakes are of 2 types: mistake of commission, and mistakes of omission. The latter is a lot more common for Mr. Buffett because many times, he misses out on buying a great company at a fair price. But when he started out, he made several mistakes of commission as well, like selling too early, buying a company with low look-through earnings, and over-looking several critical factors which made the investments unattractive.
Similarly for the man on the street, they can analyze mistakes based on these 2 categories. For me, mistakes of commission generally occurred early in my investing life, and consisted of many examples of buying for the wrong reasons, selling under the influence of emotion and not fundamentals, as well as grossly over-estimating the future potential of a company. In the next few postings, I will cover part by part each investment mistake and how it contributed to me being a better investor. Readers should note that it is not the $ value of the loss which is important, but the lessons learned. I can proudly say that I have not repeated any of my past mistakes so far, and endeavour never to repeat them for the rest of my investing life !
As for mistakes of omission, these will be discussed candidly as well. Most instances, it consists of me doing detailed, thorough research into a company. However, the company does not fit my strict criteria and thus I did not buy it. Subsequently, I was proven to be mistaken. I will give a few examples of such cases, but I will also insert a paragraph to explain why I did not commit and why I think the company may or may not still be worth buying.
To conclude, all investors should have an investment mistakes journal, to remind them not to repeat their folly and to help give you a clear, concise objective when it comes to investing. I dare say I am a much wiser person now BECAUSE I had committed those mistakes. Sometimes, life's lessons can only be learnt through experience; no amount of reading can ever replicate the knowledge that experience can bring.
As budding investors, we will surely, at some point in our lives, encounter instances whereby our analysis of a company was less than perfect. Our assumptions may have been wrong or flawed, the industry could have changed drastically over a period of time, or maybe an unanticipated legal or political change may have precipitated a drastic deterioration in fundamentals for your companies.
All these mistakes (some avoidable and some not) should be meticulously catalogued into a journal in order for us to reflect and to avoid making the same mistake twice. Personally, I have my investment journal saved as a Word document, which I periodically review to see the mistakes I have made.
An important thing for a value investor to do is to admit that he makes mistakes, instead of shying away from or covering them up. Being candid, honest and frank can help an investor to reflect upon his principles and to avoid costly mistakes in the future. Warren Buffett himself never avoids stating the mistakes that he has made for the past year to his shareholders in his Annual Shareholder's Letters. By being honest and open with yourself, you go through a learning process and emerge much clearer and confident. Hiding mistakes does not make them go away, in fact, they will most likely come back to haunt you when you least expect it.
Most mistakes are of 2 types: mistake of commission, and mistakes of omission. The latter is a lot more common for Mr. Buffett because many times, he misses out on buying a great company at a fair price. But when he started out, he made several mistakes of commission as well, like selling too early, buying a company with low look-through earnings, and over-looking several critical factors which made the investments unattractive.
Similarly for the man on the street, they can analyze mistakes based on these 2 categories. For me, mistakes of commission generally occurred early in my investing life, and consisted of many examples of buying for the wrong reasons, selling under the influence of emotion and not fundamentals, as well as grossly over-estimating the future potential of a company. In the next few postings, I will cover part by part each investment mistake and how it contributed to me being a better investor. Readers should note that it is not the $ value of the loss which is important, but the lessons learned. I can proudly say that I have not repeated any of my past mistakes so far, and endeavour never to repeat them for the rest of my investing life !
As for mistakes of omission, these will be discussed candidly as well. Most instances, it consists of me doing detailed, thorough research into a company. However, the company does not fit my strict criteria and thus I did not buy it. Subsequently, I was proven to be mistaken. I will give a few examples of such cases, but I will also insert a paragraph to explain why I did not commit and why I think the company may or may not still be worth buying.
To conclude, all investors should have an investment mistakes journal, to remind them not to repeat their folly and to help give you a clear, concise objective when it comes to investing. I dare say I am a much wiser person now BECAUSE I had committed those mistakes. Sometimes, life's lessons can only be learnt through experience; no amount of reading can ever replicate the knowledge that experience can bring.
Sunday, May 20, 2007
Misleading and Irresponsible Reporting on Stock Market "gains"
Today's Sunday Times featured an article in the main section (not the "Invest" section) titled 'Stock Boom can mean $100K profit in 4 months'. While scanning through the article, so many glaring omissions and inconsistencies were detected that I felt compelled to blog about it. It seems that whenever I see such articles in the papers talking about so called "huge windfall" in the stock market, I just feel like going on a rant as I feel it is irresponsible and preposterous.
For thos who may not have read the article, the article mentions 3 individuals who have "made money" in the current bull run (STI closed at a new all-time high of 3,512.40 as at last Friday May 18, 2007, not that I actually bother about STI, but just stating it as a point of reference). The first individual is named Mr. B.K. Tan and he is a self-employed 40-year old living in a 3-room HDB flat. Apparently, he has just made himself S$100k within 4 short months from share trading (note this word). The article goes on to say that he has plenty of company in the ranks of Singapore's "stock trading elite". And what may this elite be ? Those who excel in trading stocks which are moving up relentlessly ? Has someone somehow forgotten that in a bull market, even a 10-year old kid can pick a stock in the market and it will go up ? Thus, it would seem this group of elite may have scarificed success for actual critical thinking, considering that stock trading has now been made ever so much simpler with the bull run.
Mr. Tan had bought DBS at $9 back in 2003 and sold out at $24 last week, earning a profit of $15 per share. In addition, he has also made money from SingTel and ComfortDelgro. What was NOT mentioned was his initial capital and his % returns, which I feel is a more important gauge of his success as an investor. For example, if one started out with S$1 million to invest and obtained $100k, it is a 10% return, which is considered average in a bull run. Also, the article blatantly states that he bought DBS in 2003, yet it claims he made $100K "in 4 months". Maybe it should have been "in 4 years" instead ? If so, that would dilute the % gains he has made as it has to be divided by 4 per annum, and further expressed as a %, it may not seem that spectacular at all.
The point I am trying to drive at is this: journalists should go ahead and do their reporting, but this article appears to omit some very important aspects of a person's investing, and seems to glamorize short term quick windfall gains against long-term prudent investing practices. While people may argue that there is nothing wrong with a large gain in a short period of time, this kind of reporting may cause the ignorant and uninitiated to take larger than normal risks, in the mistaken belief that money is so easy to make in the markets. I guess the queues at the Toto and 4-D booths would thin out and everyone would just head on down to open their multiple brokerage accounts to begin trading for a living. Cynical ? Maybe. But it just may be an eventuality if this bull run continues !
The other 2 people featured are a Mr. Goh Tian Hin, 67 with 2 children, who has earned an average of S$20k per month since January (again, the % return and initial capital are not stated). What's more disturbing is the line which says "most of Mr. Goh's profits are re-invested in stocks". With high valuations running rampant and diminishing margins of safety, ploughing all the profits back into the stock market may turn out to be a bad proposition in the long run. This would imply that he had previously purchased with a good margin of safety, then cashed out for a S$20k profit every month, then re-invested that profit all right back into the market. Well, if that's the case, then we can't take the S$20k profit as "realized" can we ? Over the medium-term, if he can manage to consistently grow his earnings by S$20k per month, then we can safely conclude that he has managed to get "newfound riches". Remember that "riches" are fleeting especially when one follows the "greater fool theory", by investing at ever-increasing market prices without a good sense of the "margin of safety" concept.
