Quarterly Financial Reporting - Pros and Cons

Dr Lee Kin Wai, associate professor in Nanyang Business School, presented his findings in an article in Singapore Accountant Jan 2007. I have summarised his conclusions as follows.

Advantages

• Stock prices do react to quarterly earnings announcement.


• He then investigated and concluded on the effect of voluntary disclosure in quarterly financial reporting. He defined "voluntary disclosure" as disclosure released by management over and above the mandatory requirement in the quarterly reporting.


• The more information presented in its voluntary disclosures, the lower its cost of equity capital and debt capital.

Disadvantages

• Investors, market and consequently the management of these companies are geared towards short term focus. For those with some experience in doing business, we are aware of the great difficulties in producing results in 3-month quarterly windows but yet investors and market will measure their performance as such.


• Management may be encouraged to "manage" ie. spread their earnings over the various quarters to generate "quarter-to-quarter growth" and "beat analysts' estimates".


• Dr Lee observed incremental costs to comply in terms of human hours to prepare and approve the accounts.


• The stronger a company's internal controls, the shorter the time to close the accounts. Case for corporate governance to be strengthened.

Ban Joo's woes continue

seeking direction to a better life...

Textile firm Ban Joo & Co, whose financial year-end has been changed to September from June, reported a loss of $15.1 million for the 15 months ended Sept 30, 2007 on Friday last (as compared to net loss of $35.2 million for the 12 months ended June 30, 2006).

The loss was due mainly to provision for impairment of trade debts and losses associated with the discontinuation of operations.

The management of Ban Joo has had a really difficult and busy year given the following series of actions in attempting to improve its fortune.

• A controversial share placement exercise completed in the middle of the year saw an injection of $3.6 million and has boosted the company's cash holdings. [refer to my earlier posting http://investingwithedgar.blogspot.com/2007/06/placement-of-shares-at-discount.html] Cash and cash equivalents stood at $6 million at the end of the period. [With the company incurring a loss of about a million dollars a month, the $6million will not last very long.]
• Somehow the management managed to reduce its bank borrowings and other current liabilities by $5.7 million [ I wonder how much is the total liabilities.]
• The company announced in October that it had completed a debt restructuring agreement with various financial institutions. [I wonder how were the various financial institutions convinced of its viability.]
• Lastly, the management has also changed its year end from June to Sep. [Again I wonder why. Did I miss its explanation for the change in year end date?]

Dear Labroy and SembCorp, may I know which banks advised you on hedging?

Background - Sembcorp Marine

When the news first broke on SembCorp Marine on Oct 23, 2007, it was reported that Jurong Shipyard paid US$83m and facing unrealised loss of another US$165m.

Of course, the figure has balloned way beyond US$300m.

Background - Labroy

Labroy is the other company who caught the forex superbug. It reported forex losses of $167m in its third quarter, but it also disclosed that it had entered into forex contracts running into billions of dollars.

At the time, Labroy said that it had entered into derivative financial transactions to sell euros and purchase US dollars 'for the purpose of hedging against currency exposures in relation to anticipated euro monies coming in the next three years'. These future receipts arise from the contracts for the construction of two heavy lift jack-up vessels that Labroy secured in March 2007, for a total combined contract value of 283.6 million euros (S$567 million).

Is there a severe mismatch in the size of hedging against what Labroy is receiving. So is the company really hedging against a forex exposure or are they involved in currency speculation?

When I was a rookie in the private banking many years ago, we were constantly reminded of "no surprise culture". If we had made a mistake in effecting a client's instruction or when a client's investment has gone awry, we are to inform our superiors as soon as possible. Time is the essence. We should attempt to cut the position asap to limit further exposure.

In reality, there could be people who attempt to sit on a mistake and pray that the market should reverse and move in his favour. The losses would keep piling up and snowball into an avalanche!!!

In summary, solve the problem first when a problem arises. Witch hunting can come later.

Value investing OR Growth investing?

Can you tell the difference between the two?

Value investing is the art of looking for "out of favour" companies with discounts in price-earning (PE) multiples. Looking for established companies with proven earning records but relatively "cheap" now.

Growth investing is the "science" of looking for fast earnings growth, probably relatively young companies with possibly cutting edge, new age products seeking to change market paradigm. Such companies are usually trading at high PEs. Why? Got not much earnings to show now.

So who am I? Can I say I am both a value investor and growth investor.

In a recent presentation by Mr Jimmy Pang, a senior portfolio manager at Alliance Bernstein recently, he said,

• Forecasts for exciting companies tend to be too exciting ie. optimistic.


• On the other hand, investors are too pessimistic with value companies.

His themes were that

• "reversion to the mean is good for value stocks but bad for growth stocks" under the current investment climate.


