The value of analysts' reports

For those of you who rely heavily on analysts' reports in order to buy or sell shares in companies, let me pose this question: how much can you rely on these reports, and are they really serving the interests of the shareholder ?

First, let's analyze the analyst himself (I use a male to denote the analyst, but I know many female analysts myself, this is just for convenience sake !). The analyst has got himself a job at a brokerage house doing research and reports in order to earn a fixed income. His profession allows him to get up close and personal with company's management as well as visit the location and premises of their factories and offices (if overseas) to get a better feel of the company and their potential. Armed with this knowledge, he will proceed to write a report (usually glowing) on the company, analyze the financial figures (usually consists of forecasts) and come up with a target price.

So how is the analyst connected to the shareholders of the report for the company in which he reports on ? The answer is: NONE ! The fact is that analysts are salaried employees whose job is to understand Management and operations in the company he is researching in order to produce a meaningful report. Granted, the report is for clients who may or may not be shareholders of the company, but usually the report is not specifically prepared only for shareholders, but also for interested investors. However, a problem arises here in that the analyst becomes detached from the interests of the shareholders because he is reviewing the company from the point of view of the "outsider". Some may argue that this enhances objectivity and rationality when it comes to financial and management evaluation; but it's a double-edged sword as it also means that the analyst may not bother being "detailed" enough as this is just one of the many companies he has been tasked to research.

Let's use a simple example: Ezra Holdings Limited. I have been a shareholder of the company since October 2005 and in the process, have read up everything I can about the company, browsed through 2 years of annual reports and even spoken to key management personnel on their strategies. I do remember reading reseach reports from CLSA written by a certain Jason Wee who used to initiate coverage on Ezra. Recently, to my surprise, the analyst in charge of Ezra has been replaced by a Caroline Maes. There have been cases too when I noticed that certain companies report having a change of analyst covering it.

An immediate problem arises in such situations. 2 different analysts covering the same company will surely have different views and ways of analyzing the company. Thus, there may not be much continuity in the coverage given by the analyst on the same company (in this case, Ezra) considering that there was a change in analyst. The shareholder (i.e. me) however, will always have a consistent vested interest in the company and will continue to research on the company's prospects and progress by taking a value investing approach. Therefore, is it fair to assume that fully involved shareholders can probably understand and write a more comprehensive report on the company than any analyst ? This is my argument and I know there is no right or wrong; it's just that I am merely trying to tell readers that analysts may not always be the best people to turn to when analyzing a company; sometimes there are others who know even more than analysts, and they are the value investors who have stayed with a company through thick and thin.

Another issue I have with analysts is that they can be wildly incorrect or spot on in their analysis, but they will always get paid the same. Furthermore, can someone name me an analyst who got severely reprimanded or fired because he issued a report with a totally inaccurate target price ? Apparently, readers have to realize that a lot of the analysis and conclusions are based on (sometimes) flimsy, overly optimistic forecasts of future performance. This can decouple the reader from the reality and cause an expectation gap ! I have observed analysts being 180 degrees wrong in their analysis of a company, but I did not observe any major repercussions. In the end, the losers are the ones who faithfully lap up every single analyst report without doing some independent, logical thinking of their own. Who else can you blame if you buy without a margin of safety or based on pure hope ?

Warren Buffett has continually emphasized independent thinking, which means thinking clearly and objectively and based on facts and rational reasoning. As human beings, we are swamped with tons of information everyday from all sources, including analyst reports, friends' recommendations and pundits pushing certain industries or companies. The right thing to do is to filter out all the noise (usually about 95% of what you hear) and focus on what's important (the remaining 5%). Once you have the clarity of mind to think through an issue or to analyze a company, then analysts reports will become just that: analyst reports ! Good for bedtime reading and to give you some ideas, but not good enough to base your investment decision solely on.

The next time you come across an analyst report, read through the entire report word by word and think about what the analyst is saying. The section below describes my reaction to reading a report by DBS Vickers on Pacific Andes, one of my investments.

Pacific Andes Analyst Report - DBS Vickers

I would assume everyone has a copy of this report as it is freely available on the remisiers.org website (see my links on the right), thus I will not "copy and paste" the contents of the report. Rather, I would like to add my comments and opinion on what the analyst has already said, as I am coming from the point of view of a shareholder who has observed the business for more than a year.

Generally, the report is well-written and accurate in describing the company's current state of affairs, as well as the SGM coming up and the impending acquisition of 63.9% of CFG and the 1:1 rights issue. The report also attempts to come up with a target price (I call it intrinsic value) for PAH ex-rights, after taking in 63.9% of the profits from CFG. The analyst had a target of $1.24 pre-rights and $1.04 post-rights, assuming the company went ex-rights at a market price of $1.16 (PAH closed at $1.20 today).

