End-August 2007 Portfolio Review
The recent market volatility has allowed me to finally add to my portfolio (my second purchase in 2007 so far), and this was a purchase of 4,000 shares of Pacific Andes at a price of S$0.615 on August 17, 2007 (Friday). On this day itself, the Straits Times Index fell more than 190 points during intra-day trading, and a marvelous window of opportunity opened up for me to buy more of a good company cheaply. In fact, many good companies were showing value that day, with Swiber touching S$1.99 and Ezra touching S$4.42. These are all good prices for value investors to accumulate as these depressed prices offer a good margin of safety as compared to the intrinsic value of the company. My only regret was not queueing to buy more of Swiber at S$2.00 as I had to attend to work matters.
Anyhow, below is the usual summary of my investments and related news as at August 31, 2007 (STI at 3,392.91 points). At the request of some of the readers, I have also included my purchase date as well (note: all dividends received are included under my realized gains and NOT used to offset against my purchase price):-
1) Ezra (Vested since October 6, 2005) - Buy Price $1.30 (bonus adjusted), Market Price $5.90, gain 354%. Besides the details of the EGM which I put together in a post two days ago, Ezra has also announced today that their EOC listing has been granted in-principle approval from Oslo Bors subject to certain conditions being met. However, my personal view is that this is a very complex deal and it will still take more due diligence and time before it can be 100% complete. I trust that the company will be transparent enough to keep shareholders updated from time to time on the progress of the listing.
2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.39, gain 84.6%. Boustead are on a roll as they announced, on August 22, 2007, that they had clinched their largest contract to date of S$300 million to build a township in Libya. Details are as stated in one of my blog posts. The company is expected to clinch more projects in the upcoming months due to their strong competitive advantage in engineering solutions as well as industrial real estate solutions. The net dividend of 3.69 cents per share was received on August 22, 2007.
3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.84, gain 181.2%. It is obvious that Swiber is growing very rapidly and that the company is engaging in many activities to expand their fleet and raise funds in order to fuel further contract wins. On August 22, Swiber announced the appointment of the VP of FSO operations to spearhead this division’s growth. Subsequently, on August 24, they announced the successful bond issue of S$108.5 million to fund their fleet expansion and for working capital. Further on August 30, they announced a purchase of 4 vessels (3 accommodation barges and one submersible barge) to be added to their fleet from 4Q 2007 to 1Q 2009. The total cost of the vessel acquisitions came up to US$70.6 million, which will be funded from the proceeds of their equity fund raising plus sale-and-leaseback.
4) Global Voice (Vested since November 23, 2005; averaged down January 25, 2006) - Buy Price $0.1775 (average), Market Price $0.175, loss 1.4%. GV snared one more contract on August 21, deploying PrivaNex for Global Connect in Hamburg. For more details on the announcement, please visit SGXNet or Global Voice’s website.
5) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.77, gain 59.5%. There was no news for Suntec REIT except for some changes in substantial shareholding involving Temasek Holdings. There have been no further updates so far on the acquisition of One Raffles Quay. I received my dividend of 2.1 cents per share on August 28, 2007.
6) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 207 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.665 (rights-adjusted), Market Price $0.77, gain 17.6%. As mentioned, I added to my position on August 17 and reduced my average cost by 1 cent from 66.5 cents to 65.5 cents; thus increasing my margin of safety for this investment. With the growth of the business intact and the 63.9% recognition of CFG to come in 2Q 2008, I see a good chance of high earnings increase potential for the company moving forward. The dividend of 0.54 cents per share was received on August 24, 2007.
Overall Portfolio
My overall portfolio has increased by 104.1% from a new cost of S$46.8K as at August 31, 2007. The market value of my portfolio is around S$95.6K and unrealized gains total S$48.8K. Realized gains from previous share transactions including all dividends received since I started investing come up to about S$4.2K. Most of the gains can be attributed to the strong performances of Ezra due to news of the EOC listing, Swiber’s expansion plans and Boustead’s clinching of the S$300 million Libya township deal. The strong fundamentals in these 3 companies ensured that my portfolio was protected from the sub-prime “storm” (at least for now !).
My next portfolio review will be on Friday, September 14, 2007 after market close.
Note: I will do only one posting this weekend as I will take some time off my investments to spend with my family.
Friday, August 31, 2007
Thursday, August 30, 2007
The Dynamics of Business Fundamentals
We exist in a world where everything is in constant change, and such rapid changes are exacerbated by the use of technology which can instantly connect two people and make information exchanges all the more rapid. The same goes for businesses in this rapidly evolving world – they also change constantly and their fundamentals never stay the same. As any observer can see, industries come and go; products are launched and die out. It’s the life cycle of businesses, companies and industries, much like the lives of human beings as they go through the phases of growth, maturity then decline.
As such, when one looks at “business fundamentals”, one must be aware that this is ever-changing. Most investors refer to the term fundamentals as if it were a static event and frozen in time, but the reality is that a business is fluid and always adapting to its surroundings. If a business remained stagnant for too long, then it would be in danger of being overtaken by competitors or closing down due to poor sales. The life-cycle of a business would depend on its environment (political, economic, legal and social), industry, trends, products, services, pricing and many other aspects. Thus, the “fundamentals” alone would imply that many such factors have to be looked at, and is not just a simple matter of looking at one facet of the company. If it were really so simple, then most people would have figured things out easily and made tons of money. But in reality, most investors and traders end up losing money by purchasing businesses which cannot stand the test of time, and failing to bail out before the crisis.
How does one know when the company’s fortunes are going to turn ? Generally, a keen observer who keeps track of the company will first be aware of changes in the macro-environment, or industry. Industry developments are very important in determining whether a company can continue to flourish, or is on the verge of decline. For example, in the oil and gas industry, I am aware that oil prices will remain high (around US$70 per barrel) and this makes investing in Ezra and Swiber viable as they depend on high oil prices to generate demand for their services. Should there be an instance where alternative fuels threatened to totally replace crude oil (an unlikely scenario) or if the prices of oil dropped to below US$40 due to over-supply, then the intelligent investor would be able to deduce that companies in the oil and gas industry will start to see deteriorating fundamentals. Thus, it is a matter of being alert and pre-empting the decline, as no company can remain on the growth track forever. I will touch on the product life cycle in a future posting, in order to make my point clearer.
A seasoned and shrewd investor will look out for early signs of trouble in the companies he is vested in, in order to quickly assess the situation and sell out in case of a lingering, fundamental severe problem. These would include (but are not limited to) Acts of God (e.g. earthquakes, fires, floods destroying crops or factories), severe competition, permanent and irreversible erosion of margins, obsolescence of products, serious cash flow mismanagement etc. The difficulty, of course, is in distinguishing a temporary or minor problem from one which is going to cripple the company. In this respect, an understanding of the business and industry does help to give a clearer perspective of the problem, and to rationalize it objectively to see whether it will linger or disappear.
In conclusion, I would like to reiterate again that businesses are dynamic by nature, and that past performances or successes are NEVER an indication of future performance (e.g. Creative Technologies and OSIM). Some companies or industries have their glory days but fall into the doldrums after some time, while “long-term” investors always hope and pray for a miracle and that the stock price will somehow fly once again. Such unrealistic expectations only serve to incapitate the investor and cause him to hold on to a company whose fundamentals and business have eroded beyond recognition. Such is the harsh reality of the business world, and we must learn to cope with it or be destined to lose out in the long-run.
Next Post: I will be posting my usual portfolio summary and review of my investments tomorrow as it is the final day of August 2007; after which my next post will probably be on Swiber's announcement of the acquisition of 4 vessels.
We exist in a world where everything is in constant change, and such rapid changes are exacerbated by the use of technology which can instantly connect two people and make information exchanges all the more rapid. The same goes for businesses in this rapidly evolving world – they also change constantly and their fundamentals never stay the same. As any observer can see, industries come and go; products are launched and die out. It’s the life cycle of businesses, companies and industries, much like the lives of human beings as they go through the phases of growth, maturity then decline.
As such, when one looks at “business fundamentals”, one must be aware that this is ever-changing. Most investors refer to the term fundamentals as if it were a static event and frozen in time, but the reality is that a business is fluid and always adapting to its surroundings. If a business remained stagnant for too long, then it would be in danger of being overtaken by competitors or closing down due to poor sales. The life-cycle of a business would depend on its environment (political, economic, legal and social), industry, trends, products, services, pricing and many other aspects. Thus, the “fundamentals” alone would imply that many such factors have to be looked at, and is not just a simple matter of looking at one facet of the company. If it were really so simple, then most people would have figured things out easily and made tons of money. But in reality, most investors and traders end up losing money by purchasing businesses which cannot stand the test of time, and failing to bail out before the crisis.
How does one know when the company’s fortunes are going to turn ? Generally, a keen observer who keeps track of the company will first be aware of changes in the macro-environment, or industry. Industry developments are very important in determining whether a company can continue to flourish, or is on the verge of decline. For example, in the oil and gas industry, I am aware that oil prices will remain high (around US$70 per barrel) and this makes investing in Ezra and Swiber viable as they depend on high oil prices to generate demand for their services. Should there be an instance where alternative fuels threatened to totally replace crude oil (an unlikely scenario) or if the prices of oil dropped to below US$40 due to over-supply, then the intelligent investor would be able to deduce that companies in the oil and gas industry will start to see deteriorating fundamentals. Thus, it is a matter of being alert and pre-empting the decline, as no company can remain on the growth track forever. I will touch on the product life cycle in a future posting, in order to make my point clearer.
A seasoned and shrewd investor will look out for early signs of trouble in the companies he is vested in, in order to quickly assess the situation and sell out in case of a lingering, fundamental severe problem. These would include (but are not limited to) Acts of God (e.g. earthquakes, fires, floods destroying crops or factories), severe competition, permanent and irreversible erosion of margins, obsolescence of products, serious cash flow mismanagement etc. The difficulty, of course, is in distinguishing a temporary or minor problem from one which is going to cripple the company. In this respect, an understanding of the business and industry does help to give a clearer perspective of the problem, and to rationalize it objectively to see whether it will linger or disappear.
In conclusion, I would like to reiterate again that businesses are dynamic by nature, and that past performances or successes are NEVER an indication of future performance (e.g. Creative Technologies and OSIM). Some companies or industries have their glory days but fall into the doldrums after some time, while “long-term” investors always hope and pray for a miracle and that the stock price will somehow fly once again. Such unrealistic expectations only serve to incapitate the investor and cause him to hold on to a company whose fundamentals and business have eroded beyond recognition. Such is the harsh reality of the business world, and we must learn to cope with it or be destined to lose out in the long-run.
Next Post: I will be posting my usual portfolio summary and review of my investments tomorrow as it is the final day of August 2007; after which my next post will probably be on Swiber's announcement of the acquisition of 4 vessels.
Wednesday, August 29, 2007
Ezra – EGM on August 29, 2007
I attended the EGM held by Ezra today at 10:00 a.m. in order to approve 3 resolutions, namely the 1-for-1 bonus issue, company’s share repurchase scheme and the sale of 43% of EOC Limited on the Oslo bourse. The official business of the meeting was quickly concluded (as it usually is) with all resolutions being proposed, seconded and passed without objections. I took the opportunity to meet up with Mr. Tan Tat Ming (Finance Executive and also in charge of investor relations for Ezra Group) to discuss some salient issues regarding the company. Below are a list of issues which we covered and I am just providing a summary as I could not remember 100% of the details:-
a) On the Bonus Issue – Mr. Tan mentioned that due to the high absolute price of Ezra’s shares on SGX, several funds have been reluctant to buy into the company. Doing a 1-for-1 bonus will double the number of issued shares and half the price, thus increasing trading liquidity and also lowering the absolute cost of each lot. He said that several institutions and funds have shown interest in collecting more of Ezra’s shares but have been constrained from doing so due to the lack of liquidity.
b) On share buybacks – Previously, Ezra had purchased 3 million shares at a price of S$5.60 per share from the open market but this was declared a “void” transaction as the company did not have the mandate for a share buyback program at the time. Thus, this 3 million shares will be released (sold) back to the open market and the company will make an appropriate announcement when this occurs. The company has no plans to buy back shares in the foreseeable future.
c) On rationale for divestment of 43% of EOC – I queried Mr. Tan on the rationale for the disposal of 43% of EOC, arguing that Ezra Group will actually recognize lower profits because most of the profits from the new vessels were coming through the production and construction division helmed by EOC. He mentioned that it was to be a trade-off as Ezra wanted to “lighten” their balance sheet, thus by disposing of the 43% interest in EOC, they need not consolidate line-by-line items for EOC from FY 2008 onward. On the flip side, profits will also be slightly lower and will be incorporated into a line “share of profits from associated company” as EOC will now be an associate instead of a subsidiary. The intention, he said, was for Ezra to grow its AHTS fleet separate from the production and construction division helmed by EOC, and their idea was to beef up the balance sheet of EOC as a result of this divestment. I do not totally agree that this is the best thing to do but I am willing to put my faith in the Management, seeing their track record at managing the company so far.
d) On progress of divestment of EOC – As stated in the circular, the agreed upon price for the divestment and subsequent sale of vendor shares was estimated at between NOK 24 and NOK 26, and the final price will be determined once the contract is signed for the listing. Mr. Chan Eng Yew is currently in Norway handling the EOC matter, and everything is going smoothly as planned. A few weeks ago, CLSA came up with a report speculating that delays may occur in listing EOC at an attractive valuation due to the recent weakness in the markets and reduced confidence on the part of investors. Mr. Tan’s assurance was that this was an equity offering (not debt), thus there should be significantly less resistance to it.
e) On clinching another FPSO deal – EOC will be working towards that as the company plans to bid for another FPSO deal some time in the future. Financing was of course an issue but Mr. Tan’s assurance was that once the announcement was made, all the required tie-ups with regards to financing would have been made. The Group is looking towards acquiring an FPSO in the range of US$200 million to US$300 million rather than the super-large types in the North Sea which can go as high as US$1 billion.
f) On progress of conversion of current FPSO – The current conversion of the FPSO “Kitty Knutsen” is progressing smoothly and the vessel has been renamed Lewek FPSO 1. It is expected to be delivered some time in FY 2008.
g) On alternative fuels and whether they can threaten Ezra’s business – Mr. Tan assured me that oil and gas will always have a part to play in society, even if alternative fuels should one day become commercially viable to produce in mass quantities. This is because too many vessels, aircraft and vehicles are constructed for use with gasoline, and this will not change for at least 50 years (my personal estimate). He also mentioned that for bio-diesel, he has heard that the cost of producing it (from corn) is now higher than the price of the output generated, thus long-term feasibility of this procedure is in question.
h) On charter probabilities and rates for 30,000 bhp vessels – According to Mr. Tan, there was a recent charter of a 28,000 bhp AHTS at a spot rate of US$250,000 per day ! This rate is, of course, not sustainable for longer-term charters but will average around US$100,000 to US$150,000 per day, still a very significant amount indeed. As such, the new 30,000 bhp vessels being built by Pan-United Marine are also equipped with state-of-the-art DP3 (Dynamic Positioning) systems. This technology gives the vessels an added competitive advantage and this should enable them to command higher rates.
i) On charter of Lewek Champion (recently delivered pipe-lay vessel) – I wanted to clarify the charter of Ezra’s pipe-laying vessel Lewek Champion as there were two separate announcements regarding the charter of this vessel, one to ConocoPhillips for 1H FY 2008, and another for a sub-sea pipeline installation for a national oil company. Mr. Tan said that the sub-sea charter can be considered a long-term one, while the ConocoPhillips is more of a spot rate charter which will not extend beyong 1H FY 2008; thus the vessel can be deployed to 2 different locations depending on the needs of the charterer. He also clarified that the US$888 million as announced in the press release was the entire project value, but that Ezra would only be earning a part of that (he did not elaborate on the % as it would be market-sensitive I guess).
j) On strategic stake in Ezion Holdings (formerly known as Nylect) – Ezion is involved in semi-submersibles and Ezra had acquired part of the company in order to enable a strategic fit between Ezion and its Vietnamese fabrication yard. The yard is currently expanding and Ezion’s role in future would be to support the new pre-fabricated vessels coming from the yard. Personally, I have no shareholdings in Ezion as I feel there is no value at current market prices. Ezra’s entry price into Ezion was 33.1 cents, thus they are sitting on some good unrealized gains as well. Hopefully, they will be able to integrate Ezion into their business smoothly and enable more profits to be recognized as a result.
k) On their Vietnamese Fabrication yard – This yard is expanding and Ezra will announce something soon on the development and progress of this yard. Staff strength currently number about 300+ (mostly Vietnamese skilled workers including welders) and is set to increase. The yard is constructing platforms, which are used alongside rigs during the oil drilling phase. Platforms and deployed as fixed structures alongside floating rigs in order to stabilize the operations and enable drilled oil to be piped back to the rig for collection. I am guessing that this will be another area of growth for Ezra as it intends to capture a larger portion of the oil and gas cycle by constructing platforms. Mr. Tan did casually mention that Ezra has identified another land parcel for possible expansion of the Vietnamese yard, but this cannot be confirmed unless the company does an official press release.
I have covered the major points discussed with Mr. Tan, and hopefully the company can continue its growth trajectory to make this a value company to own for many years down the road. From what I heard today, I expect to see more positive developments down the road for shareholders and interested investors. Unlocking the value of EOC through a vendor sale of shares on the Main Board of Oslo is only the first step in Ezra’s ambitious expansion plan.
