tag:blogger.com,1999:blog-70108160316912894792024-03-15T18:09:49.044-07:00THE SECRET INVESTORSInvest. Don't Speculate.secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.comBlogger15125tag:blogger.com,1999:blog-7010816031691289479.post-83481706095727590072018-02-26T05:15:00.001-08:002018-02-26T05:15:37.916-08:00HL Global Enterprises (AVX.SI) - Cloud of Uncertainty RemovedIn my <a href="http://secretinvestors.blogspot.com/2017/11/hl-global-enterprises-avxsi-potential.html" target="_blank">previous post here</a>, we discussed about HL Global Enterprises' relatively complicated disposal of LKN Investment International Pte Ltd (LKNII) and some salient features about why the shares of the company were worth a bet. Looks like most (if not all) of the points covered went through nicely and things are indeed looking very well for them.<br />
<br />
In Summary:<br />
<br />
<b>1. Disposal of LKNII and CHQ is completed and the >S$100M proceeds are already received.</b><br />
<b><br /></b>
<b>2. Part of the proceeds are used to pay off the Venture Lewis loan in full.</b><br />
<b><br /></b>
<b>3. HL Global Enterprises' future earnings will be relieved of the heavy interest expense as a result of payment of the loan and we should reasonably expect positive earnings going forward.</b><br />
<b><br /></b>
<b>4. The free cash flows of the group remains positive as usual.</b><br />
<b><br /></b>
<b>5. The group has applied for removal from the SGX-ST watchlist and they had undertaken to provide a reasonable exit offer for minority shareholders should SGX-ST somehow rejects the application (in my opinion, this scenario is unlikely).</b><br />
<b><br /></b>
<b>6. A 3-cents dividend is declared, giving a yield of 6.4% on current price of 46.5-cents. This is the first dividend declared since probably >10 years ago.</b><br />
<b><br /></b>
<b>7. The group is reviewing the proposed development of their Melaka property as well as sourcing for sustainable and viable businesses with the huge excess cash that remains even after the payment of the 3-cents dividend.</b><br />
<b><br /></b>
<b>8. There are some changes to the Board.</b><br />
<b><br /></b>
HL Global Enterprises has essentially gone from <u>net debt to net cash of about 60-cents</u> per share. <u>Book value also went from negative to about +84-cents</u> per share (higher than my previous estimate of 75-cents per share). As mentioned <a href="http://secretinvestors.blogspot.com/2017/11/hl-global-enterprises-avxsi-potential.html" target="_blank">previously</a>, even after this disposal the group still have various profitable operations, investments and properties. At just 46.5-cents today and considering that much of the uncertainty related to the disposal removed, HL Global Enterprises is still significantly undervalued and definitely worth a bet.<br />
<br />
<i>Disclosure:</i><br />
<i>Long HL Global Enterprises (AVX.SI) since Jul '17</i>secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com10tag:blogger.com,1999:blog-7010816031691289479.post-83242900765330593282017-11-22T14:58:00.001-08:002017-11-22T15:52:04.117-08:00HL Global Enterprises (AVX.SI) - Potential exit from SGX-ST WatchlistA few interesting facts from the completion of the complex disposal of <b>HL Global Enterprises</b>'<b> (AVX.SI)</b> share capital of LKN Investment International Pte Ltd (LKNII), which consists of 100% interest in Hutai that owns the 106-unit serviced apartment building Elite Residences located near Shanghai's central district as well as the 60% interest in loss-making CHQ that consists of the 455-unit Copthorne Hotel in Qingdao, located near Qingdao's central business district. More information can be gleaned <a href="http://infopub.sgx.com/FileOpen/Completion_disposal_LKNII.ashx?App=Announcement&FileID=479492" target="_blank">here</a>:<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqcaCuJNk8EHr_1tgA9g6ShGc7ryHA9KZsj7LhJtQe8VxcJvraQ2vMMW-jlo-4sAfcN9JMaGbQv-xUMNoJ5aJhzbPuIv9WwbBU_2tdo6NSiiKzUL18zs1x-QO2hLJz1JoMzqA4INZREut4/s1600/Picture1.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="599" data-original-width="473" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqcaCuJNk8EHr_1tgA9g6ShGc7ryHA9KZsj7LhJtQe8VxcJvraQ2vMMW-jlo-4sAfcN9JMaGbQv-xUMNoJ5aJhzbPuIv9WwbBU_2tdo6NSiiKzUL18zs1x-QO2hLJz1JoMzqA4INZREut4/s320/Picture1.jpg" width="252" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Elite Residences in Shanghai, the PRC</td></tr>
</tbody></table>
<b>1. The company will receive net proceeds in excess of S$100M from both deals, the bulk of it already received.</b><br />
<b><br /></b>
<b>2. HL Global will become a net cash company VS a net debt company before the disposal.</b><br />
<b><br /></b>
<b>3. HL Global should report positive book value VS a negative book value previously.</b><br />
<b><br /></b>
<b>4. The now positive book value should also be very much more than the current market cap (I estimate it to be around S$72M or S$0.75/share vs market cap of about S$44M or S$0.455/share).</b><br />
<b><br /></b>
<b>5. The company will report a significant gain in earnings this year due to this disposal.</b><br />
<b><br /></b>
<b>6. Main investments and properties of the group after completion still consists of:</b><br />
a. 100% interest in Augustland Hotel Sdn Bhd which owns and operates the profitable Copthorne Hotel Cameron Highlands;<br />
b. 49% interest in a management services company to Equatorial Hotel Shanghai;<br />
c.100% interest in Victory Heights which owns a land located in Tengah Malaysia and finally;<br />
d. 2 other pieces of land of approximately 8,400 sqm in Cameron Highlands, Malaysia.<br />
<br />
As guided by management in earlier reports, I believe HL Global will use part of the huge cash proceeds for the repayment of the unsecured loan which has been one of the main causes of its losses the past few years via interest expense. Coupled with loss-making CHQ already out of the picture, HL Global should be able to <u>report reasonable earnings going forward, fulfill the financial exit criteria and be<b> removed from the SGX-ST Watchlist</b></u> that is probably causing disinterest in the shares of this company. The company has also been reporting positive free cash flows.<br />
<br />
Lastly, the substantial cash that remains even after paying the unsecured loan in full may be used to fund suitable acquisitions of new businesses and possibly, the payment of a dividend.<br />
<br />
Management has been trying various ways to get HL Global out of the SGX-ST watchlist for some time now and I think this is one of the more favorable (if not most favorable) outcomes that potentially will lead to the exit of SGX watchlist.<br />
<br />
<i>Disclosure:</i><br />
<i>Long HL Global Enterprises (AVX.SI) since Jul '17</i>secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com9tag:blogger.com,1999:blog-7010816031691289479.post-71007672103053195502016-07-21T01:07:00.001-07:002016-07-21T01:07:37.989-07:00SMRT Corporation Buyout Offer: An Alternative ViewpointTemasek is buying out the 'troubled' transport firm SMRT at S$1.68 - valuing the company at about S$2.56B. Because Temasek owns 54.1%, they have to pay about S$1.18B for the remaining stake.<br />
<br />
Readers of my blog would have known I <a href="http://secretinvestors.blogspot.sg/2014/12/my-sg-porfolio-2014-top-realized-gains.html" target="_blank">bought SMRT </a>back in 2014 at an average cost of about $1.02 and sold the same year at $1.49. I left a comment and highlighted that the non-fare segment of the company seemed attractive as follows:<br />
<br />
<div class="MsoNormal">
<i>Comment: Quite lucky here as a
short while from my initial purchase, the price spiked up due to government's
announcement about the new model. Nevertheless, the price at S$1.02 was clearly
undervalued. The non-fare segment of the company was rather attractive
too. Considering the nature and moat of the business, I probably run the risk
that I've sold too low at S$1.49. Price now is S$1.58.<o:p></o:p></i><br />
<i><br /></i>
<h3>
<b>Some SMRT Non-Rail Results</b></h3>
</div>
<div class="MsoNormal">
<i><br /></i></div>
<div class="MsoNormal">
Let's have a look at the results of 3 of the largest <b>Non-Rail segments</b>, namely: the Taxi, Rental and Advertising Segment -<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj0xo_8QBfQwIsevEOHKrildqAKghX2mXT_iHzGxwvjCqhmMJpOFeU9XZKPe57Nd6Gq4ND4H7dmkALRRC9pfXXfbDc0tHa67LlNNa47AJAPP1DPw9DB7IRKS6o2_7qLkVwGeSwd-DiNCox/s1600/SMRT+Rental+Segment.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="96" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj0xo_8QBfQwIsevEOHKrildqAKghX2mXT_iHzGxwvjCqhmMJpOFeU9XZKPe57Nd6Gq4ND4H7dmkALRRC9pfXXfbDc0tHa67LlNNa47AJAPP1DPw9DB7IRKS6o2_7qLkVwGeSwd-DiNCox/s640/SMRT+Rental+Segment.png" width="560" /></a></div>
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEguo2fHQn-yPWgp92nBAUSW3jmq9BjAEJFabmpkcw9BcaXestAevbnCWbyJxJOk9Z_MLd5cr6qa5p_i0Yj_c_OEcf8JlRRQV_LS8SDr_uPSmDFqXfELfhsvQ95W_mqbtvQlN0SxDa1NhYjt/s1600/SMRT+Advertising+Segment.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="106" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEguo2fHQn-yPWgp92nBAUSW3jmq9BjAEJFabmpkcw9BcaXestAevbnCWbyJxJOk9Z_MLd5cr6qa5p_i0Yj_c_OEcf8JlRRQV_LS8SDr_uPSmDFqXfELfhsvQ95W_mqbtvQlN0SxDa1NhYjt/s640/SMRT+Advertising+Segment.png" width="570" /></a></div>
<div class="MsoNormal">
<br /></div>
<br />
<br />
<br />
<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSqiM6NUF-0qzKw25QoXgZ0EtyNiYl-Gau3n2VK1v4QVoWhgbEKhCZ2V3yv2ViNa95LvSxnhy50n7mUBvv7LrQ7e62_y0bIOTJf6612qbTRK2_X3t7c19gWlOktbtCniRoBNAYYLzXh6_8/s1600/SMRT+Taxi+Segment.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" height="114" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSqiM6NUF-0qzKw25QoXgZ0EtyNiYl-Gau3n2VK1v4QVoWhgbEKhCZ2V3yv2ViNa95LvSxnhy50n7mUBvv7LrQ7e62_y0bIOTJf6612qbTRK2_X3t7c19gWlOktbtCniRoBNAYYLzXh6_8/s640/SMRT+Taxi+Segment.png" width="560" /></a><br />
<br />
As can be seen, all 3 segments have shown marked and consistent increase in both the topline and operating results (total in 2016: S$123M) over the past 6 years. The total operating profit for the Rail & Non-Rail Segments is S$142.6M. That means the 3 biggest <b>Non-Rail </b>segment is <u>>85% of the total Non-Rail and Rail operating results</u>. I think it is not unreasonable to expect that the Non-Rail segments will do quite well in the foreseeable future. These 3 very profitable, inherently stable and growing segments combined could probably be worth about S$1.7B (this is only a quick and dirty estimate of 13X - 15X operating profit). Also take note that there are other Non-Rail segments that may be of some value as well (classified as Engineering Services, Other Services and Investment Holding and Support Services).<br />