The sensitivity analysis is quite well done, except that it misses a crucial aspect: the future earnings potential and vertical integration enjoyed by PAH, PAIH and CFG. Most analysts' reports are pretty accurate with the numbers (hey they are trained in that !) and can use DCF, sum of the parts and PER to value a company. However, as I mentioned, the fact that they use the term "target price" shows that they are only evaluating the numerical and financial aspects of the company. What is intangible is the company's competitive advantage, exclusive fishing licences from the Peru acquisition, scaling up of operations downstream as they move into fish SCM and fishmeal processing, economies of scale in managing a larger fleet of purse seine vessels as well as cost reductions on negotiation of the 4th VOA. All these factors alone will command a premium when viewed objectively, thus the intrinsic value of PAH will definitely be higher than just $1.04 ex-rights (using 10x FY 2008 PER). The analyst had also failed to project for the earnings growth of PAH, and thus the numbers used are purely from FY 2007's profit, which is historical and rather useless for predicting the future intrinsic value of the company.

Thus, from this example, one can see that analyst reports may not account for everything; and the discerning shareholder should seek to learn more about the company in which he has a stake, in order to form a more well-rounded opinion on the prospects of a company. A long-term approach also helps as one can think of the business as evolving, without a singlewell-defined intrinsic value but more like a rolling, increasing value. The target prices set by a brokerage firm are merely static targets which are probably outdated in about a month's time. This is the dynamic nature of investing and understanding businesses, which is why value investing is almost a full-time job !

End-May 2007 Portfolio Review

Below is a month-end review of share prices and and update of my companies' status:-

1) Ezra - Buy Price $1.30 (bonus adjusted), Market Price $5.65, gain 334%. On May 23, 2007, the company announced that it had awarded a US$25.6 million contract to Labroy Marine Limited to construct a 125m pipe-Laying, accommodation, well service & maintenance vessel. This comes as no surprise as CLSA had already mentioned that Ezra was planning to add 3 new vessels to its fleet for FY 2009. What is interesting is that these 3 vessels are going to be equipped with the latest technology to handle deep-sea O&G exploration. Management are indeed gearing up for the future and it is hoped that O&G activities will really move towards deep-water in time to come.

2) Boustead - Buy Price $1.295 (average), Market Price $1.93, gain 49%. As reviewed in one of my posts, Boustead still has a lot of potential moving into FY 2008 because they are well-positioned in the right industries at the moment. They have operations in energy recycling, wasterwater management as well as properties. The buoyant market for their services will surely see improved earnings and hopefully margins in time to come. Gross dividend is 4.5 cents/share and I am awaiting the Annual Report and AGM to be held.

3) Swiber - Buy Price $1.01, Market Price $1.72, gain 70.3%. Nothing much to report on Swiber except that it appears the price is trending towards my estimated intrinsic value for the company (in my previous post). This bodes well for investors who have assessed the long-term prospects of the company and wish to enter at a good price to ensure margin of safety.

4) Global Voice - Buy Price $0.1775 (average), Market Price $0.195, gain 9.9%. Just yesterday, GV has announced a contract with Deutsche Bourse to provide dark fiber connections. This is yet another contract snared (contract value not mentioned as per usual) by GB since my last review on May 15th. Investor relations has also improved with personal emails being sent to inform shareholders of the latest developments and contract wins. Capacity USA is coming soon on June 25-26, 2007 in USA New York and CEO Noel Meaney is expected to speak about the importance of good private fiber networks. Hopefully, this will further raise the profile of the company and land them more significant deals.

5) Suntec REIT - Buy Price $1.11, Market Price $2.00, gain 80.2%. No significant updates. The dividend of 1.965 cents/share was paid to me on May 29, 2007.

6) Pacific Andes - Buy Price $0.81, Market Price $1.16, gain 43.2%. As reviewed in yesterday's post, PAH has enjoyed good earnings growth and has declared a dividend of 1.08 cents/share pre-rights. A special general meeting is being held at the Grand Hyatt Hotel at 10.30 a.m. on June 18, 2007 to seek approval for the rights issue. I will try my best to attend this meeting as it gives me an opportunity to talk to the Management.

My overall portfolio has increased by 83.4% from cost as at May 31, 2007. Looking forward, nothing has fundamentally changed about any of my companies, and I will continue to monitor industry news about the fishing industry, network requirements in Europe, oil and gas industry as well as the property market. I do not expect much news in June 2007 as it is traditionally a quiet month. Positive catalysts would be new contracts from Ezra or Swiber (unlikely in June, maybe later in the year), more contracts for Boustead (Salcon is the one I am eyeing for FY 2008) and of course, even more contract wins for Global Voice. For Pacific Andes, there should be some write-ups by analysts in the next few trading days and I will review them accordingly.