• "there is very little value to wring out of value companies but there is a lot of value to be found in growth companies"

What is the reward of correctly identifying the "right" growth company to invest in?

Well, if you had invested $10,000 in Cosco five years ago, you would be a millionaire today!!!! (worth $1.1m today)

Mr Oei has made another $14mio.

What is the deal?

On Nov 13, 2007, Mr Oei is selling the 55,000 sq ft freehold site to Mr Freddie Tan (the former publisher of Magazines Incorporated) for about $52 million - realising a gain of almost $14 million or 37 per cent since Feb 2007.

I highlighted the property purchases in my earlier posting in the share swapping exercises.

http://investingwithedgar.blogspot.com/2007/02/what-is-happening-with-mr-oei-novena.html

The two properties, at 98 and 100 Pasir Panjang Road, were acquired from Novena Holdings for some $29.8 million. His total cost, is said to be around $38 million.

Another deal in the bag for Mr Oei. The next question still awaiting an answer would be - Where will Mr Oei house the 10,000 Buddhas? One thing for sure, it will be a very nice place.

SPH is more than fixed deposit

Would you consider investing in a company that gives you the following?

Company's last closing share price - $4.48.

1. The company is earning 32cts per share for you.
2. It is paying out 26cts per share as dividend. This is equivalent to a gross yield of 5.8% per annum (against share price). Compare that with how much are you getting from your fixed deposit or saving accounts?
3. The company is in a business of selling necessities ie. information and entertainment distributed over various channels ie. newspapers, magazines, internet etc etc etc.
4. Generating positive cash flow of $40mio.
5. Topline grew by 13.6%.
6. Profit attributable to shareholders grew by 18.1% to $506mio.

P/S - I have some CPF monies in SPH trying to beat the current 2.5% interest rate for the ordinary account.

Merrill Lynch recommends SC Global

Yesterday Merrill Lynch initiated coverage of property firm SC Global Developments with a 'buy' rating and set a price target of $9.50. (closed at $6.45, up 45cts on Oct 4, 2007)

Merrill Lynch said the stock was undervalued and could appreciate further when SC Global launches two of its residential projects in the coming six months.

I am sorry I am unable to agree with that recommendation on the simple basis that I don't think Simon Cheong will sell himself short.

Back in June 2007, Wheelock Properties bought and Simon sold a 10% stake in SC Global Developments at @$6 for a total value of $112.1mio.

Check out my posting on that transaction.
http://investingwithedgar.blogspot.com/2007/06/young-simon-and-old-wheelock.html

It was only so recently that both buyer and seller (who are veterans in the property business) valued SC Global at $6 per share. I am sure Simon knows the value of its assets and would have present-valued certain percentage of future value.

Nothing much has changed since Jun 2007. I will be glad to lay my hand on the details of Merrill Lynch's recommendation. Please pass me a copy if you have it!!!

Till then, I am with Simon's valuation.

It doesn't pay to save

He also works in Shenton Way.

Huh? Well at least for next few years where we should be experiencing negative real interest rates.



What is negative REAL interest rate?
Real interest rate = Nominal rate less inflation rate


So a negative real interest rate is when the gross interest interest rates that you are getting from your Bank for your saving account and fixed deposit are generally lower than the inflation rate.



The inflation rate is expected to be 1% to 2%.



If you let your monies sits in your saving account, your monies would buy less less things as any interest earned is outstripped by climb in consumer prices.



For example, DBS Bank offers to pay 1.8% per annum for $50,000 - $99,999 24-month fixed deposit.



I am not discouraging the age old good habit of saving.



But I am highlighting the need for you to aggressively manage your monies ie. to seek out investment opportunities which could yield higher than inflation rate at a risk level acceptable to you.



Bottomline - It doesn't pay to save amid rising inflation, low bank rates. Ask your money to work harder.

CPF interest rate increase

Toward the beginning of the month, we were told that the first $60,000 in the various accounts will be given an additional 1%.


This is to help grow our retirement fund. I cheer to that.


A couple of weeks later, today, I heard it on radio that the inflation rate is now at 1-2% and it is expected to go up in the second half of the year.


From this piece of news, it dawned upon me the importance of the 1% increase in interest rate announced earlier.


Without this increase in CPF rate, our funds in the CPF Ordinary account would be accumulating at close to inflation rate. Bottomline - No real increase in purchasing power.


Bottomline - We need to ensure that our monies work even harder to ensure sufficient funds for retirement.

Mr Oei is selling down his Centillion shares

On Friday alone, it is estimated that he made $26mio from selling the 300,000,000 million shares that he has.

That effectively reduced his holdings from 26.47% to 19.72%...

HUH!!!! He still got 19.72%%%%%

40.6% was the highest level he held.

Mr Oei, I will pay good attention to your next purchase decision. Really hope to learn from you.