I attended the EGM held by Ezra today at 10:00 a.m. in order to approve 3 resolutions, namely the 1-for-1 bonus issue, company’s share repurchase scheme and the sale of 43% of EOC Limited on the Oslo bourse. The official business of the meeting was quickly concluded (as it usually is) with all resolutions being proposed, seconded and passed without objections. I took the opportunity to meet up with Mr. Tan Tat Ming (Finance Executive and also in charge of investor relations for Ezra Group) to discuss some salient issues regarding the company. Below are a list of issues which we covered and I am just providing a summary as I could not remember 100% of the details:-
a) On the Bonus Issue – Mr. Tan mentioned that due to the high absolute price of Ezra’s shares on SGX, several funds have been reluctant to buy into the company. Doing a 1-for-1 bonus will double the number of issued shares and half the price, thus increasing trading liquidity and also lowering the absolute cost of each lot. He said that several institutions and funds have shown interest in collecting more of Ezra’s shares but have been constrained from doing so due to the lack of liquidity.
b) On share buybacks – Previously, Ezra had purchased 3 million shares at a price of S$5.60 per share from the open market but this was declared a “void” transaction as the company did not have the mandate for a share buyback program at the time. Thus, this 3 million shares will be released (sold) back to the open market and the company will make an appropriate announcement when this occurs. The company has no plans to buy back shares in the foreseeable future.
c) On rationale for divestment of 43% of EOC – I queried Mr. Tan on the rationale for the disposal of 43% of EOC, arguing that Ezra Group will actually recognize lower profits because most of the profits from the new vessels were coming through the production and construction division helmed by EOC. He mentioned that it was to be a trade-off as Ezra wanted to “lighten” their balance sheet, thus by disposing of the 43% interest in EOC, they need not consolidate line-by-line items for EOC from FY 2008 onward. On the flip side, profits will also be slightly lower and will be incorporated into a line “share of profits from associated company” as EOC will now be an associate instead of a subsidiary. The intention, he said, was for Ezra to grow its AHTS fleet separate from the production and construction division helmed by EOC, and their idea was to beef up the balance sheet of EOC as a result of this divestment. I do not totally agree that this is the best thing to do but I am willing to put my faith in the Management, seeing their track record at managing the company so far.
d) On progress of divestment of EOC – As stated in the circular, the agreed upon price for the divestment and subsequent sale of vendor shares was estimated at between NOK 24 and NOK 26, and the final price will be determined once the contract is signed for the listing. Mr. Chan Eng Yew is currently in Norway handling the EOC matter, and everything is going smoothly as planned. A few weeks ago, CLSA came up with a report speculating that delays may occur in listing EOC at an attractive valuation due to the recent weakness in the markets and reduced confidence on the part of investors. Mr. Tan’s assurance was that this was an equity offering (not debt), thus there should be significantly less resistance to it.
e) On clinching another FPSO deal – EOC will be working towards that as the company plans to bid for another FPSO deal some time in the future. Financing was of course an issue but Mr. Tan’s assurance was that once the announcement was made, all the required tie-ups with regards to financing would have been made. The Group is looking towards acquiring an FPSO in the range of US$200 million to US$300 million rather than the super-large types in the North Sea which can go as high as US$1 billion.
f) On progress of conversion of current FPSO – The current conversion of the FPSO “Kitty Knutsen” is progressing smoothly and the vessel has been renamed Lewek FPSO 1. It is expected to be delivered some time in FY 2008.
g) On alternative fuels and whether they can threaten Ezra’s business – Mr. Tan assured me that oil and gas will always have a part to play in society, even if alternative fuels should one day become commercially viable to produce in mass quantities. This is because too many vessels, aircraft and vehicles are constructed for use with gasoline, and this will not change for at least 50 years (my personal estimate). He also mentioned that for bio-diesel, he has heard that the cost of producing it (from corn) is now higher than the price of the output generated, thus long-term feasibility of this procedure is in question.
h) On charter probabilities and rates for 30,000 bhp vessels – According to Mr. Tan, there was a recent charter of a 28,000 bhp AHTS at a spot rate of US$250,000 per day ! This rate is, of course, not sustainable for longer-term charters but will average around US$100,000 to US$150,000 per day, still a very significant amount indeed. As such, the new 30,000 bhp vessels being built by Pan-United Marine are also equipped with state-of-the-art DP3 (Dynamic Positioning) systems. This technology gives the vessels an added competitive advantage and this should enable them to command higher rates.
i) On charter of Lewek Champion (recently delivered pipe-lay vessel) – I wanted to clarify the charter of Ezra’s pipe-laying vessel Lewek Champion as there were two separate announcements regarding the charter of this vessel, one to ConocoPhillips for 1H FY 2008, and another for a sub-sea pipeline installation for a national oil company. Mr. Tan said that the sub-sea charter can be considered a long-term one, while the ConocoPhillips is more of a spot rate charter which will not extend beyong 1H FY 2008; thus the vessel can be deployed to 2 different locations depending on the needs of the charterer. He also clarified that the US$888 million as announced in the press release was the entire project value, but that Ezra would only be earning a part of that (he did not elaborate on the % as it would be market-sensitive I guess).
j) On strategic stake in Ezion Holdings (formerly known as Nylect) – Ezion is involved in semi-submersibles and Ezra had acquired part of the company in order to enable a strategic fit between Ezion and its Vietnamese fabrication yard. The yard is currently expanding and Ezion’s role in future would be to support the new pre-fabricated vessels coming from the yard. Personally, I have no shareholdings in Ezion as I feel there is no value at current market prices. Ezra’s entry price into Ezion was 33.1 cents, thus they are sitting on some good unrealized gains as well. Hopefully, they will be able to integrate Ezion into their business smoothly and enable more profits to be recognized as a result.
k) On their Vietnamese Fabrication yard – This yard is expanding and Ezra will announce something soon on the development and progress of this yard. Staff strength currently number about 300+ (mostly Vietnamese skilled workers including welders) and is set to increase. The yard is constructing platforms, which are used alongside rigs during the oil drilling phase. Platforms and deployed as fixed structures alongside floating rigs in order to stabilize the operations and enable drilled oil to be piped back to the rig for collection. I am guessing that this will be another area of growth for Ezra as it intends to capture a larger portion of the oil and gas cycle by constructing platforms. Mr. Tan did casually mention that Ezra has identified another land parcel for possible expansion of the Vietnamese yard, but this cannot be confirmed unless the company does an official press release.
I have covered the major points discussed with Mr. Tan, and hopefully the company can continue its growth trajectory to make this a value company to own for many years down the road. From what I heard today, I expect to see more positive developments down the road for shareholders and interested investors. Unlocking the value of EOC through a vendor sale of shares on the Main Board of Oslo is only the first step in Ezra’s ambitious expansion plan.
Tuesday, August 28, 2007
The difficulty in being Objective
Today, I will embark on a short, succinct but very relevant post on objectivity. As investors, I had mentioned that the hardest thing to master are your emotions and this is the number one chief reason why so many people lose money in the stock market. Not only must you be able to grasp the company’s fundamentals well and analyze the financial statements; but one must also be able to control the emotional urges that get other investors into trouble, namely fear and greed. Objectivity is another aspect of the emotional equation, in which an investor’s mind tends to be clouded, subjective and biased until he can get past the “vested interest syndrome” as I call it.
Just what exactly is this weird-sounding syndrome ? To put it in layman’s terms, it simply means falling in love with the stock and company ! In all honesty, I may also be guilty of this without realizing it as many of my companies form my core long-term holdings. People tend to seek out information which affirms their beliefs and every investor would do their best to uncover information which is positive for their investments; thereby leading to the dangerous situation where potential negative developments surrounding the company’s industry or fundamentals remain “shrouded” because of selective retention. Investors tend to shun bad news about their investments because it does not conform to their expected view of how their investments should perform. Hence, this is a selective bias which, admittedly, is very difficult to detect and eliminate. It usually requires an objective non-vested third-party to provide a more objective and balanced view of a company.
This is why I strongly encourage feedback on my blog (through comments) when I write on the companies I own. My analysis may be flawed and skewed as I am vested, thus it may impair my objectivity in analyzing the situation as I may only see the rosy side and not the potentially negative side. On my own, I also visit forums to check out quality postings and others’ analysis of my companies in order to obtain a more balanced view. I actually encourage dissenting views and differing opinions which may enable me to view a company from a different perspective, and I try hard to reduce and eliminate the selective perception tendency (which filters out all negative news automatically). Thus far, I have had balanced views on Global Voice, Ezra Holdings and also Pacific Andes and have taken these views into account when I blog about the risks of such businesses. Without such views and opinions in an open forum, I doubt I would have been able to provide both sides of the story regarding a new company announcement or results release.
On the flip side though, while the importance of seeking differing opinions and viewpoints cannot be downplayed, it is also important for a value investor to maintain a certain degree of independent thinking. By this, I mean that one ought to use his own brain juice to think independently on the situation and not be overly influenced by crowd perception. As Benjamin Graham put it: “You are right not because the crowd is right; you are right because your reasoning and facts are correct”. People may have a hidden agenda, vested interest or behave too emotionally when it comes to talking about companies they either love or hate, thus take everything in stride but go through the pertinent facts in order to make your own decisions.
A parting note: Remember to view all facts objectively and impartially, as if you were a third-party observer. Although this had proved to be difficult for most investors due to the presence of emotional attachments to a company they either love or hate, it must still be attempted in order to obtain an unbiased view of one’s investment. Only then can an investor truly work towards achieving a reasonable rate of return on his investment.
Update: Thanks to little willow for pointing out that the above quote (in bold) was made by Benjamin Graham and not Warren Buffett. I have amended the post to reflect this.
Today, I will embark on a short, succinct but very relevant post on objectivity. As investors, I had mentioned that the hardest thing to master are your emotions and this is the number one chief reason why so many people lose money in the stock market. Not only must you be able to grasp the company’s fundamentals well and analyze the financial statements; but one must also be able to control the emotional urges that get other investors into trouble, namely fear and greed. Objectivity is another aspect of the emotional equation, in which an investor’s mind tends to be clouded, subjective and biased until he can get past the “vested interest syndrome” as I call it.
Just what exactly is this weird-sounding syndrome ? To put it in layman’s terms, it simply means falling in love with the stock and company ! In all honesty, I may also be guilty of this without realizing it as many of my companies form my core long-term holdings. People tend to seek out information which affirms their beliefs and every investor would do their best to uncover information which is positive for their investments; thereby leading to the dangerous situation where potential negative developments surrounding the company’s industry or fundamentals remain “shrouded” because of selective retention. Investors tend to shun bad news about their investments because it does not conform to their expected view of how their investments should perform. Hence, this is a selective bias which, admittedly, is very difficult to detect and eliminate. It usually requires an objective non-vested third-party to provide a more objective and balanced view of a company.
This is why I strongly encourage feedback on my blog (through comments) when I write on the companies I own. My analysis may be flawed and skewed as I am vested, thus it may impair my objectivity in analyzing the situation as I may only see the rosy side and not the potentially negative side. On my own, I also visit forums to check out quality postings and others’ analysis of my companies in order to obtain a more balanced view. I actually encourage dissenting views and differing opinions which may enable me to view a company from a different perspective, and I try hard to reduce and eliminate the selective perception tendency (which filters out all negative news automatically). Thus far, I have had balanced views on Global Voice, Ezra Holdings and also Pacific Andes and have taken these views into account when I blog about the risks of such businesses. Without such views and opinions in an open forum, I doubt I would have been able to provide both sides of the story regarding a new company announcement or results release.
On the flip side though, while the importance of seeking differing opinions and viewpoints cannot be downplayed, it is also important for a value investor to maintain a certain degree of independent thinking. By this, I mean that one ought to use his own brain juice to think independently on the situation and not be overly influenced by crowd perception. As Benjamin Graham put it: “You are right not because the crowd is right; you are right because your reasoning and facts are correct”. People may have a hidden agenda, vested interest or behave too emotionally when it comes to talking about companies they either love or hate, thus take everything in stride but go through the pertinent facts in order to make your own decisions.
A parting note: Remember to view all facts objectively and impartially, as if you were a third-party observer. Although this had proved to be difficult for most investors due to the presence of emotional attachments to a company they either love or hate, it must still be attempted in order to obtain an unbiased view of one’s investment. Only then can an investor truly work towards achieving a reasonable rate of return on his investment.
Update: Thanks to little willow for pointing out that the above quote (in bold) was made by Benjamin Graham and not Warren Buffett. I have amended the post to reflect this.
Monday, August 27, 2007
Swiber – Inaugural Bond Issue of S$108.5 Million
On August 24, 2007, Swiber announced the completion of a successful bond placement through CitiCorp Investment Bank (“Citi”), raising a total of S$108.5 million as part of their S$300 million multi-currency medium term note programme established on July 20, 2007. This programme was established with the aim of raising funds for Swiber’s fleet expansion through debt, after utilizing the options of equity financing and sales and leaseback.
Terms of the Bond Issue and Financial Effects
The 3-year bonds are issued in two tranches: S$54 million was raised on a fixed-rate tranche with an interest rate of 4.34% per annum payable semi-annually, while the other S$54.5 million tranche has a floating interest rate which is 140 basis points (1.4%) above the 3-month Singapore Dollar Swap Offer rate and is payable quarterly. The bonds will mature on August 24, 2010 and will NOT be traded on the SGX-ST. After reading up a little on swaps (on HSBC website which was rather technical), I found that they are more versatile than fixed-rate loans in an increasing interest-rate environment; and that swaps are generally used to protect a company against adverse movements in interest rates. Upon further reading from the OCBC website, I found that the Swop Offer Rates (SOR) are fixed daily at 11 a.m. by the Association of Banks in Singapore and it will be based on the date of loan disbursement and NOT the underlying loan amount. Thus, thus rate will actually be fixed and reported in the Business Times after the day the funds are made available. In the absence of a fixed rate, I shall use an SOR rate of 3% (as SOR are supposed to be more flexible than fixed-rate loans, hence I used a lower %) and adjust it accordingly when the company makes further announcements.
From the numbers provided, the computation of the interest rate is as follows: for the fixed-rate tranche, the interest payable per annum is S$2.3436 million, which works out to S$1.1718 million every half-yearly. Since this tranche was taken up on August 24, 2007, the next interest installment payment would be on February 24, 2008 in FY 2008 (which will impact the 1Q FY 2008 results). For the floating-rate tranche, assuming a 3% SOR, the floating rate will be about 4.4% per annum. This works out to about S$2.398 million worth of interest payments per annum, which translates into about S$600,000 every quarter. The next interest installment for this tranche will be on November 24, 2007 and will thus impact the FY 2007 financials. The total interest payable per annum on the entire bond issue is about S$4.716 million (about US$3.1 million).
Based on Swiber’s balance sheet as at June 30, 2007, it shows that they have cash and bank balances of US$8.8 million, which is more than sufficient to service this bond issue. A quick check on their cash flow statement reveals that for 2Q 2007, there was US$2.9 million worth of operating cash inflows generated. If we annualized this, it would imply that Swiber generates about US$11.6 million worth of cash inflows from operations annually; more than enough to service the annual interest commitments for this bond issue. Also, please note that the operating cash flows for 2Q 2007 are not fully indicative of Swiber’s cash generating ability moving into the future, because as more contracts come into force, their operating cash inflows generation capability should also dramatically increase.Gearing will increase from 0.52 (using 2Q 2007 figures) to 1.73, which is a three-fold increase, as a result of the issuance of the bonds. This high gearing is a concern but in this industry, capex is a very important aspect of growing the business and the case was similar for Ezra Holdings Limited (though they preferred to use sale-and-leasebacks and equity issues rather tan debt). The advantage of debt is that it can offer a better rate than raising funds through equity, as investors will demand an equity risk premium to cover them in case the business does not grow as planned. I will be closely tracking Swiber’s gearing and cash flows in future periods to assess if the company can manage their debts well.
Outlook and Prospects
The fundamentals of Swiber have changed as a result of this bond issue, and moving forward, I have to see more contract wins in other regions in which they have not penetrated before in order to bolster my confidence in the company. As the CEO Mr.Raymond Goh mentioned, building the fleet is of course important, but this is based on the assumption that a stronger and larger fleet can help them to clinch contracts of higher value and also allow them to control costs well as they would not need to rely on third-party vessels.
As mentioned in Swiber’s press release, this is the first bond issue from an oil and gas services company and the only bond issue of significant size (not sure what their benchmark is !) from a local company since May 2007. The fact that the bond issue was attractively priced amid current “market volatility” and increased wariness due to the sub-prime mortgage issue in the USA serves to emphasize the confidence which asset managers and insurance companies have in the company. CitiCorp managed to make full use of a window of opportunity given by the Fed cutting bank lending rates by 50 basis points in order to price the bond issue more attractively, which attests to their expertise and experience. Moving forward, I see more synergies created as Swiber continues to work with CitiCorp on future debt issuances from their S$300 million dollar medium term note programme.
Swiber – Appointment of new VP of FSO Operations Mr. Ronald L. Schakosky
On August 22, 2007, Swiber announced yet another appointment of a senior management staff. This time, it was the vice-president of their Floating, Production and Offloading (“FSO”) division. He is Mr. Ronald L. Schakosky, a 59-year old American who has 25 years of experience in the oil and gas industry. His experience and knowledge lie in field engineering, field development, FSO and FPSO projects and operations and he is expected to “inject a new and innovative management style and perspective to the Group’s operations”. By this, it would imply that there should be a new approach to the old way of doing things and hopefully processes and projects will be reviewed and revamped to make them more cost-effective and efficient.
This latest announcement demonstrates Swiber’s commitment to improving their Management team, by hiring senior management personnel with vast experience in the oil and gas sector in order to boost the Group’s competencies and knowledge base. The good thing is that the Company strives to keep shareholders informed of such developments, which is another plus point in terms of voluntary corporate disclosure.
On August 24, 2007, Swiber announced the completion of a successful bond placement through CitiCorp Investment Bank (“Citi”), raising a total of S$108.5 million as part of their S$300 million multi-currency medium term note programme established on July 20, 2007. This programme was established with the aim of raising funds for Swiber’s fleet expansion through debt, after utilizing the options of equity financing and sales and leaseback.