My next portfolio review will be on June 17 or 18th (the day I return from my honeymoon). In the meantime, I have not done further research into any companies as I wish to review my financial position after my honeymoon (I expect to spend a significant amount in Europe !).

Pacific Andes Holdings Limited - FY 2007 Financial Statement Analysis and Review

Pacific Andes finally released their FY 2007 financial statements today. Revenue was up 48.9% from HK$3.55 billion to HK$5.29 billion. Gross profits increased by 67.8% and net profit attributable to shareholders increased by 49.7%, from HK$257.4 million to HK$385.4 million. However, after stripping out exceptional items (such as a gain on dilution of interest in CFG after the latter did a placement of 29 million shares to institutional investors at S$3.98 per share), net profit would have increased by 38.1% from HK$176.1 million to HK$243.2 million. This represents a significant step for PAH as it has shown consistent growth over the last 2 financial years, aided in part by their aggressive expansion into Peruvian waters and the building up of their fishing division.

Let’s do a quick numerical analysis for PAH:-

Profit Attributable to Shareholders (less exceptional gains) = HK$243.2 million (equivalent to about S$48.6 million)

Issued Share Capital = 662,215,616 shares

Earnings Per Share (cents) = 7.34 cents/share

Price-Earnings Ratio at S$1.16 closing price = 15.8 times

Thus, I would conclude PAH is reasonably valued according to FY 2007 earnings, and some may argue that it is a little high at 15.8x, but this is rather subjective as Synear Foods is trading at 20-30x PER.

Gross margins are 18.2% for FY 2007 as compared to 16.2% for FY 2006, an increase of 2 percentage points. Management has mentioned that they are in the process of negotiating the terms of the 4th VOA, and if successful, they should be able to reduce costs further. Net margins have dipped slightly for PAH, at 4.60% for FY 2007 as compared to 4.95% for FY 2006. This is probably due to higher costs incurred in acquiring new vessels, operating costs relating to these vessels as well as interest expenses on the convertible bonds and senior notes.

The company has declared a dividend of 1.08 cents per share pre-rights, and together with the interim dividend of 1.3 cents per share, makes up a total of 2.38 cents/share. The dividend yield at the closing price of $1.16 is thus 2.05%. For myself, being vested at 81 cents, the dividend yield will be 2.93%.

Balance Sheet Comments

Non-current assets had increased significantly from HK$850 million to HK$3.476 billion. The bulk of the increase can be attributed to an increase in property, plant and equipment as well as deferred charter hires for their vessels; as well as vessel permits. If I am not wrong, these vessel permits can last for a period of 50 years and so will remain in the balance sheet for quite some time. Goodwill on consolidation of CFIL also contributed to the increase.

Current assets increased by only 26.8% in total and most of the increase can be attributed to increases in receivables as well as advances to suppliers. Disappointingly, cash and bank balances only improved by about HK$8.695 million due to the large amounts of cash needed to secure the new vessels.

For current liabilities, trade and other payables saw a significant jump, which was in line with increased operational capability (there was also a corresponding jump in receivables). Finance leases also appeared on the balance sheet as I suspect the charter hire is structured as a finance lease and capitalized, rather than treated as an operating lease and expensed (this is opposed to the sale and leaseback system practiced by Ezra and Swiber which uses operating leases). Total gearing is now 116.9% which is frighteningly high, up from 82.3% a year back.

Key risks

The key risks will include massive dilution from the conversion of the CB as well as the high gearing for PAH, thus increasing interest expenses and hitting the bottom line. Also, it remains to be seen if the fishing and fishmeal division for the company can grow steadily and capture more market share.

Other risks include a worldwide ban on fishing activities due to over-fishing in certain parts of the world, which may affect revenues. Costs may also go up if appropriate equipment needs to be installed in order to remain environmentally friendly (e.g. no bottom trawling is allowed in certain areas of the ocean). Another risk is that of the demand for fish and fishmeal decreasing although this is remote considering that fish has always been a staple diet for many cultures and countries. A final risk I can think of is that of natural disasters which may damage or capsize the super-trawlers and/or purse seine vessels.

