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.

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.