<br />
I'm not so sure why the focus out there concerns so much about the Rail segment and why the management has not expressed any thoughts on the striving Non-Rail segment with regards to the buyout offer. But from the standpoint of the investor and those who are supposed have a duty to look after shareholders' interest, <i>it is unwise to focus solely on the Rail segment and keep harping about the Rail's corresponding risk.</i><br />
<i><br /></i>
There seems to be much confusion whether SMRT Rails should be more concerned with the investors' interest or the public's. Also, Chief Executive Desmond Kuek (former army general) said that "significant risks remain and many factors are outside the control of SMRT such as uncertainty over future fare increases and ridership numbers." I'm not so sure how 'significant' the risk for the rail segment is in the future despite being relieved of their heavy operating assets under the new Rail Financing Framework. I would hazard a guess that both fare and ridership numbers will at least remain stable and it is likely that operations will be less risky compared to before the implementation of the framework.<br />
<br />
<h3>
<b>Proposed Solution</b></h3>
<br />
<ol>
<li>Since the focus of the buyout seemed to be on the Rail segment: spin out the Non-Rail segments so that their proper value can be realized by the market. Existing shareholders should be more than happy to then sell off the operations of the Rail and Bus segments not owned by Temasek for a lesser, say S$500M (this values the Rail & Bus segments to be about S$1.1B. Assuming the above valuation of $1.7B for the 3 Non-Rail segments are correct, SMRT could potentially be worth in excess of S$2.8B which corresponds to a price of about S$1.84 per share). </li>
<li>Offer a (higher) price that truly reflects the value of <u>both</u> the Rail & Non-Rail segments. (I read in the news that in the past 10 odd years, SMRT's price averaged about S$1.64. Offered price is S$1.68. Obviously some shareholders might be unhappy with the current offer).</li>
</ol>
<h3>
<b>Advantages are Two-Fold:</b></h3>
<div>
<ol>
<li>Rail and Bus assets out of the way and privatized - the role of a public transport operator can be better fulfilled in the long term without taking the pressure of short-term market expectations.</li>
<li>With the Rail segment out, the market can more easily discern the true value of the remaining Non-Rail entities. Not only can shareholders receive some cash from the disposal, they would probably be very pleased to have their hands on a growing and very profitable Non-Rail segment.</li>
</ol>
<h3>
<b>Some Things to Work Out</b></h3>
</div>
<div>
<b><br /></b></div>
<div>
Now, the Advertising and Rental businesses are obviously highly intertwined with the Rail business. Therefore, the question to ask is if the above solution is possible at all? I'll leave these to the shareholders and management to answer for themselves. It's tough, but a fair and equitable solution should be created for all parties involved.</div>
<br />
<br />
<br />
<i>Disclosure:</i><br />
<i>No position in SMRT (S53.SI) as of 21 July 2016</i><br />
<br />
<br />secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com8tag:blogger.com,1999:blog-7010816031691289479.post-70679043455654488022016-01-27T08:27:00.000-08:002016-01-31T07:56:19.329-08:00Koyo International (5OC.SI) - Is It Worth The Risk?<b>Koyo International </b>(<a href="http://www.koyotech.com/" rel="nofollow" target="_blank">Company Website</a>) is listed in the SGX Catalist since 2009 and its principal activities broadly consists of four core segments, namely:<br />
<br />
<ol>
<li>Mechanical and Electrical engineering services</li>
<li>Supply of renewable energy and green products for building services</li>
<li>Property development and construction</li>
<li>Supply of construction materials and ancillary services</li>
</ol>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjiRjntqK2QfPqzRmG5T-bnTr3K4tcAkEQWYHJ0t8VjiRwtTxBhX2mh4fTp4dD7SeJInEodspv4R9QmevK6Y7jkT7mC41knAQYURGmGNALXTbMw2TUZX0SrVPiKZxbg-atxyYaod5tQBJw/s1600/Koyo+Logo.bmp" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="86" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjiRjntqK2QfPqzRmG5T-bnTr3K4tcAkEQWYHJ0t8VjiRwtTxBhX2mh4fTp4dD7SeJInEodspv4R9QmevK6Y7jkT7mC41knAQYURGmGNALXTbMw2TUZX0SrVPiKZxbg-atxyYaod5tQBJw/s400/Koyo+Logo.bmp" width="400" /></a></div>
<div>
<br /></div>
<div>
The company has been operating since the 1980s. As of 1H2015, it has S$42.2M (VS S$20M Revenue for 2014) worth of contracts on hand with completion dates between 2015 to 2021. I'm not going to talk much here - readers can understand more and judge for themselves in the annual reports or company website.</div>
<div>
<br /></div>
<div>
As mentioned in my previous <a href="http://secretinvestors.blogspot.sg/2016/01/what-start-to-stock-market-in-2016.html" target="_blank"><u>post</u></a>, I would prefer to keep my articles brief in the future. I'll keep this analysis simple without delving too much into the specifics. Some basic metrics are as follows:</div>
<div>
<br /></div>
<div>
Price = S$0.061</div>
<div>
P/E (ttm) = 7.8x</div>
<div>
EV/EBIT = 3.7x (est $6M excess cash VS $14.9M net cash)</div>
<div>
P/B (mrq) = 0.66x</div>
<div>
ROE (TTM) = 8.4%</div>
<div>
<br /></div>
<h2>
<span style="color: #444444; font-size: large;">The Story</span></h2>
<div>
Over the past 1-2 years, for largely unknown reasons, the share price skyrocketed from around S$0.05 all the way to a high of S$0.40. Readers of my blog would have known that I bought into its shares a couple of years back and sold it for a decent profit. More details <a href="http://secretinvestors.blogspot.sg/2014/12/my-sg-porfolio-2014-top-realized-gains.html" target="_blank"><u>here.</u></a></div>
<div>
<br /></div>
<div>
On 15 Jan 2016, SGX released a statement and urged caution when dealing with Koyo International's share as >30% of the trading was done by the same group buying and selling among themselves.</div>
<div>
<br /></div>
<div>
When the market reopened the next trading day (18 Jan 2016), the share price crashed >80% to about S$0.05 and subsequently recovered to between S$0.055-S$0.065 range.</div>
<div>
<br /></div>
<h2>
<b><span style="color: #444444; font-size: large;">Summary of Investment Thesis</span></b></h2>
<div>
<ol>
<li>There's currently no evidence or indications from SGX that the management or insiders themselves are manipulating the share price.</li>
<li>On 18 Jan 2016, the company bought back 6,300,000 shares @ about S$0.099 for a total of $630K. That's about 3.3% of outstanding shares.</li>
<li>On 19 Jan 2016, independent director Serena Lee purchased 800,000 shares and raised her stake from zero to about 0.42% of outstanding.</li>
<li>On 20 Jan 2016, Serena Lee again bought another 700,000 shares, raising her stake from 0.42% to 0.78%. A quick check shows that if Serena does not sell any shares from this point on, she should be one of the top 20 largest shareholders of the company. To my knowledge, Serena did not own any shares of the company since at least 2011.</li>
<li>Current price is one of the lowest since 15 months back and my valuation work shows that the company would be worth <i>at minimum </i>S$0.07 and its intrinsic value should be closer to S$0.10.</li>
<li>Some brokerages have instituted trading restrictions on the company after the "Trade with Caution Alert" by SGX, causing the share price to remain depressed even after crashing significantly.</li>
<li>The company has a relatively long operating history, is in sound financial condition and I can reasonably expect it to continue turning in respectable results in the next 5-10 years.</li>
</ol>
<h2>
<span style="color: #444444; font-size: large;">Key Risks</span></h2>
</div>
<div>
The 2 main risks I observe were: 1. Accounting issues with financial statements and/or 2. Certain parties are in fact the ones manipulating the share price (its not hard to find out who stands to gain most when the share price of the company is up). If an analyst bought it even at such low prices, any one of these materializing may mean a disastrous investment result. No amount of margin of safety can save an analyst from a fraudulent financial statement and a management that lacks integrity.</div>
<div>
<br /></div>
<div>
So far, there's no indication or evidence of such risks materializing (yet). Also, the share buybacks from the company and an independent director provide some level of comfort.</div>
<div>
<br /></div>
<h2>
<b><span style="color: #444444; font-size: large;">Conclusion and Some Thoughts</span></b></h2>
<div>
At S$0.40, Koyo International is clearly expensive and a purchase at that point would certainly prove reckless. At the same time, a price of S$0.056 clearly undervalues the company and absent the 2 key risks coming true, a purchase should turn out profitable.</div>
<div>
<br /></div>
<div>
Does being slapped with a "Trade with Caution" alert by SGX warrant a significant sell-down to huge undervaluation territory? It really depends. Security selection requires a skillful balance between the facts of the past and possibilities of the future. The future is uncertain and as investors, we always have to take and manage risk. The risks mentioned above are very real but the fact is that there are currently little evidence that it will happen. An investor always have to deal with probabilities and as of now, my own judgement (I may be dead wrong) tells me that the risk to reward ratio is largely skewed to my advantage.</div>
<div>
<br /></div>
<div>
To be sure, if any of the risks mentioned turn out to be true, it is sensible to sell the stock (even at a loss). Before that, one can only control his/her risk by first understanding them and then diversifying adequately as well as sizing such positions appropriately so that it will not inflict mortal damage to the portfolio as a whole.</div>
<div>
<br /></div>
<div>
Interestingly, this situation bears some resemblance to that of Avi-Tech Electronics which is listed in the SGX Watchlist due to 3 consecutive years of pre-tax losses. The share price got hammered so badly that a purchase (do refer to my write-up <a href="http://secretinvestors.blogspot.sg/2015/02/avi-tech-electronics-update-30.html" target="_blank"><u>here</u></a>) made just last year would have reaped respectable results and dividends for the aggressive investor.</div>
<div>