Growth Prospects

- CFG and PAH will manage to re-negotiate the terms of the 4th VOA and lower costs so as to improve gross and net margins
- The fishing and fishmeal division under PAH grows significantly as a result of more vessel acquisitions for fishmeal processing in future.
- Signing of additional VOA for CFG which will increase the allowable catch above 270,000 tons.
- Improved earnings as a result of higher margins from economies of scale in combining the operations of the expanded fleet of vessels
- Rising prices for fish and fishmeal products worldwide may give PAH a better edge in pricing their catch and reaping higher margins as a result
- PAH acquiring 63.9% means that net profits attributable to shareholders will increase significantly from FY 2008 onwards. It remains to be seen if this will translate into a higher intrinsic value. I do not expect better dividends because of the high gearing the company has got itself into. It should try to conserve cash as much as possible unless it has sufficient operating cash flows to justifying a dividend increase.

PAH have called for a SGM to be held at Grand Hyatt Hotel on June 18, 2007 (Monday) at 10:30 a.m to approve the rights issue. Assuming the rights issue is approved, the company’s share capital will double and its earnings per share will drop. Thus, unless the company significantly scales up earnings, it may not offset the benefits of an increased share float; and this will ultimately cause shareholders to weep.

Execution and cost-control are key elements for success for PAH and CFG, as the company is very aggressive in its expansion, thus exposing itself to much risk.

Note: My end-May 2007 portfolio review will be posted tomorrow as PAH’s results takes precedence over the discussion of my portfolio. Stay tuned !

Pan-United Marine - The S$2.38 per share offer

It is with much shock, surprise and ultimately disappointment that I report this. Dubai Drydocks World LLC (DD) has, through HSBC, offered to purchase Pan-United Marine (PUM) at S$2.38 per share, valuing the company at S$647.7 million. As at the date of the announcement, 70.08% of the institutional shareholders had already accepted the offer; thus it is an upward task for minority shareholders to say "no". If DD obtains >90% of the company, they have to make a compulsory takeover offer for the remaining shares and delist PUM from the SGX-ST.

A little bit of history first....PUM was initially one of the companies which fell into my radar for value investment. My research began about 6 months ago (around Dec 2006) when a fellow shareholder of Ezra (whom I met at the Ezra FY 2006 AGM) recommended this jewel of a company. He told me he had bought shares at $1.30 and was also a value investor (incidentally, he also recommended Amtek to me, which was trading at 55 cents at the time and which is also subject to a takeover offer at $1.10 per share). My curiousity was piqued as I had also seen announcements from time to time on SGXNet of the company securing ship building and ship repair contracts of significant value. In addition, I knew it had a very generous dividend policy as well. At the time, the stock was trading in the range of $1.20 to $1.30.

Subsequent to the Ezra AGM, I began my research in earnest. I looked at every financial announcement made by the company since 2005 through to 2006, and read the annual reports, visited the website and examined its competitors such as Labroy Marine and ASL Marine. I did an extensive review of the numbers, its prospects, current yards (Singapore and Batam) and also read the chairman's MD&A. Everything seemed to point to a good investment as the company had a lot of latent potential and its intrinsic value was perceived to be much higher than the current market price as the PER was only about 7-8x at the time. In addition, it was growing its order book very quickly and was aiming to expand capacity by building another yard in the near future. Net margins and ROE were also healthy as compared to sector peers.

However, I made the mistake most value investors make, which is a mistake of omission. Not being confident enough of my analysis, I hesitated to buy with the reason that its competitive advantage could not be sustained. However, in time to come, PUM would clinch major deals including the S$98 million deal to build the world's first 30,000 bhp AHTS offered by none other than Ezra (what an irony !) as well as other contracts to boost their order books further past S$500 million. A simple calculation would yield a forward PER of only about 10-11x base on their burgeoning order book.

Which brings me to my next point: that DD is offering a ridiculously low price for PUM ! With the growth rate experienced by PUM and the fact that it can capture such significant contracts, this means that it has a strong competitive edge in snaring such contracts. Surely DD could give the Management more "face" and offer a much better price of at least S$2.80 to S$3.00 ? Offering S$2.38 values the company at close to 11x forward PER, and assuming PUM is able to capture more contracts, forward PER can easily fall to 7-8x again. This, coupled with a generous dividend policy, good ROE and earnings growth, is more evidence that the offer is under-valuing the company. My suggestion is that minority shareholders should reject the offer and wait for a higher bid, though with 70.08% acceptance level, I am not sure if this can work. Will any reader care to enlighten me ?

The lesson to take away from here is: have confidence that you did enough research and identified a potential gem, and make sure to establish that it is being offered by Mr. Market at a significant discount to intrinsic value to offer a good margin of safety. I corrected this mistake of omission in Feb 2007 by analyzing and promptly purchasing Swiber after doing a review and intrinsic value estimation for it (i.e. after it announced the Brunei Shell contract).