Terms of the Bond Issue and Financial Effects
The 3-year bonds are issued in two tranches: S$54 million was raised on a fixed-rate tranche with an interest rate of 4.34% per annum payable semi-annually, while the other S$54.5 million tranche has a floating interest rate which is 140 basis points (1.4%) above the 3-month Singapore Dollar Swap Offer rate and is payable quarterly. The bonds will mature on August 24, 2010 and will NOT be traded on the SGX-ST. After reading up a little on swaps (on HSBC website which was rather technical), I found that they are more versatile than fixed-rate loans in an increasing interest-rate environment; and that swaps are generally used to protect a company against adverse movements in interest rates. Upon further reading from the OCBC website, I found that the Swop Offer Rates (SOR) are fixed daily at 11 a.m. by the Association of Banks in Singapore and it will be based on the date of loan disbursement and NOT the underlying loan amount. Thus, thus rate will actually be fixed and reported in the Business Times after the day the funds are made available. In the absence of a fixed rate, I shall use an SOR rate of 3% (as SOR are supposed to be more flexible than fixed-rate loans, hence I used a lower %) and adjust it accordingly when the company makes further announcements.
From the numbers provided, the computation of the interest rate is as follows: for the fixed-rate tranche, the interest payable per annum is S$2.3436 million, which works out to S$1.1718 million every half-yearly. Since this tranche was taken up on August 24, 2007, the next interest installment payment would be on February 24, 2008 in FY 2008 (which will impact the 1Q FY 2008 results). For the floating-rate tranche, assuming a 3% SOR, the floating rate will be about 4.4% per annum. This works out to about S$2.398 million worth of interest payments per annum, which translates into about S$600,000 every quarter. The next interest installment for this tranche will be on November 24, 2007 and will thus impact the FY 2007 financials. The total interest payable per annum on the entire bond issue is about S$4.716 million (about US$3.1 million).
Based on Swiber’s balance sheet as at June 30, 2007, it shows that they have cash and bank balances of US$8.8 million, which is more than sufficient to service this bond issue. A quick check on their cash flow statement reveals that for 2Q 2007, there was US$2.9 million worth of operating cash inflows generated. If we annualized this, it would imply that Swiber generates about US$11.6 million worth of cash inflows from operations annually; more than enough to service the annual interest commitments for this bond issue. Also, please note that the operating cash flows for 2Q 2007 are not fully indicative of Swiber’s cash generating ability moving into the future, because as more contracts come into force, their operating cash inflows generation capability should also dramatically increase.Gearing will increase from 0.52 (using 2Q 2007 figures) to 1.73, which is a three-fold increase, as a result of the issuance of the bonds. This high gearing is a concern but in this industry, capex is a very important aspect of growing the business and the case was similar for Ezra Holdings Limited (though they preferred to use sale-and-leasebacks and equity issues rather tan debt). The advantage of debt is that it can offer a better rate than raising funds through equity, as investors will demand an equity risk premium to cover them in case the business does not grow as planned. I will be closely tracking Swiber’s gearing and cash flows in future periods to assess if the company can manage their debts well.
Outlook and Prospects
The fundamentals of Swiber have changed as a result of this bond issue, and moving forward, I have to see more contract wins in other regions in which they have not penetrated before in order to bolster my confidence in the company. As the CEO Mr.Raymond Goh mentioned, building the fleet is of course important, but this is based on the assumption that a stronger and larger fleet can help them to clinch contracts of higher value and also allow them to control costs well as they would not need to rely on third-party vessels.
As mentioned in Swiber’s press release, this is the first bond issue from an oil and gas services company and the only bond issue of significant size (not sure what their benchmark is !) from a local company since May 2007. The fact that the bond issue was attractively priced amid current “market volatility” and increased wariness due to the sub-prime mortgage issue in the USA serves to emphasize the confidence which asset managers and insurance companies have in the company. CitiCorp managed to make full use of a window of opportunity given by the Fed cutting bank lending rates by 50 basis points in order to price the bond issue more attractively, which attests to their expertise and experience. Moving forward, I see more synergies created as Swiber continues to work with CitiCorp on future debt issuances from their S$300 million dollar medium term note programme.
Swiber – Appointment of new VP of FSO Operations Mr. Ronald L. Schakosky
On August 22, 2007, Swiber announced yet another appointment of a senior management staff. This time, it was the vice-president of their Floating, Production and Offloading (“FSO”) division. He is Mr. Ronald L. Schakosky, a 59-year old American who has 25 years of experience in the oil and gas industry. His experience and knowledge lie in field engineering, field development, FSO and FPSO projects and operations and he is expected to “inject a new and innovative management style and perspective to the Group’s operations”. By this, it would imply that there should be a new approach to the old way of doing things and hopefully processes and projects will be reviewed and revamped to make them more cost-effective and efficient.
This latest announcement demonstrates Swiber’s commitment to improving their Management team, by hiring senior management personnel with vast experience in the oil and gas sector in order to boost the Group’s competencies and knowledge base. The good thing is that the Company strives to keep shareholders informed of such developments, which is another plus point in terms of voluntary corporate disclosure.
Sunday, August 26, 2007
Personal Finance Part 2 – Credit Cards
To continue my series on personal finance, I would like to touch on an often controversial, yet unavoidable issue – that of credit cards. It is a well-know fact that developing countries such as Singapore have residents who are increasingly dependent on credit and debt as a way to pursue an “enhanced” lifestyle. Since just one generation ago when Singapore became independent, our lives have become increasingly fast-paced and materialistic. This is evident from the prevalence of sports cars being spotted recently on the streets of Singapore and also from the various interactions from my peers, friends and colleagues. The conversation would inevitably steer towards the “possessions” one has, what car you are driving (if you own one) and what flat you lived in. Perhaps it is a result of Singapore’s strong economic growth which has precipitated such affluence and materialism, but the constant pursuit of money is still a worrying trend. Credit cards are often mentioned in the media as exacerbating this problem by offering cheap credit to people who do not know how to make full use of it. What do I mean by this ? Read on to find out….
Credit cards are basically a form of debt given to a cardholder such that he can utilize this debt to “spend” until he reached his credit limit (this is usually less than twice his monthly salary). The card allows one to do hassle-free shopping (you do not have to bring cash around) and also allows you to spend much more than you normally are able to. At the end of the month, a statement summarizing the previous month’s transactions is mailed to the cardholder, and he has until a specific deadline to choose to pay the minimum sum or the full amount, after which interest (usually as high as 24% per annum) will be levied on the outstanding amount. The pros and cons of credit cards are listed in the simple table below:-
Advantages of Credit Cards
i) Allows one to do hassle-free spending, without having to carry massive amounts of cash for a major purchase;
ii) Allows one to spend more than one normally can as the card limit is usually about twice the cardholder’s salary;
iii) Gives the cardholder a 2-month interest-free “loan”, as the statement usually arrives one month after the date of transaction, while the deadline for settling the account is another month from the date of receipt of statement. In effect, this allows you to retain your cash for 2 months without settling your outstanding bills;
iv) Summarized statement showing the vendors visited and amounts paid: this acts as a sort of accountability statement and record for you to review your purchases for the previous month;
v) Perks and bonuses which come with each card which include accrual of loyalty points, special discounts and good shopping/holiday deals
Disadvantages of Credit Cards
i) Allows one to roll over debts into future periods, effectively incurring high interest charges for those ignorant of such compounding;
ii) Encourages wanton spending as the card gives the feeling of not departing with immediate cash, thus the psychological effect is dissimilar from actually forking out real money or using a debit card (which immediately deducts your bank account);
iii) Creates a “plastic” culture, where credit cards are seen as a way to enhance spending and allow people to roll over their balances. Thus, many people are caught over-extending themselves and living on “borrowed money”.
In spite of the apparent disadvantages, I am of the belief that it is up to the individual to control his or her proper use of the card, as the card can be a powerful tool when used correctly as it gives a 2-month interest-free loan. It is akin to fire in that we must know how to control and use it; it is useful when used for cooking and heating but it can also destroy and kill.
Recently, I came across an ad for the Citi Clear Card , which changes the concept of owning credit cards. Most credit cards come with minimum income requirements but this card has no minimum requirement and people as young as 21 can apply for it. Those above 18 can apply too but require parental consent. I support the aim of this card as it attempts to educate the young on the benefits of credit, while at the same time it also has sufficient safeguards to ensure that these youths do not go astray. Such features are:-
a) Card is automatically blocked once the cardmember misses his/her payment – this prevents the cardholder from incurring further debts assuming that he or she is unable to pay for previous ones
b) The credit limit is capped at S$500, which is a good way to ensure that cardholders do not over-spend. This also allows the cardholder to appreciate the value of money by starting small until he/she goes out to work and earn money.
In addition, the Citi Clear Card also has discounts and privileges at over 600 merchant locations, which is one of the advantages I mentioned above. Not many cards offer a choice of so many merchants and some of the partner include Velvet Underground, Winebar, Heeren Shops, Café Cartel, TCC, Coffee Club, Haagen Dazs and California Fitness just to name a few. One new noteworthy feature worth mentioning is their one-touch biometric payment which allows you to settle your purchases with the touch of your finger ! Truly technology can work wonders and what safer way is there than your own biology which cannot be replicated like normal cards can ? I was also pleasantly surprised when I found out about this feature as I admit to feeling nervous over possible credit card fraud. Online shopping and rewards programs are also available with this card and it would seem that Citibank is having a first-mover advantage by introducing this card to the youths and targeting a new segment of the population.
In fact, with the safeguards for this card and the additional perks, I was even thinking of signing up for one myself as I currently only have a UOB card and it would be good to enjoy the perks associated with the Citi Clear Card. For all those interested in applying, please click here in order to be directed to the relevant webpage by Citibank.
The above is just an example of one of the more recently launched credit cards which incorporate good benefits and also safety features in order to promote good credit habits. Thus, in conclusion, please do make use of credit cards in order to obtain your free 2-month loan but please DO pay the full amount in time in order to avoid the massively expensive 24% per annum interest charges which follow !
To continue my series on personal finance, I would like to touch on an often controversial, yet unavoidable issue – that of credit cards. It is a well-know fact that developing countries such as Singapore have residents who are increasingly dependent on credit and debt as a way to pursue an “enhanced” lifestyle. Since just one generation ago when Singapore became independent, our lives have become increasingly fast-paced and materialistic. This is evident from the prevalence of sports cars being spotted recently on the streets of Singapore and also from the various interactions from my peers, friends and colleagues. The conversation would inevitably steer towards the “possessions” one has, what car you are driving (if you own one) and what flat you lived in. Perhaps it is a result of Singapore’s strong economic growth which has precipitated such affluence and materialism, but the constant pursuit of money is still a worrying trend. Credit cards are often mentioned in the media as exacerbating this problem by offering cheap credit to people who do not know how to make full use of it. What do I mean by this ? Read on to find out….
Credit cards are basically a form of debt given to a cardholder such that he can utilize this debt to “spend” until he reached his credit limit (this is usually less than twice his monthly salary). The card allows one to do hassle-free shopping (you do not have to bring cash around) and also allows you to spend much more than you normally are able to. At the end of the month, a statement summarizing the previous month’s transactions is mailed to the cardholder, and he has until a specific deadline to choose to pay the minimum sum or the full amount, after which interest (usually as high as 24% per annum) will be levied on the outstanding amount. The pros and cons of credit cards are listed in the simple table below:-
Advantages of Credit Cards
i) Allows one to do hassle-free spending, without having to carry massive amounts of cash for a major purchase;
ii) Allows one to spend more than one normally can as the card limit is usually about twice the cardholder’s salary;
iii) Gives the cardholder a 2-month interest-free “loan”, as the statement usually arrives one month after the date of transaction, while the deadline for settling the account is another month from the date of receipt of statement. In effect, this allows you to retain your cash for 2 months without settling your outstanding bills;
iv) Summarized statement showing the vendors visited and amounts paid: this acts as a sort of accountability statement and record for you to review your purchases for the previous month;
v) Perks and bonuses which come with each card which include accrual of loyalty points, special discounts and good shopping/holiday deals
Disadvantages of Credit Cards
i) Allows one to roll over debts into future periods, effectively incurring high interest charges for those ignorant of such compounding;
ii) Encourages wanton spending as the card gives the feeling of not departing with immediate cash, thus the psychological effect is dissimilar from actually forking out real money or using a debit card (which immediately deducts your bank account);
iii) Creates a “plastic” culture, where credit cards are seen as a way to enhance spending and allow people to roll over their balances. Thus, many people are caught over-extending themselves and living on “borrowed money”.
In spite of the apparent disadvantages, I am of the belief that it is up to the individual to control his or her proper use of the card, as the card can be a powerful tool when used correctly as it gives a 2-month interest-free loan. It is akin to fire in that we must know how to control and use it; it is useful when used for cooking and heating but it can also destroy and kill.
Recently, I came across an ad for the Citi Clear Card , which changes the concept of owning credit cards. Most credit cards come with minimum income requirements but this card has no minimum requirement and people as young as 21 can apply for it. Those above 18 can apply too but require parental consent. I support the aim of this card as it attempts to educate the young on the benefits of credit, while at the same time it also has sufficient safeguards to ensure that these youths do not go astray. Such features are:-
a) Card is automatically blocked once the cardmember misses his/her payment – this prevents the cardholder from incurring further debts assuming that he or she is unable to pay for previous ones
b) The credit limit is capped at S$500, which is a good way to ensure that cardholders do not over-spend. This also allows the cardholder to appreciate the value of money by starting small until he/she goes out to work and earn money.
In addition, the Citi Clear Card also has discounts and privileges at over 600 merchant locations, which is one of the advantages I mentioned above. Not many cards offer a choice of so many merchants and some of the partner include Velvet Underground, Winebar, Heeren Shops, Café Cartel, TCC, Coffee Club, Haagen Dazs and California Fitness just to name a few. One new noteworthy feature worth mentioning is their one-touch biometric payment which allows you to settle your purchases with the touch of your finger ! Truly technology can work wonders and what safer way is there than your own biology which cannot be replicated like normal cards can ? I was also pleasantly surprised when I found out about this feature as I admit to feeling nervous over possible credit card fraud. Online shopping and rewards programs are also available with this card and it would seem that Citibank is having a first-mover advantage by introducing this card to the youths and targeting a new segment of the population.
In fact, with the safeguards for this card and the additional perks, I was even thinking of signing up for one myself as I currently only have a UOB card and it would be good to enjoy the perks associated with the Citi Clear Card. For all those interested in applying, please click here in order to be directed to the relevant webpage by Citibank.
The above is just an example of one of the more recently launched credit cards which incorporate good benefits and also safety features in order to promote good credit habits. Thus, in conclusion, please do make use of credit cards in order to obtain your free 2-month loan but please DO pay the full amount in time in order to avoid the massively expensive 24% per annum interest charges which follow !
Saturday, August 25, 2007
Boustead – S$300 Million Contract to Build Township in Libya
Boustead has announced on the evening of August 22, 2007 that it had clinched its largest and most significant contract to date: that of building a township in Al Marj in Libya. The total value of this contract stands at S$300 million and will be jointly entered into by Boustead and their joint-venture partner General Construction and Building Company (GCBC), which is the largest construction company in Libya. According to the agreement, Boustead will own 65% of the joint venture and it plans to build 1,164 single-storey semi-detached houses. Boustead will be utilizing advanced technology in order to augment the township and ensure that it is equipped with state of the art technology coupled with a modern Arabic architectural façade.
With this contract (Boustead’s largest to date), Boustead’s order book expands to close to S$700 million, a record for the Group to date. This success can be attributed to the Group trimming off its “excess fats” in order to focus its competencies on three core business; that of engineering, water/wastewater treatment and industrial real estate solutions. By specializing and possessing a high level of quality, Boustead is able to clinch contracts which span the globe. This is their main competitive advantage and continues to help them to secure new customers (as announced on August 13, 2007 regarding the S$26 million engineering contracts) in locations all over the world.
According to Philip Securities’ latest report on Boustead, the analyst Lim Thian Koon mentions that he expects more projects coming up for Boustead. This is predicated on the fact that the Libyan government is embarking on a long-term project to construct 400,000 homes in the country within the next decade. Boustead, being the first Singapore company to design and build a new township in Libya, would have establish an early foothold and gain a first mover advantage when it comes to the design and construction of more houses in other parts of Libya. In addition, Salcon is also just completing the construction of the largest sewage treatment plant there; thus Boustead’s name should be firmly entrenched within the country. This makes it all the more likely that more projects will be clinched by Boustead in future.
As for the numbers, taking the Philips’ Securities report as a good guide, this S$300 million project will be 65% owned by Boustead, which means a total revenue of S$195 million recognized over 24 months. As at the date of announcement, there are about 7 months remaining for FY 2008. Thus, the project is assumed to be 7/24 (or about 30%) complete as at the end of FY 2008 and this amounts to S$58.5 million. Management has informed Philip Securities that the gross margin for the township stands at 15-20% (this is taken from the report and cannot be independently verified); therefore yielding a gross profit of about S$8.775 million (using 15% because of prudence). I assume net margin is only about 5% of revenue recognized, so net profit will be in the range of S$2.9 million. Although this does not seem very high, please note that it is computed using very conservative assumptions and that Boustead Projects + the engineering division still have a fat order book for FY 2008 waiting to be recognized.