<br /></div>
<div>
Let me know what are your thoughts.</div>
<div>
<br /></div>
<div>
<i>Disclosure:</i></div>
<div>
<i>Long Koyo International (5OC.SI)</i></div>
<div>
<i><br /></i></div>
<div>
<i>Note: Disclaimer applies. Not a recommendation to buy or sell.</i></div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com18tag:blogger.com,1999:blog-7010816031691289479.post-89389590738547373322016-01-07T09:58:00.000-08:002016-01-07T09:58:13.982-08:00What a Start to the Stock Market in 2016!<div class="MsoNormal">
<h2>
<b><span style="color: #444444; font-size: large;">Portfolio Results for 2015</span></b></h2>
<o:p></o:p></div>
<div class="MsoNormal">
I think readers of this blog would probably have guessed
that I did OK in 2015. <span lang="EN-US"><u><a href="http://secretinvestors.blogspot.sg/2014/12/ap-oil-5ausi-neglected-but-cheap-stock.html" target="_blank">AP Oil</a></u></span></div>
gained >46%, <a href="http://secretinvestors.blogspot.sg/2015/02/avi-tech-electronics-update-30.html" target="_blank"><u>Avi-Tech</u></a> gained >38% but <a href="http://secretinvestors.blogspot.sg/2014/12/sembcorp-industries-u96si-is-it-worth.html" target="_blank"><u>Sembcorp Industries</u></a> <i>crashed</i> a hefty -34% (all returns before dividends) since my write-up
in this blog. What a crazy ride in 2015: On a portfolio basis and taking into
account dividends received, my Singapore portfolio went as high as +18.7%
(August) but ended off the year with a +12.8% gain while my Hong Kong portfolio went
from +48.5% (May) and ended 2015 with +25.7%. <o:p></o:p>
<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis-J-pa35ImH4sSmRlBk_Ri_0jJ3Wt8aqeQKyU80Tu06HvIiavVpm0DuO_iGPoPeP7ezt-HPEzjB3CmGIHf3upeQMC7zt52mKH6u69H_-N3mVtH2OPyoPlzpTNrx0BMWwTQwJlOPgpiXsq/s1600/Stock+market+2016.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Investment 2016" border="0" height="213" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis-J-pa35ImH4sSmRlBk_Ri_0jJ3Wt8aqeQKyU80Tu06HvIiavVpm0DuO_iGPoPeP7ezt-HPEzjB3CmGIHf3upeQMC7zt52mKH6u69H_-N3mVtH2OPyoPlzpTNrx0BMWwTQwJlOPgpiXsq/s320/Stock+market+2016.jpg" title="Stock market 2016" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Will 2016 be a good year for stock markets?</td></tr>
</tbody></table>
<div style="text-align: center;">
<span id="goog_95942688"></span><span id="goog_95942689"></span><br /></div>
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Despite a 15% decline in 2015, our STI index continues to
register losses in the first few days of 2016. From its peak of about 3550, the
index had sunk about 23%. Will 2016 be a down year again? Honestly, your guess is as
good as mine.</div>
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<o:p></o:p></div>
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<b><span style="color: #444444; font-size: large;"><br /></span></b>
<br />
<h2>
<b><span style="color: #444444; font-size: large;">Opportunities Abound</span></b></h2>
</div>
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<o:p></o:p></div>
<div class="MsoNormal">
For me, rather than trying to predict at the macro level, I
feel it is more fruitful to focus on valuations of individual companies.
Despite the uncertainty surrounding the market, make no mistake about it: <i>there are more opportunities to take
advantage of than it was just a few months back</i>. Uncertainty is the friend
of the buyer of long term values. Always be extra cautious in your dealings with the Mr Market but never be afraid of taking strategic advantage over him.</div>
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<o:p></o:p></div>
<div class="MsoNormal">
<b><span style="color: #444444; font-size: large;"><br /></span></b>
<br />
<h2>
<b><span style="color: #444444; font-size: large;">What I am going to do in 2016?</span></b></h2>
</div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<span lang="EN-US">The wider
the fluctuations of the market, and the longer they persist in one direction,
the more difficult it is to preserve the <i>investment</i> viewpoint in dealing with
common stocks. </span>I think it is of utmost importance for an investor to
have a logical process for investment and have the mental & emotional
fortitude to stick to it despite daily market gyrations & noises. Different
investors have different philosophies and the following is what I found quite useful (at least for me) thus far:</div>
<div class="MsoNormal">
</div>
<ol>
<li>Try to get a general sense how the business operate</li>
<li>Ask yourself honestly if you can reasonably see the company still in existence and operating well >10 years later</li>
<li>Limit your risk - ensure the company is in sound financial condition</li>
<li>Limit your risk yet again - make sure the price you pay is significantly below your estimate of the business' value</li>
<li>Diversify your risk adequately</li>
<li>Have patience and conviction for value to be realized - the market for short term returns is very competitive but the market for longer term returns is much less competitive</li>
</ol>
<div class="MsoNormal">
These pointers are quite similar to my post on <a href="http://secretinvestors.blogspot.sg/2014/12/stocks-investment-philosophy.html" target="_blank"><u>Our Investment Philosophy</u></a> and I intend to adhere to it in 2016 and beyond.<br />
<span style="color: #444444; font-size: large;"><br /></span>
<br />
<h2>
<span style="font-size: large;"><span style="color: #444444;">Final Note</span></span></h2>
</div>
<div class="MsoNormal">
I’ve been slowly accumulating a few SG and HK stocks in the
past few months and one of them appears to be a rare find – having
reasonable defensive characteristics with potential for growth and selling at
extremely attractive prices. I intend to concentrate more on that particular
stock, probably towards 15-20% of my portfolio. If I have the time, I’ll
probably discuss more about them.</div>
<br />
<div class="MsoNormal">
A few friendly readers actually emailed and asked if I’ve stopped
writing. I very much like to continue but will likely do so with shorter posts
and at a very leisurely pace. Meanwhile, I’ll be more than happy to discuss
investment related questions via the comments section of this blog or email at
secretinvestors@gmail.com. Happy stockpicking!<o:p></o:p></div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com197tag:blogger.com,1999:blog-7010816031691289479.post-32129467822167213352015-10-12T00:53:00.001-07:002015-10-12T00:53:18.781-07:00The Question of Dividends as Passive Income<div style="border-bottom: solid windowtext 1.0pt; border: none; mso-border-bottom-alt: solid windowtext .75pt; mso-element: para-border-div; padding: 0cm 0cm 1.0pt 0cm;">
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Recently, a friend directed me
to Giraffe Value’s blog <a href="http://www.giraffevalue.com/dividend/" rel="nofollow" target="_blank">post</a> titled “Investing For Dividend Income(Passive) is a Fairytale!!!<span id="goog_728541764"></span><span id="goog_728541765"></span>” The angle about dividends (that they cannot be considered passive income) brought forward by GV is refreshing indeed but I believe GV has
missed out some salient points and thus decided to offer an alternative
perspective in this topic by commenting in his blog. With GV's knowledge,
I herewith copy my comments (with very minor edits to make things more easily
understood) below. It may be helpful if you first read GV's article to understand his take on dividends.</div>
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<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyumrr8HfWDgPR_ww1vM96FG2wKBdsttOPJgN7gFFMq_UURv_4LNHe2bXFoCf50CfMxA4Z5iC-cq2WV8g7FO60n4Zc7_JNsXFCcgGtx4U0F3d0jcrcKeNvR7AvyuQLw-AKz10ZzsSkvjSV/s1600/dividends.gif" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="dividend as passive income" border="0" height="308" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyumrr8HfWDgPR_ww1vM96FG2wKBdsttOPJgN7gFFMq_UURv_4LNHe2bXFoCf50CfMxA4Z5iC-cq2WV8g7FO60n4Zc7_JNsXFCcgGtx4U0F3d0jcrcKeNvR7AvyuQLw-AKz10ZzsSkvjSV/s320/dividends.gif" title="Dividends as Passive Income" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">With the CD & XD effect, are Dividends paid out still considered Passive Income to the investor?</td></tr>
</tbody></table>
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Readers of this blog would have realized my reply are drawn out of and adheres closely to the "Business Perspective" section in my <a href="http://secretinvestors.blogspot.sg/2014/12/stocks-investment-philosophy.html" target="_blank"><u>Stocks Investment Philosophy</u></a> in which my investment framework is based on.</div>
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<br /></div>
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Also, as shown in my reply, I did agree with some points underscored
by GV. My intention here is to bring about healthy discussions in the hope of getting more clarity in this subject matter through insights and thoughts provided by readers and investors.<br />
<br /></div>
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Hi GV,<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
Good effort on your post. However, I wish to highlight an
alternative viewpoint that I personally feel provides a more inclusive and comprehensive
take about dividends. I believe the point of contention here is <u>whether
dividends paid out is considered ‘passive income.</u>’ <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
First and foremost, I assume that your 2 questions are valid
in identifying whether passive income is involved. I would also add-on a 3rd
point to make the argument more robust:<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
1. Are you
richer after getting that dividend?<o:p></o:p></div>
<div class="MsoNormal">
2. Would your
capital not get compromised after you receive the dividend?<o:p></o:p></div>
<div class="MsoNormal">
3. Is the
money received passive (as opposed to the word ‘active’).<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
As a fundamental investor (I think you are one as well),
perhaps it is more insightful to look at holding the stock as being <b>part-owners of the
business</b>. To avoid complication, let’s just assume that we have 100% ownership
of a business. This view point can be easily extended to one who have partial
ownership of the business through buying its shares in the market.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
As 100% owners of a profitable business, we employ officers
to add value to goods and services produced so as to generate income for us.
