The big picture impacts on Singapore companies

looking for light in gloomy days

Ms Teh Hooi Ling, in this weekend's BT, attempted to answer 2 huge questions as follows:-

• What kind of impact do macroeconomic factors have on companies?


• What are the companies which will suffer the most in an unexpected downturn?

This is the list of characteristics she has highlighted.

• Companies with high levels of debt ie. financial leverage.


• Companies with high fixed costs in relation to total costs in running the business ie. operating leverage.


• Companies with loooonng cash conversion cycle and consequence of credit crunch by their suppliers.


• For external characteristics, inflation and foreign exchange movements would impact negatively.

She atttempted to back up her Econs 101 presentation with data analysis of winners and losers during market upheavals in 1987, 1997 and 2007.

But as the circumstances of excesses were different for different upheavals, the market responses were thus different. She had observed the public listed companies. How about private business entities? Thus inconclusive.

Panacea?
She ended her article with strategies that were generally adopted and proven effective by 750 Finnish companies during the recession in 1989-93.
In the medium term, companies should:-

• continue to invest in new product development


• continue your effort to acquire new customers.

Edgar's closing remarks
Ms Teh attempted to address 2 huge questions very very briefly in an article. It may serve as a quick read and be adopted for many out there.

Her study of Singapore companies' experience in the last 3 upheavals could be developed further and acts as standalone materials. It does not seem to fit in flow of arguments that she has presented in the preceding portion.

In the long run, similar for companies and for individual like you and I, we should generally maintain a healthy lifestyle for higher probability of longetivity.

Benjamin Yeo prophecies ...

a failed bbq in december rain

Who is Mr Benjamin Yeo?
He is the Executive Director and Head of UBS Wealth Management Research. Today he spoke to about 40-50 people at today's ICPAS/ACCA Executive Lunch Series.


Here are some quotes from Mr Yeo that I managed to reap.

• The initial phase of making easy money from the stock market is over. Going forth, look for valuation.
  
• Consumption in US has never experienced negative growth. [I wonder why. Is it due to natural population growth? Or is it due to immigration numbers into US?]
  
• Countries with high export as a percentage of GDP are Malaysia, Singapore and Thailand. As such, any slowdown in consumption in US will have a significant impact on these countries.
  
• Korea, Taiwan and Thailand have the lowest average market PE for the Asian equity markets. Based on data in Dec 2007.
  
• In the equity sphere, emerging market - overvalued. Among other asset classes, real estate and commodities are overvalued with corporate bonds, undervalued.
  
• Singapore, despite a year of bad export figures in 2007, still managed to post such strong growth figure.

In conclusion

1. look for market with significant domestic demand


2. look for healthcare and infrastructural themes in your investment


3. flight to quality will continue ie. go for large capitalisation stocks


4. more writeoffs could be expected in the coming months - which would give us a more difficult first half of 2008.

Enbloc muse - Interest on 5% deposit

Background

In a property transaction, the buyer would place a deposit of 5-10% of the purchase price to the seller. The money is held in trust by the seller's lawyer pending completion of the sale & purchase.

The interest earned on the sum of monies has been kept by the seller's lawyer. [Do they have the legal right to that interest?]

Situation

In this situation that I became aware of, the seller's lawyer has "kindly" agreed to share the interest income on a 50-50 basis with a few hundred sellers of an enbloc property.

Upon the completion of sale and after a few reminders, cheques for the interest income were sent to the sellers. One of the sellers asked for a statement from the lawyer to detail how the amount was derived.

The lawyer said no statement would be issued as the payment was purely made out of goodwill and with no legal obligation.

This seller persisted for the statement as a contract was crystallised [in its opinion] when the lawyer made the offer to share the interest earned on 50-50 basis.

The seller then raised the matter to the Law Society for "help" to secure the statement from its members. The Society said they are not in a position to intervene in a private contract. The seller subsequently changed its position to request the Society to review the conduct of the members in this transaction.

While the seller was in the midst of preparing the paperwork to activate the independent tribunal to review the complaint, the lawyer responded through the Society with the required statement.

Moral of the Story

• Who is legally entitled to the interest earned?


• Is there such a thing as paying out of goodwill for the above situation?


• The interest earned can be "shared". In an enbloc sale, the interest earned could be significant given the size of the transaction and possible long delay due to legal challenges from majority sellers, minority sellers etc etc etc...

"Whose arm did they use?"

When I was told that a Singapore listed company is acquiring another company for $525mio at a valuation of 25x earnings. The price was arrived at on an arm's length, willing-buyer-willing-seller basis. My immediate response was, "Whose arm did they use?"

SNF Corporation, the electronics distributor, has proposed a reverse takeover deal which will see the business of Healthway Medical Services Pte Ltd (HMS) being injected into the listed entity.

SNF will issue 2.6 billion shares in exchange for the ownership to the clinics (doctors and nurses included?) and their future profits.

At 25x PE, I am pretty sure we can buy into blue chips with proven and sustainable income streams. I would be interested in the justifications for the acquisition.

No guarantee in life.

Recently in an investment briefing by a company going for an IPO, we were told in an “unofficial” way that the buying company can’t really rely on profit guarantees issued by ex-shareholders of the company that was acquired, especially if the target companies were from third world countries.

Take for example.
When Company A (who is going for IPO) buys Company B in China for a price tag of $50 million (with questionable assets with minimal book value) that come with a profit guarantee of $10 million a year for two years (when the real price could be $30 million).

Investors to an IPO also cannot be sure whether profit guarantees will result in actual profits or are merely used to make a purchase look good by playing the “PE game” and allow the buyer to have a decent-looking income statement for a few years while having purchased poorly performing assets.

What is the “PE game”? If Company A were to go for IPO at a PE of 8, the $10mio profit guarantee would translate to an additional $80mio in its valuation.

What could Company A do if the acquired entity did not achieve the guaranteed profit? In BT dated Nov 13, 2007, R Sivanithy asked what remedies investors have when guarantees fail to materialise.

They could try going after the sellers after 2 years’ of operating the business and possibly spend another few more years of being entangled in Courts with legal procedures. Assuming the buyers were to be finally successful in the Courts (after incurring heavy legal fees), the sellers may have disappeared completely or the sellers may have conveniently lost the ability to pay for the profit guarantee.

So we, the poor shareholders, end up with an emptied pocket.