The intangible benefits arising from this record contract are obvious: it shows that Boustead has the ability and capability to clinch multi-million dollar contracts by partnering with other parties, when it was previously assumed that such mega-projects may strain the Group’s ability to properly manage and handle. Another plus point is that the Group is trusted and well-respected in diverse areas of the world which Singapore companies seldom dare to venture into. This gives Boustead a competitive advantage as it means that it can tap on its expertise in property development and high-end engineering solutions to provide a unique offering similar to the one demonstrated in Libya. In time to come, it is highly likely that Boustead would be able to collaborate with other partners in order to clinch more mega-deals, as it continues to focus on its core competencies and sharpen its competitive edge. Barring unforeseen circumstances, I can already envision that FY 2008 will be another record year of revenues and profits for Boustead, making it their sixth consecutive year of revenue and profit growth.
Next Post: More on Swiber’s newly appointed VP of FSO operations as well as their successful inaugural bond issuance amounting to S$108.5 million to fund their fleet expansion. Stay tuned !
Boustead has announced on the evening of August 22, 2007 that it had clinched its largest and most significant contract to date: that of building a township in Al Marj in Libya. The total value of this contract stands at S$300 million and will be jointly entered into by Boustead and their joint-venture partner General Construction and Building Company (GCBC), which is the largest construction company in Libya. According to the agreement, Boustead will own 65% of the joint venture and it plans to build 1,164 single-storey semi-detached houses. Boustead will be utilizing advanced technology in order to augment the township and ensure that it is equipped with state of the art technology coupled with a modern Arabic architectural façade.
With this contract (Boustead’s largest to date), Boustead’s order book expands to close to S$700 million, a record for the Group to date. This success can be attributed to the Group trimming off its “excess fats” in order to focus its competencies on three core business; that of engineering, water/wastewater treatment and industrial real estate solutions. By specializing and possessing a high level of quality, Boustead is able to clinch contracts which span the globe. This is their main competitive advantage and continues to help them to secure new customers (as announced on August 13, 2007 regarding the S$26 million engineering contracts) in locations all over the world.
According to Philip Securities’ latest report on Boustead, the analyst Lim Thian Koon mentions that he expects more projects coming up for Boustead. This is predicated on the fact that the Libyan government is embarking on a long-term project to construct 400,000 homes in the country within the next decade. Boustead, being the first Singapore company to design and build a new township in Libya, would have establish an early foothold and gain a first mover advantage when it comes to the design and construction of more houses in other parts of Libya. In addition, Salcon is also just completing the construction of the largest sewage treatment plant there; thus Boustead’s name should be firmly entrenched within the country. This makes it all the more likely that more projects will be clinched by Boustead in future.
As for the numbers, taking the Philips’ Securities report as a good guide, this S$300 million project will be 65% owned by Boustead, which means a total revenue of S$195 million recognized over 24 months. As at the date of announcement, there are about 7 months remaining for FY 2008. Thus, the project is assumed to be 7/24 (or about 30%) complete as at the end of FY 2008 and this amounts to S$58.5 million. Management has informed Philip Securities that the gross margin for the township stands at 15-20% (this is taken from the report and cannot be independently verified); therefore yielding a gross profit of about S$8.775 million (using 15% because of prudence). I assume net margin is only about 5% of revenue recognized, so net profit will be in the range of S$2.9 million. Although this does not seem very high, please note that it is computed using very conservative assumptions and that Boustead Projects + the engineering division still have a fat order book for FY 2008 waiting to be recognized.
The intangible benefits arising from this record contract are obvious: it shows that Boustead has the ability and capability to clinch multi-million dollar contracts by partnering with other parties, when it was previously assumed that such mega-projects may strain the Group’s ability to properly manage and handle. Another plus point is that the Group is trusted and well-respected in diverse areas of the world which Singapore companies seldom dare to venture into. This gives Boustead a competitive advantage as it means that it can tap on its expertise in property development and high-end engineering solutions to provide a unique offering similar to the one demonstrated in Libya. In time to come, it is highly likely that Boustead would be able to collaborate with other partners in order to clinch more mega-deals, as it continues to focus on its core competencies and sharpen its competitive edge. Barring unforeseen circumstances, I can already envision that FY 2008 will be another record year of revenues and profits for Boustead, making it their sixth consecutive year of revenue and profit growth.
Next Post: More on Swiber’s newly appointed VP of FSO operations as well as their successful inaugural bond issuance amounting to S$108.5 million to fund their fleet expansion. Stay tuned !
Wednesday, August 22, 2007
Personal Finance Part 1 – Pillars of Wealth Building
This is part 1 of a brand new series on personal finance. I will be discussing various methods of building wealth, including how to minimize expenses as well as covering topics such as credit cards, cars, property, loans and other financial matters pertaining to individuals. Investing will of course be touched on as well as part of personal finance, as I believe investing is the only way to grow and build your long-term wealth as CPF simply isn’t enough (yes, even with that extra 1% I am very sure it is still insufficient for retirement !).
I would like to start off the series by introducing my own personal 3 pillar of wealth building: Savings, Insurance and Investment. These are not methods by which one can get instantly rich (try Toto if you want to win instant riches !), but I believe they help us to prepare for contingencies and also to build long-term sustainable wealth which can be passed on to our next generation. Always remember that we are not only earning money for ourselves, but also our loved ones (e.g. father, mother, siblings and spouse as well as children). Thus, it is not enough to merely earn enough for yourself, but it is also critically important to grow our wealth at a reasonable rate (in this case, I mean greater than inflation rate) and to compound our savings so that we can enjoy a comfortable, worry-free retirement. Below are my three pillars and a brief summary of each. As this series moves along, I will elaborate more on each pillar. Feel free to leave comments if you have other wealth-building ideas or if you need to share your own experiences on wealth accumulation.
Savings
Most people under-estimate the power of saving regularly. Although saving itself will not guarantee that we can “grow” our money, at least it doesn’t cause our money to simply vanish (especially if you are one who does not track your monthly expenses). My belief is that one should at least attempt to save 30% of their take-home pay (i.e. gross salary less 20% compulsory CPF contribution to CPF OA). Remember that it is now much one earns, but rather how much one spends which determines how much he is able to save every month. A “high-flyer” earning S$10,000 (net) a month and spending S$9,000 on luxury items, partying and car accessories will only end up with S$1,000 of savings (10%). However, a thrifty person earning a S$4,000 net salary and spending only S$2,500 can manage to save more in monetary terms (S$1,500 per month as opposed to Mr. Spendthrift) as well as percentage terms (37.5% compared to 10%). I personally keep a spreadsheet to track my expenses in terms of meals for the month, transport as well as “other” purchases like movies, books and clothing.
Insurance
Insurance acts as a safety net should anything happen to oneself. Most people who think insurance isn’t important or that they don’t need it obviously have NOT considered what happens should they die or meet with a serious accident one day. Please remember that when something bad happens to you, it is the loved ones around you who suffer (either from lack of your steady income to support them, or expenses incurred in providing you with appropriate and constant care). Thus, insurance is a form of safeguard against financial loss and gives you peace of mind. These days, insurance also comes in the form of savings plans (which I will elaborate on more in a future post) which allows you to save regularly at an interest rate higher than inflation. This allows one to protect one’s earnings as well as save constantly and compound one’s wealth. I personally have 3 insurance policies (2 life and 1 life/term/savings) while my wife has 2 (one life and the other life/term/savings). Notice that I did not mention ILP (Investment-linked policies)…..this will be elaborated on in more detail during my posting on insurance and financial planners.
Investing
Finally, the most important and powerful way of building wealth is through investments, either in property, equities, bonds or unit trusts. If one follows prudent principles for investing for the long-term, one can enjoy very good returns of 11% (30-year period), which is nearly 3 times the average level of inflation (3%). By introducing value investing, I hope to show readers that slow and steady wealth building through long-term investing is a sure way of growing your nest egg. Foolishly exposing oneself to the unpredictable patterns of the daily stock quotes in an attempt to second-guess sentiment and emotions is at best futile, and at worst foolish. I have mentioned the difference between trading and investing in a previous post so I will not go into it once again. Suffice to say that proper temperament and studious research and reading are important pre-requisites for doing consistently well in the market. As this is mainly a value investing blog, I will not touch too much on unit trusts and bonds but I will be making a brief mention on property investing in a subsequent post.
In Part 2 of Personal Finance series: I will explore the use of credit and debit cards and introduce some features of the latest cards to readers. I will also discuss the pros and cons of credit and how we can maximize the use of the credit card.
In my next post: I will touch on Boustead’s S$300 million contract to build a township in Libya and also cover Swiber’s appointment of a new VP for FSO operations.
This is part 1 of a brand new series on personal finance. I will be discussing various methods of building wealth, including how to minimize expenses as well as covering topics such as credit cards, cars, property, loans and other financial matters pertaining to individuals. Investing will of course be touched on as well as part of personal finance, as I believe investing is the only way to grow and build your long-term wealth as CPF simply isn’t enough (yes, even with that extra 1% I am very sure it is still insufficient for retirement !).
I would like to start off the series by introducing my own personal 3 pillar of wealth building: Savings, Insurance and Investment. These are not methods by which one can get instantly rich (try Toto if you want to win instant riches !), but I believe they help us to prepare for contingencies and also to build long-term sustainable wealth which can be passed on to our next generation. Always remember that we are not only earning money for ourselves, but also our loved ones (e.g. father, mother, siblings and spouse as well as children). Thus, it is not enough to merely earn enough for yourself, but it is also critically important to grow our wealth at a reasonable rate (in this case, I mean greater than inflation rate) and to compound our savings so that we can enjoy a comfortable, worry-free retirement. Below are my three pillars and a brief summary of each. As this series moves along, I will elaborate more on each pillar. Feel free to leave comments if you have other wealth-building ideas or if you need to share your own experiences on wealth accumulation.
Savings
Most people under-estimate the power of saving regularly. Although saving itself will not guarantee that we can “grow” our money, at least it doesn’t cause our money to simply vanish (especially if you are one who does not track your monthly expenses). My belief is that one should at least attempt to save 30% of their take-home pay (i.e. gross salary less 20% compulsory CPF contribution to CPF OA). Remember that it is now much one earns, but rather how much one spends which determines how much he is able to save every month. A “high-flyer” earning S$10,000 (net) a month and spending S$9,000 on luxury items, partying and car accessories will only end up with S$1,000 of savings (10%). However, a thrifty person earning a S$4,000 net salary and spending only S$2,500 can manage to save more in monetary terms (S$1,500 per month as opposed to Mr. Spendthrift) as well as percentage terms (37.5% compared to 10%). I personally keep a spreadsheet to track my expenses in terms of meals for the month, transport as well as “other” purchases like movies, books and clothing.
Insurance
Insurance acts as a safety net should anything happen to oneself. Most people who think insurance isn’t important or that they don’t need it obviously have NOT considered what happens should they die or meet with a serious accident one day. Please remember that when something bad happens to you, it is the loved ones around you who suffer (either from lack of your steady income to support them, or expenses incurred in providing you with appropriate and constant care). Thus, insurance is a form of safeguard against financial loss and gives you peace of mind. These days, insurance also comes in the form of savings plans (which I will elaborate on more in a future post) which allows you to save regularly at an interest rate higher than inflation. This allows one to protect one’s earnings as well as save constantly and compound one’s wealth. I personally have 3 insurance policies (2 life and 1 life/term/savings) while my wife has 2 (one life and the other life/term/savings). Notice that I did not mention ILP (Investment-linked policies)…..this will be elaborated on in more detail during my posting on insurance and financial planners.
Investing
Finally, the most important and powerful way of building wealth is through investments, either in property, equities, bonds or unit trusts. If one follows prudent principles for investing for the long-term, one can enjoy very good returns of 11% (30-year period), which is nearly 3 times the average level of inflation (3%). By introducing value investing, I hope to show readers that slow and steady wealth building through long-term investing is a sure way of growing your nest egg. Foolishly exposing oneself to the unpredictable patterns of the daily stock quotes in an attempt to second-guess sentiment and emotions is at best futile, and at worst foolish. I have mentioned the difference between trading and investing in a previous post so I will not go into it once again. Suffice to say that proper temperament and studious research and reading are important pre-requisites for doing consistently well in the market. As this is mainly a value investing blog, I will not touch too much on unit trusts and bonds but I will be making a brief mention on property investing in a subsequent post.
In Part 2 of Personal Finance series: I will explore the use of credit and debit cards and introduce some features of the latest cards to readers. I will also discuss the pros and cons of credit and how we can maximize the use of the credit card.
In my next post: I will touch on Boustead’s S$300 million contract to build a township in Libya and also cover Swiber’s appointment of a new VP for FSO operations.
Tuesday, August 21, 2007
Research Series Part 6 – The Balance Sheet
Part 6 of my research series focuses on the balance sheet of a company. For readers who are not familiar with accounting, the Balance Sheet is simply a statement of affairs of a company and consists of a summary of its assets, liabilities and equity. The formula is assets minus liabilities equals to equity, and any net profit or loss will be added to or deducted from equity respectively. This is how the Income Statement flows into the Balance Sheet. Another point to note is that the Income Statement represents the FLOW of revenues and expenses for the entire financial year, while the Balance Sheet reperesents a SNAPSHOT in time for the company (e.g. December 31, 2006). Thus, the balance sheet for January 1, 2007 may be very different from that of December 31, 2006.
In spite of this drawback of lacking the “flow” concept, a balance sheet analysis is absolutely essential in researching a company as it gives investors a summary of the types and amounts of assets and liabilities of a company, and how these can affect the operations and financial health of the company in future periods. Note that many items on the Balance Sheet have multiple period effects, meaning that their effects can linger for more than one financial period. This is in contrast to Income Statements where what you see may only pertain to one financial period (the one under review, that is). An example of a multiple period item would be a 5-year long-term loan, which has interest expenses accruing on a yearly basis for 5 financial periods.I will not go into an excessively lengthy and technical explanation of the Balance Sheet, as most readers are not accounting-trained and writing such a post will simply put everyone to sleep ! Instead, I will focus on salient parts of the Balance Sheet with the hope of simplifying key aspects such that laymen and normal investors can get a grip of a company’s financial standing. The items to be touched on are as follows:-
1) Fixed Assets – Companies which spend on fixed assets (called capital expenditures or capex) usually should have some form of justification for it. Some companies may be building new plants, acquiring more machinery to expand operations, or even buying up leasehold property in order to expand their premises. Such moves involve large amounts of cash to be paid and one must note that there is an Income Statement effect called depreciation for high capex companies. Most investors like to hear news of companies building new plants or acquiring new assets through subsidiaries but neglect to think of the effects of depreciation which will eat into the bottom line. For more information on depreciation methods and how to compute this, please consult any Annual Report’s section on accounting policies.
2) Intangible Assets – This would include goodwill, patents, trademarks and rights to original published material. These assets are so named as they do not have physical substance but constitutes a certain value nonetheless because of the premium that people place on having such assets. Note that goodwill is externally acquired and cannot be internally generated (nope, you do NOT generate goodwill by being friendly to your boss !) and this usually happens when the cost of acquisition exceeds the NTA value of an acquiree company. The excess will be booked as goodwill. Any increase should be investigated as it will lead to amortization charges which impact the income statement (amortization is similar to depreciation but accountants just like to call it something different).
3) Trade Receivables (Debtors) – The increase in debtors should be roughly equal to the increase in revenues (makes sense unless most of the revenues consist of cash sales !). If the increase (in % terms) is greater than the increase in revenues, one must look at the number of days of receivables outstanding to get a better idea of how fast their debtors pay up. Normally, a significant increase in receivables should be an area of concern as this may mean that while the company is generating higher revenues, they may not be generating cash inflows as quickly.
4) Inventories (Stocks) – For companies which are into manufacturing, retail or trading, this number is significant as it tells the reader how fast inventories are being used and the turnaround time for stocks to be sold. Check out the note to the accounts pertaining to the inventories to see how well the company is managing their inventory. Excessive build up of inventories may point towards an inability to sell due to obsolescence, which may prompt a stock write-off in future periods (this happens to some IT companies). Too little inventory is also not good as it may indicate that the company’s re-order procedure is flawed, thus leaving them out of stock and unable to generate revenues.
5) Cash and Bank Balances – This is probably the single most important item within the balance sheet and is the item hardly anybody talks about (in forums at least, everyone loves to concentrate on profit, sales and margins only). I will dedicate an entire posting on the cash flow statement in part 7 but for now, all I can say is that a company with good free-cash flow (FCF) from operating activities is fundamentally strong enough to withstand recessions and a high interest rate environment (assuming it is moderately geared).
6) Trade Payables (Creditors) – Kind of the opposite of debtors, this measures how fast creditors are being paid off and it is important for a discerning reader to ascertain the cash conversion cycle; which is the rate of stockturn plus the rate of receivables turn minus the rate of payables turn. The cash conversion days will give an idea of how fast the company can generate cash to fund its operations and whether they are paying creditors faster than they are collecting from debtors. One example is my recently reviewed Global Voice (read the review for more details).
7) Bank Loans – The amount of loans on a company’s balance sheet divided by its equity is called “gearing” or “leverage”. This represents the indebtedness of the company to banks and financial institutions, and can be an important barometer to compare against other companies within the same industry. If bank loans increased a lot, it may show that the company is relying on too much leverage to grow, which is unhealthy because of the high interest costs involved. However, on the flip side, some gearing is also good as it helps to finance the costs of capex and/or expansion in the short term when the company may be just starting out.
This is just a simple summary of the major items to look out for in the Balance Sheet. There are two ratios which are of particular importance with regards to the balance sheet, and they are the current ratio and the quick (acid-test) ratio. Current ratio is simply current assets divided by current liabilities and measures how much each dollar of liability is supported by current assets. If current liabilities exceed current assets, then the company is in negative working capital and is technically “insolvent” as it is unable to repay all its short-term liabilities. This is a dangerous situation for any company. The quick ratio is similar to the current ratio except that the numerator is “current assets less inventories”; and this is to measure the liquidity of the remaining current assets to service the curent liabilities. Many companies who have too much of their assets focused in inventories will show a low quick ratio. This may be an indication that inventories are stockpiling into unhealthy levels.