Pacific Andes FY 2007 results and End-May 2007 Portfolio Review

As of May 29, 2007, Pacific Andes has yet to release its FY 2007 results. This is rather uncharacteristic of the company as it usually releases results by the second last week of May. Last year, results were out by May 23, 2006. As tomorrow is the final trading day of May 2007, I will be doing my twice-monthly portfolio review and commentary. However, if Pacific Andes announces results tomorrow, then it will take precedence over the portfolio review, which will then be postponed to Vesak Day on May 31, 2007.

Wishing everyone a Happy and Prosperous June 2007 !

Signs of Irrational Exuberance ?

One of the many signs of irrational exuberance is excessive optimisim in the common man on the street. As retail investors, we are exposed to a myriad of stimuli from our colleagues, friends, peers, relatives, family and the general public. All this stimuli culminate into a general feel of the "ground", meaning the psychology of the market and the optimism level of the people.

In the last week alone, I have had experiences which point to mild signs of irrational exuberance. OK, perhaps we should not use the word "irrationa;" just yet; let's call it rational exuberance then ! The key word I wish to highlight is "exuberance", which means unbridled optimisim and enthusiasm (this is NOT a webster definition).

I have a meeting up with 3 other friends once a month to discuss our lives and investment strategies as well as the market in general. Recently, these 3 friends (2 are active traders and one is a laid-back investor) have expressed much optimism in the Singapore as well as China market. One friend even quipped that she felt like quitting her job just to trade in the market, as anything you buy now will go up ! I cautiously pointed out to her that buying lemons or duds in a bull market can also land one in trouble; looking at the sad cases of GEMS TV (new low of 77 cents today) and OSIM (new low of 68.5 cents). I have also noticed a marked increase in trading activity among the 3, with frequency of trades and number of counters increasing by the month. This is a rough gauge of optimism and opportunism as they wish to catch the "trend" and "ride the momentum". Of course, buying a stock just because it is going up is, according to Mr. Warren Buffett, the stupidest reason to buy a stock. I kept that knowledge to myself as I did not wish to offend anyone at the table.

Another instance was when I went out with another guy friend. Over dinner, he mentioned that he and his 2 other friends have been egging each other on to "buy and buy". This was to capitalize on many money-making opportunities as they traded their way up the stock's price. My friend had made many rounds from a single counter and he credited this to the bull market. Also of mention was another friend of his who supposedly (I can't verify this) mortgaged his parent's landed property for S$1.7 million last August 2006 so that he could pump ALL of it into the market ! As of this writing, he reported that his friend proudly proclaimed that he had made S$900,000 out of his initial investment, giving a return of roughly 50+%. The problem I realized was that people don't see things ni % terms, but rather always look at absolute numbers to judge performance. To my friend, S$900,000 is a lot of money and yes, it is a heck lot of money to most of us who are earning a monthly salary of between S$2 to S$5k. But when one looks at the capital involved, it is just over a 50% gain. I mentioned that his performance was not good if he only managed a 50+% gain during a massive bull run, and my friend gasped in surprise. This actually ties back to the phenomenon where people judge stocks based on their absolute price rather than seeing the value behind an investment. Commonly, I have heard of friends who can pump 100 lots into a 10 cent counter with zero potential, yet only manage a miserly 3 lots on a $2.00 company with a lot of latent potential. To me this is plain skewed ! If the company has value you should simply buy more (as I did for Swiber and Boustead even though they were above $1); buying lots of a DUD company is much worse than buying a little of a fantastic company.

Anyhow, I digress again. There are apparent signs of slight exuberance and optimism and stories of people plonking tons of cash into an over-valued market (let's face it, most companies are either fairly valued or over-valued now). In a major correction, these people are more likely to be subjected to emotions because they were so excited in the first place buying all the way up. Thus, the key is still to purchase after objective analysis, and leave yourself a margin of safety.

Ezra Holdings - CLSA Corporate Access Forum (An Update)

A brief update on Ezra Holdings. I managed to obtain a short report on Ezra from CLSA which held their corporate forum recently. Mr. Lionel Lee, MD of Ezra and Mr. Chan Eng Yew (Assistant General Manager) briefed the analyst who prepared the report. The salient points are:-

1) Ezra have recently (on May 1) opened an office in Aberdeen and this will help it to focus on business in Europe and America. I see this as a good platform and springboard for them to extend their reach beyond Asia, but take note that they face major players like Solstad and Tidewater.

2) It is adding 30 vessels this FY and most will be delivered in 2H FY 2007. Today's BT also featured a full-length article showing Ezra unveiling the Lewek Penguin, which is a 12,000 bhp AHTS vessel. Thus, it would appear that vessel delivery is on track and Ezra's corporate communications is willing to spend the $ to enhance their visibility to the public and to shareholders.