What is "share buyback"?

my sunday jog

Who is buying?

It is the public listed company buying back its own shares from the open market using company's fund. Shareholders' approval must be secured to use company's funds for this purpose.

Under the old rule, the shares would be cancelled. Current rule allows such shares to be placed in a Treasury Account ie. a holding account.

What are the possible reasons for such action?

• to enhance Return on Equity
• to tighten control over the company by the majority shareholders' using company's fund
• to discourage any takeover attempt by restricting supply of free floating shares
• to return excess capital back to shareholders
• to buyback and give the shares to employees as reward under its various incentive schemes
• to support the company's share price

When is it an appropriate time for the company to do it?

It is usually done during periods in which the respective company thinks its share price is undervalued.

It is reported in BT yesterday that the total value of share buybacks rose from $53.47mio in July to $174.6mio in Aug to date.

UOB Bank alone accounted for $143.32mio ie. an amazing 63% of total value of share buybacks over the these 2 months. Haw Par Corp, another company related to Wee family, bought back $40mio worth of shares.

So is the Wee family signalling to us to buy too???

Holding period for shares

I just been informed by Ms Teh Hooi Ling in her article in yesterday's BT that there is a formula used to measure average holding period.

What is the formula?

It is calculated based on the annualised value of stocks traded in a month divided by the entire market cap of the stock exchange and multiplied by 365 days.

Last month ie. July 2007, the number of days a stock is held by investors in Singapore last month hit 353 days. It is the second lowest level in the last 17 years since the dotcom bubble in June 1999.

For the record, it was 309 days in June 1999.

So is it good or bad to have "a low holding period"?

Back in 1994 and 2000, average holding periods during thes 2 years dropped to the lowest level during their respective peak of the stock market.

And two months back, holding periods for stocks in Asia was at its briefest, shorter than even in 1994 and 2000.

Thus on hindsight, the correction should have been seen to be coming.

Lesson learnt - Set up the formula in your Excel spreadsheet and monitor it for the next stock market crash!!!

360 day-year or 365 day-year - What is the big deal?

I have just been informed by my DBS Credit Card Statement that:-

"the basis of interest calculation will be revised FROM existing 360 day-year TO 365/366 day-year (in a leap year)"

I couldn't believe my eyes!!!!

That for once in my life, I am looking at an unilateral amendment to a service agreement that is in favour of customers.

So what is the big deal?

Allow me to illustrate with an example. Let us say I have a personal loan of $10,000 at 14% p.a. What is my interest expense for the month of August (a 31-day month) based on:-

a) 365 day-year and;

b) 360 day-year?

Answer

For a 365 day-year, my Aug's interest expense,

$10,000 x 14% x 31/365 = $118.90

For a 360 day-year, my Aug's interest expense,

$10,000 x 14% x 31/360 = $120.56

Based on DBS Bank's revision of its basis year, it has implicitly given me a discount of $1.65 per $10,000 loan per month (estimated).

If you multiply this by the billions of personal loans, credit card loans, car loans, property loans, travel loans, renovation loans etc etc etc, this would be (as I am not sure whether this is applicable to all DBS loans) a significant move by a leading bank in Singapore in the right direction ie. a fair deal to both the bank and its customers.

Cheers to DBS Bank!

P/S - Refer to http://anythingwithedgar.blogspot.com/2007/05/how-to-increase-your-companys.html for my earlier expression of displeasure.

Have you got a call from your broker?

It is definitely BAD news if I had received a MARGIN call from my broker in the last 2 weeks.

What is a margin call?

Situation arises when I have borrowed money from stockbroking firm to partially pay for my share purchases AND the share price of that counter fell significantly.

Example

I have purchased 100 lots (ie. 100,000 shares) of Company X at $1 per share. At 80% financing, I paid $20,000 from my own pocket and the remaining $80,000 borrowed from the firm.

When the share price dropped to 70 cents, the firm would recalculate the loan amount ie. 80% of 70 cents x 100,000 shares = $56,000.

The firm would call me to top up the difference of $24,000 (ie. $80,000 less $56,000)!

If I got the money, I would pay the $24,000.
If I got no money, I would be forced to sell my shares at a loss of $30,000!!!

Moral of the story - You must consider the downside for any upside that you are expecting.

Do you have a CDP account?

No? What is that?

CDP is the Central Depository account where your scripless (share certificateless) shares are held.

Many people have opened their CDP account in recent months (eg. in July 2007, 6,200 accounts were opened). Many are only entering the stock market from Jan 2007.

There are about 250,000 accounts that are active (active is defined by at least one buy or sell in the last 3 months). If we assume that Singapore has 3.4 million adults over the age of 20 years old, this would mean that only 7.4% of adult population have an exposure in the stock market.