What an investor must do is to read the income statement in conjunction with the Balance Sheet, as both are linked to each other. Practice reading up on Balance Sheets and Income Statements of various local listed companies to give yourself a flavour of what you will be analyzing and how to go about doing it. Nothing beats practice, as they say !
Note: I will be starting a new series soon on “Personal Finance” which talks and discusses about good habits to build wealth, owning cars, property, credit and debit cards, loans and also money-saving habits. A little bit on taxes as well, if readers are interested. Please give me feedback on what you wish to know more about by commenting ! Thanks !
Part 6 of my research series focuses on the balance sheet of a company. For readers who are not familiar with accounting, the Balance Sheet is simply a statement of affairs of a company and consists of a summary of its assets, liabilities and equity. The formula is assets minus liabilities equals to equity, and any net profit or loss will be added to or deducted from equity respectively. This is how the Income Statement flows into the Balance Sheet. Another point to note is that the Income Statement represents the FLOW of revenues and expenses for the entire financial year, while the Balance Sheet reperesents a SNAPSHOT in time for the company (e.g. December 31, 2006). Thus, the balance sheet for January 1, 2007 may be very different from that of December 31, 2006.
In spite of this drawback of lacking the “flow” concept, a balance sheet analysis is absolutely essential in researching a company as it gives investors a summary of the types and amounts of assets and liabilities of a company, and how these can affect the operations and financial health of the company in future periods. Note that many items on the Balance Sheet have multiple period effects, meaning that their effects can linger for more than one financial period. This is in contrast to Income Statements where what you see may only pertain to one financial period (the one under review, that is). An example of a multiple period item would be a 5-year long-term loan, which has interest expenses accruing on a yearly basis for 5 financial periods.I will not go into an excessively lengthy and technical explanation of the Balance Sheet, as most readers are not accounting-trained and writing such a post will simply put everyone to sleep ! Instead, I will focus on salient parts of the Balance Sheet with the hope of simplifying key aspects such that laymen and normal investors can get a grip of a company’s financial standing. The items to be touched on are as follows:-
1) Fixed Assets – Companies which spend on fixed assets (called capital expenditures or capex) usually should have some form of justification for it. Some companies may be building new plants, acquiring more machinery to expand operations, or even buying up leasehold property in order to expand their premises. Such moves involve large amounts of cash to be paid and one must note that there is an Income Statement effect called depreciation for high capex companies. Most investors like to hear news of companies building new plants or acquiring new assets through subsidiaries but neglect to think of the effects of depreciation which will eat into the bottom line. For more information on depreciation methods and how to compute this, please consult any Annual Report’s section on accounting policies.
2) Intangible Assets – This would include goodwill, patents, trademarks and rights to original published material. These assets are so named as they do not have physical substance but constitutes a certain value nonetheless because of the premium that people place on having such assets. Note that goodwill is externally acquired and cannot be internally generated (nope, you do NOT generate goodwill by being friendly to your boss !) and this usually happens when the cost of acquisition exceeds the NTA value of an acquiree company. The excess will be booked as goodwill. Any increase should be investigated as it will lead to amortization charges which impact the income statement (amortization is similar to depreciation but accountants just like to call it something different).
3) Trade Receivables (Debtors) – The increase in debtors should be roughly equal to the increase in revenues (makes sense unless most of the revenues consist of cash sales !). If the increase (in % terms) is greater than the increase in revenues, one must look at the number of days of receivables outstanding to get a better idea of how fast their debtors pay up. Normally, a significant increase in receivables should be an area of concern as this may mean that while the company is generating higher revenues, they may not be generating cash inflows as quickly.
4) Inventories (Stocks) – For companies which are into manufacturing, retail or trading, this number is significant as it tells the reader how fast inventories are being used and the turnaround time for stocks to be sold. Check out the note to the accounts pertaining to the inventories to see how well the company is managing their inventory. Excessive build up of inventories may point towards an inability to sell due to obsolescence, which may prompt a stock write-off in future periods (this happens to some IT companies). Too little inventory is also not good as it may indicate that the company’s re-order procedure is flawed, thus leaving them out of stock and unable to generate revenues.
5) Cash and Bank Balances – This is probably the single most important item within the balance sheet and is the item hardly anybody talks about (in forums at least, everyone loves to concentrate on profit, sales and margins only). I will dedicate an entire posting on the cash flow statement in part 7 but for now, all I can say is that a company with good free-cash flow (FCF) from operating activities is fundamentally strong enough to withstand recessions and a high interest rate environment (assuming it is moderately geared).
6) Trade Payables (Creditors) – Kind of the opposite of debtors, this measures how fast creditors are being paid off and it is important for a discerning reader to ascertain the cash conversion cycle; which is the rate of stockturn plus the rate of receivables turn minus the rate of payables turn. The cash conversion days will give an idea of how fast the company can generate cash to fund its operations and whether they are paying creditors faster than they are collecting from debtors. One example is my recently reviewed Global Voice (read the review for more details).
7) Bank Loans – The amount of loans on a company’s balance sheet divided by its equity is called “gearing” or “leverage”. This represents the indebtedness of the company to banks and financial institutions, and can be an important barometer to compare against other companies within the same industry. If bank loans increased a lot, it may show that the company is relying on too much leverage to grow, which is unhealthy because of the high interest costs involved. However, on the flip side, some gearing is also good as it helps to finance the costs of capex and/or expansion in the short term when the company may be just starting out.
This is just a simple summary of the major items to look out for in the Balance Sheet. There are two ratios which are of particular importance with regards to the balance sheet, and they are the current ratio and the quick (acid-test) ratio. Current ratio is simply current assets divided by current liabilities and measures how much each dollar of liability is supported by current assets. If current liabilities exceed current assets, then the company is in negative working capital and is technically “insolvent” as it is unable to repay all its short-term liabilities. This is a dangerous situation for any company. The quick ratio is similar to the current ratio except that the numerator is “current assets less inventories”; and this is to measure the liquidity of the remaining current assets to service the curent liabilities. Many companies who have too much of their assets focused in inventories will show a low quick ratio. This may be an indication that inventories are stockpiling into unhealthy levels.
What an investor must do is to read the income statement in conjunction with the Balance Sheet, as both are linked to each other. Practice reading up on Balance Sheets and Income Statements of various local listed companies to give yourself a flavour of what you will be analyzing and how to go about doing it. Nothing beats practice, as they say !
Note: I will be starting a new series soon on “Personal Finance” which talks and discusses about good habits to build wealth, owning cars, property, credit and debit cards, loans and also money-saving habits. A little bit on taxes as well, if readers are interested. Please give me feedback on what you wish to know more about by commenting ! Thanks !
Monday, August 20, 2007
Global Voice – 1H 2007 Results Review
Well, to start off, let me reiterate again my fears for the IT industry and how I was “cautiously optimistic” and even “slightly pessimistic” before the 1H 2007 results were released. Suffice to say that my worst “fears” have come true, as my estimate of the competitiveness and cost-efficiency of companies in the IT industry was more or less right. Looking at the sorry state of companies such as Mediaring and Trek 2000, I sometimes wonder what the future will be like for these companies. They are in an intense industry which is changing every 6 months, and which sees prices being slashed by 70-80% due to shorter and shorter product life cycles. It is with a heavy heart and a tinge of regret that I bring you this analytical review:-
Income Statement
The income statement for 1H 2006 is apparently “misleading”, as a bulk of revenues came from “non-recurring infrastructure sales and sales from discontinued operations”. Notwithstanding this fact, recurring revenues only rose a miserable 20% in spite of the fact that they inked about 20+ contracts since Jan 2007 (announced on SGXNet almost on a regular basis by now). The problem here is that purchases also grew as they had to set up a datacenter and to extend higher sales-led connections (whatever that means). A lot of the cost of goods is not adequately explained to my satisfaction and this irks me to some extent. If a company has low margins (or in this case, a net loss margin) I would really appreciate it if Management could dissect the numbers and focus more on how to cut costs. This, incidentally, was not done in their commentary of significant trends on pages 9 and 10 of the financial statements.
If one takes into account the jump in staff costs (presumably to boost their sales and marketing workforce in order to clinch the aforementioned contracts) as well as the jump in depreciation expenses due to the setting up on an additional datacenter, you can clearly see why there is no profit from operations. Forget about Management’s excessive (yes, excessive !) focus on EBITDA; the truth is that depreciation is an expense like any other (except that it has no cash basis) and will still affect a company’s bottom line. Saying that they are EBITDA profitable is tantamount to calling a cat “a dog which meows”. This to me stinks of trying to avoid the problems of turning around the business (meaning Management is not being candid).
As can be glaringly seen, finance costs (namely, interest on convertible bonds) was up a whopping 631% to EUR 1.08 million. Looking to Page 2 of the press release, it mentions that GV has signed EUR 11.2 million of new contracts in the first 6 months of FY 2007. A simple computation will tell you that finance costs alone are 10% of new contracted revenues ! This is an extremely high figure compared to other companies where interest costs are typically less than 5% of the revenue figure (for Pacific Andes, this figure is 3.8% of their revenues). Cash flows are also an issue when interest costs are so high, yet revenue cannot keep pace with it.
Balance Sheet
Looking at the Balance sheet does give me the chills. As an accounting-trained guy, I cannot help but wonder how the company’s balance sheet had deteriorated to this extent. Firstly, have a quick look at the current ratio. Their total current assets are EUR 6.715 million while total current liabilities total EUR 9.32 million ! So GV are in negative working capital and their current ratio is a dismal 0.72 (for 1H 2006 the current ratio was marginally better at 0.87). Technically, this means that GV is insolvent as all their current assets are insufficient to service their current liabilities. This is one big danger signal for any company, but more so for GV as I mentioned it has high interest and staff costs.
Interest bearing borrowings are 26.6% of total equity, and about 446% of current assets. Looking at GV’s paltry cash balance of EUR 760K as at June 30, 2007; it seems glaringly obvious that this borrowing would not be paid down anytime soon. In fact, I am seriously concerned about GV’s ability to continue to service the loan interest, assuming their cash flows remain weak (see next section on cash flow statement).Altogether, a very weak balance sheet which may not be able to hold up in future accounting periods.
Cash Flow Statement
The cash flow statement, in all honesty, does not look compellingly attractive either. Take a look at the net cash from operating cash flows and one can see that there is a net outflow of EUR 4.785 million; which implies that they are not generating enough cash to cover their basic operations. This is opposed to EUR 942K of cash inflows for June 30, 2006. The main culprit appears to be the decrease in payables and the increase in receivables, which has provided the “squeeze” for GV. Their cash conversion cycle must be seriously examined as the numbers show that they may be paying off their creditors much faster than they are collecting from debtors, which leads to the problem mentioned above.
Cash flows from investing activities continues to be negative as GV has invested EUR 2.2 million to purchase the datacenter and related equipment. As can be seen under their cash flows from financing activities, the interest paid more than wipes out any cash inflows from further borrowings. It would imply that GV can only seem to raise enough cash through borrowings, which increases their gearing and interest costs. An extremely worrying trend is for any company to rely too much on financing activities to generate cash inflows instead of letting the operations side generate the required cash flow. Contrast this with Boustead’s cash flow statement which showed a healthy operating cash flow which more than covered any interest payments from loans.
Prospects and Outlook
From these numbers alone, warning bells are already sounding. Many people on various forums trumpet their “unwavering support” for GV in hopes of a turnaround and an improvement in its fortunes. For me, I rely objectively on the numbers and all three financial documents present numbers which do not look favourable at all ! I made the mistake of deluding myself back in Feb 2007 that things still looked rosy and the company could improve its earnings through a gain in revenues. Apparently, not only has that not come to pass, but it seems that the company is now technically insolvent and has a major problem managing their cash flows effectively. Management is also not candid as it focuses too much on how to grow their market share and gives a lengthy and often unnecessary description of the changes in the industry and how it will benefit the company. My take is: clean up your own act first (i.e. turnaround) before analyzing the industry and prospects for your company. It’s like trying to run when you have a gaping wound in your leg: all the while it is bleeding but you only think about next week’s races and how many more competitions are coming up instead of focusing on bandaging the wound.
In view of the above analysis and objective number-crunching, I do not see any real reason for being “loyal” to this investment. Loyalty without reason amounts to stupidity in my opinion, especially when faced with such numbers. The fundamentals have deteriorated significantly and I can no longer justify to myself why I should be optimistic or hopeful. Even if (and this is a big IF) GV manages to turn around in future, it will be a huge opportunity cost for me as my money is locked up in this investment without dividends, interest or capital gains.
Thus, I will proceed to divest this investment and re-deploy the proceeds into other worthwhile companies. To the reader, it is up to you (as an intelligent investor) to make your own conclusions and use independent thinking to sort out the facts. I wish all remaining Global Voice shareholders good luck in their investment.
Note: Since I am in no hurry to realize more cash (as I already have a cash stash ready for deployment during this market correction), I will wait for a better price to divest GV as Mr. Market is being excessively manic-depressive right now. Let's wait for one of those days when he is irrationally exuberant, then I can quietly sell him my stake in this company.
Well, to start off, let me reiterate again my fears for the IT industry and how I was “cautiously optimistic” and even “slightly pessimistic” before the 1H 2007 results were released. Suffice to say that my worst “fears” have come true, as my estimate of the competitiveness and cost-efficiency of companies in the IT industry was more or less right. Looking at the sorry state of companies such as Mediaring and Trek 2000, I sometimes wonder what the future will be like for these companies. They are in an intense industry which is changing every 6 months, and which sees prices being slashed by 70-80% due to shorter and shorter product life cycles. It is with a heavy heart and a tinge of regret that I bring you this analytical review:-
Income Statement
The income statement for 1H 2006 is apparently “misleading”, as a bulk of revenues came from “non-recurring infrastructure sales and sales from discontinued operations”. Notwithstanding this fact, recurring revenues only rose a miserable 20% in spite of the fact that they inked about 20+ contracts since Jan 2007 (announced on SGXNet almost on a regular basis by now). The problem here is that purchases also grew as they had to set up a datacenter and to extend higher sales-led connections (whatever that means). A lot of the cost of goods is not adequately explained to my satisfaction and this irks me to some extent. If a company has low margins (or in this case, a net loss margin) I would really appreciate it if Management could dissect the numbers and focus more on how to cut costs. This, incidentally, was not done in their commentary of significant trends on pages 9 and 10 of the financial statements.
If one takes into account the jump in staff costs (presumably to boost their sales and marketing workforce in order to clinch the aforementioned contracts) as well as the jump in depreciation expenses due to the setting up on an additional datacenter, you can clearly see why there is no profit from operations. Forget about Management’s excessive (yes, excessive !) focus on EBITDA; the truth is that depreciation is an expense like any other (except that it has no cash basis) and will still affect a company’s bottom line. Saying that they are EBITDA profitable is tantamount to calling a cat “a dog which meows”. This to me stinks of trying to avoid the problems of turning around the business (meaning Management is not being candid).
As can be glaringly seen, finance costs (namely, interest on convertible bonds) was up a whopping 631% to EUR 1.08 million. Looking to Page 2 of the press release, it mentions that GV has signed EUR 11.2 million of new contracts in the first 6 months of FY 2007. A simple computation will tell you that finance costs alone are 10% of new contracted revenues ! This is an extremely high figure compared to other companies where interest costs are typically less than 5% of the revenue figure (for Pacific Andes, this figure is 3.8% of their revenues). Cash flows are also an issue when interest costs are so high, yet revenue cannot keep pace with it.
Balance Sheet
Looking at the Balance sheet does give me the chills. As an accounting-trained guy, I cannot help but wonder how the company’s balance sheet had deteriorated to this extent. Firstly, have a quick look at the current ratio. Their total current assets are EUR 6.715 million while total current liabilities total EUR 9.32 million ! So GV are in negative working capital and their current ratio is a dismal 0.72 (for 1H 2006 the current ratio was marginally better at 0.87). Technically, this means that GV is insolvent as all their current assets are insufficient to service their current liabilities. This is one big danger signal for any company, but more so for GV as I mentioned it has high interest and staff costs.
Interest bearing borrowings are 26.6% of total equity, and about 446% of current assets. Looking at GV’s paltry cash balance of EUR 760K as at June 30, 2007; it seems glaringly obvious that this borrowing would not be paid down anytime soon. In fact, I am seriously concerned about GV’s ability to continue to service the loan interest, assuming their cash flows remain weak (see next section on cash flow statement).Altogether, a very weak balance sheet which may not be able to hold up in future accounting periods.
Cash Flow Statement
The cash flow statement, in all honesty, does not look compellingly attractive either. Take a look at the net cash from operating cash flows and one can see that there is a net outflow of EUR 4.785 million; which implies that they are not generating enough cash to cover their basic operations. This is opposed to EUR 942K of cash inflows for June 30, 2006. The main culprit appears to be the decrease in payables and the increase in receivables, which has provided the “squeeze” for GV. Their cash conversion cycle must be seriously examined as the numbers show that they may be paying off their creditors much faster than they are collecting from debtors, which leads to the problem mentioned above.
Cash flows from investing activities continues to be negative as GV has invested EUR 2.2 million to purchase the datacenter and related equipment. As can be seen under their cash flows from financing activities, the interest paid more than wipes out any cash inflows from further borrowings. It would imply that GV can only seem to raise enough cash through borrowings, which increases their gearing and interest costs. An extremely worrying trend is for any company to rely too much on financing activities to generate cash inflows instead of letting the operations side generate the required cash flow. Contrast this with Boustead’s cash flow statement which showed a healthy operating cash flow which more than covered any interest payments from loans.