3) The vessels are increasingly catered towards deep-water and Ezra will be bidding for another FPSO in the next 12-18 months. It also started an engineering division in London which will employ and research on technology for deep water capabilities. This point is promising as it shows Management is investing for the future (i.e. FY 2009 and beyond).

4) The company sees good potential in China and hopes to increase contribution there by 10x from US$10 million to US$100 million with enlarged bhp capacity. This point is a little ambiguous as I did not think that China had contributed much to Ezra's top line in the past. What the article is saying is that Ezra plans to grow revenue by 10x, which is a little too ambitious in my opinion. Perhaps a more conservative target could be 2-3x, in order to avoid over-optimism. This is because Ezra has not reported taking any concrete steps to capture a share of the China market, yet the Management seem to be making such optimistic claims. As a shareholder, it is natural that I have doubts on whether they can deliver.

A little note: KS Energy announced today that they are purchasing Norway's Atlantic Oil for US$80 million. This will allow them to diversify their product offering into support vessels as well, thus making them effectively a direct competitor of Ezra. Also, this acquisition opens up new markets for them and broadens their reach. It remains to be seen if the acquisition is earnings-accretive as they did not disclose the earnings for Atlantic Oil (also, I am unable to determine the PER used in the purchase, but it is likely in the low to mid-teens as most oil and gas companies are trading at such multiples on the Oslo Stock Exchange). Thus, this news does NOT bode well for Ezra as they have another potential competitor to contend with.

Investment Mistakes Part 1 - Buying purely for dividend

Dear readers, this is the first of a series of write-ups regardig my investment mistakes which I had mentioned before that I would talk about. The importance of maintaining an investment journal to catalogue all mistakes and lessons learnt had already been blogged about by myself in a previous post. Now, I will attempt to go into detail on th various mistakes and how value investors should keep a clear, rational mind when going about the investment process. Also, I had just gone for a Europe Trip briefing today and am pleased to confirm that my honeymoon will officially begin on June 6 (midnight) till June 17 (early morning touchdown). During this time, I will NOT be blogging at all (obviously !) and will also be totally "out of the market". I will give all readers another reminder again when the time comes.

OK so let's begin. The first mistake I wish to talk about is to buy a company purely for dividend. First, I would like to say that if you are above 50, have very low tolerance for risk or have more than enough spare cash; then by all means this may be the right method for you. However, I am coming from the perspective that younger people would wish to purchase a company in order to extract more capital gains from it, rather than dividends. This is because dividends cannot be guaranteed (it depends on the cash flows and health of the company) and the so-called dividend yield may even be offset by capital loss; thus making it a bad investment.

The example which I quote is a real-life one which happened to myself back in Feb 2005 (when I first began investing). I had purchased MCL Land Limited due to a massive dividend declared of 68 cents per share (gross). After the XD, the price fell from my purchase price of $1.97 to $1.37, which was greater than the net dividend of 54 cents per share (at 20% tax rate) from this company. I sold it at a loss of about 3% from my total investment cost, which can be considered small but the lesson to learn here is that one should not buy purely because a large dividend has been declared. Sometimes, it is more important to dissect the company to see if it has growth prospects. Otherwise, you may just sit on your butt collecting dividend all your life while the stock price languishes (this does not apply to REITS which are good for stable income). For avoidance of doubt, I emphasize that this approach is for people who are going for growth or value companies in order to enjoy multt-bagger capital gains in 5-10 years.

Thus, dividend should be seen as a bonus rather than a requirement for investing in a company. I have often heard my friends mentioning how good it is to buy X company because they just declared a large dividend. To provide a counter-argument, companies which declare large dividends may not be good because they have nothing better to do with the cash ! Thus, they are returning it back to shareholders instead of using it to grow the business and to produce superior returns. Each company should be evaluated based on its merits, but in general, companies who propose large dividends or capital distribution have no other uses for their cash, which is why they are returning it back to shareholders. As a good example, I was pleased that Ezra Holdings Limited, in its April 9 GY 2007 results announcement, did not declare a cash dividend but instead proposed a bonus share dividend. This would help it to conserve cash yet expand its capital base to provide better trading liquidity and affordability for its shares.

The REIT I am holding now (Suntec REIT) is purely for dividend and I have no growth expectations for this REIT. Thus, I can safely say my 5 other companies are purchased for their growth prospects; dividends will be a good bonus.