Every dollar earned from the business wholly belongs to the owners. In the
general sense, if earnings are $10M and beginning of year assets is $100M, the
company is now worth $110M. Going back to the 3 questions above, It is clear
that with full ownership of the business <i>and</i> by way of earnings generated, the
owners are now 1) $10M richer and obviously 2) their capital is not
compromised. Also, as the officers are the ones doing the hard work, we can
conclude that 3) it is ‘passive’ in nature. With this, we can say the earnings
are passive income to the owners.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The owners have the option to either keep the money in the
business as retained earnings or issue the earnings out as dividends. If say,
$5M of the earnings are released as dividends, the company is now worth $105M.
But because the owners <u>own</u> the business, their net worth is still $110M ($5M
dividends received plus $105M worth of business assets wholly owned by owners)
which necessarily means that in totality, their net worth still increased by
$10M. Is this $10M still considered passive? I argue so based on the 3
questions asked above. <i>To the owners, these dividends are in actual fact just a
proxy to get hold of the passive earnings of the company.</i><o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Your take regarding the HDB is almost exactly the same as
the above scenario where it fulfils the 3 questions asked. Because in the stock
market, we are partial owners of the company, we tend to consider only the
dividends ($5M) and<i> neglected the fact that the remaining $5M of the earnings
fully belonged to all shareholders as well </i>(I believe your argument missed this
point too). So this $10M of earnings is akin to the rental income we get from a
fully owned HDB property.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Now let’s think from the standpoint of the <b>stock investor</b>.
Here, I would agree with you that an investor should consider both capital
appreciation and dividend return but I just want to highlight that dividends in
the investor's perspective are still passive income. Investor A purchase a
stock a $1 and price appreciates to $2. The company subsequently declares a
$0.50 dividends and share price proceeds to drop to $1.50 due to the XD effect.
Investor B purchases a stock at $1 and price appreciates to $2 with no
dividends declared. Both investors had a net gain of $1 from their investments.
Considering both realized and unrealized gain, it is clear that they are all
passive income to both investors. <i>Having no net gain between Investor A and B
does not mean there are no passive income involved.</i><o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I also agree that your left pocket right pocket - zero sum
game theory makes perfect sense (but this does not mean dividends are not
passive income). Because dividends are
usually paid in liquid cash out of the company, it makes sense that stock price
should drop by the amount of dividends released. If not, we will find that the
net worth of the investor (which includes both dividends received as well as
ownership of the business) increase inexplicably. However, this effect is just
a logical stock market <i>event</i> to ensure that - assuming other things remaining
constant - the total amount of what owners received and what the business have
are the same before and after the event. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
To conclude, CD-XD phenomenon is <i>just an Event which fails
to explain that dividends received are not passive income but it does not
necessarily mean that dividends are not passive income.</i> Viewed in the proper
way, the owner’s earnings are passive income and since dividends usually comes
from owner’s earnings, they are part of the passive income in every sense of
the word.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I got to your post because a friend referred it to me. Your
post must have generated strong interest as I understand that there are some
follow-ups in other financial blogs which mostly agree with your point that dividends
are not passive income. However, I feel that if we viewed this issue as a
whole, the logical (as well as intuitive) explanation contradicts the point
that dividends cannot be considered passive income. We've communicated some
time back and I know you are, like me, a keen learner of stock investments.
Hope to hear more about investments from you.<o:p></o:p></div>
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Secretinvestors<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
PS: I appreciate that readers share their views about this in the comments section below. Also, GV gave an interesting reply to this comment. Readers can
refer to his blog article for that and decide for themselves which view point is more valid and logical.<br />
<br />
<br />
Related Articles:<br />
<a href="http://secretinvestors.blogspot.sg/2014/12/stocks-investment-philosophy.html" target="_blank">Our Stocks Investment Philosophy</a></div>
<div class="MsoNormal">
<o:p></o:p></div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com18tag:blogger.com,1999:blog-7010816031691289479.post-15806362772566519822015-02-13T20:42:00.002-08:002015-02-13T20:42:40.968-08:00Avi-Tech Electronics Update - 30% Unrealized Gain in 2-3 Months & Half-year Earnings ReportIn my analysis on Avi Tech Electronics (See <a href="http://secretinvestors.blogspot.sg/2015/01/avi-tech-electronics-ct1si-is-quick.html" target="_blank"><u>Avi-Tech Electronics - Is Quick Profit Possible?</u></a>), I highlighted the reasons both quantitatively and qualitatively, why I feel the company is undervalued and that the various ongoing corporate actions may serve as a catalyst to drive up the price towards its true value. Since my <a href="http://secretinvestors.blogspot.sg/2014/12/my-sg-porfolio-2014-top-realized-gains.html" target="_blank"><u>initial post</u></a> about it on 30 December, the price has risen from S$0.074 to S$0.091 - a reasonable gain of >22% in about one and a half months. My own average price of S$0.699 would mean a 30% gain since around 2-3 months back at November. With the release of the half-yearly results yesterday, this post is just an update about how the story unfolds so far and my intended actions.<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCLd6eotTu-3IJ3cPo7_MN5zdIX1Rvd62W_R2-pM_ZD6W_xXmIWeL4J5iZ5K-gh3m9htNqUb7h5P1uEmJ_ZdzKMTH-qjYa-1C6E6kdNpHeXPwrM9qwFwxgLcvs5sWkyABQFhdPUfIKwBtN/s1600/Avi+Tech+Logo.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img alt="Avi Tech logo" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCLd6eotTu-3IJ3cPo7_MN5zdIX1Rvd62W_R2-pM_ZD6W_xXmIWeL4J5iZ5K-gh3m9htNqUb7h5P1uEmJ_ZdzKMTH-qjYa-1C6E6kdNpHeXPwrM9qwFwxgLcvs5sWkyABQFhdPUfIKwBtN/s1600/Avi+Tech+Logo.jpg" title="AviTech Logo" /></a></div>
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<b><span style="color: #444444; font-size: 18px;">Much Improved Continuing Operations - Industry or Management Actions?</span></b><br />
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left; margin-right: 1em; text-align: left;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKaBvrsiw_glXV7i42fysHyjkCZ_iEyJesPj_IrgZpDyP6ICW4DnmooYjJPGEHnN6ocmrw6u1gS9Rz8fRsLaQzBR6AmdQg7SdXJz43JNBHbFOmDwuXHHqUC7APbGNht8klMh68Gg3Myq1N/s1600/Avi+Tech+Electronics+1H15+Financial+Summary.jpg" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img alt="Avi Tech Electronics Half year 2015 Financial Summary" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKaBvrsiw_glXV7i42fysHyjkCZ_iEyJesPj_IrgZpDyP6ICW4DnmooYjJPGEHnN6ocmrw6u1gS9Rz8fRsLaQzBR6AmdQg7SdXJz43JNBHbFOmDwuXHHqUC7APbGNht8klMh68Gg3Myq1N/s1600/Avi+Tech+Electronics+1H15+Financial+Summary.jpg" height="85" title="Avi-Tech Electronics Half year 2015 Financial Summary" width="576" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: 12.8000001907349px;">Table 1: Avi Tech Electronics 1H15 Financial Summary (Continuing Operations)</span></td></tr>
</tbody></table>
<b><br /></b>
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
As seen clearly from the Table 1 above, revenue, gross profit and net income show marked improvements. Similar growth may be observed in its operating cash flows (you can find out more from the company's latest earnings release).<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxggk6d_a7gklF5SSlNq4fTcvVRC7xb7ILOirkblktQNf9JPgLvtvJ9MNeL34muUYoECAS-7KTb3aWutpMmxM_F1RkxxXLOVlc29n-WJf_9rafg6XAb9NR6w-apkSQvwgwcJxBjvGo230U/s1600/Avi-Tech+Yearly+Results.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Avi-Tech Results Including Disposal Group" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxggk6d_a7gklF5SSlNq4fTcvVRC7xb7ILOirkblktQNf9JPgLvtvJ9MNeL34muUYoECAS-7KTb3aWutpMmxM_F1RkxxXLOVlc29n-WJf_9rafg6XAb9NR6w-apkSQvwgwcJxBjvGo230U/s1600/Avi-Tech+Yearly+Results.jpg" height="140" title="Avi Tech Results with Disposal Group" width="576" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: 12.8000001907349px;">Table 2: Avi-Tech Results Including & Excluding Disposal Group</span></td></tr>
</tbody></table>