Finally, the article mentions a 22 year old NTU undergraduate from the faculty of business called Mr. Terence Lim, who started trading (note the word again) in stocks in August 2006 and has since made S$1,500. Onec again (and I am tired of mentioning this), there was no mention of his initial capital or his % return on investment. But if he had really started in August 2006 and only managed to gain S$1,500 considering the super-bull run thus far, then I would say it is very likely that most of his gains were the result of numerous trades which cancelled each other out, leaving a net effect of S$1,500. Frictional costs such as brokerage fees and commissions would have further eaten into his profits, causing a further reduction in profits. Again, the article mentions that he has "re-invested" his money into stocks, another indication that a trading mentality was used, disregarding valuations.
The article seems to inter-change the words "trading" and "investing" as if they were the same thing. What irks me most is that most people do not even distinguish between the 2 terms ! To them, trading and investing are synonymous ! Let me quote exactly what Benjamin Graham said of investing: "It is a process by which thorough analysis will show a safety of principle and offer a satisfactory return, anything else is speculative". Quantitative analysis of numbers, financial results, income statements, balance sheets, ratios and cash flow statements have formed the basis of modern fundamental analysis of companies, and Benjamin Graham was advocating a thorough analysis to minimize losses and to ensure a reasonable rate of return. Thus, by this definition, trading will be considered speculation as it involves guessing the psychology of the crowd and whether they will continue to follow the greater fool theory; while investing is a methodical examination of a company's numbers to ascertain if it has the potential to reap returns to shareholders. Of the 2, I have chosen the latter because it offers safety of principle and a possible better than market return on my investment.
A quick comment on such articles periodically written by ST and BT. The way the words are construed would normally imply that quick gains and riches can be found through short-term trading methods within the stock market. Not many articles have been written detailing the value investing process and how long-term wealth can be achieved through carefu analysis, patience and proper temperament. Most articles, to my chagrin, are heavily skewed towards reporting on short-term results, glorifying quick gains, putting market pundits and punters on a pedestal, and harping on the ease of winning money in a bull market.
One can only observe that the significant increase of such articles in recent months points towards a disturbing conclusion: that of irrational exuberance, and imminent market collapse. While I would not go so far as to predict market conditions (I hate doing that, and try to avoid it if friends ask), I would say that a bull market is usually in its final stages when news reports are not longer cautious, do not have disclaimers (unlike this article) and offer endless, mindless optimism.
Today's Sunday Times featured an article in the main section (not the "Invest" section) titled 'Stock Boom can mean $100K profit in 4 months'. While scanning through the article, so many glaring omissions and inconsistencies were detected that I felt compelled to blog about it. It seems that whenever I see such articles in the papers talking about so called "huge windfall" in the stock market, I just feel like going on a rant as I feel it is irresponsible and preposterous.
For thos who may not have read the article, the article mentions 3 individuals who have "made money" in the current bull run (STI closed at a new all-time high of 3,512.40 as at last Friday May 18, 2007, not that I actually bother about STI, but just stating it as a point of reference). The first individual is named Mr. B.K. Tan and he is a self-employed 40-year old living in a 3-room HDB flat. Apparently, he has just made himself S$100k within 4 short months from share trading (note this word). The article goes on to say that he has plenty of company in the ranks of Singapore's "stock trading elite". And what may this elite be ? Those who excel in trading stocks which are moving up relentlessly ? Has someone somehow forgotten that in a bull market, even a 10-year old kid can pick a stock in the market and it will go up ? Thus, it would seem this group of elite may have scarificed success for actual critical thinking, considering that stock trading has now been made ever so much simpler with the bull run.
Mr. Tan had bought DBS at $9 back in 2003 and sold out at $24 last week, earning a profit of $15 per share. In addition, he has also made money from SingTel and ComfortDelgro. What was NOT mentioned was his initial capital and his % returns, which I feel is a more important gauge of his success as an investor. For example, if one started out with S$1 million to invest and obtained $100k, it is a 10% return, which is considered average in a bull run. Also, the article blatantly states that he bought DBS in 2003, yet it claims he made $100K "in 4 months". Maybe it should have been "in 4 years" instead ? If so, that would dilute the % gains he has made as it has to be divided by 4 per annum, and further expressed as a %, it may not seem that spectacular at all.
The point I am trying to drive at is this: journalists should go ahead and do their reporting, but this article appears to omit some very important aspects of a person's investing, and seems to glamorize short term quick windfall gains against long-term prudent investing practices. While people may argue that there is nothing wrong with a large gain in a short period of time, this kind of reporting may cause the ignorant and uninitiated to take larger than normal risks, in the mistaken belief that money is so easy to make in the markets. I guess the queues at the Toto and 4-D booths would thin out and everyone would just head on down to open their multiple brokerage accounts to begin trading for a living. Cynical ? Maybe. But it just may be an eventuality if this bull run continues !
The other 2 people featured are a Mr. Goh Tian Hin, 67 with 2 children, who has earned an average of S$20k per month since January (again, the % return and initial capital are not stated). What's more disturbing is the line which says "most of Mr. Goh's profits are re-invested in stocks". With high valuations running rampant and diminishing margins of safety, ploughing all the profits back into the stock market may turn out to be a bad proposition in the long run. This would imply that he had previously purchased with a good margin of safety, then cashed out for a S$20k profit every month, then re-invested that profit all right back into the market. Well, if that's the case, then we can't take the S$20k profit as "realized" can we ? Over the medium-term, if he can manage to consistently grow his earnings by S$20k per month, then we can safely conclude that he has managed to get "newfound riches". Remember that "riches" are fleeting especially when one follows the "greater fool theory", by investing at ever-increasing market prices without a good sense of the "margin of safety" concept.
Finally, the article mentions a 22 year old NTU undergraduate from the faculty of business called Mr. Terence Lim, who started trading (note the word again) in stocks in August 2006 and has since made S$1,500. Onec again (and I am tired of mentioning this), there was no mention of his initial capital or his % return on investment. But if he had really started in August 2006 and only managed to gain S$1,500 considering the super-bull run thus far, then I would say it is very likely that most of his gains were the result of numerous trades which cancelled each other out, leaving a net effect of S$1,500. Frictional costs such as brokerage fees and commissions would have further eaten into his profits, causing a further reduction in profits. Again, the article mentions that he has "re-invested" his money into stocks, another indication that a trading mentality was used, disregarding valuations.