Prospects and Outlook
From these numbers alone, warning bells are already sounding. Many people on various forums trumpet their “unwavering support” for GV in hopes of a turnaround and an improvement in its fortunes. For me, I rely objectively on the numbers and all three financial documents present numbers which do not look favourable at all ! I made the mistake of deluding myself back in Feb 2007 that things still looked rosy and the company could improve its earnings through a gain in revenues. Apparently, not only has that not come to pass, but it seems that the company is now technically insolvent and has a major problem managing their cash flows effectively. Management is also not candid as it focuses too much on how to grow their market share and gives a lengthy and often unnecessary description of the changes in the industry and how it will benefit the company. My take is: clean up your own act first (i.e. turnaround) before analyzing the industry and prospects for your company. It’s like trying to run when you have a gaping wound in your leg: all the while it is bleeding but you only think about next week’s races and how many more competitions are coming up instead of focusing on bandaging the wound.
In view of the above analysis and objective number-crunching, I do not see any real reason for being “loyal” to this investment. Loyalty without reason amounts to stupidity in my opinion, especially when faced with such numbers. The fundamentals have deteriorated significantly and I can no longer justify to myself why I should be optimistic or hopeful. Even if (and this is a big IF) GV manages to turn around in future, it will be a huge opportunity cost for me as my money is locked up in this investment without dividends, interest or capital gains.
Thus, I will proceed to divest this investment and re-deploy the proceeds into other worthwhile companies. To the reader, it is up to you (as an intelligent investor) to make your own conclusions and use independent thinking to sort out the facts. I wish all remaining Global Voice shareholders good luck in their investment.
Note: Since I am in no hurry to realize more cash (as I already have a cash stash ready for deployment during this market correction), I will wait for a better price to divest GV as Mr. Market is being excessively manic-depressive right now. Let's wait for one of those days when he is irrationally exuberant, then I can quietly sell him my stake in this company.
Sunday, August 19, 2007
Mr. Market's Mood Swings
Interestingly enough, the recent sharp stock market correction has highlighted a much discussed, but often rarely experienced phenomenon in investing literature: that of the mood swings of Mr. Market. As you all may know, Benjamin Graham, the father of value investing, created this very apt and interesting allegory to describe the volatile nature of the stock market daily fluctuations. He used an imaginary character called Mr. Market and likened him to a real-life person who would always be available to offer you a quote (price) to either buy or sell a particular company. Like all of us, Mr. Market had mood swings akin to any normal human being: sometimes he would be irrationally exuberant and offer a very high price for the business; while at other times (such as the last 3 days) he would be manic-depressive and see nothing but bad days ahead and offer a very low (ridiculously) price for the same company. We as investors are free to either accept his price or ignore it.
So how does this tie in to the topic ? Well, Mr. Market's mood swings tend to be more towards the extreme when he becomes manic-depressive, as can be witnessed in the last 3 trading days. In the last 5 months before Ju,ly 2007, all was sunny and bright and Mr. Market remained cheerful and optimistic. Suddenly, within a space of 3 short weeks, his mood swung to the other extreme and he was offering bargain basement prices for fundamentally strong companies. Isn't it amazing how volatile the mood swings of Mr. Market can be ? It is OK for us to ignore him as he will always be back the next day with a new quote. The danger is when his mood influences YOURS as well, and you give in to the same state as Mr.Market and fail to objectively appraise the value of the business. I took advantage of Mr. Market on Friday and accepted his offer of S$0.615 per share for Pacific Andes.
In analyzing his mood swings, several factors should be taken into consideration to explain why his manic-depressiveness comes so rapidly, swiftly and suddenly:-
a) Loss aversion - Mr. Market, like all of us, has a mental loss aversion system which tells him that the pain of a loss is more than twice the enjoyment of a gain. Thus, he feels the pain of a loss more acutely and desperately tries to offer ANY price just to get rid of his stake in a company, fearing that the sky would fall on him.
b) Programmed Selling - Many hedge funds, institutions and mutual funds have automated programs which trigger sell orders if the price of a security falls to a certain level. This is to "protect their profits" and ensure that they do not suffer a massive price drop from which they are unable to recover from.
c) Short-sellers - Short-sellers are people who sell shares of companies they do not own (by borrowing scrip). In SGX and USA, this is allowed but the person must "cover" (buy-back) within the same trading day. In market corrections, short-sellers come out in force to depress prices further as they hope to buy back at a much lower price. Since prices fall a lot faster (in general) compared to rises, this has the effect of severely depressing a company's stock price, sometimes to ridiculous levels.
d) Margin Calls (Forced-Selling) - Trading on margin is a common term used to describe people who invest/trade in the stock market using leverage. Commonly, they are allowed to borrow up to 3-4x the value of their shares, using their shares as collateral. Once prices fall below the margin limit (for more info on this, I suggest asking your broker !), they have to "top up" the margin account with cash. Those who are unable to do so will suffer forced selling of their shares in order to satisfy the collateral.
The 4 factors above are very pervasive in a market which is crashing, and contributes greatly to the manic-depressive mood of Mr. Market. Also take note that bad news usually comes in waves and does not seem to stop once panic selling begins. This is just a perception, actually, as people's minds are already attuned to bad events and thus selective filtering ensures that the bad news sounds worse and the good news sounds muted. In all probability, such "bad news" was already circulating during bull markets but the media, press and so-called "pundits" helpt o exacerbate the situation by headlining every single piece of bad news and putting it on the front page in BIG, BOLD letters (I was surprised they didn't use red font).
Some examples can be seen in the recent front pages of newspapers, where the words "market rout", "sharp sell-off" and "possible economic recession" are repeated again and again. One must remember that the sub-prime issue was already present 9 months ago; so why do people start making noise only now ? All because bear Stearns and BNP Paribas said that some of their funds could not be valued ? Sounds like a massive over-reaction ? You, as the intelligent investor, should be the one to decide.
Note: Next post will be on Global Voice's 1H 2007 review (probably Monday evening).
P.S. - Please feel free to leave comments on ANY posting of mine. I will be informed through email and will reply personally to every comment (as long as it's not frivolous haha !).
Interestingly enough, the recent sharp stock market correction has highlighted a much discussed, but often rarely experienced phenomenon in investing literature: that of the mood swings of Mr. Market. As you all may know, Benjamin Graham, the father of value investing, created this very apt and interesting allegory to describe the volatile nature of the stock market daily fluctuations. He used an imaginary character called Mr. Market and likened him to a real-life person who would always be available to offer you a quote (price) to either buy or sell a particular company. Like all of us, Mr. Market had mood swings akin to any normal human being: sometimes he would be irrationally exuberant and offer a very high price for the business; while at other times (such as the last 3 days) he would be manic-depressive and see nothing but bad days ahead and offer a very low (ridiculously) price for the same company. We as investors are free to either accept his price or ignore it.
So how does this tie in to the topic ? Well, Mr. Market's mood swings tend to be more towards the extreme when he becomes manic-depressive, as can be witnessed in the last 3 trading days. In the last 5 months before Ju,ly 2007, all was sunny and bright and Mr. Market remained cheerful and optimistic. Suddenly, within a space of 3 short weeks, his mood swung to the other extreme and he was offering bargain basement prices for fundamentally strong companies. Isn't it amazing how volatile the mood swings of Mr. Market can be ? It is OK for us to ignore him as he will always be back the next day with a new quote. The danger is when his mood influences YOURS as well, and you give in to the same state as Mr.Market and fail to objectively appraise the value of the business. I took advantage of Mr. Market on Friday and accepted his offer of S$0.615 per share for Pacific Andes.
In analyzing his mood swings, several factors should be taken into consideration to explain why his manic-depressiveness comes so rapidly, swiftly and suddenly:-
a) Loss aversion - Mr. Market, like all of us, has a mental loss aversion system which tells him that the pain of a loss is more than twice the enjoyment of a gain. Thus, he feels the pain of a loss more acutely and desperately tries to offer ANY price just to get rid of his stake in a company, fearing that the sky would fall on him.
b) Programmed Selling - Many hedge funds, institutions and mutual funds have automated programs which trigger sell orders if the price of a security falls to a certain level. This is to "protect their profits" and ensure that they do not suffer a massive price drop from which they are unable to recover from.
c) Short-sellers - Short-sellers are people who sell shares of companies they do not own (by borrowing scrip). In SGX and USA, this is allowed but the person must "cover" (buy-back) within the same trading day. In market corrections, short-sellers come out in force to depress prices further as they hope to buy back at a much lower price. Since prices fall a lot faster (in general) compared to rises, this has the effect of severely depressing a company's stock price, sometimes to ridiculous levels.
d) Margin Calls (Forced-Selling) - Trading on margin is a common term used to describe people who invest/trade in the stock market using leverage. Commonly, they are allowed to borrow up to 3-4x the value of their shares, using their shares as collateral. Once prices fall below the margin limit (for more info on this, I suggest asking your broker !), they have to "top up" the margin account with cash. Those who are unable to do so will suffer forced selling of their shares in order to satisfy the collateral.
The 4 factors above are very pervasive in a market which is crashing, and contributes greatly to the manic-depressive mood of Mr. Market. Also take note that bad news usually comes in waves and does not seem to stop once panic selling begins. This is just a perception, actually, as people's minds are already attuned to bad events and thus selective filtering ensures that the bad news sounds worse and the good news sounds muted. In all probability, such "bad news" was already circulating during bull markets but the media, press and so-called "pundits" helpt o exacerbate the situation by headlining every single piece of bad news and putting it on the front page in BIG, BOLD letters (I was surprised they didn't use red font).
Some examples can be seen in the recent front pages of newspapers, where the words "market rout", "sharp sell-off" and "possible economic recession" are repeated again and again. One must remember that the sub-prime issue was already present 9 months ago; so why do people start making noise only now ? All because bear Stearns and BNP Paribas said that some of their funds could not be valued ? Sounds like a massive over-reaction ? You, as the intelligent investor, should be the one to decide.
Note: Next post will be on Global Voice's 1H 2007 review (probably Monday evening).
P.S. - Please feel free to leave comments on ANY posting of mine. I will be informed through email and will reply personally to every comment (as long as it's not frivolous haha !).
Friday, August 17, 2007
Pacific Andes – 1Q 2008 Results Analysis
Pacific Andes reported their 1Q 2008 results on August 14, 2007. The results were in line with my expectations as the Group (including CFG) has been aggressively expanding their fleet of purse seine vessels as well as supertrawlers. The surprise came from the growth in their fishmeal operations and also the increased margins for PAH, as cost of goods sold increased by only 33.7% while revenue zoomed ahead by 42.5%, resulting in an increase in gross profit of HK$197.9 million (101.5% increase). I will analyze the results according to the following sections:-
Income Statement
Top line growth was strong with 42.5% growth in revenues to HK$2.138 billion. The frozen fish SCM business made up HK$1.275 billion (59.7%) of the revenue pie, while the fishing division made up the remaining HK$0.863 billion (40.3%). This increase for the fishing division was more than 100% as compared to 1Q 2007. This was mainly due to PAH’s fishing division under CFG which saw strong growth in 2007 with the acquisition of more vessels and associated economies of scale. The frozen fish SCM business did not register much profit growth (only 15.4%) but the fishing division saw an 81.8% growth in profits. Thus, PAH’s strategy of acquiring a larger stake in CFG through the convertible bonds and rights issue was a wise move, as much value was crystallized from this division. Moving forward, more growth is expected from the fishing division as the recent acquisitions of the additional supertrawlers and purse seine vessels have yet to be fully incorporated into the operating results.
As for margins, taking the net profit attributable to shareholders breakdown from each division divided by the revenue contributions, we get a margin of 3.64% for the frozen fish SCM business and 5.85% for the fishing division. This is just an indication of the relative profitability of each division as it should be noted that as at the date of this report, PAH still owns only 28.8% of CFG and this is why net margins seem to low. Still, it can be readily seen that the fishing division has a higher margin than the SCM business; and since this is the main growth driver moving forward, we should expect strong earnings accretion from PAH for the rest of FY 2008. Note: PAH will recognized the 63.9% earnings from CFG from 2Q 2008 onwards.
Gross margins were 18.4% for 1Q 2008 versus 13% for 1Q 2006, boosted mainly from the economies of scale in operating a larger fleet of vessels, as well as efficient use of their supertrawlers. Net margin improved from 8.62% to 10.4% which is also an encouraging sign that Management can control expenses effectively even though finance costs have risen 172%. Overall, net profit (before allocation to shareholders and MI) grew an impressive 71.3%.
A quick note on the breakdown of revenues by geographical regions: China still made up the bulk of revenues, taking up 78% or HK$1.667 billion for 1Q 2008. Recently, China has been rocked by various scandals involving tainted toys (recall by Mattel), cardboard in buns and contaminated toothpaste. As a result, consumers all over the world have been wary of China food products and China’s reputation has also been tarnished as a result of this. Even the Chinese themselves are more wary of their own country’s food and fortunately, PAH sources for ocean catch which means that they should not be affected too badly by this current negative sentiment.
Balance Sheet
PAH has a sound balance sheet in which current liabilities are more than adequately backed up by liquid current assets. Current ratio stands at a healthy 2.25 for 1Q 2008 as compared to 1.91 for 1Q 2007, while quick ratio improved from 1.51 in 1Q 2007 to the current 1.93 in 1Q 2008. Of course, part of this improvement came as a result of lower inventories as the fishing season is very cyclical (more fish tends to get caught around 1Q of the financial year i.e. April to June); but the increase in cash and bank balances is also a welcome surprise as PAH have had to bear much higher interest payments as a result of the issuance of their US$93 million convertible bonds due 2012.
Speaking of convertible bonds, PAH reported that US$9.1 million of convertible bonds were exercised in 1Q 2008 giving rise to the issuance of about 12.8 million shares, causing slight dilution to shareholders. The remaining convertible bond amount is US$83.9 million and the conversion price has been reset to S$0.8553 as a result of the rights issue. This is actually a blessing in disguise (even though shareholders may not welcome the dilution) as this means PAH can save on a portion of interest expenses moving forward.
Cash Flow Statement
Net cash received from operations actually decreased from HK$636 million in 1Q 2007 to HK$254 million in 1Q 2008. This was due to higher interest expenses from the convertible bonds (about 5.5 times higher) and also much higher income taxes due to the tax regulations imposed by the Peruvian authorities. These two major cash flow drains are likely to persist for quite some time, but PAH has still managed to chalk up a net operating cash flow in spite of these ramped up expenses as their operations have also expanded proportionately. Moving forward, I would expect the higher contributions from the fishing division to bring in healthy cash inflows to offset the increases in income taxes and interest costs.
For investing cash flows, the main culprit for the reduction in cash was the acquisition of an increased stake in CFG (from 28.8% to 63.9%, as many shareholders would by now be aware of). Funds were raised from the issuance of convertible bonds (under financing cash flows) in order to pay for the increase in stake. A total of HK$555 million was paid out as a deposit for the acquisition of shares, and to date the acquisition has already been completed. The cash flow statement is not indicative or representative of the normal operations of the company as they are in a state of transition from owning 28.8% to 63.9% of CFG; thus shareholders should not be unduly worried about the large cash inflows and outflows resulting from the two sections as mentioned in this paragraph.
Outlook and Prospects
PAH should be able to enhance their earnings from the fishing division strongly as this is the faster growing division for PAH and CFG. Powered by recent acquisitions and economies of scale, shareholders should see margins improving and revenues plus earnings growing strongly as more value is unlocked. CFG is also continuously on the lookout for more potentially earnings-accretive acquisitions in Peru in order to position itself as one of the dominant players in the fishmeal market. The rise of fishmeal prices and growing worldwide affluence also bodes well for the industry and should contribute to strong growth for CFG and consequently, PAH as well.
New fishing grounds will also be tapped for the fishing of Chilean Jack Mackerel, which is a “relatively under-utilized” fish species. All PAH would say is that they had conducted “trial operations” for this species and results turned out to be “satisfactory”. The new upgraded supertrawlers will be deployed for this task so we have to assume that fish hold capacity is integral to achieving high enough yields of this species (as well as other profitable species) to justify the capex for the upgrade(s). However, much is left intentionally vague as I believe Management have no clue as to whether this new species would prove to be successful in generating good margins (similar to fishmeal and Peruvian anchovy). Still, it’s a step in the right direction since it shows that Management is pro-actively seeking new revenue sources while at the same time, growing their existing operations for SCM and fishmeal.
Finally, yet another positive for the Group is the ability to enjoy better efficiencies once it deploys the new upgraded supertrawlers by the end of CY 2007. This will not only enhance fish hold capacity (which is integral in increasing their catch) but also allows the Group to reduce reliance on third-party suppliers of fishmeal, thus improving margins. Moving forward, catalysts to look out for will be further acquisitions of Peruvian assets to drive growth, as well as positive developments within the fishmeal industry.
Update: I have purchased 4 more lots of PAH at S$0.615 today, lowering my average cost in PAH to S$0.655 from S$0.665. The situation in Peru is still uncertain, but as shareholders we have to hope for the best !
Pacific Andes reported their 1Q 2008 results on August 14, 2007. The results were in line with my expectations as the Group (including CFG) has been aggressively expanding their fleet of purse seine vessels as well as supertrawlers. The surprise came from the growth in their fishmeal operations and also the increased margins for PAH, as cost of goods sold increased by only 33.7% while revenue zoomed ahead by 42.5%, resulting in an increase in gross profit of HK$197.9 million (101.5% increase). I will analyze the results according to the following sections:-
Income Statement
Top line growth was strong with 42.5% growth in revenues to HK$2.138 billion. The frozen fish SCM business made up HK$1.275 billion (59.7%) of the revenue pie, while the fishing division made up the remaining HK$0.863 billion (40.3%). This increase for the fishing division was more than 100% as compared to 1Q 2007. This was mainly due to PAH’s fishing division under CFG which saw strong growth in 2007 with the acquisition of more vessels and associated economies of scale. The frozen fish SCM business did not register much profit growth (only 15.4%) but the fishing division saw an 81.8% growth in profits. Thus, PAH’s strategy of acquiring a larger stake in CFG through the convertible bonds and rights issue was a wise move, as much value was crystallized from this division. Moving forward, more growth is expected from the fishing division as the recent acquisitions of the additional supertrawlers and purse seine vessels have yet to be fully incorporated into the operating results.