I've extracted Table 2 from my <a href="http://secretinvestors.blogspot.sg/2015/01/avi-tech-electronics-ct1si-is-quick.html" target="_blank"><u>previous post</u></a> on Avi Tech. Here, you'll notice that the company has been loss making for many years. Also, despite cleaning up the effects of the subsidaries (they are contributing the bulk of losses for the past few years) that are in the midst of being discontinued, the core operations still show slight negative results from 2012 to 2014. Since 1Q2015, it is clear that not only did the disposal of subsidiaries help stem further losses, the improvements in core business have contributed to profitability as well. All in all, the results in 1H2015 represents a significant turnaround transition from loss-making to profitability.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEht6z2utGnePNCMtDt4HTnXytOZWspkBmmox_Fb5efeFJ7BpjSyXuCphdnOfbMUuyUOqFB9iJbEEad9NCv0ZU_qNvdNvfGzS1N1siFh43FseiBJOO6I_VlniYOV76zlUMS9FGxqKGhc2EGV/s1600/Avi-Tech+Quarter-Quarter+&+Half+Year+Results.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Avi Tech Quarterly and Half Yearly Results" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEht6z2utGnePNCMtDt4HTnXytOZWspkBmmox_Fb5efeFJ7BpjSyXuCphdnOfbMUuyUOqFB9iJbEEad9NCv0ZU_qNvdNvfGzS1N1siFh43FseiBJOO6I_VlniYOV76zlUMS9FGxqKGhc2EGV/s1600/Avi-Tech+Quarter-Quarter+&+Half+Year+Results.jpg" height="212" title="AviTech QonQ & Half Year Results" width="576" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Table 3: Avi Tech Quarter-Quarter & Half Year Results (Continuing Operations)</td></tr>
</tbody></table>
I believe it is important to pinpoint whether the improvements in core operations are the result of improvement in trends of the industry or due to specific actions undertaken by the management. From the announcement, the management mentioned that the semi-conductor industry as a whole appears to be in an uptrend recovery and they 'remain optimistic of continued improving performance if this uptrend continues'. With improved results seen across all business segments, it is pretty clear that the industry recovery did play a large part in the increase in revenue for the past few quarters.<br />
<br />
However, I argue that the management played a significant role in retaining these revenues especially since the company's inclusion into the SGX watchlist in 4Q14. The gross profit margin has grown from 11.3% in 4Q14 to 22.6% in 2Q15 and this is, to quote the management, 'partly the result of effectiveness of the ongoing cost control measures and the enhancement in productivity across all business segments'. This is made clearer if we observe the drop of COGS as a percentage of revenue from 88.7% in 4Q14 to 77.4% in 2Q15. Another factor that plays a part is the significant decline of its operating expenses as a percentage of revenue from 18.9% to 9.9%. Although we do not have much information about the specifics of operating expenses, in the typical case such expenses should not provide future economic benefits to the company and thus such cost-cutting measures usually will not have serious undesirable consequences.<br />
<br />
To sum it all up, an investor of the company should be heartened to see that the better set of results are not solely due to general improvements in the semi-conductor industry but also due to active steps taken by the management to ensure that more money flows into the bottom line.<br />
<br />
<h2>
<b><span style="color: #444444; font-size: 20px;">Bonus: Cash from Discontinued Operations</span></b></h2>
I just want to highlight the fact that the discontinued operations did contribute a decent amount to the bottom line in the past 2 quarters. Although non-recurring in nature, its always good to know that its disposal will continue to throw in some amounts of cash for the company. The net asset value of this group under disposal currently stands at about $966,000.<br />
<br />
<h2>
<b><span style="color: #444444; font-size: 20px;">Interim Dividends - 1st Time Since 2011</span></b></h2>
Another positive note is the resumption of dividend payments after a hiatus of more than 3 years. Coupled with the purchase of shares by directors in the past 6 months, the interim dividends declared is a clear show of confidence from management that they believe that the company has indeed turned around. The interim dividends of $0.3 cents per share represents about 3.3% dividend yield at current market prices (4.3% based on my own purchase price).<br />
<br />
<h2>
<b><span style="color: #444444; font-size: 20px;">Valuation</span></b></h2>
In my previous article about Avi-Tech, I estimated that the liquidation value to be about S$0.094 per share. Using the same method alluded in that post, the new liquidation value should be S$0.099. I continue to believe that this is the minimum valuation that should be afforded to the company, especially considering that the continued improvement of business operations should provide further support to its intrinsic worth. This new valuation <i>excludes</i> the proceeds that Avi-Tech could have received in the future from the disposal of its subsidiaries.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJbuIvE-hS4C4lDBzCLn_Fe7w2vNrktAn6m9Quzoe5-3LLSOsQ1ApvzKUf0MO451IViwxT9jeQfFXqmnMCUrzZOhvz4fVs2jOZzyt4gyWfqe-Js3N-pzNu9_CsfJougcU1CTzTVExEK4IC/s1600/Avi+Tech+Electronics+Pro-Forma+Results.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Avi Tech Electronics Pro Formal Financial Results" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJbuIvE-hS4C4lDBzCLn_Fe7w2vNrktAn6m9Quzoe5-3LLSOsQ1ApvzKUf0MO451IViwxT9jeQfFXqmnMCUrzZOhvz4fVs2jOZzyt4gyWfqe-Js3N-pzNu9_CsfJougcU1CTzTVExEK4IC/s1600/Avi+Tech+Electronics+Pro-Forma+Results.jpg" height="326" title="Avitech Electronics Pro-forma Financial Results" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Table 4: Avi Tech Electronics Pro-Forma Financial Results</td></tr>
</tbody></table>
Another reasonable way of checking the valuation would be the use of pro-forma statements as shown above. The main assumption here is that management is able to continue to keep Cost of Sales and Operating Expenses at 79.9% and 10.7% of revenue, as per 1H15 results. Finance costs and Operating income have been pretty stable over the years and should not venture too far away from $0.100M and $1M respectively.<br />
<br />
From Scenario 1, if we were to assume that revenue reverts back to its worst level seen so far in 2014 (for eg, if semi-conductor industry as a whole declines and affect sales badly), the implied P/E ratio at current price of S$0.091 is 12.7x. Do note that 2014 net earnings is negative. This difference is mainly due to management's cost cutting and productivity measures that I had highlighted above - which further shows the importance of such management actions. If we were to annualize the 1H15 results such that the revenue will at least maintain current levels (as in Scenario 2), the implied P/E becomes 11.0x. These valuations ain't that demanding at all. Of course, the P/E based on my purchase price would have been much lower at 9.8x and 8.4x respectively. (I did not include Scenario 3, which is for those who feel the improvement in the industry as a whole will contribute further to sales growth. If this does happen, valuations will obviously be more attractive.)<br />
<br />
<h2>
<b><span style="color: #444444; font-size: 20px;">Conclusion</span></b></h2>
It seems that Avi-Tech Electronics has finally turned around. Although we can't be sure if these very much improved results can be sustained, we can take comfort that:<br />
<ol>
<li>The discontinued subsidiaries will not contribute any more losses to the company.</li>
<li>Share purchase from directors in the past months and the resumption of dividends after >3 years indicate management's confidence about the prospects of the company.</li>
<li>Management seems to be actively taking targeted measures to ensure profitability since the company was placed in the SGX Watchlist.</li>
<li>The current market price of the company is not too excessive, both on a liquidation and earnings basis.</li>
</ol>
<div>
Having said all these and with the new estimated minimum liquidation value of $0.099 as a guide, I'll probably continue to hold on to my shareholdings until price exceeds above this or if there's any serious deterioration of fundamentals in the company that warrants my attention. Did any of you bought into Avi-Tech? Let me know your opinions!<br />
<br />
Related Articles:<br />
<a href="http://secretinvestors.blogspot.sg/2015/01/avi-tech-electronics-ct1si-is-quick.html" target="_blank"><u>Avi Tech Electronics (CT1.SI) - Is Quick Profit Possible?</u></a><br />
<a href="http://secretinvestors.blogspot.sg/2014/12/my-sg-porfolio-2014-top-realized-gains.html" target="_blank"><u>My SG Porfolio (Top Realized Gains & Losses) and Some Recent Picks</u></a><br />
<br />
<i>Disclosure:</i><br />