The article seems to inter-change the words "trading" and "investing" as if they were the same thing. What irks me most is that most people do not even distinguish between the 2 terms ! To them, trading and investing are synonymous ! Let me quote exactly what Benjamin Graham said of investing: "It is a process by which thorough analysis will show a safety of principle and offer a satisfactory return, anything else is speculative". Quantitative analysis of numbers, financial results, income statements, balance sheets, ratios and cash flow statements have formed the basis of modern fundamental analysis of companies, and Benjamin Graham was advocating a thorough analysis to minimize losses and to ensure a reasonable rate of return. Thus, by this definition, trading will be considered speculation as it involves guessing the psychology of the crowd and whether they will continue to follow the greater fool theory; while investing is a methodical examination of a company's numbers to ascertain if it has the potential to reap returns to shareholders. Of the 2, I have chosen the latter because it offers safety of principle and a possible better than market return on my investment.
A quick comment on such articles periodically written by ST and BT. The way the words are construed would normally imply that quick gains and riches can be found through short-term trading methods within the stock market. Not many articles have been written detailing the value investing process and how long-term wealth can be achieved through carefu analysis, patience and proper temperament. Most articles, to my chagrin, are heavily skewed towards reporting on short-term results, glorifying quick gains, putting market pundits and punters on a pedestal, and harping on the ease of winning money in a bull market.
One can only observe that the significant increase of such articles in recent months points towards a disturbing conclusion: that of irrational exuberance, and imminent market collapse. While I would not go so far as to predict market conditions (I hate doing that, and try to avoid it if friends ask), I would say that a bull market is usually in its final stages when news reports are not longer cautious, do not have disclaimers (unlike this article) and offer endless, mindless optimism.
Saturday, May 19, 2007
Objective Thinking and Selective Perception
Often, the path towards value investing is fraught with doubt and uncertainty. To the uninitiated, I was once a person who did not have any value investing principles under my belt, and it cost me dearly; both in terms of losses and opportunity costs. Once I had established my circle of competence through analysis and research, I could step down the path of value investing proper.
The principle of objective thinking is perhaps the most difficult aspect of investing. Investing is essentially full of emotions, even without looking at a stock market. You will have feelings of doubt, uncertainty, hesitation, regret as well as moments of extreme sadness and happiness depending on how your investments perform. Remember that we, as investors, cannot be right all the time, but the trick is to make small losses and large gains so that in the long run, you earn a decent return on your investment. Objective thinking involves evaluating a potential investment as well as ongoing review for one in which you already partially own. Ultimately, this will involve lots of reading, research and fact-finding. If you own a company in the oil and gas industry, then follow up on the news for oil and gas, including the demand/supply for oil, oil prices and the like. Warren Buffett himself has a voracious appetite for knowledge, and remember that knowledge makes one wealthy, while money makes one rich. Being wealthy is much more important than simply being rich, because people remember you as a human being instead of just recalling "oh yes he was a RICH person".
How does one remain objective ? Most of the time, I use numbers in order to ground my thinking. As most readers will observe, when I analyze a company and its financials and/or any corporate announcement, I will usually provide some number-crunching. Numbers are in fact the most objective method of evaluating a company. Other ways include industry review, management review and company prospects, and these can be subjective depending on which commentary you read. People write articles in business papers, digests and newsletters about a myriad industries, and sometimes sifting through the pile of information to gather actual knowledge can be a tough call. Using Google or Yahoo to search does help somewhat, but the Internet is still voluminous enough to frustrate most users who wish to search for information.
For example, a simple search on the fishing industry (because I own Pacific Andes) turned up all sorts of hits, most of which were unrelated to the fishing industry. It's difficult to find a specific research report on, for example, the fishing resources in various continents and laws and regulations on over-fishing in these areas. Yet, this objective research can make a difference when one evaluates his investment in a company to see if the fundamentals have changed. So, my advice to value investors is: don't give up so easily, and try searching for information using different phrases or words.
Selective perception (and retention) is a marketing term used to describe consumers who unconsciously tune out advertisements which do not suit their personal preferences. For example, a person who is not into cars would mentally filter out information about car models, designs and prices while flipping through a newspaper. Conversely, if he were interested in watches, he would pay particular attention to adverts on watches and be on an active lookout for good bargains and designs.
That said, when selective perception is applied to objective research, it can be very harmful indeed. This would imply that the investor effectively tunes out all news which is negative to his investment, and only chooses to acknowledge the positives. An example would be to filter out the information on an over-supply in AHTS for FY 2009 because it would force a re-evaluation of your decision criteria for selecting a company which builds AHTS. Instead, the reader would only concentrate on articles/news that validate his assumptions. This could result in errorneous decisions being made and in the worst case scenario, holding on to a company whose fundamentals have changed drastically.
To conclude, my advice would be to objectively analyze all pertinent information relating to the investments you own, as well as investments you wish to own. Absorb the good + the bad, and then make a decision based on the positives and negatives. As they say in this world, nothing is perfect; thus, people who see only a perfect world are inadvertently deluding themselves.
Often, the path towards value investing is fraught with doubt and uncertainty. To the uninitiated, I was once a person who did not have any value investing principles under my belt, and it cost me dearly; both in terms of losses and opportunity costs. Once I had established my circle of competence through analysis and research, I could step down the path of value investing proper.
The principle of objective thinking is perhaps the most difficult aspect of investing. Investing is essentially full of emotions, even without looking at a stock market. You will have feelings of doubt, uncertainty, hesitation, regret as well as moments of extreme sadness and happiness depending on how your investments perform. Remember that we, as investors, cannot be right all the time, but the trick is to make small losses and large gains so that in the long run, you earn a decent return on your investment. Objective thinking involves evaluating a potential investment as well as ongoing review for one in which you already partially own. Ultimately, this will involve lots of reading, research and fact-finding. If you own a company in the oil and gas industry, then follow up on the news for oil and gas, including the demand/supply for oil, oil prices and the like. Warren Buffett himself has a voracious appetite for knowledge, and remember that knowledge makes one wealthy, while money makes one rich. Being wealthy is much more important than simply being rich, because people remember you as a human being instead of just recalling "oh yes he was a RICH person".
How does one remain objective ? Most of the time, I use numbers in order to ground my thinking. As most readers will observe, when I analyze a company and its financials and/or any corporate announcement, I will usually provide some number-crunching. Numbers are in fact the most objective method of evaluating a company. Other ways include industry review, management review and company prospects, and these can be subjective depending on which commentary you read. People write articles in business papers, digests and newsletters about a myriad industries, and sometimes sifting through the pile of information to gather actual knowledge can be a tough call. Using Google or Yahoo to search does help somewhat, but the Internet is still voluminous enough to frustrate most users who wish to search for information.
For example, a simple search on the fishing industry (because I own Pacific Andes) turned up all sorts of hits, most of which were unrelated to the fishing industry. It's difficult to find a specific research report on, for example, the fishing resources in various continents and laws and regulations on over-fishing in these areas. Yet, this objective research can make a difference when one evaluates his investment in a company to see if the fundamentals have changed. So, my advice to value investors is: don't give up so easily, and try searching for information using different phrases or words.