As for margins, taking the net profit attributable to shareholders breakdown from each division divided by the revenue contributions, we get a margin of 3.64% for the frozen fish SCM business and 5.85% for the fishing division. This is just an indication of the relative profitability of each division as it should be noted that as at the date of this report, PAH still owns only 28.8% of CFG and this is why net margins seem to low. Still, it can be readily seen that the fishing division has a higher margin than the SCM business; and since this is the main growth driver moving forward, we should expect strong earnings accretion from PAH for the rest of FY 2008. Note: PAH will recognized the 63.9% earnings from CFG from 2Q 2008 onwards.
Gross margins were 18.4% for 1Q 2008 versus 13% for 1Q 2006, boosted mainly from the economies of scale in operating a larger fleet of vessels, as well as efficient use of their supertrawlers. Net margin improved from 8.62% to 10.4% which is also an encouraging sign that Management can control expenses effectively even though finance costs have risen 172%. Overall, net profit (before allocation to shareholders and MI) grew an impressive 71.3%.
A quick note on the breakdown of revenues by geographical regions: China still made up the bulk of revenues, taking up 78% or HK$1.667 billion for 1Q 2008. Recently, China has been rocked by various scandals involving tainted toys (recall by Mattel), cardboard in buns and contaminated toothpaste. As a result, consumers all over the world have been wary of China food products and China’s reputation has also been tarnished as a result of this. Even the Chinese themselves are more wary of their own country’s food and fortunately, PAH sources for ocean catch which means that they should not be affected too badly by this current negative sentiment.
Balance Sheet
PAH has a sound balance sheet in which current liabilities are more than adequately backed up by liquid current assets. Current ratio stands at a healthy 2.25 for 1Q 2008 as compared to 1.91 for 1Q 2007, while quick ratio improved from 1.51 in 1Q 2007 to the current 1.93 in 1Q 2008. Of course, part of this improvement came as a result of lower inventories as the fishing season is very cyclical (more fish tends to get caught around 1Q of the financial year i.e. April to June); but the increase in cash and bank balances is also a welcome surprise as PAH have had to bear much higher interest payments as a result of the issuance of their US$93 million convertible bonds due 2012.
Speaking of convertible bonds, PAH reported that US$9.1 million of convertible bonds were exercised in 1Q 2008 giving rise to the issuance of about 12.8 million shares, causing slight dilution to shareholders. The remaining convertible bond amount is US$83.9 million and the conversion price has been reset to S$0.8553 as a result of the rights issue. This is actually a blessing in disguise (even though shareholders may not welcome the dilution) as this means PAH can save on a portion of interest expenses moving forward.
Cash Flow Statement
Net cash received from operations actually decreased from HK$636 million in 1Q 2007 to HK$254 million in 1Q 2008. This was due to higher interest expenses from the convertible bonds (about 5.5 times higher) and also much higher income taxes due to the tax regulations imposed by the Peruvian authorities. These two major cash flow drains are likely to persist for quite some time, but PAH has still managed to chalk up a net operating cash flow in spite of these ramped up expenses as their operations have also expanded proportionately. Moving forward, I would expect the higher contributions from the fishing division to bring in healthy cash inflows to offset the increases in income taxes and interest costs.
For investing cash flows, the main culprit for the reduction in cash was the acquisition of an increased stake in CFG (from 28.8% to 63.9%, as many shareholders would by now be aware of). Funds were raised from the issuance of convertible bonds (under financing cash flows) in order to pay for the increase in stake. A total of HK$555 million was paid out as a deposit for the acquisition of shares, and to date the acquisition has already been completed. The cash flow statement is not indicative or representative of the normal operations of the company as they are in a state of transition from owning 28.8% to 63.9% of CFG; thus shareholders should not be unduly worried about the large cash inflows and outflows resulting from the two sections as mentioned in this paragraph.
Outlook and Prospects
PAH should be able to enhance their earnings from the fishing division strongly as this is the faster growing division for PAH and CFG. Powered by recent acquisitions and economies of scale, shareholders should see margins improving and revenues plus earnings growing strongly as more value is unlocked. CFG is also continuously on the lookout for more potentially earnings-accretive acquisitions in Peru in order to position itself as one of the dominant players in the fishmeal market. The rise of fishmeal prices and growing worldwide affluence also bodes well for the industry and should contribute to strong growth for CFG and consequently, PAH as well.
New fishing grounds will also be tapped for the fishing of Chilean Jack Mackerel, which is a “relatively under-utilized” fish species. All PAH would say is that they had conducted “trial operations” for this species and results turned out to be “satisfactory”. The new upgraded supertrawlers will be deployed for this task so we have to assume that fish hold capacity is integral to achieving high enough yields of this species (as well as other profitable species) to justify the capex for the upgrade(s). However, much is left intentionally vague as I believe Management have no clue as to whether this new species would prove to be successful in generating good margins (similar to fishmeal and Peruvian anchovy). Still, it’s a step in the right direction since it shows that Management is pro-actively seeking new revenue sources while at the same time, growing their existing operations for SCM and fishmeal.
Finally, yet another positive for the Group is the ability to enjoy better efficiencies once it deploys the new upgraded supertrawlers by the end of CY 2007. This will not only enhance fish hold capacity (which is integral in increasing their catch) but also allows the Group to reduce reliance on third-party suppliers of fishmeal, thus improving margins. Moving forward, catalysts to look out for will be further acquisitions of Peruvian assets to drive growth, as well as positive developments within the fishmeal industry.
Update: I have purchased 4 more lots of PAH at S$0.615 today, lowering my average cost in PAH to S$0.655 from S$0.665. The situation in Peru is still uncertain, but as shareholders we have to hope for the best !
Thursday, August 16, 2007
Pacific Andes - 7.9 Point Richter Scale Earthquake in Lima, Peru
This is an urgent update as I have received news about a major earthquake in Lima, Peru. As of this writing, 330 people have been reportedly killed by this earthquake, and a tsunami alert has also been set off just to warn people of possible tsunamis hitting the coastal areas. Pacific Andes and CFG have substantial operations in Peru (fishmeal operations) and so far the companies have updated that they are NO casualties and the main office (80 km north of the epicentre) is doing fine. As communication lines are down, it will take some time before contact can be established with the other offices and plants within Peru. However, I anticipate limited damage for PAH and CFG's operations as their plants were not located close to the quake centre. Still, this is one of those events called "act of God" which no value investor can predict with certainty !
Let us all say a prayer for those who died in this tragedy and also wish those injured a speedy recovery. Life is a lot more precious than the pursuit of money and profits, sometimes I feel ashamed of myself for being such a capitalist prick......oh well we are Singaporeans after all and are so driven by money and wealth that sometimes we fail to see people struggling to survive and get by in such disaster zones. I will strive to do volunteer work when I get older, just to give something back to society.....
Straits Times Index - Drop of 243.43 points within 2 trading days to 3,152.16
This is a special post on the above, which illustrates vividly the effects of a crisis on financial markets. Within just 2 trading days, the STI has lost what it took 4 months to gain. What people don't realize in general is the volatile nature of markets and how important sentiment can be in the functioning of markets. Liquidity is another concern, of course, and if this dries up further we should see more bloodletting and more chances to buy good companies on the cheap.
Dear readers, I urge you to take this sharp correction as a reminder that you should ALWAYS purchase with a reasonable margin of safety; otherwise the steep drop in prices will be all the more painful psychologically for anyone to bear. All humans have a greater loss aversion (about 2x) as compared to reward satisfaction, which means we feel the pain of a loss more than twice the enjoyment of a gain. Thus, during this turbulent time, I would expect more people to sell low and those who have been playing on leverage to feel the sharp prick of the double-edged sword. Take this volatility as a lesson learnt that money is never easy to make consistently in the market, and that value investing helps to buffer against such times by ensuring that you get a decent return (it does not have to be exceptional) on your investment.
Good luck to all investors, and may you all find more good bargains in this market.
This is an urgent update as I have received news about a major earthquake in Lima, Peru. As of this writing, 330 people have been reportedly killed by this earthquake, and a tsunami alert has also been set off just to warn people of possible tsunamis hitting the coastal areas. Pacific Andes and CFG have substantial operations in Peru (fishmeal operations) and so far the companies have updated that they are NO casualties and the main office (80 km north of the epicentre) is doing fine. As communication lines are down, it will take some time before contact can be established with the other offices and plants within Peru. However, I anticipate limited damage for PAH and CFG's operations as their plants were not located close to the quake centre. Still, this is one of those events called "act of God" which no value investor can predict with certainty !
Let us all say a prayer for those who died in this tragedy and also wish those injured a speedy recovery. Life is a lot more precious than the pursuit of money and profits, sometimes I feel ashamed of myself for being such a capitalist prick......oh well we are Singaporeans after all and are so driven by money and wealth that sometimes we fail to see people struggling to survive and get by in such disaster zones. I will strive to do volunteer work when I get older, just to give something back to society.....
Straits Times Index - Drop of 243.43 points within 2 trading days to 3,152.16
This is a special post on the above, which illustrates vividly the effects of a crisis on financial markets. Within just 2 trading days, the STI has lost what it took 4 months to gain. What people don't realize in general is the volatile nature of markets and how important sentiment can be in the functioning of markets. Liquidity is another concern, of course, and if this dries up further we should see more bloodletting and more chances to buy good companies on the cheap.
Dear readers, I urge you to take this sharp correction as a reminder that you should ALWAYS purchase with a reasonable margin of safety; otherwise the steep drop in prices will be all the more painful psychologically for anyone to bear. All humans have a greater loss aversion (about 2x) as compared to reward satisfaction, which means we feel the pain of a loss more than twice the enjoyment of a gain. Thus, during this turbulent time, I would expect more people to sell low and those who have been playing on leverage to feel the sharp prick of the double-edged sword. Take this volatility as a lesson learnt that money is never easy to make consistently in the market, and that value investing helps to buffer against such times by ensuring that you get a decent return (it does not have to be exceptional) on your investment.
Good luck to all investors, and may you all find more good bargains in this market.
Wednesday, August 15, 2007
Mid-August 2007 Portfolio Review
The market has been turbulent these past 2 weeks and opened up many opportunities for finding companies which are being undervalued according to Mr. Market’s manic-depressive mood swings. Some say it might be contrarian to actually feel happy when the market is crashing down, while others lament their hard-earned money going down the drain. However, I believe in buying to keep for a long time and thus my main business is purchasing, not selling. Purchasers always look for the lowest possible prices, and I am no different. Suffice to say that these last two weeks have made me very happy indeed as it has given me the opportunity to hunt for good bargains. I am commencing my research into one or two companies now and will post my findings once I am done.
Below is a summary and rundown of my investments and related news as at August 15, 2007 (STI at 3,273.25 points):-
1) Ezra - Buy Price $1.30 (bonus adjusted), Market Price $5.50, gain 323.1%. On August 7, 2007, Ezra announced a milestone contract for Lewek Champion, their maiden pipelay and accommodation barge. Recall that Lewek Champion was also chartered out to ConocoPhillips for another job which will end in FY 2008. Thus, this contract can ensure earnings flow till FY 2010, though the value of the contract(s) were not stated. On August 9, 2007, Ezra received in-principle approval for their bonus issue, which paved the way for them to declare an EGM to be held on August 29, 2007 to address the issue of share re-purchase, bonus of 1-for-1 and the sale of 43% of EOC. I have since received the circular for the EGM and will do a posting on it soon. I also intend to attend the EGM to probe for more answers to some nagging questions.
2) Boustead - Buy Price $1.295 (average), Market Price $2.07, gain 59.8%. On August 10, 2007, Boustead Projects announced another design, build and lease contract for a logistics facility for Panalpina Worldwide. The contract value was not stated but this is the 6th contract win for Boustead Projects this year, augmenting their order book strongly and giving the division a good start to FY 2008. Also immediately on August 13, 2007, Boustead also secured oil and gas engineering contracts worth S$26 million.
3) Swiber - Buy Price $1.01, Market Price $2.77, gain 174.3%. On August 6, 2007, the company announced the acquisition of North Shipyard Pte Ltd for S$10.3 million in order to vertically integrate their operations. This acquisition would be funded through internal resources. Subsequently, they reported their 1H 2007 results and saw a 300+% jump in net profits (excluding exceptional gains) as well as rising margins. Moving forward, they are targeting new markets such as India, the Middle East and China to expand into.
4) Global Voice - Buy Price $0.1775 (average), Market Price $0.165, loss 7.0%. GV snared two more contracts in the first two weeks of August 2007 with WuSys and LHV. They also announced a somewhat disappointing set of results yesterday as they were still loss-making. I will be doing a review of GV’s 1H 2007 financials so please stay tuned for that.
5) Suntec REIT - Buy Price $1.11, Market Price $1.84, gain 71.2%. There was no news for Suntec REIT during August 2007.
6) Pacific Andes - Buy Price $0.665 (rights-adjusted), Market Price $0.68, gain 2.26%. PAH released their 1Q 2008 results yesterday and I will be doing a detailed review of the financials as well as operations. Gross margins were up and net profit attributable to shareholders increased by 42%. I intend to add to my position should Mr. Market decide to price this company below 65 cents.
Overall Portfolio
My overall portfolio has increased by 93.3% from cost as at August 15, 2007. The market value of my portfolio is around S$85.7K. The recent sharp market correction has brought prices down to a more decent level, more on par with valuations as compared to when the STI was trading at 3,600+. I can see good opportunities arising from the downturn and will be waiting with sufficient cash to scoop up the bargains once I have completed my research on the companies I am eyeing.
My next portfolio review will be on Friday, August 31st, 2007 after market close and I will also report on Ezra’s EGM.
NOTE: My next post will be on Friday as I will taking a short break from blogging in order to focus on analyzing PAH and GV’s results. Cheers to all investors !
Update: Edited PAH's closing price as pointed out by la papillion. There is no change to my portfolio value or gain as I took the computed figure from my spreadsheet directly. It was just a typo error for PAH's closing price and gain.
The market has been turbulent these past 2 weeks and opened up many opportunities for finding companies which are being undervalued according to Mr. Market’s manic-depressive mood swings. Some say it might be contrarian to actually feel happy when the market is crashing down, while others lament their hard-earned money going down the drain. However, I believe in buying to keep for a long time and thus my main business is purchasing, not selling. Purchasers always look for the lowest possible prices, and I am no different. Suffice to say that these last two weeks have made me very happy indeed as it has given me the opportunity to hunt for good bargains. I am commencing my research into one or two companies now and will post my findings once I am done.
Below is a summary and rundown of my investments and related news as at August 15, 2007 (STI at 3,273.25 points):-
1) Ezra - Buy Price $1.30 (bonus adjusted), Market Price $5.50, gain 323.1%. On August 7, 2007, Ezra announced a milestone contract for Lewek Champion, their maiden pipelay and accommodation barge. Recall that Lewek Champion was also chartered out to ConocoPhillips for another job which will end in FY 2008. Thus, this contract can ensure earnings flow till FY 2010, though the value of the contract(s) were not stated. On August 9, 2007, Ezra received in-principle approval for their bonus issue, which paved the way for them to declare an EGM to be held on August 29, 2007 to address the issue of share re-purchase, bonus of 1-for-1 and the sale of 43% of EOC. I have since received the circular for the EGM and will do a posting on it soon. I also intend to attend the EGM to probe for more answers to some nagging questions.
2) Boustead - Buy Price $1.295 (average), Market Price $2.07, gain 59.8%. On August 10, 2007, Boustead Projects announced another design, build and lease contract for a logistics facility for Panalpina Worldwide. The contract value was not stated but this is the 6th contract win for Boustead Projects this year, augmenting their order book strongly and giving the division a good start to FY 2008. Also immediately on August 13, 2007, Boustead also secured oil and gas engineering contracts worth S$26 million.
3) Swiber - Buy Price $1.01, Market Price $2.77, gain 174.3%. On August 6, 2007, the company announced the acquisition of North Shipyard Pte Ltd for S$10.3 million in order to vertically integrate their operations. This acquisition would be funded through internal resources. Subsequently, they reported their 1H 2007 results and saw a 300+% jump in net profits (excluding exceptional gains) as well as rising margins. Moving forward, they are targeting new markets such as India, the Middle East and China to expand into.
4) Global Voice - Buy Price $0.1775 (average), Market Price $0.165, loss 7.0%. GV snared two more contracts in the first two weeks of August 2007 with WuSys and LHV. They also announced a somewhat disappointing set of results yesterday as they were still loss-making. I will be doing a review of GV’s 1H 2007 financials so please stay tuned for that.
5) Suntec REIT - Buy Price $1.11, Market Price $1.84, gain 71.2%. There was no news for Suntec REIT during August 2007.
6) Pacific Andes - Buy Price $0.665 (rights-adjusted), Market Price $0.68, gain 2.26%. PAH released their 1Q 2008 results yesterday and I will be doing a detailed review of the financials as well as operations. Gross margins were up and net profit attributable to shareholders increased by 42%. I intend to add to my position should Mr. Market decide to price this company below 65 cents.
Overall Portfolio
My overall portfolio has increased by 93.3% from cost as at August 15, 2007. The market value of my portfolio is around S$85.7K. The recent sharp market correction has brought prices down to a more decent level, more on par with valuations as compared to when the STI was trading at 3,600+. I can see good opportunities arising from the downturn and will be waiting with sufficient cash to scoop up the bargains once I have completed my research on the companies I am eyeing.