<i>Long Avi-Tech Electronics (CT1.SI)</i></div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com13tag:blogger.com,1999:blog-7010816031691289479.post-39743559074676357342015-02-01T15:49:00.000-08:002015-02-01T15:49:02.322-08:00Q&A: Insights Gained from Interesting CommentsI mentioned previously in the post on <a href="http://secretinvestors.blogspot.sg/2014/12/stocks-investment-philosophy.html" target="_blank"><u>Our Stock Investment Philosophy</u></a> that one of the reasons for writing in this blog is to subject our investment thoughts to scrutiny and feedback so as to gain new insights in our investment journey. In the past 2 months, there are multiple comments from fellow bloggers and readers about my writings that I feel adds so much value to this blog. I couldn't ask for more. I'll like to take this opportunity to thank readers for their insightful comments and also republish some of these for the benefit of those who had have missed these comments despite reading the article.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPuYIg4DDF71Wh6oFZbKuf5YlCtESjk_dxL7Uj9L2TxU20SaWGKfhW874Y87HbwIbsUOQR4i1-m9drbQ8fRbHZ-Sm1qjbK59yAoAVTPqpPj7UdfecI3JfFqtr4A42uTQcBrbe8xa3QN7Xt/s1600/Q+&+A.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPuYIg4DDF71Wh6oFZbKuf5YlCtESjk_dxL7Uj9L2TxU20SaWGKfhW874Y87HbwIbsUOQR4i1-m9drbQ8fRbHZ-Sm1qjbK59yAoAVTPqpPj7UdfecI3JfFqtr4A42uTQcBrbe8xa3QN7Xt/s1600/Q+&+A.jpg" height="132" width="320" /></a></div>
<br />
I've tried my best to be selective and also to summarize these questions and answers so that readers can get the gist of it. Also, to save time, I've organized in such a way that you can go to the relevant heading and/or question that interests you. Of course, there are more comments which are very insightful and definitely worth a look if you have time. If you want more details, you can click on the headings to go to the relevant article (the comments section is below these articles, scroll down all the way if you want to read only those).<br />
<br />
<h2>
<span style="color: #444444; font-size: large;"><a href="http://secretinvestors.blogspot.sg/2014/12/sembcorp-industries-u96si-is-it-worth.html" target="_blank">Sembcorp Industries - Is It Worth the Buy Now?</a></span></h2>
<div>
<b><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><br /></span></b></div>
<div>
<b><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;">The one thing analysts and all
investors (and myself) have been saying is the low PER their utilities segment
is currently valued in. We think it's cheap if we compare it against fellow
peers. But the question is, it has been for many years they are trading under
PER of 10x, so I'm not quite sure what would propel the shares to be trading at
15x. We may be too optimistic in that sense. We may be wrong of course but the
market has proven us wrong again and again. Will we see a day where it is
trading at PER of 15x? Maybe yes one day, and we can only hope. </span></b></div>
<br />
<div class="MsoNormal">
<span style="background: white; font-family: Arial, sans-serif; line-height: 115%;">Reply: I suspect that many investors
or potential ones are still deeply fixated about Sembcorp’s Marine business and
has not been aware of the success and growth of the utilities business, thereby
undervaluing it. Like you, I’m also not sure what would propel the shares of
the Utilities segment to 15x. But assuming we are not comparing with its peer
businesses or the market's valuation, and only basing strictly on a discounted
cash flow perspective, I think this valuation is fair considering the economic
characteristics of Utilities segment (leading position, stability and
predictability of cash flows etc). Basically on a zero-growth basis we are
putting a discount rate of 6.7% for a respectable business.</span><span style="font-family: Arial, sans-serif; line-height: 115%;"><br />
<br />
<span style="background: white;">Also, my hunch is
that my valuation for the Marine segment is probably a tad too low (Earnings
power of S285M vs TTM earnings of S$345M plus PER of 12-13X) and I have considered
the Urban Development business to be worth zero which is definitely not true.</span><br />
<br />
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">Lastly, some final
considerations which I did not include in the post is that – the Marine segment
is probably the one providing the cash for Utilities expansion traditionally.
If Marine is unable to do well under current circumstances, the Utilities might
be affected. Sembcorp claims that the small Urban Development business may be a
springboard for further involvement in opportunities for Utilities side but so
far I haven’t really seen any synergies in this aspect (anyone, please correct
me if I’m wrong). I guess these business relations wasn’t completely factored
into my analysis. The valuation might be higher or lower because of these but I
must really thank the margin of safety for providing some comfort here.<span style="color: red;"><o:p></o:p></span></span></span></div>
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<span style="color: red; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;"><br /></span></span></div>
<div class="MsoNormal">
<b><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;">As an investor of SCI too, I feel pretty
confident. Yet, looking at the price curve, I noted that in Oct 2011, there is
a dip of prices below 3.5? And that was already way beyond post crisis low
period below 2.5.<span class="apple-converted-space"> </span></span>I had
not followed SCI then and was curious why did that happen?<span class="apple-converted-space"> </span>Just pondering will a repeat
happen?<o:p></o:p></b></div>
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<b><span class="apple-converted-space"><br /></span></b></div>
<div class="MsoNormal">
<span style="background: white; font-family: Arial, sans-serif; line-height: 115%;">Reply: Great questions posed there
regarding the price chart. I think your guess is as good as mine whether a
repeat of price below S$3.50 or even S$2.50 will happen. Personally, I feel
there’s always a chance something like that will happen again though.</span><span style="font-family: Arial, sans-serif; line-height: 115%;"><br />
<br />
<span style="background: white;">However, looking at
this situation on a value standpoint may be a source of vindication. The
~S$3.40 price occurred in 2011Q4. In terms of available information then and
for simplicity, we can use 2010’s financial data for reference. With earnings
of S$793M (you may want to refer to the<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2FIbrgFyyZH-4u5RuWKjhmDM8SttLc-06M7tYqlaiWEsJZpOaHyF9tE9VVE0eKXLfEuXdlaV-b1V3bqvZy_IQUxRlbE8G05YRgykEmboCacj_6WNQVaq-8VZIongkA0kgPrjfnBsFZ3C8/s1600/Sembcorp+Industries+5-year+results.png" target="_blank"><u> table in my post</u></a>), the PER turns out to
be about 7.7x which is also very attractive. Perhaps that is why over such a
short period of time 3-6 months, the stock price recovered.<o:p></o:p></span></span></div>
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<span style="font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;"><br /></span></span></div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
<span style="background: white; font-family: Arial, sans-serif; line-height: 115%;">Alternatively, if you follow
<a href="http://secretinvestors.blogspot.sg/2014/12/sembcorp-industries-u96si-is-it-worth.html" target="_blank"><u>my post</u></a> and using the same technique, (Here, I assume that my view of the
fundamentals/stability for both Marine & Utilities is the same at that
point in time as it is now (this is quite likely) & I also used latest
results for Utilities but 7-years average for Marine instead of 10 years), the
valuation becomes S$6650M or about $3.70/share. I ignored the other segments in
both cases. It turns out that this is decidedly less attractive at that point
of time compared to now on a price to value basis (Value VS Price – 2011 is
S$3.70 VS S$3.40 & 2014 is S$5.15 VS S$4.15). Thus we can say that even
though the price is lower at ~$3.40 in 2011, it is not necessarily more
attractive when it is priced at S$4.15 in 2014. Of course there may be bias
(hindsight) etc but I’ve tried to minimize them using the same method when
looking at the company for both periods.</span><span style="font-family: Arial, sans-serif; line-height: 115%;"><br />
<br />
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">I guess the point
here is that due to business developments over the years, we have better
clarity in forming a rough intrinsic value estimate of the business itself which
in 2014, we estimate it to be close to S$5.15 wherein we ‘wrongly’ estimate it
to be at S$3.70 based on the available data in 2011. Without any doubts, we may
yet again be proved wrong as the future unfolds. That's why we can't depend
only on this counter in our entire portfolio.<span style="color: red;"><o:p></o:p></span></span></span></div>
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<span style="color: red; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;"><br /></span></span></div>
<div class="MsoNormal">
<b><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;">Not satisfied with the dividend yield.</span><o:p></o:p></b></div>
<div class="MsoNormal">
<b><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
<span style="background: white; font-family: Arial, sans-serif; line-height: 115%;">Reply: The dividend yield for
Sembcorp Industries is not the best among many of the blue chip stocks around.