Selective perception (and retention) is a marketing term used to describe consumers who unconsciously tune out advertisements which do not suit their personal preferences. For example, a person who is not into cars would mentally filter out information about car models, designs and prices while flipping through a newspaper. Conversely, if he were interested in watches, he would pay particular attention to adverts on watches and be on an active lookout for good bargains and designs.
That said, when selective perception is applied to objective research, it can be very harmful indeed. This would imply that the investor effectively tunes out all news which is negative to his investment, and only chooses to acknowledge the positives. An example would be to filter out the information on an over-supply in AHTS for FY 2009 because it would force a re-evaluation of your decision criteria for selecting a company which builds AHTS. Instead, the reader would only concentrate on articles/news that validate his assumptions. This could result in errorneous decisions being made and in the worst case scenario, holding on to a company whose fundamentals have changed drastically.
To conclude, my advice would be to objectively analyze all pertinent information relating to the investments you own, as well as investments you wish to own. Absorb the good + the bad, and then make a decision based on the positives and negatives. As they say in this world, nothing is perfect; thus, people who see only a perfect world are inadvertently deluding themselves.
Thursday, May 17, 2007
Investment Horizon and Returns
Most people who begin to invest in either equities, unit trusts or derivatives don't really have an idea of investment horizon. Neither do they actually have a concrete or realistic target for investment returns. This post will try to tackle some aspects of this decision-making process, and to share my own personal view of my horizon cum returns expectation.
Investment horizon can be defined as the period of time in which you wish to "lock up" your investment. This means that during this period of time, the investment basically stays dormant, either increasing or decreasing in value. This is akin to a fixed deposit where your money is "frozen" with a fixed interest rate until withdrawal. However, for equities, the time period can be anything from a few minutes (for day traders) to a tens of years (value investing). When one puts in a sum of money into a counter, one must be mindful of their investment period, for this has a bearing on their returns. For short-term traders, a few minutes is sufficient as long as they hit their profit % target. For investors, letting their profits run is common, and multi-baggers emerge among the good companies.
This all seems very simple right ? Short-term and long-term isn't exactly rocket science ! The problem surfaces when people turn a short-term trade into a long-term investment, or vice versa. To illustrate, take Mr. X, who plonked down 10 lots of Lottvision today at 65 cents (the peak) with a long-term view to seeing the company's lottery business grow and generate good earnings. However, when there was a massive sell-down to 56 cents, suddenly he panics and turns his long-term ambition into a short-term trade by selling. This is an emotional response which is typical of human psychology, thus Mr. X cannot be faulted for feeling panicky when his shares fell 20%. The trick is in determining, in the first place, why you bought the company and to fix your investment horizon. If these are in place, no amount of fluctuation will cause you to sell low. Volatility gives opportunities for value investors to buy at cheap prices, as there are always people out there who will panic and sell low to YOU.
Another counter-example is a guy called Mr. Y who decides to do momentum trading, or as they call it, going with the flow of the crowd (see my post on "the madness of crowds"). He buys in excitedly at 65 cents (Lottvision again, since this is such a wonderful example of a volatile stock), hoping to flip it quickly at a profit when it hits 70 cents. Let's say, hypothetically, that the share price starts to tank and it never reaches his buy price for the next few weeks. He will then decide to turn into a "long-term" investor, and wait it out. I have seen this happen to older relatives, who have told me horror stories of holding Informatics at 80 cents, BBR at 70 cents and even Van Der Horst at $8 (it's now called Interra Resources and trading at a fraction of $8).
So what's the moral of the story ? I am not saying buy and hold is wrong, but we must make decisions based on objective facts, and not be driven by emotions. Evaluate the company to see if there is any potential, or if its business is just going downhill. This is a key factor in determining whether buy and hold is suitable, or to sell immediately and take a minor loss. After all, money invested in a losing counter is also an opportunity cost.
Most traders will tell you to have a cut-loss strategy of let's say, 10% below your buy price. But how many of us has the mental discipline to stick to it ? From the people I've met, I dare say nealy 99% will just hold through the drop. Thus, in the end, people buy high and sell low.
For investment returns, I see people on forums having extremely unrealistic expectatons ! People always expect to buy something for like, 3 cents, and hope to see it go up to $1, for a 33 bagger ! Let's be realistic, how many companies can grow their earnings by 33x over a period of a few months ? Others will expect sentiment-driven rallies to last forever and keep averaging up, only to end up with negative returns in the end.
A good way to be realistic about returns is to benchmark this against returns from other forms of investments. As far as I know, cash gives the lowest return (less than 1% p.a.), bonds give about 5% on average while equities have been known to average about 11-12% return p.a. over 30 years. Thus, a good figure to expect will be in the range of 10-15% for a long-term horizon. I will not discuss short-term expectations as everyone knows that investment profits/losses can be wildly fluctuating. What I am dicussing is a consistent approach to obtaining returns on your investment.
To conclude, investing with a good margin of safety will give the investor an overall return of 10-15% on average, per year. This is inclusive of dividends as well as capital gains. Investing wisely and not based on sentiment will ensure that your money can only grow in time instead of shrinking. Remember leh, this is YOUR hard-earned money, so use it wisely.
Most people who begin to invest in either equities, unit trusts or derivatives don't really have an idea of investment horizon. Neither do they actually have a concrete or realistic target for investment returns. This post will try to tackle some aspects of this decision-making process, and to share my own personal view of my horizon cum returns expectation.
Investment horizon can be defined as the period of time in which you wish to "lock up" your investment. This means that during this period of time, the investment basically stays dormant, either increasing or decreasing in value. This is akin to a fixed deposit where your money is "frozen" with a fixed interest rate until withdrawal. However, for equities, the time period can be anything from a few minutes (for day traders) to a tens of years (value investing). When one puts in a sum of money into a counter, one must be mindful of their investment period, for this has a bearing on their returns. For short-term traders, a few minutes is sufficient as long as they hit their profit % target. For investors, letting their profits run is common, and multi-baggers emerge among the good companies.
This all seems very simple right ? Short-term and long-term isn't exactly rocket science ! The problem surfaces when people turn a short-term trade into a long-term investment, or vice versa. To illustrate, take Mr. X, who plonked down 10 lots of Lottvision today at 65 cents (the peak) with a long-term view to seeing the company's lottery business grow and generate good earnings. However, when there was a massive sell-down to 56 cents, suddenly he panics and turns his long-term ambition into a short-term trade by selling. This is an emotional response which is typical of human psychology, thus Mr. X cannot be faulted for feeling panicky when his shares fell 20%. The trick is in determining, in the first place, why you bought the company and to fix your investment horizon. If these are in place, no amount of fluctuation will cause you to sell low. Volatility gives opportunities for value investors to buy at cheap prices, as there are always people out there who will panic and sell low to YOU.