Pacific Andes Holdings Limited - OCBC research head Carmen Lee's Stock Picks

On a side note, in today's The Edge Singapore publication, Pacific Andes was featured as one of Carmen Lee's stock picks for growth and value stocks. There was a glaring typo which said that PAH owns 63.9% of China Fishery; but the acquisition is essentially not complete yet ! In fact, only the CB has been issued, but the rights issue is still subject to shareholder approval and an EGM needs to be convened. The report is misleading as it assumes everything has already been finalized; it is also too short a write-up as it does not talk about China Fishery's recent purchases of up to 7 purse seine vessels for increased fishmeal holding volume and catch volume. OCBC's target price is $1.41, which I feel is kind of plucked from the air since PAH's FY 2007 results are not even out yet. Judging by the way the business is growing, I am hoping for better margins and better valuations in time to come.

Comparison between trading and investing - A personal view

Today I had the wonderful opportunity to view the inner workings of a professional trader, and to see how his mind works and also view the strategies and concepts involved. This person has been consistently posting on the CNA (Channelnewsasia) forum and his daily trades are almost always on contra. For privacy reasons, I will not be stating his nickname on my blog but most of you readers who visit and post on CNA forum will know who this person is.

Suffice to say that I observe and read his postings as a matter of interest, to so-called view the opposite side of the looking glass to see how life is as a trader. After all, value investing and trading are as different as night and day; so it can be very interesting for me to view another perspective. The even better part is that this person is articulate and not afraid to speak his mind about how he trades, and is even open enough to show the world his gain/loss record. I admire him for his transparency and his tenacity, as well as the hard work he has put in. Even though out methods are totally different, we both have a common goal which is to work towards a steady return and to achieve financial freedom.

What I would like to comment on is the difference in the nature of trading and investing (as observed from this person's comments), and why this difference has made me choose the path of value investing. It's more like a life choice which one undertakes because of his character and outlook; there is no "right" or "wrong" to it. It's a personal choice and I respect that.

The first distinctive difference is the amount of time devoted to the market. A trader has to be constantly watching the market in order to trade successfully. I have not met a successful trader who uses some built-in software to help him decide on buy/sell timings. Traders track prices, not companies; thus their attention must always be on the screen to look for breakouts or flags (I am not a TA person, so just quoting some terms. I apologize if I have misused them !). For investors, much of their homework is done at their own time, and once they buy into a company, they can usually just forget about the market and live their own personal lives.

According to the person's account, there is sufficient "emotional turmoil" and a deterioration of his personal life which transcends the money aspect. Thus, for those seeking quick wealth, just remember that sometimes life is really more than just about the money (and this top trader makes an average of about 40-50k per month, not a small sum by any standard). I have a wife who loves me and my family whom I still visit 3 times a week, and I truly enjoy my job now and the travelling opportunities it offers cos I am able to see the world around me. Sometimes, when I am in a reflective mood, I question what my objective in life is. Yes, investing can get me rich slowly, but ultimately I wish to enjoy what life can offer: food, friends, love, children, travelling, karaoke and many other aspects. By choosing the value investing path, I sincerely believe that I can have the best of both worlds, namely to build my wealth (albeit slowly and not as swiftly as the top trader) and to be with the people I love doing the things I love.

Thus, in summary, all I can say is that if you choose to be a trader, make sure you know what you will be sacrificing and also take note of the cost of your choice. Which is to say that investing will also take a toll (the research) and sometimes my wife will also complain that I am so busy researching companies that I spend less time with her. Currently, I have the ideal portfolio till the next market crash (during which I will pick up the companies which I have researched cheaply) and thus I do not have to spend time doing research. Another thing about trading: what I've heard is that about 5% win big (in this case, this top trader is part of the 5%), another 20-25% barely break even with a small profit or loss, while the rest end up with massive losses.

The reason is simple. Traders need the following to survive and be successful:-

1) The technical knowledge to read charts, interpret patterns and recognize trends
2) Mental fortitude to take advantage of crowd psychology and not succumb to it
3) A strict cut-loss rule, while letting your profits run (top traders have mastered this to near perfection)
4) Learning when to put down 10 lots to contra and when to put down 100 lots. In other words, the strength of conviction in your abilities (1 big bad trade can cancel out 10 good ones).
5) Be alert, nimble with a keen eye and fast fingers, not to mention in depth knowledge of how buy/sell queues work and market knowledge as well (this includes economic trends, inflation, Ben Bernanke spouting doomsday stuff etc.)
6) To give up most of your daytime (during trading hours) to constantly monitor the market. In other words, this MUST be your full-time job as one can't possibly trade if one already has a full time job doing something else.
7) The humility to accept mistakes and not get carried away with arrogance.

To be fair, to be a good investor, you would also require the proper psychology with regards to market movements. Generally, being an investor will require less actual time WATCHING the markets, and this is why I prefer it.

That said, I would like to take this opportunity to congratulate this top trader as his record is really impressive ! But, the bottom line is I would rather stick to what I am doing now as it gives me more personal satisfaction. Money is important yes, but it's not everything in life.

