Isetan Singapore

Minority investors are working very hard now trying to get Isetan Singapore to pay $2 special dividend to take advantage of S44 tax credits.

It is reported that Isetan Tokyo would have to pay a higher tax in Japan on dividend received from Singapore. Thus Isetan Singapore, 61% subsidiary of Isetan Tokyo, has been very very nimble in paying less than 2% dividends over the year.

Discussion with Isetan management has not resolved conundrum.

It was noted that capital appreciation for this counter over 25 years is estimated at only 57%. Hmm .. has Isetan Singapore been listed in Singapore for so long? "1981", said Mr How Kok Kooi, now 70 years old.

By listing in Singapore, Isetan Tokyo must have obviously done so after considering its tax advisers. It is costly to receive foreign dividends.

Then how does Isetan Tokyo justify its involvement in Singapore?
Isetan Singapore pays royalty fees to Isetan Tokyo ie. a percentage of turnover (regardless of whether Isetan Singapore makes money or not).

The 61% shareholder gets paid a percentage of turnover every year (wonder how many percent), while the remaining 39% shareholders have been getting less than 2% (on par value or share price?) over the 25 years?

Is it really like that?

Next question - Now that Isetan Singapore has some accumulated profits over the year, what is the modus operandi of Japanese companies with foreign subsidiaries in dealing with cash cows given the tax structure in Japan?

P/S - I don't own any Isetan shares.
Share price as of 29 Dec 2006 - $5.20 at PE of 22.1

Merry Christmas!

Merry Christmas, my friends.

For me, it has to be a better investing year in 2007. Ha!

Thailand's U turn

Issue
Thailand's military government imposed foreign exchange controls the "hot monies" on Monday and then did a partial reversal of some measures on Tuesday.

What is "hot monies"?
They are monies moving around the world looking to maximise its yield and/or secure capital appreciation.

The measure that captured the headline is the need for banks in Thailand to hold 30% of any foreign currency above USD20,000 for a year without paying interest.

Why did Thai government contemplate the moves in the first place?
To stem flows of such monies into country which had caused appreciation of Thai baht. The appreciation in baht would cause Thai's tourism and exports to be more expensive.

Consequences
The moves have caused losses to the tune of millions of dollars in the equity and bond markets over various exchanges.

Investors' confidence in investing in Thailand and possibly in the regional markets is shaken. Malaysia is still digesting the negative implications of the exchange control measures they did many years ago.

C K Tang - Deja vu?

Proposal
Tang brothers are offering shareholders 65cts per share.
If acceptances > 90%, they will pay 70cts.

Background
This is the 2nd effort to privatise the company.
First time in Oct 2003 at the then offer price of 42cts was voted down.
There was an episode with UOB Bank on the financing extended to CK Tang. Based on my memory, CK Tang has secured re-financing from an alternative source after paying an early settlement fees to the tune of million of dollars.

Question
Is the current price a fair offer for a stake in a very very very prime real estate albeit in a competitive retail business and rapidly improving hotel business?

If the shareholders had accepted the offer in 2003, a shareholder would have missed on about 15% per annum rate of capital appreciation.

Minority shareholders, please do not be distracted by the poor health of Mr Tang Wee Sung. As a human, I am sorry to hear that.

But please justify the economic basis for the offer.

P/S - I have no C K Tang shares as of today.

Valuation for a company - A Method

The following is a method (among many) in attempting to estimate the valuation of a company.



Proposition



Value of company =
Book Value + NPV of future stream of abnormal earnings



where

• Book Value - ie. original capital invested to start the business
  
• Abnormal earnings - ie. earnings above the cost of capital

Consequently from the above proposition, you would have 3 possible scenarios.

1. when company's earnings > cost of capital


2. when company's earnings = cost of capital


3. when company's earnings < cost of capital
   

Investors would be willing to pay MORE than the book value of the company in scenario 1. Whereas, investors should pay a price equal to the book value of company for scenario 2. In scenario 3, investors should seek a discount on the book value to justify a normal return on investment.

My view

I would recommend the use of current networth (net assets) of the company instead of just the "original capital".

For a company that has been in business for many years, it would be using the original capital invested + any retained earnings + other reserves as the current capital involved in funding the business operations today.

The above formulation is a multi-year model ie. both the investors and owners of the business are required to look at future areas of business that would generate the abnormal returns.



We can use a single-year model to be used as "rough" valuation.

Example - ABC is company with the following profile:-
- a net assets of $100
- It generated a profit of $10 ie. 10% return on net assets.
- cost of capital for this businees is 7%.

The "rough" valuation should be around,
$10/7% = $142.86 (ie. > greater than net assets of $100)

Reference - "Abnormal earnings drive a firm's value", Business Times, Teh Hooi Ling, Dec 2-3, 2006.

Joseph D. Piotroski

Who is Joseph Piotroski?
He teaches accounting at the University of Chicago. He has developed a simple strategy that anyone can use to become a better investor.

His Proposition
Based on his accounting knowledge on fundamental analysis, he is able to provide an organised way to hunt for value stocks.

His Research
Between 1976 and 1996, He focused on the bottom 20% of the price/book universe at the end of each year.

He discovered the following:-
* one-year performance of these stocks beat the market by about six percentage points annually,
* but all the gains came from fewer than half of the companies.

Upon analysing the winners and losers, he is able to rank stocks on a 9-point scale based on accounting benchmarks.

His 9-point Scale
The Scale is sub-divided in 3 main areas ie. 4 points on Income Statement items, 3 points on Balance Sheet items and 2 points on efficiency factors respectively.

1. positive earnings,
2. positive cash flow,
3. year-to-year earnings growth
4. cash flow that exceeded earnings (a crude measure of accruals)
5. if the ratio of long-term debt to total assets declined over the past year,
6. if the current ratio improved (current assets divided by current liabilities)
7. if the company didn't issue shares
8. an improvement in gross margins
9. an improvement in asset turnover (revenue divided by total assets)

His Results after applying the 9-point Scale
* Companies near the top of Piotroski's rankings (eights and nines) beat the market by 13% over one year.
* Companies near the bottom (zeros and ones) trailed the market by 10% points.
* The gains continued for two, possibly three, years.

Summary
He has identified a set of criteria that can beat the market by up to 13% or avoid significant loss. The question now would be - Is the same scale applicable to our regional stock markets?

Reference - "Value or Growth", Paul Sturm, Smartmoney, May 2004

Should there be a "gang" in the Board of Directors?

I strongly agree that a director should step down if he thinks he can no longer be effective.

But is it appropriate for a director to step down for reason that he could no longer be effective in the absence of his "gang" in the board? Let me cite a recent occurrence of this "gang" thingy.

Prof Cham Tao Soon, who was elected to Robinson's board during AGM in mid Oct 2006, resigned in early Nov 2006. He said that he felt he could not carry on since his fellow independent directors - Ms Chew Gek Khim and Mr Winston Tan - were 'abandoning ship'.

Ms Chew, Mr Tan and Prof Cham had offered themselves for election. The shareholders had voted for them during the AGM. They were duly elected to the Robinson's Board. They must have assessed their individual ability to contribute prior to acceptance for nomination. The shareholders who voted for them must have agreed that each of them can contribute. There was no representation from Prof Cham prior to election that he could not be effective in the absence of the other two.

In Siow Li Sen's Business Times article dated 16 Nov 2006, some degree of "collegiate" atmosphere within a board is necessary to maximise their contribution to the business and shareholders.

What is appropriate?
The jury is still out in slowly maturing corporate governance scene in Singapore. As of now, it certainly leaves a sour taste in my mouth.