Another counter-example is a guy called Mr. Y who decides to do momentum trading, or as they call it, going with the flow of the crowd (see my post on "the madness of crowds"). He buys in excitedly at 65 cents (Lottvision again, since this is such a wonderful example of a volatile stock), hoping to flip it quickly at a profit when it hits 70 cents. Let's say, hypothetically, that the share price starts to tank and it never reaches his buy price for the next few weeks. He will then decide to turn into a "long-term" investor, and wait it out. I have seen this happen to older relatives, who have told me horror stories of holding Informatics at 80 cents, BBR at 70 cents and even Van Der Horst at $8 (it's now called Interra Resources and trading at a fraction of $8).
So what's the moral of the story ? I am not saying buy and hold is wrong, but we must make decisions based on objective facts, and not be driven by emotions. Evaluate the company to see if there is any potential, or if its business is just going downhill. This is a key factor in determining whether buy and hold is suitable, or to sell immediately and take a minor loss. After all, money invested in a losing counter is also an opportunity cost.
Most traders will tell you to have a cut-loss strategy of let's say, 10% below your buy price. But how many of us has the mental discipline to stick to it ? From the people I've met, I dare say nealy 99% will just hold through the drop. Thus, in the end, people buy high and sell low.
For investment returns, I see people on forums having extremely unrealistic expectatons ! People always expect to buy something for like, 3 cents, and hope to see it go up to $1, for a 33 bagger ! Let's be realistic, how many companies can grow their earnings by 33x over a period of a few months ? Others will expect sentiment-driven rallies to last forever and keep averaging up, only to end up with negative returns in the end.
A good way to be realistic about returns is to benchmark this against returns from other forms of investments. As far as I know, cash gives the lowest return (less than 1% p.a.), bonds give about 5% on average while equities have been known to average about 11-12% return p.a. over 30 years. Thus, a good figure to expect will be in the range of 10-15% for a long-term horizon. I will not discuss short-term expectations as everyone knows that investment profits/losses can be wildly fluctuating. What I am dicussing is a consistent approach to obtaining returns on your investment.
To conclude, investing with a good margin of safety will give the investor an overall return of 10-15% on average, per year. This is inclusive of dividends as well as capital gains. Investing wisely and not based on sentiment will ensure that your money can only grow in time instead of shrinking. Remember leh, this is YOUR hard-earned money, so use it wisely.
Wednesday, May 16, 2007
The madness of crowds
Today, let's explore the above phrase very simply and aptly titled "the madness of crowds". This phrase actually came from Sir Isaac Newton (yes, the sciency guy who gave us the three laws of motion, but was a tad slow in getting to the part about relativity !) when he lost a ton of money in the South Sea bubble (see this link http://www.stock-market-crash.net/southsea.htm). Newton lost a lot of money in the bubble and speculative mania, which led him to remark that he could predict the motion of heavenly bodies, but not the madness of people.
This concept basically ties back to the greater fool theory which I blogged about some time back. Crowd or herd mentality comes about when many people jump into a "hot" counter or hyped-up stock, thus creating the "bubble". More and more speculators, seeing the amazing and meteoric rise in the share price (sometimes within seconds), feel a compelling urge to jump in as well. And so the madness builds up, as more and more ignorant people pile into the counter, pushing it higher and higher, resulting in the greater fool theory being in play. When the party's over, those still left in the dark hall will probably not be able to find their way home, and even the coaches have turned to pumpkins (akin to Cinderella). Warren Buffett warns of this behaviour when he mentions that such madness is akin to dancing in a room without clocks. Everyone knows that the party ends at midnight, but everyone wants one last dance. But in this room without clocks, no one wants to leave and no one knows exactly when to leave. Thus, a great number end up getting "trapped" and burnt.
As I was observing the market today, I had quite a good first-hand experience with crowd madness. Lottvision was massively played up today and it jumped up 11 cents from $0.505 to $0.615, on a volume of 141 million shares ! The SI forum was alive with people patting each other on the back for the "quick" and "instant" profits made from this sentiment driven rally. Others even proudly admitted moving "in and out", thus making profits a few times over. Yet others proudly proclaim that they bought in just before closing, to wait for the next burst of energy to push the counter past $1.00.
This is just one simple example of madness, and irrational exuberance. Everyone knows the company is loss-making and has no fundamentals to speak of. Even the new core business of lottery machines has yet to formally take of, but people are already talking excitedly about super profits and massive gains. It doesn't take a genius to figure out that inflated expectations are akin to a big bubble blown out of chewing gum. The chewing gum bubble will burst in the end, leaving a sticky mess, and the child will grow tired of sucking on the now-tasteless gum and throw it away.
This is exactly how the crowd reacts, moving from one stock to another, akin to a butterfly visiting flower after flower to gather nectar. Needless to say, this practice can be lucrative in a bull market and sudden rally, but what happens in a crash ? People who think they are so smart get caught off guard; imagine buying 200 lots to contra and the price crashes 10 cents, that's a $20,000 contra loss. All it takes is one BAD contra trade to wipe all many small good ones.
Thus, is it worth the effort ? Buffett mentions that most people cannot resist the temptation to trade in and out of the market, because they liken activity to intelligence and profit-making. Actually, the best profits I've known have been the ones where I bought into a good company, and SAT ON MY BUTT doing nothing at all. This may sound strange to a reader unfamiliar with value investing, but that's precisely what happens.
Value investing can guarantee steady returns, year after year, through all kinds of markets. In bull markets, historically, traders and speculators have outperformed value investors (this is a natural thing, as value investors are conservative and do not take unnecessary risks). But in a bear market or a market trading flat, value investors are the ones who reap the most benefits. This is because of the margin of safety principle and the fact that they concentrate on the business, not the share price.
For more information on value investing, I do recommend a book called "Value Investing for Dummies", which I have found in most good bookstores.
Today, let's explore the above phrase very simply and aptly titled "the madness of crowds". This phrase actually came from Sir Isaac Newton (yes, the sciency guy who gave us the three laws of motion, but was a tad slow in getting to the part about relativity !) when he lost a ton of money in the South Sea bubble (see this link http://www.stock-market-crash.net/southsea.htm). Newton lost a lot of money in the bubble and speculative mania, which led him to remark that he could predict the motion of heavenly bodies, but not the madness of people.
This concept basically ties back to the greater fool theory which I blogged about some time back. Crowd or herd mentality comes about when many people jump into a "hot" counter or hyped-up stock, thus creating the "bubble". More and more speculators, seeing the amazing and meteoric rise in the share price (sometimes within seconds), feel a compelling urge to jump in as well. And so the madness builds up, as more and more ignorant people pile into the counter, pushing it higher and higher, resulting in the greater fool theory being in play. When the party's over, those still left in the dark hall will probably not be able to find their way home, and even the coaches have turned to pumpkins (akin to Cinderella). Warren Buffett warns of this behaviour when he mentions that such madness is akin to dancing in a room without clocks. Everyone knows that the party ends at midnight, but everyone wants one last dance. But in this room without clocks, no one wants to leave and no one knows exactly when to leave. Thus, a great number end up getting "trapped" and burnt.