My next portfolio review will be on Friday, August 31st, 2007 after market close and I will also report on Ezra’s EGM.
NOTE: My next post will be on Friday as I will taking a short break from blogging in order to focus on analyzing PAH and GV’s results. Cheers to all investors !
Update: Edited PAH's closing price as pointed out by la papillion. There is no change to my portfolio value or gain as I took the computed figure from my spreadsheet directly. It was just a typo error for PAH's closing price and gain.
Tuesday, August 14, 2007
Swiber – 2Q and 1H 2007 Results Review
Swiber has released their 2Q and 1H 2007 results yesterday, and they were largely in line with expectations and there were no major surprises. As mentioned previously, I will be focusing more on the margins and cash flows for Swiber as I believe these are the more critical aspects of the business which should be examined. From the recent contract flow and the positive announcements, it is to be expected that Swiber have managed to grow their revenue and profit base. The question now is the future prospects of the company in terms of growing not just their revenue base, but also their geographical reach, customer base, size of contracts and margins. My analysis will be in sections as follows:-
Income Statement
Revenues for 2Q 2007 grew by 232% while net profits were up by 678%.Excluding exceptional items such as disposal of fixed assets and vessels held for sale, net profit for 2Q 2007 would have been up by about 305%. For 1H 2007, revenues were up 220% and gross profit improved by 235%. This was due in part to the recognition of income from the Indonesian and Brunei Shell projects which have already commenced. A quick glance at the margins shows substantial improvement: for 2Q 2007, GP margins stood at 29.4% as compared to 2Q 2006’s 18.9%; for 1H 2007, GP margin was 28.6% against 27.3% for 1H 2006. This improvement of 10.5 percentage points for 2Q year-on-year is a result of more vessels coming on stream in Swiber’s ambitious fleet expansion program. By utilizing their own vessels, Swiber reduced reliance on third-party vessel chartering and thus improved their margins on contracts as well. Note that net profit margins are not used as they have been distorted by the presence of exceptional items; gross margins measure the returns on contracts more effectively as it involves the full costs associated with providing the EPCIC services.
The glaring figure which stood out are the finance costs as a result of taking up more bank loans (their gearing increased from 22% to about 52%). Finance costs rose an astronomical 871% from only US$97K in 2Q 2006 to US$942K in 2Q 2007. This is one of the reasons why additional leverage can hurt the income statement, and fortunately Swiber has generated sufficient cash flows from their operating activities to cover this interest payment (see Cash Flow Statement section). Adminstrative expenses also increased much more rapidly than revenues (increase of 319% versus only 232% increase in revenues), which shows that Management should focus more efforts in cost-cutting to reduce unnecessary expenses. Most companies tend to chalk up higher expenses as they grow and expand but if expenses rise disproportionately to sales, then it is a cause for concern. A small note: the Group also suffered an exchange loss of US$206K as a result of the weakening of the US$ against most other currencies (Swiber’s reporting currency is in US$).
Balance Sheet
Swiber’s balance sheet is relatively uncluttered and I did work out some simple figures to get a feel of things. Working capital stands at US$29.3 million for 30 June, 2007 as compared to US$13.1 million for 31 December, 2006; this represents an increase of 124% and it can be attributed mainly to the increase in trade receivables (a natural thing to happen as revenue has also scaled up significantly) and assets held for sale (by this I assume they are vessels held for sale). This was partially offset by the increase in short-term bank loans of US$9.0 million (an increase of 205% over 2Q 2006) and other payables. The gearing has increased significantly from 22% to about 52% as a result of Swiber taking up more short and long-term loans (cumulative increase over 31 December, 2006 is US$19.7 million, a 182.9% increase) to finance their fleet expansion. With the introduction of their US$300 million multi-currency medium term note program, this gearing is expected to increase from the current 55%. All I can say is that Swiber should watch their gearing closely and see that it does not get too high, otherwise the interest expenses will eat into cash flow for which operating cash inflows may not be able to cover.
Current ratio stood at 1.51 for June 30, 2007 as compared to 1.38 for December 31, 2006. The increase was mainly due to the increases in trade receivables and assets held for sale as mentioned before, but since these are not liquid it would actually affect the quick ratio if I were to attempt to compute it. However, taking into account that Swiber is rapidly expanding for FY 2007, I find that this is acceptable though risky.
Cash Flow Statement
In spite of the higher interest charges on bank loans, Swiber still managed to generate about US$2.9 million worth of operating cash inflows. However, it should be noted that their trade payables were lower for June 30, 2007 as compared to June 30, 2006; this may imply that they are paying off creditors faster than collecting from debtors, or it could simply be a timing difference. We will not be able to know unless we understand Swiber’s cash conversion cycle (in days), but this is just an area I am highlighting.
Most of the activity took place under investing activities. Cash of US$24.6 million was received from the disposal of vessels held for sale, while there were more purchases of fixed assets and vessels held for sale, presumably these relate to the scaling up of their operations, fleet expansion and opening of new offices in the Middle East (through the MOU) and India. The result is a net cash outflow of US$13 million.
For financing cash flows, most of the funds flowed in through the taking up of new bank loans with collaterals using cash (pledged deposits) and vessels. Some pledged deposits were also “freed up” on the sale of vessels and the net increase in financing cash flows amounted to S$13.7 million, which almost completely offsets the cash outflows from investing activities.
From this summary, it can be seen that Swiber has to generate strong operating cash flows in future periods in order to be able to service their bank loan interest and gradually reduce their leverage (by paying off bank loans). This is somewhat similar to the approach used by OSIM as they are generating lots of cash from operations (though not profits) which they are using to pay down most of their loans. A company’s cash flow situation may be very different from their profitability situation (as illustrated by OSIM) and thus far, Swiber has managed its cash well such that there was a net cash inflow of US$3.44 million. Hopefully, as the business scales up and more contracts are won, their operating cash inflows will boost their cash balances more strongly and ensure that they have enough cash to operate smoothly.
Outlook and Prospects
The CEO Mr. Raymond Goh has articulated Swiber’s three-prong growth strategy very clearly in the press release and subsequent analyst presentation. The first is to grow their fleet significantly (which they are doing) by owning 29 vessels by the end of FY 2007. In addition, they have three vessel orders planned for FY 2008 to FY 2009 in order to extend their EPCIC capabilities. The second is to extend Swiber’s network into regions which they previously did not have business, such as the Middle East, Bangladesh, China and Vietnam. Thus far, progress has been made for the Middle East and India but there has been no news of the Group trying their hand to capture a slice of the China or Vietnamese market. The final piece of strategy involves cost-cutting technology and innovative technological advancements to cater to the shallow-water oil and gas industry. This has been accelerated by the purchase of North Shipyard Pte Ltd as it helps Swiber to vertically integrate and acts as a research base for new technologies as well.
Moving forward, the future looks bright although there are things to watch out for along the way. As I have learnt in business, nothing is smooth sailing and it always pays to keep an eye on a business which you have purchased a piece of.
Next Post: My mid-August 2007 review will take place tomorrow. After that, I will be reviewing PAH's 1Q 2007 results and GV's 1H 2007 results; both of which were released today.
Swiber has released their 2Q and 1H 2007 results yesterday, and they were largely in line with expectations and there were no major surprises. As mentioned previously, I will be focusing more on the margins and cash flows for Swiber as I believe these are the more critical aspects of the business which should be examined. From the recent contract flow and the positive announcements, it is to be expected that Swiber have managed to grow their revenue and profit base. The question now is the future prospects of the company in terms of growing not just their revenue base, but also their geographical reach, customer base, size of contracts and margins. My analysis will be in sections as follows:-
Income Statement
Revenues for 2Q 2007 grew by 232% while net profits were up by 678%.Excluding exceptional items such as disposal of fixed assets and vessels held for sale, net profit for 2Q 2007 would have been up by about 305%. For 1H 2007, revenues were up 220% and gross profit improved by 235%. This was due in part to the recognition of income from the Indonesian and Brunei Shell projects which have already commenced. A quick glance at the margins shows substantial improvement: for 2Q 2007, GP margins stood at 29.4% as compared to 2Q 2006’s 18.9%; for 1H 2007, GP margin was 28.6% against 27.3% for 1H 2006. This improvement of 10.5 percentage points for 2Q year-on-year is a result of more vessels coming on stream in Swiber’s ambitious fleet expansion program. By utilizing their own vessels, Swiber reduced reliance on third-party vessel chartering and thus improved their margins on contracts as well. Note that net profit margins are not used as they have been distorted by the presence of exceptional items; gross margins measure the returns on contracts more effectively as it involves the full costs associated with providing the EPCIC services.
The glaring figure which stood out are the finance costs as a result of taking up more bank loans (their gearing increased from 22% to about 52%). Finance costs rose an astronomical 871% from only US$97K in 2Q 2006 to US$942K in 2Q 2007. This is one of the reasons why additional leverage can hurt the income statement, and fortunately Swiber has generated sufficient cash flows from their operating activities to cover this interest payment (see Cash Flow Statement section). Adminstrative expenses also increased much more rapidly than revenues (increase of 319% versus only 232% increase in revenues), which shows that Management should focus more efforts in cost-cutting to reduce unnecessary expenses. Most companies tend to chalk up higher expenses as they grow and expand but if expenses rise disproportionately to sales, then it is a cause for concern. A small note: the Group also suffered an exchange loss of US$206K as a result of the weakening of the US$ against most other currencies (Swiber’s reporting currency is in US$).
Balance Sheet
Swiber’s balance sheet is relatively uncluttered and I did work out some simple figures to get a feel of things. Working capital stands at US$29.3 million for 30 June, 2007 as compared to US$13.1 million for 31 December, 2006; this represents an increase of 124% and it can be attributed mainly to the increase in trade receivables (a natural thing to happen as revenue has also scaled up significantly) and assets held for sale (by this I assume they are vessels held for sale). This was partially offset by the increase in short-term bank loans of US$9.0 million (an increase of 205% over 2Q 2006) and other payables. The gearing has increased significantly from 22% to about 52% as a result of Swiber taking up more short and long-term loans (cumulative increase over 31 December, 2006 is US$19.7 million, a 182.9% increase) to finance their fleet expansion. With the introduction of their US$300 million multi-currency medium term note program, this gearing is expected to increase from the current 55%. All I can say is that Swiber should watch their gearing closely and see that it does not get too high, otherwise the interest expenses will eat into cash flow for which operating cash inflows may not be able to cover.
Current ratio stood at 1.51 for June 30, 2007 as compared to 1.38 for December 31, 2006. The increase was mainly due to the increases in trade receivables and assets held for sale as mentioned before, but since these are not liquid it would actually affect the quick ratio if I were to attempt to compute it. However, taking into account that Swiber is rapidly expanding for FY 2007, I find that this is acceptable though risky.
Cash Flow Statement
In spite of the higher interest charges on bank loans, Swiber still managed to generate about US$2.9 million worth of operating cash inflows. However, it should be noted that their trade payables were lower for June 30, 2007 as compared to June 30, 2006; this may imply that they are paying off creditors faster than collecting from debtors, or it could simply be a timing difference. We will not be able to know unless we understand Swiber’s cash conversion cycle (in days), but this is just an area I am highlighting.
Most of the activity took place under investing activities. Cash of US$24.6 million was received from the disposal of vessels held for sale, while there were more purchases of fixed assets and vessels held for sale, presumably these relate to the scaling up of their operations, fleet expansion and opening of new offices in the Middle East (through the MOU) and India. The result is a net cash outflow of US$13 million.
For financing cash flows, most of the funds flowed in through the taking up of new bank loans with collaterals using cash (pledged deposits) and vessels. Some pledged deposits were also “freed up” on the sale of vessels and the net increase in financing cash flows amounted to S$13.7 million, which almost completely offsets the cash outflows from investing activities.
From this summary, it can be seen that Swiber has to generate strong operating cash flows in future periods in order to be able to service their bank loan interest and gradually reduce their leverage (by paying off bank loans). This is somewhat similar to the approach used by OSIM as they are generating lots of cash from operations (though not profits) which they are using to pay down most of their loans. A company’s cash flow situation may be very different from their profitability situation (as illustrated by OSIM) and thus far, Swiber has managed its cash well such that there was a net cash inflow of US$3.44 million. Hopefully, as the business scales up and more contracts are won, their operating cash inflows will boost their cash balances more strongly and ensure that they have enough cash to operate smoothly.
Outlook and Prospects
The CEO Mr. Raymond Goh has articulated Swiber’s three-prong growth strategy very clearly in the press release and subsequent analyst presentation. The first is to grow their fleet significantly (which they are doing) by owning 29 vessels by the end of FY 2007. In addition, they have three vessel orders planned for FY 2008 to FY 2009 in order to extend their EPCIC capabilities. The second is to extend Swiber’s network into regions which they previously did not have business, such as the Middle East, Bangladesh, China and Vietnam. Thus far, progress has been made for the Middle East and India but there has been no news of the Group trying their hand to capture a slice of the China or Vietnamese market. The final piece of strategy involves cost-cutting technology and innovative technological advancements to cater to the shallow-water oil and gas industry. This has been accelerated by the purchase of North Shipyard Pte Ltd as it helps Swiber to vertically integrate and acts as a research base for new technologies as well.
Moving forward, the future looks bright although there are things to watch out for along the way. As I have learnt in business, nothing is smooth sailing and it always pays to keep an eye on a business which you have purchased a piece of.
Next Post: My mid-August 2007 review will take place tomorrow. After that, I will be reviewing PAH's 1Q 2007 results and GV's 1H 2007 results; both of which were released today.
Monday, August 13, 2007
The Importance of Dividends
Several events over the last few months have led to me to question the importance of declaring a dividend for any invested company. After all, as shareholders, what better reward should we expect than an immediate cash “return” on our investment in the form of a dividend ? As I was attending AGMs and EGMs, shareholders of all shapes and sizes and ages would almost invariably come up with this million-dollar-question: will the dividend increase next financial year ?
To begin to analyze this seemingly innocuous question, let’s first take a look at what a dividend represents. A dividend is simply an appropriation of a company’s retained profits and earnings from the previous financial year, which they are paying out a portion (say 30-50%) in cash to shareholders. This payout is entirely optional as Management is not contractually bound to pay out any part of the company’s earnings as dividends, unlike in the case of bonds (or debentures) where interest payment obligations have to be met. Thus, most of the time, a dividend payout is a signal that Management either wishes to reward shareholders for their loyalty (and themselves too, as most of the time Management and Directors do hold shares of their own in the company) or has too much cash on hand which they don’t know how to make good use of. Let’s take it part by part.
Management says in the first example that dividends are a way of rewarding shareholder. This is well-supported because as the business takes off, the earnings, revenues and margins of the company also increase, thus increasing the total shareholders’ “value” in the company. The value is then crystallized in the form of dividends, which represent a return on what the shareholders had originally invested in the company. Looking at it from this angle, it seems perfectly justified. However, an informed shareholder should also note the company’s cash flow requirements (such as for capex and future capital commitments) and ensure that Management is not paying out more than it should. This is a difficult aspect to determine as usually only the insiders know how much funds the company needs and how much it can disburse as dividends, but a good estimate would come from the nature of the industry, the company’s strategies and the capital commitments note (from the Annual Report).
In the second example, Management gives out cash as a special or one-time dividend because they have too much cash sloshing around and they have no better use for it. All I can say is Management is probably not confident of putting the money to better use, which is why they would rather give it back to shareholders. This is not necessarily a good thing as it may indicate that the company has entered the mature or even decline phase of the business such that its products have a stable (rather than growing) demand and sales may even start to stagnate or taper off. Most companies that I have noticed which pay out a special dividend may do so due to the aforementioned reason, or due to the sale of a property or shares in an investment. Shareholders should not invest in a company hoping for such “one-time” payouts, as this may imply the company’s business may be on the decline and that they are considering divesting and moving into another. Carefully scrutinize the business of each company you intend to invest in so as to avoid this costly mistake. Otherwise, the dividend gain may very well be offset by the capital loss !
Another form of dividend which may be declared is a dividend-in-specie. This in essence is a share dividend, meaning a dividend in the form of shares in another company rather than in cash. One recent example is Boustead’s dividend-in-specie in the shares of Easycall International Limited (now renamed as China Education Limited) of about 3.14 cents/share. Ezra had also initially intended to dividend out its shares in EOC Limited to shareholders in the form of a dividend-in-specie, but later decided to sell the shares away as vendor shares in order to raise more funds for expansion. The advantages of this exercise are that shareholders get to hold shares in another company which may have its own growth prospects as well. The downside is that such companies may also have dormant or stagnant business models with little growth, thus “trapping” your investment for many years. In Easycall’s case, it was bought over by Raffles Education Corp and the shares soared from a low of about 8 cents to a high of over 90 cents, returning about a 1000% gain to those who faithfully held on to them. But this is more of an anomaly than the norm, and shareholders should remain cautious about dividend-in-specie announcements.
To summarize, dividends are a double-edged sword as it can be either a good or bad thing for a company depending on the context and the company’s business cum industry. There is no right or wrong and each case should be evaluated on its own merits. For high-growth companies such as Swiber, for example, it will be much better for them to retain earnings rather than pay out dividends as they can use the cash more efficiently to grow the business. Reinvested dividends can help to grow a company’s intrinsic value and if this is the case, then the argument should be made for no dividends until the company has reached a stable rate of growth (becoming a cash cow). For the record, Berkshire Hathaway (Warren Buffett’s holding company) has NEVER paid a dividend (except only once which Buffett admitted was a mistake), but has seen the value of its shares soar to as high as US$100,000 per share. Thus, there is really no limit to share price appreciation as long as the business is growing and earnings are increasing.
Next post: Analysis of Swiber's 2Q 2007 Financial Results + Updates for Boustead and Global Voice....stay tuned !
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