However, I suggest that dividend yield is part of the overall analysis.<span class="apple-converted-space"> </span></span><span style="font-family: Arial, sans-serif; line-height: 115%;"><br />
<br />
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">If after analysis,
we like a stock like Sembcorp but we feel the yield is too low, I think there's
2 ways to handle this:<span class="apple-converted-space"> </span></span><br />
<br />
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">1. If you feel that
dividends will remain constant, wait for the price to drop further to get a
higher dividend yield; or</span><br />
<br />
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">2. Ensure the current
price is low enough such that there's good upside for capital appreciation. Buy
at this low enough price and hope that based on the fundamentals &
potential growth of the company, the earnings will increase in the long-term
and<span class="apple-converted-space"> </span>maybe<span class="apple-converted-space"> future dividends will increase as a
result.</span></span><br />
<br />
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">For me, since the
current dividend yield is already good enough for me and the company has been
paying dividends yearly for >10 years now, I opt for the latter point 2
which is obviously the less wiser way.<span style="color: red;"><o:p></o:p></span></span></span></div>
<div class="MsoNormal">
<span style="color: red; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;"><br /></span></span></div>
<h2>
<span style="color: #444444; font-family: Arial, sans-serif; font-size: large;"><span style="background-color: white; line-height: 15.3333320617676px;"><b><a href="http://secretinvestors.blogspot.sg/2015/01/avi-tech-electronics-ct1si-is-quick.html" target="_blank">Avi-Tech Electronics - Is Quick Profit Possible?</a></b></span></span></h2>
<div class="MsoNormal">
<span style="font-family: Arial, sans-serif;"><span style="background-color: white; line-height: 15.3333320617676px;"><br /></span></span></div>
<div class="MsoNormal">
<b><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;">Seems this company has trouble finding ways to
make money? It's longer term prospect doesn't sound exciting. </span></b><b><span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;">Be careful of
considering liquidation value based on its current cash. Check how much it
burns as well. Can disappear quickly due to operating expenses if it isn't
generating profitable sales. That margin of safety may not exist.<o:p></o:p></span></span></b></div>
<div class="MsoNormal">
<b><span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;"><br /></span></span></b></div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; font-family: Arial, sans-serif; line-height: 115%;">Reply: Thanks so much for visiting my
blog. I think you’ve raised a valid point here. The longer term prospect
doesn’t sound exciting at all. However, I believe the beaten-down price coupled
with the various corporate actions that act as some sort of catalyst have made
the stock a potentially attractive investment.</span><span style="font-family: Arial, sans-serif; line-height: 115%;"><br />
<br />
<span style="background: white;">With regards to
liquidation value, I’ve used it as one of the indicators of the company’s
value. Like I mentioned in <a href="http://secretinvestors.blogspot.sg/2015/01/avi-tech-electronics-ct1si-is-quick.html" target="_blank"><u>this post</u></a>, between 2011-2013, the bulk of negative
earnings are attributed to the subsidiaries (they contributed –S$12.8M while
core ops contributed +S$1.7M). These loss-making subsidiaries are the exact
same ones that management will discontinue and this will help stem much of the
losses. Core operations endured comparatively minor losses which was worst at
-S$1.61M in 2013 (VS subsidiaries –S$7.6M in 2012). 1Q2015 shows core business
operating profitably signalling a potential turnaround.<span class="apple-converted-space"> </span></span><br />
<br />
<span style="background: white;">With these, I believe
the company is<span class="apple-converted-space"> </span><i>unlikely</i><span class="apple-converted-space"><i> </i>to
burn as much cash as the past 3-4 years and correspondingly, the liquidation
value can be used as a reasonable guide to its valuation<span class="apple-converted-space"> </span></span><i>at this point in
time</i>. Of course, the future is unpredictable and
management can still burn cash in the future, especially through similar
unsuccessful acquisitions. What I can say is that I did not place any positive
prospects of the future in my valuation while the negative prospects are still
guarded by some indication of margin of safety.</span><br />
<br />
<span style="background: white;">All in all, if I
can find a few companies in this investment situation and at this price level
for my even-type portfolio, I think the probability of profiting should be high
overall. If you read my previous post on<span class="apple-converted-space"> </span></span></span><span style="background: white; font-family: Arial, sans-serif; line-height: 115%; text-decoration: none;"><u><a href="http://secretinvestors.blogspot.sg/2014/12/my-sg-porfolio-2014-top-realized-gains.html">My SG
Portfolio 2014 and Some recent picks</a></u></span><span class="apple-converted-space"><span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; font-family: Arial, sans-serif; line-height: 115%;">,you will
notice some companies in my event-type situations aren’t doing very well
operationally and doesn’t seem to have bright prospects (one of them is facing
a lawsuit too). I guess the point here for me is that because of these past
losses, the price of Avi-Tech had been beaten down by investors/speculators<span class="apple-converted-space"> </span></span><i>to a point so low</i> that they have essentially assumed these losses are very
likely to continue far into the future.<o:p></o:p></span></div>
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<span class="apple-converted-space"><br /></span></div>
<h2>
<span style="background: white; font-family: Arial, sans-serif; line-height: 115%;"><span style="color: #444444; font-size: large;"><a href="http://secretinvestors.blogspot.sg/2015/01/how-to-get-rich-beauty-of-compounding.html">How to Get Rich - The Beauty of Compounding to Investors & Companies</a></span></span></h2>
<div class="MsoNormal">
<b><span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><br /></span></b>
<br />
<div class="MsoNormal">
<b><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;">Have you tried using
simulation which is the most important factor out of the three? Time, starting
capital or return factor?</span><o:p></o:p></b></div>
</div>
<div class="MsoNormal">
<b><span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;"><br /></span></span></b></div>
<div class="MsoNormal">
<span class="apple-converted-space">
</span></div>
<div class="MsoNormal">
<div class="MsoNormal">
<span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;">I think you’ve posed a
very valid case here about finding out which is the most important factor.
Honestly, I'm not very good at such simulations. But if you've noticed, I've
used a factor of 1.5 for rate of return, r and starting capital, P in the case study
(i.e $100K x 1.5 = $150K, 10% x 1.5 = 15%). For time period, t, if we use a
starting capital of $100K and 30 years (20years x 1.5), the final amount would
be about S$1.75M. From this single but likely inconclusive datapoint, it
appears that time period and rate of return are the most important factors to
consider.</span><span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><br />
</span></div>
<span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><br /></span><span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;">Unfortunately the
rate of return probably is one of the least predictable of the 3 factors since
there's no way we can be sure we can achieve 10% or 15% return over the long
haul. Because of this unpredictability, I thought it is not so useful to state
which factor is the most important in the practical sense. However, very
fortunately for us, the time period is quite within our control and easily
‘applied’ if and only if we are young enough to start. Then again, achieving a
2-3% return over the long haul is probably easier than say, compounding it for
50 years due to the limitations of being a human. A balanced effort in working
on all factors should be the better way to handle the compound equation.</span></span><br />
<span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><br /></span><span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;">All the 3 factors
are highly intertwined and complementary to one another. For example,
compounding $100K at 15% for 18, 19 and 20 years will give $1.24M, $1.42M
($180K more from 18th year), $1.64M ($220K more from 19th year) respectively. A
good compound rate is important but the effect will be more pronounced if the
length of time is extended due to the exponential effect of the formula.
Similar relation applies for the other factors.</span></span><br />
<span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><br /></span><span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;">In conclusion, due
to the varying ease of application and unpredictable nature of some factors, it
is quite hard to conclude decisively which factor will do most for us in our
lifetime. Consequently, I believe the best way to reconcile this is to focus on
all 3 factors based on my proposed method to tackle each factor<span class="apple-converted-space"> </span></span></span><a href="http://secretinvestors.blogspot.sg/2015/01/how-to-get-rich-beauty-of-compounding.html"><span style="background: white; color: #771000; font-family: Arial, sans-serif; line-height: 115%; text-decoration: none;"><u>in my
post</u></span></a><span class="apple-converted-space"><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;"> </span><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;">(under The Real Trick – Combining all 3 Inputs).</span></span><br />
<span class="apple-converted-space"><span style="background: white; color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><br /></span></span>
</div>
<h2>
<span style="background: white; font-family: Arial, sans-serif; line-height: 115%;"><span style="color: #444444; font-size: large;"><a href="http://secretinvestors.blogspot.sg/2015/01/the-beauty-of-compounding-in-companies.html" target="_blank">THE BEAUTY OF COMPOUNDING COMPANIES & ITS IMPLICATIONS</a></span></span></h2>
<div class="MsoNormal">
<span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;"><b><br /></b></span></span><span style="color: #333333; font-family: Arial, sans-serif; line-height: 115%;"><span style="background: white;"><b>Good post again to show the different scenarios amongst the 4. It's interesting
though that you actually used the book value as a measurement of growth. I
thought book value growth is much harder to achieve than earnings growth as it
covers a wider spectrum. It is like earnings is the subset of that.</b><o:p></o:p></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
<span style="font-family: Arial, sans-serif; line-height: 115%;"><span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">Reply: I used book value
in this case because it's easier for me to explain the compounding effect.
Also, unlike earnings and cashflows, book value is less subject to fluctuations
with time and thus more predictable for use. Besides these, book value is
highly related to earnings - A consistently growing book value usually
indicates healthy earnings over the period since whatever is left in net income
after deducting dividends goes to the book. Lastly, we can also view book value
as a rough gauge to the company's intrinsic value if it is to be a liquidated.