As I was observing the market today, I had quite a good first-hand experience with crowd madness. Lottvision was massively played up today and it jumped up 11 cents from $0.505 to $0.615, on a volume of 141 million shares ! The SI forum was alive with people patting each other on the back for the "quick" and "instant" profits made from this sentiment driven rally. Others even proudly admitted moving "in and out", thus making profits a few times over. Yet others proudly proclaim that they bought in just before closing, to wait for the next burst of energy to push the counter past $1.00.
This is just one simple example of madness, and irrational exuberance. Everyone knows the company is loss-making and has no fundamentals to speak of. Even the new core business of lottery machines has yet to formally take of, but people are already talking excitedly about super profits and massive gains. It doesn't take a genius to figure out that inflated expectations are akin to a big bubble blown out of chewing gum. The chewing gum bubble will burst in the end, leaving a sticky mess, and the child will grow tired of sucking on the now-tasteless gum and throw it away.
This is exactly how the crowd reacts, moving from one stock to another, akin to a butterfly visiting flower after flower to gather nectar. Needless to say, this practice can be lucrative in a bull market and sudden rally, but what happens in a crash ? People who think they are so smart get caught off guard; imagine buying 200 lots to contra and the price crashes 10 cents, that's a $20,000 contra loss. All it takes is one BAD contra trade to wipe all many small good ones.
Thus, is it worth the effort ? Buffett mentions that most people cannot resist the temptation to trade in and out of the market, because they liken activity to intelligence and profit-making. Actually, the best profits I've known have been the ones where I bought into a good company, and SAT ON MY BUTT doing nothing at all. This may sound strange to a reader unfamiliar with value investing, but that's precisely what happens.
Value investing can guarantee steady returns, year after year, through all kinds of markets. In bull markets, historically, traders and speculators have outperformed value investors (this is a natural thing, as value investors are conservative and do not take unnecessary risks). But in a bear market or a market trading flat, value investors are the ones who reap the most benefits. This is because of the margin of safety principle and the fact that they concentrate on the business, not the share price.
For more information on value investing, I do recommend a book called "Value Investing for Dummies", which I have found in most good bookstores.
Tuesday, May 15, 2007
Mid-May 2007 Portfolio Review
It's time for a quick half-monthly review of my portfolio and my companies' businesses.
1) Ezra - Buy Price $1.30 (bonus adjusted), Market Price $5.50, gain 323%. The company had just ordered 2 ultra-large AHTS, and are working towards capturing their 2nd FPSO contract. EGM is to be held soon for approval of the bonus share issue.
2) Boustead - Buy Price $1.295 (average), Market Price $1.96, gain 51.3%. Boustead had won a S$11 million contract for Boustead Projects just yesterday. They should be releasing results in the final week of May 2007, and their proposed building of a power station in Dinh Binh Vietnam is still awaiting approval.
3) Swiber - Buy Price $1.01, Market Price $1.94, gain 92.1%. Swiber just released a corporate presentation and analyst briefing for 1Q 2007 results. It helps to explain a few of my concerns regarding margins and cash flows, and I am hoping the company can perform better in 2Q 2007 and beyond.
4) Global Voice - Buy Price $0.1775 (average), Market Price $0.205, gain 15.5%. GV is experiencing slow but steady growth after rebranding as EUNetworks. Just today, they announced a new 3-year agreement with UBL. For more of GV's contracts, please see my writeup in the next section.
5) Suntec REIT - Buy Price $1.11, Market Price $2.02, gain 82.0%. As this is a REIT, nothing much to comment. Yield is still fair at about 5% for my buy price, and I am expecting them to acquire some property in the near future which is yield-accretive, as the price has run up somewhat.
6) Pacific Andes - Buy Price $0.81, Market Price $1.13, gain 39.5%. China Fishery just reported results today and bottom line increased by 54%, so the flow through effect should hit PAH. PAH has yet to release more details of its proposed acquisition of 63.9% of CFG, and an EGM also needs to be convened to approve this major transaction. Results are expected in the 2nd last week of May 2007.
Overall, my portfolio has increased 88.3% from cost as at today. I should be aiming for at least 100% capital gains on my overall portfolio assuming Boustead, Swiber and Pac Andes show strong results moving forward. My next review will be at end-May (i.e. May 30, as May 31 is a public holiday).
Global Voice - An Update
Global Voice has so far captured many contracts this year and is rapidly building up its customer base. Below is a summary of all contracts captured so far for FY 2007:-
a) Jan 3, 2007 - Provision of private network for Hodgeson University
b) Jan 22, 2007 - Multi-Year contract with Largest Internet Exchange, AMS-IX
c) Feb 6, 2007 - Agreement with Denit for redundant data-centre
d) Mar 5, 2007 - Agreement with Techem for converged mission critical connectivity
e) Mar 12, 2007 - Contract with Endemol for content delivery solution
f) Mar 21, 2007 - 365 Hosting expands agreement with GV
g) Mar 27, 2007 - CreditWeb selects GV for global transaction platform
h) Apr 18, 2007 - Cyso selects GV for delivery of solution
i) Apr 23, 2007 - Blue Face chooses GV for highly redundant communications
j) May 8, 2007 - GV and UNet seal agreement for broadband services across the Netherlands
k) May 15, 2007 - GV concludes agreement with UBL to deploy high availability solution
In total, there have been 11 contracts won so far this year. Not counting Hosting365 which was an expansion of an existing contract, there have been on average 2 contracts captured per month (total = 10). Thus, this year has been a bumper year for GV, as the whole of FY 2006 only saw the capturing of about 5-6 contracts (and all of which were for the later part of FY 2006). In addition to these contracts, GV has also launched their Stuttgart network which will further enhance their competitiveness. The CEO Noel Meaney will also be one of the speakers at Capacity 2007, to be held in New York on 25 and 26 June 2007, and will be speaking on how to enhance revenue streams for companies through the use of EUNetwork's solutions.
To summarize, it looks very positive for GV for FY 2007; but this can only be validated once the 1H 2007 financial statements are out. They are due for release close to the end of August 2007, so there is still time for the company to continue to capture contracts to build up its recurring revenue base. At the current price of $0.205, it is difficult to conclude if this is a fair value for GV as PER cannot be used to value the company (it was loss-making in FY 2006). Still, GV may turn out to be as successful as Mediaring (the first profitable VoIP company) and Aztech (which does VoIP products) if it manages to build a strong customer base and leverage on its brand equity.
It's time for a quick half-monthly review of my portfolio and my companies' businesses.
1) Ezra - Buy Price $1.30 (bonus adjusted), Market Price $5.50, gain 323%. The company had just ordered 2 ultra-large AHTS, and are working towards capturing their 2nd FPSO contract. EGM is to be held soon for approval of the bonus share issue.
2) Boustead - Buy Price $1.295 (average), Market Price $1.96, gain 51.3%. Boustead had won a S$11 million contract for Boustead Projects just yesterday. They should be releasing results in the final week of May 2007, and their proposed building of a power station in Dinh Binh Vietnam is still awaiting approval.