So if you don't have a CDP account, you belong to the majority. But is this good for you?

Basically I don't think staying away from investing in shares is good for your retirement. Why? As equity investment consistently outperform bonds in the past, it is advisable to allocate some of your monies in the stock market.

Reference - "Not many benefit from bull run", Teh Hooi Ling, BT, Aug 4, 2007.

Things people do not care

The following are things people do not care about when the market is red hot!!! The following are quotes from today's papers after the blood bath yesterday.

"People are not investing BUT trading."
[(red face) Edgar was trading on IPOs. He didn't read the prospectus.]

"It went from unbelievably bullish to unbelievably bearish in just hours."
[Edgar was searching for news to explain the suddent turn in sentiment. I thought a bomb went off somewhere in the world.]

"Traders were unnerved by a sharp sell-down..."
[Edgar has been mentally prepared for this type of occurrence. He was actually looking to buy.]

"Many heavily traded stocks are those belonging to financially strapped companies with poor earnings records."
[Edgar is fully aware of this and has been advising caveat emptor. See past posting.]

"Reverse takeovers can take as long as a year."
[Edgar understands the difficulty of doing business. A simple deal may take weeks or months to negotiate. Imagine a reverse takeover between 2 entitites under 2 different legal, accounting, financial and sovereign jurisdictions. The deal may even break down.]

"Can a company with poor earnings record be valued at close to a billion dollars?"
[Edgar cannot believe it is happening. But apparently there are many who give such valuation to those companies.]

Mr Oei again with Equation and Centillion

Who are the investors?

• Mr Oei Hong Leong
• Mr Eddie Chng, Equation (ex-HeShe)

What is the target company?
- Centillion Environment & Recycling (ex-Citiraya)



Background

• In 2005, Mr Oei and Equation bailed out Centillion by investing $8.05mio each for 37.5% share each of company.


• Centillion also gave both investors the right to buy more shares. Each may buy another 950mio shares for $8.05mio.

On the Tuesday, 17 July 2007,
Both gave notice to exercise that right. Expected settlement on Friday.
Each would then control 42.86% of Centillion.



Looking forward to Friday, 20 July 2007
Assuming Centillion share price hold steady at 20cts, both Mr Oei and Equation are sitting on a paper gain of $364mio each!!!!! (computation as per BT's article)

$8.05mio for $364mio over 2 years!


My sincere respect to you, Mr Oei and Mr Eddie Chng.

Another Mr Oei's sale and profit

Just over a week after he sold off his shares in Super Coffeemix for an estimated profit of $40mio, he sold off the entire 29.98% stake in China Healthcare.

Estimated profit - about $13mio.

Didn't know China Healthcare was Econ Healthcare until yesterday. Since most of the Chinese counters are in fashion, I wonder whether I can change my company name to China XXXX Pte Ltd.

May we speculate why he sold China Healthcare or why he is in the mood of selling or are these two transactions totally unrelated but coincident?

China Healthcare and Super Coffeemix are ripe for profit taking given the recent run in share prices. Just like hundred of other counters on SGX?

IPO Strategy

Hi friends,

In the middle of a night of a day last week, I chanced upon the opportunity to apply for IPO for China Sunsine using the massively convenient internet banking. The IPO price was 39cts and I decided then to apply for 20 lots.

The next day after the closing date, I was informed that I have been successfully alloted 3 lots.

On trading day, I sold at 57.5cts. A nimble profit of 18.5cts per share or $500 over a few days.

Given the small success, I started to give IPO a little more attention. I applied to a few but was unsuccessful in all of them. The opportunities missed are as follows.

• RH Energy - IPO at 32cts and closed the trading day at 87cts.
• China Angel - IPO at 35cts. Traded as high as 80cts.

Moral of story - It confirms again - There is no sure thing. Caveat Emptor always.

P/S - Financial One - IPO'd at $1.15 and closed the day at $1.15.

HG Metal Chairman sells 1.1mio shares

The point - Whenever an insider make a buy/sell activity or a series of buy/sell activities, we should pay attention.

We need to evaluate that action/s in perspective ie.

• How insider is this person? Key/majority/very executive shareholder?
  
• no. of shares bought/sold against his existing holding
  
• any reason given for the buy/sell - Sometime, the person may sell to pay for the bungalow he is buying etc etc.
  
• pattern based on past activities of this person

Let us take a look at what is reported in Straits Times today on the sale of 1.1mio made by HG Metal Chairman.

• Who is he? The Chairman of the company.
  
• 1.1mio shares sold --> reduced his total shareholding position from 6.06% to 5.65%.
  
• no reason given
  
• pattern of activity - I did not check.

My view - He sold when the share price broke new high yesterday. I think he could be cashing in on some of the gains.