Boustead Singapore Limited FY 2007 Results

I was expecting PAH to report its FY 2007 results today, but to my surprise it turned out to be Boustead instead ! Anyhow, a quick glance at the results showed strong growth in net profit, as it was up 41% from S$24.8 million to S$35.2 million. Revenues also showed strong growth of 18.9% from S$289.2 million to S$343.9 million. Gross margins dropped from 37.7% to 34.1%, and the company attributed this to the increased cost of sand due to the sand export ban from Indonesia, which pushed up prices of concrete for Boustead Projects, as well as higher global commodity prices which raised the cost of fabrication.

Net margins (excluding MI) were 10.2% for FY 2007, as compared to 8.6% for FY 2006. I feel this was primarily due to Boustead buying up a larger stake in their subsidiaries, thus reducing the MI portion of profits. If they can manage to lift up gross margins (the problems mentioned were temporary in nature and are not likely to affect long-term gross profitability), then they can probably achieve a higher net margin of about 12-14% (optimistic view).

Currently, the EPS based on FY 2007 results (and total shares of 254,837,000) is 13.8 Singapore cents. Thus, at a closing price of $2.05 the company is trading at 14x PER, which is very reasonable if you think of its growth potential. Boustead has three main arms: Engineering Services, Water and Wastewater Treatment as well as Industrial Real Estate Solutions. The demand for engineering services is increasing in many parts of the world and Boustead has an edge in terms of recycling various waste products back into fuel or electricity. For their wastewater treatment, they are involved in the Water Solutions Alliance to explore opportunities in the Middle East, and that should yield positive results in FY 2008. Also, with the property boom,the industrial real estate arm with its world-renowned expertise in designing industrial buildings is poised to benefit from the boom. Thus, taking into account the above factors, a higher PER of about18x should justify Boustead's growth. This would price the company at $2.63 base on FY 2007 earnings.

Earnings clarity for FY 2008 are not too obvious, but already there have been 2 projects secured since March 2007, which are going to be fully recognized in FY 2008. The Annual Report will probably yield more insights into the company's prospects and their current and future projects which may be partially or fully recognized in FY 2008. Mr. FF Wong has done a good job of selling off unrelated businesses and positioning Boustead for future growth. This is Boustead's fifth consecutive year of record revenues and profits, and FY 2008 is set to be its sixth if all goes well.

Currently, there is also the Binh Dinh power station awaiting approval from the prime minister. If confirmed, this could be Boustead's single largest contract and will significantly boost its order book and demand a re-rating of its intrinsic value. A final gross dividend of 4.5 cents less 18% tax (net 3.69 cents/share) was declared to utilize their remaining s44 balance, and it will be payable on August 20, 2007. More insights should be revealed at their AGM which of course I will attending. The date is as yet unknown as the Annual Report has to come out first. I will probably dedicate one whole posting to analyzing the Annual Report as I feel this is key to understanding a company and its strategies. Also, the next few days may find me posting more insights about Boustead based on analysts' comments and some experienced forumers' analysis, whichever is more relevant. Stay tuned !

Ezra orders new Deep-water vessel for FY 2009

Ezra continues with its fleet expansion plans by announcing today that it has ordered a pipe-laying, accommodation, well-service and maintenance vessel (the "vessel") from Labroy Marine for delivery in the first half of FY 2009 (i.e. anytime from September 2008 till February 2009). I was a little surprised by this as I had not expected another vessel order coming so soon after their May 3, 2007 order for 2 ultra-large 30,000 bhp AHTS. Initially, during the early part of FY 2007, I was worried that Ezra had fallen behind on ordering vessels for FY 2009 to spearhead their continued growth. Now, it seems that Management has got it well-planned by ordering vessels for deep-water oil exploration, a sign that they are looking to the future prospects of chartering out such vessels. There is a shift towards deep water exploration and this is becoming increasingly important as time passes. It is estimated that by FY 2009 more than 50% of oil exploration will move into deepwater (up from 10% currently).

This is Ezra's second pipelay vessel after their first order called Hull 600 which will be delivered in FY 2007. This would build up their capabilities in the pipe-laying area and allow for more deepwater support (as stated in their announcement which describes many technical aspects of the vessel in great detail). The cost of the vessel is US$25.6 million which will be funded by bank borrowings and internal funds. I suspect that some of the placement proceeds should also be used for this vessel, as I am concerned over Ezra's gearing and whether it has gone up too high.

The company will only report quarterly results from FY 2008 onwards, thus we must wait till about Oct 2007 before the earnings report is out. In the meantime though, it will still be possible to email their IR to enquire on their gearing. Also, the EGM for the bonus issue should be a good opportunity to engage the Management and chairman/CEO on issues.