3) Swiber - Buy Price $1.01, Market Price $1.94, gain 92.1%. Swiber just released a corporate presentation and analyst briefing for 1Q 2007 results. It helps to explain a few of my concerns regarding margins and cash flows, and I am hoping the company can perform better in 2Q 2007 and beyond.
4) Global Voice - Buy Price $0.1775 (average), Market Price $0.205, gain 15.5%. GV is experiencing slow but steady growth after rebranding as EUNetworks. Just today, they announced a new 3-year agreement with UBL. For more of GV's contracts, please see my writeup in the next section.
5) Suntec REIT - Buy Price $1.11, Market Price $2.02, gain 82.0%. As this is a REIT, nothing much to comment. Yield is still fair at about 5% for my buy price, and I am expecting them to acquire some property in the near future which is yield-accretive, as the price has run up somewhat.
6) Pacific Andes - Buy Price $0.81, Market Price $1.13, gain 39.5%. China Fishery just reported results today and bottom line increased by 54%, so the flow through effect should hit PAH. PAH has yet to release more details of its proposed acquisition of 63.9% of CFG, and an EGM also needs to be convened to approve this major transaction. Results are expected in the 2nd last week of May 2007.
Overall, my portfolio has increased 88.3% from cost as at today. I should be aiming for at least 100% capital gains on my overall portfolio assuming Boustead, Swiber and Pac Andes show strong results moving forward. My next review will be at end-May (i.e. May 30, as May 31 is a public holiday).
Global Voice - An Update
Global Voice has so far captured many contracts this year and is rapidly building up its customer base. Below is a summary of all contracts captured so far for FY 2007:-
a) Jan 3, 2007 - Provision of private network for Hodgeson University
b) Jan 22, 2007 - Multi-Year contract with Largest Internet Exchange, AMS-IX
c) Feb 6, 2007 - Agreement with Denit for redundant data-centre
d) Mar 5, 2007 - Agreement with Techem for converged mission critical connectivity
e) Mar 12, 2007 - Contract with Endemol for content delivery solution
f) Mar 21, 2007 - 365 Hosting expands agreement with GV
g) Mar 27, 2007 - CreditWeb selects GV for global transaction platform
h) Apr 18, 2007 - Cyso selects GV for delivery of solution
i) Apr 23, 2007 - Blue Face chooses GV for highly redundant communications
j) May 8, 2007 - GV and UNet seal agreement for broadband services across the Netherlands
k) May 15, 2007 - GV concludes agreement with UBL to deploy high availability solution
In total, there have been 11 contracts won so far this year. Not counting Hosting365 which was an expansion of an existing contract, there have been on average 2 contracts captured per month (total = 10). Thus, this year has been a bumper year for GV, as the whole of FY 2006 only saw the capturing of about 5-6 contracts (and all of which were for the later part of FY 2006). In addition to these contracts, GV has also launched their Stuttgart network which will further enhance their competitiveness. The CEO Noel Meaney will also be one of the speakers at Capacity 2007, to be held in New York on 25 and 26 June 2007, and will be speaking on how to enhance revenue streams for companies through the use of EUNetwork's solutions.
To summarize, it looks very positive for GV for FY 2007; but this can only be validated once the 1H 2007 financial statements are out. They are due for release close to the end of August 2007, so there is still time for the company to continue to capture contracts to build up its recurring revenue base. At the current price of $0.205, it is difficult to conclude if this is a fair value for GV as PER cannot be used to value the company (it was loss-making in FY 2006). Still, GV may turn out to be as successful as Mediaring (the first profitable VoIP company) and Aztech (which does VoIP products) if it manages to build a strong customer base and leverage on its brand equity.
Monday, May 14, 2007
Swiber - 1Q 2007 Results Analysis
Swiber Holdings Limited released its 1Q 2007 financial statements and press release today. You can check SGX Announcements page (see links on right side of my blog) to look for it. Basically, to sum it up, I expected more from the financials and was a little disappointed by what I read. Below is an analysis of various aspects of the financials:-
First of all, gross margins for 1Q 2007 have declined to only 27.5% as compared to 1Q 2006 which saw gross margins as high as 37.4%. That's a nearly 10 percentage point drop in gross margins, and this could have boosted earnings significantly. One quick glance already makes it obvious - revenues may have increased by 205.8% but cost of goods sold increased even more by 254.1% ! Management should provide some clarity on why margins continue to be squeezed, but no specific mention was made in the press release or performance review.
Net margins have also decreased from 28.4% in 1Q 2006 to only 18.9% for 1Q 2007. I was already being conservative when I estimated their earnings based on 30% net margin, but to be fair, that took into account the fact that most of their vessels have been delivered. In this case, I would assume that the remaining 10 vessels have yet to be delivered, thus putting a strain on margins as the company has to use third-party vessels. The next step Management should take is to update shareholders on the status of the delivery of the vessels, and assure shareholders that margins will improve in future. Just as a hypothetical illustration, if margins had remained at 1Q 2006 levels, we would be seeing net earnings of US$5,487k instead of the current profit of US$3,642k. That's a 50.7% increase in earnings assuming margins had at least been maintained at 1Q 2006 levels !!
Finance costs have also ballooned 210.7% from US$75k to US$233K, reflecting an increase in bank borrowings for the company. While they maintain that debt/equity ratio remains at 0.35, nevertheless, increased borrowings would mean increased interest costs. In a rising interest rate environment, this could cause a larger cash flow drain for the company. A quick look at the Balance Sheet shows that short-term loans more than doubled from US$4.4m to US$9.8m. Long-term loans have also risen and total liabilities are US$57.5m as compared to only US$42.0 a year ago. Trade and other receivables have also increased significantly, ostensibly due to the 200+% increase in top-line, but the company should comment on the number of days of receivables outstanding to see if their cash conversion cycle has improved. A major worry for me for any company is their ability to manage cash; if this is absent, then the company could face a cash crunch even as they are making profits.
The cash flow statement is another area of concern. The company actually generated NEGATIVE cash flows from operating activities of US$3.7 million ! This was because their increase in receivables had more than offset their increase in trade payables, which is the worrying aspect I talked about. Assuming the company pays its creditors faster than it collects from its debtors, we could see more trouble ahead in terms of cash flow management. Let's hope this problem is only temporary with the spending on capex and would resolve by 2Q, otherwise it is a glaring area to highlight to the Management.
As can be observed, about US$9.7m was spent on capex as compared to US$3.8 million a year ago. When put in context, this is justifiable as the company is aggressively expanding its fleet. The sale and leaseback arrangement also means that cash flows will be eased under "investing activities" as the sale would generate immediate cash back for them. Thus, it is hoped that the company can continue to invoke such MOU in order to ease their raising of cash through bank loans, which necessarily incurs interest costs.
Their order book as at March 31, 2007 is US$176 million as stated. The LOI for the Indonesian installation of pipelines and platforms is worth US$21.3 million, thus their current order book as at May 14, 2007 stands at US$197.3 million. Only US$70.4 million from the Shell deal will be recognized for FY 2007, thus the total order book forFY 2007 is about US$99.8m + US$21.3m = US$121.1 million. Taking a net margin of 18.9% (as derived from 1Q 2007 and is thus a good indicator), we would arrive at earnings of US$22.9 million. Add this to the current earnings of US$3.7 million and we get US$26.6 million. Using a conversion rate of 1US$ to S$1.51, we get a net profit of S$40.15 million. Thus, the EPS based on 369 million shares is 10.9 singapore cents. Applying a conservative PER of 13x gives a fair value of S$1.414 for Swiber.
But intrinsic value is more than just about numbers. Swiber is currently aggressively expanding its fleet and negotiating for more deals in the region. Being an EPCIC player operating in a niche market, their focus has given them a better competitive advantage. Management is also pro-active, forward-looking and competent and so far they have delivered (except for the margins !). Thus, it might be prudent to apply a slightly higher PER of 15x for their strong entrenched position within the oil and gas industry and their niche focus. This would translate into an intrinsic value of S$1.635 per share for Swiber, based on forecast EPS of 10.9 cents. Thus, at the current closing price of S$2, I feel Swiber is over-valued. A more reasonable price to buy at would be around the S$1.60 to S$1.70 level.
Further catalysts would include:-
1) Securing of more LOI and contracts for EPCIC projects
2) More sale and leaseback deals to securitize more vessels to aid in fleet expansion
3) Setting up of more repreentative offices in countries where they wish to establish a foothold, namely Middle East, Bangladesh, Vietnam and Thailand
4) Ordering of more confirmed vessels for FY 2008 in order to build their capabilities. Currently, many aspects of their 2nd wave of expansion are merely "planned" and are not concrete yet.
For shareholders who find this review useful, or who have a comment to make about my numbers and assumptions used, please feel free to drop a comment. I will try to reply as soon as I can.
Have a great week ahead, everyone !
Swiber Holdings Limited released its 1Q 2007 financial statements and press release today. You can check SGX Announcements page (see links on right side of my blog) to look for it. Basically, to sum it up, I expected more from the financials and was a little disappointed by what I read. Below is an analysis of various aspects of the financials:-
First of all, gross margins for 1Q 2007 have declined to only 27.5% as compared to 1Q 2006 which saw gross margins as high as 37.4%. That's a nearly 10 percentage point drop in gross margins, and this could have boosted earnings significantly. One quick glance already makes it obvious - revenues may have increased by 205.8% but cost of goods sold increased even more by 254.1% ! Management should provide some clarity on why margins continue to be squeezed, but no specific mention was made in the press release or performance review.
Net margins have also decreased from 28.4% in 1Q 2006 to only 18.9% for 1Q 2007. I was already being conservative when I estimated their earnings based on 30% net margin, but to be fair, that took into account the fact that most of their vessels have been delivered. In this case, I would assume that the remaining 10 vessels have yet to be delivered, thus putting a strain on margins as the company has to use third-party vessels. The next step Management should take is to update shareholders on the status of the delivery of the vessels, and assure shareholders that margins will improve in future. Just as a hypothetical illustration, if margins had remained at 1Q 2006 levels, we would be seeing net earnings of US$5,487k instead of the current profit of US$3,642k. That's a 50.7% increase in earnings assuming margins had at least been maintained at 1Q 2006 levels !!
Finance costs have also ballooned 210.7% from US$75k to US$233K, reflecting an increase in bank borrowings for the company. While they maintain that debt/equity ratio remains at 0.35, nevertheless, increased borrowings would mean increased interest costs. In a rising interest rate environment, this could cause a larger cash flow drain for the company. A quick look at the Balance Sheet shows that short-term loans more than doubled from US$4.4m to US$9.8m. Long-term loans have also risen and total liabilities are US$57.5m as compared to only US$42.0 a year ago. Trade and other receivables have also increased significantly, ostensibly due to the 200+% increase in top-line, but the company should comment on the number of days of receivables outstanding to see if their cash conversion cycle has improved. A major worry for me for any company is their ability to manage cash; if this is absent, then the company could face a cash crunch even as they are making profits.
The cash flow statement is another area of concern. The company actually generated NEGATIVE cash flows from operating activities of US$3.7 million ! This was because their increase in receivables had more than offset their increase in trade payables, which is the worrying aspect I talked about. Assuming the company pays its creditors faster than it collects from its debtors, we could see more trouble ahead in terms of cash flow management. Let's hope this problem is only temporary with the spending on capex and would resolve by 2Q, otherwise it is a glaring area to highlight to the Management.
As can be observed, about US$9.7m was spent on capex as compared to US$3.8 million a year ago. When put in context, this is justifiable as the company is aggressively expanding its fleet. The sale and leaseback arrangement also means that cash flows will be eased under "investing activities" as the sale would generate immediate cash back for them. Thus, it is hoped that the company can continue to invoke such MOU in order to ease their raising of cash through bank loans, which necessarily incurs interest costs.
Their order book as at March 31, 2007 is US$176 million as stated. The LOI for the Indonesian installation of pipelines and platforms is worth US$21.3 million, thus their current order book as at May 14, 2007 stands at US$197.3 million. Only US$70.4 million from the Shell deal will be recognized for FY 2007, thus the total order book forFY 2007 is about US$99.8m + US$21.3m = US$121.1 million. Taking a net margin of 18.9% (as derived from 1Q 2007 and is thus a good indicator), we would arrive at earnings of US$22.9 million. Add this to the current earnings of US$3.7 million and we get US$26.6 million. Using a conversion rate of 1US$ to S$1.51, we get a net profit of S$40.15 million. Thus, the EPS based on 369 million shares is 10.9 singapore cents. Applying a conservative PER of 13x gives a fair value of S$1.414 for Swiber.
But intrinsic value is more than just about numbers. Swiber is currently aggressively expanding its fleet and negotiating for more deals in the region. Being an EPCIC player operating in a niche market, their focus has given them a better competitive advantage. Management is also pro-active, forward-looking and competent and so far they have delivered (except for the margins !). Thus, it might be prudent to apply a slightly higher PER of 15x for their strong entrenched position within the oil and gas industry and their niche focus. This would translate into an intrinsic value of S$1.635 per share for Swiber, based on forecast EPS of 10.9 cents. Thus, at the current closing price of S$2, I feel Swiber is over-valued. A more reasonable price to buy at would be around the S$1.60 to S$1.70 level.
Further catalysts would include:-
1) Securing of more LOI and contracts for EPCIC projects
2) More sale and leaseback deals to securitize more vessels to aid in fleet expansion
3) Setting up of more repreentative offices in countries where they wish to establish a foothold, namely Middle East, Bangladesh, Vietnam and Thailand
4) Ordering of more confirmed vessels for FY 2008 in order to build their capabilities. Currently, many aspects of their 2nd wave of expansion are merely "planned" and are not concrete yet.
For shareholders who find this review useful, or who have a comment to make about my numbers and assumptions used, please feel free to drop a comment. I will try to reply as soon as I can.
Have a great week ahead, everyone !
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