This means that using book value is not wrong although it may not be the best
choice in the end.</span></span><br />
<span style="font-family: Arial, sans-serif; line-height: 115%;"><span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><br /></span></span>
<span style="font-family: Arial, sans-serif; line-height: 115%;"><span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">Other Articles:</span></span><br />
<span style="font-family: Arial, sans-serif; line-height: 115%;"><span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://secretinvestors.blogspot.sg/2014/12/my-sg-porfolio-2014-top-realized-gains.html" target="_blank">My SG Portfolio 2014 (Top Realized Gains & Losses) and Some Recent Picks</a></span></span><br />
<span style="font-family: Arial, sans-serif; line-height: 115%;"><span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://secretinvestors.blogspot.sg/2014/12/ap-oil-5ausi-neglected-but-cheap-stock.html" target="_blank">AP Oil - A Neglected but Cheap Stock in Singapore</a></span></span><br />
<span style="font-family: Arial, sans-serif; line-height: 115%;"><a href="http://secretinvestors.blogspot.sg/2014/12/stocks-investment-philosophy.html">Our Stocks Investment Philosophy</a></span><br />
<br />
<br /></div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com1tag:blogger.com,1999:blog-7010816031691289479.post-4390127593270251332015-01-22T17:43:00.004-08:002015-01-22T17:43:50.278-08:00The Beauty of Compounding in Companies and Its ImplicationsIn my previous post on <a href="http://secretinvestors.blogspot.sg/2015/01/how-to-get-rich-beauty-of-compounding.html" target="_blank"><u>The Beauty of Compounding to Investors</u></a>, I've discussed briefly on the mechanics of the simple compound interest equation and concluded that the best way for an investor to optimize its use is to identify each factor (starting capital, compound rate, time period) in the equation separately and work on the weaknesses (especially those that is easily within our control) so that the integration of all 3 factors can hopefully produce an exceptional result. In this post, I'll talk more about this effect on companies and try to relate it to the individual investor.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiz3Dv9_FGmQrqGi47HhYIBqRJZAXoJOhmpPuN9vnwBwyY9PX3_4pxZPxJbpqXO6ITU1mc0fgL67_bNWgeD3R7Q8SNteGwdZY432BxY9fAuvnZWSihL543S_qUubX6XvLp5-MCdDZACWXQ0/s1600/Einstein+Compound+Interest.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img alt="Albert Einstein on Stock Compound Interest" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiz3Dv9_FGmQrqGi47HhYIBqRJZAXoJOhmpPuN9vnwBwyY9PX3_4pxZPxJbpqXO6ITU1mc0fgL67_bNWgeD3R7Q8SNteGwdZY432BxY9fAuvnZWSihL543S_qUubX6XvLp5-MCdDZACWXQ0/s1600/Einstein+Compound+Interest.jpg" height="191" title="Albert Einstein on Compound Interest" width="320" /></a></div>
<br />
<h3>
Case Studies & Assumptions</h3>
Let's use some of case studies for Company X (if you are curious about the company's real identity, <a href="https://www.facebook.com/pages/Secret-Investors/723313461097164?ref=hl" target="_blank"><u>like me on Facebook</u></a> or follow my posts via email by subscribing on the right panel - Let me know by commenting below or emailing me at secretinvestors@gmail.com when this is done). As usual, to make things simple, some assumptions have to be made for the model:<br />
<ol>
<li>In the actual case, Company X managed to grow its book value by compounding it at >10% annually for the past 12 years. Here, we assume that this growth rate will continue for the next 5 years. Book value now is $0.25 per share.</li>
<li>Assume book value is a reasonable estimate to intrinsic value of the company and the market price of its stock will converge to its intrinsic/book value at the end of 5 years.</li>
<li>No other forces (inflation etc) are at play that will skew the final results.</li>
</ol>
<div>
4 scenarios will be used here (please note again that book value for all scenarios is $0.25 per share):<br />
<ul>
<li>Scenario A: Market Price: $0.20 (20% discount to book), Growth rate: 0%</li>
<li>Scenario B: Market Price: $0.30 (20% premium to book), Growth rate: 10%</li>
<li>Scenario C: Market Price: $0.25 (at book value), Growth rate: 10%</li>
<li>Scenario D: Market Price: $0.20 (20% discount to book), Growth rate: 10%</li>
</ul>
<div>
<br /></div>
<div>
<h3>
<b>Summary of Scenario Results</b></h3>
</div>
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left; margin-right: 1em; text-align: left;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiT_AEmLQSRitz-dT9G0fKQDQ18FVtEcC3rO7T51gGotZZpQS4_dztpwQ-vbEIYvILNkEoj8any9cEzNlrL8cl6v0x90I_PuvUaLiVwcYlVFv3Sq8xAULoE9sI7cDEM-BQfZwlX84pnw_gS/s1600/Stock+Company+Compound+Results.jpg" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img alt="Shares Investment Results - Dividends Excluded" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiT_AEmLQSRitz-dT9G0fKQDQ18FVtEcC3rO7T51gGotZZpQS4_dztpwQ-vbEIYvILNkEoj8any9cEzNlrL8cl6v0x90I_PuvUaLiVwcYlVFv3Sq8xAULoE9sI7cDEM-BQfZwlX84pnw_gS/s1600/Stock+Company+Compound+Results.jpg" height="107" title="Stock Investment Results - Dividends Excluded" width="576" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Scenario Capital Appreciation Results (Dividends not factored in)</td></tr>
</tbody></table>
<div>
<br /></div>
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</div>
<div class="separator" style="clear: both; text-align: left;">
Comparing Scenarios A & B, we see that despite paying at 20% premium to book value (for B), the stock investor is still able to turn in better results compared to one who bought at 20% discount to book value (for A) - provided the growth rate is high enough. In this case, a quick calculation shows that a 4.5% growth rate in Scenario B is sufficient to get the same 25% results achieved in Scenario A.</div>
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<br /></div>
<div class="separator" style="clear: both; text-align: left;">
Comparing Scenarios C & D, it is clear that although the purchase price of D is only 20% lower than C and both have the same growth rate, D turns it significantly higher results (much more than 20%). All in all, Scenario D gives the best results. For your info: Company X is currently <i>priced below</i> that of Scenario D now, indicating a better upside if we were to base it on this very simplistic model.</div>
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<br /></div>
<div class="separator" style="clear: both; text-align: left;">
This is a very simplistic view of the compounding effect but it does show the powerful snowballing effect of the compound equation. The key limitations are obviously in the assumptions. In the first place, we can't know for sure whether the book value or 'intrinsic' value can grow at 10% for the next year, save to say for 5 straight years. Also, there are definitely many other factors or uncertainties at play that will affect the final result. Lastly, for most companies, the book value does not equate to the intrinsic value. Even if they do, the market price may or may not converge to this implied intrinsic value at the end of 5 years (it could be earlier or later). Despite these limitations, I believe its good enough to show the compounding effect and its implications to the stock investor.</div>
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<br /></div>
<h3 style="clear: both; text-align: left;">
The Ultimate Approach - Dual Margin of Safety</h3>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: inherit;">Margin of safety is an important part of our overall investment framework as discussed in the post on <u><a href="http://secretinvestors.blogspot.sg/2014/12/stocks-investment-philosophy.html" target="_blank">Our Stocks Investment </a></u></span><u><a href="http://secretinvestors.blogspot.sg/2014/12/stocks-investment-philosophy.html" target="_blank">Philosophy</a></u><span style="font-family: inherit;">. The above exhibit suggests 2 key ways to profit from the stock market. First and foremost, the investor can purchase securities at a price that is currently at a discount to a readily ascertainable intrinsic value as in Scenario A. This discount is in itself a margin of safety. Alternatively, the investor can purchase the security at a reasonably fair price as compared to the current intrinsic value but he or she must be confident that the future prospects or growth is so good that it is sufficient margin of safety for a profit to be made, as in Scenario C above. </span></div>
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<span style="font-family: inherit;"><br /></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: inherit;">The best approach to stock selection is of course to find securities that meets both criteria or approaches discussed in the previous paragraph - by having a discount to current value <i>and</i> potential growth that can further increase this value in the foreseeable future such that the cushion in price-value gap widens further over time. This is similar to Scenario D in the above table which as shown, give the best results out of the 4.</span></div>
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<span style="font-family: inherit;"><br /></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: inherit;">I will discuss further about the obstacles in execution in the application of the Dual Margin of Safety approach and end off with my proposed solution. Let me know if there's alternative methods or approaches that you've been doing that has been consistently successful ya?</span></div>
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<br /></div>
<div class="separator" style="clear: both; text-align: left;">
<i>Disclosure:</i></div>
<div class="separator" style="clear: both; text-align: left;">
<i>Long Company X - Do you know which company is this?</i></div>
<div class="separator" style="clear: both; text-align: left;">
<i><br /></i></div>
<div class="separator" style="clear: both; text-align: left;">
<i>As mentioned, if you are curious about Company X's real identity, <a href="https://www.facebook.com/pages/Secret-Investors/723313461097164?ref=hl" target="_blank"><u>like me on Facebook</u></a> or follow my posts via email by subscribing on the right panel - When this is done, let me know by commenting below or emailing me at secretinvestors@gmail.com :-)</i></div>
<div>
<br /></div>
<div>
<br /></div>
</div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com6tag:blogger.com,1999:blog-7010816031691289479.post-60313067816651569492015-01-16T20:33:00.000-08:002015-01-16T20:33:24.682-08:00How to Get Rich - The Beauty of Compounding to Investors and Companies<div class="MsoNormal" style="background: white; line-height: 13.5pt; margin-bottom: 11.25pt; mso-outline-level: 1;">
<span style="color: #181818; font-family: "Georgia","serif"; font-size: 10.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 18.0pt;"><i>"</i></span><span style="font-family: inherit;"><i>Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."</i> - Albert Einstein.</span></div>
<div class="MsoNormal" style="background: white; line-height: 13.5pt; margin-bottom: 11.25pt; mso-outline-level: 1;">
<span lang="EN-US" style="font-family: inherit;">I’m always
amazed by the mechanics and impact of the compounding effect. The basic compound
interest formula is:- <o:p></o:p></span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZm2rCXPqeRr5Z7-3K9ZFFA35GGhPMXdJn1tESNDkcdmtKBVVth3oMy1qcWDtCc1bTy5h9iE3B0rrzxI-o8JXlsD4QYB8Oar9yk_XJ6088YFCd-w6E7ZATSiwvZpgsV7e884he27XrNrPB/s1600/Compound+Interest+Formula.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZm2rCXPqeRr5Z7-3K9ZFFA35GGhPMXdJn1tESNDkcdmtKBVVth3oMy1qcWDtCc1bTy5h9iE3B0rrzxI-o8JXlsD4QYB8Oar9yk_XJ6088YFCd-w6E7ZATSiwvZpgsV7e884he27XrNrPB/s1600/Compound+Interest+Formula.jpg" /></a></div>
<span style="font-family: inherit;">Where:</span></div>
<div class="MsoNormal" style="background: white; line-height: 13.5pt; margin-bottom: 11.25pt; mso-outline-level: 1;">
<span style="color: #181818; font-family: inherit; font-size: 10.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 18.0pt;">F = Future value or final value of the
investment<br />
P = Principal or the starting capital <br />
r = Annual rate of return<br />
t = The number of years this return is compounded<o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: 13.5pt; margin-bottom: 11.25pt; mso-outline-level: 1;">
<span style="color: #181818; font-family: inherit; font-size: 10.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 18.0pt;">To let the compounding effect work its
wonder, an investor needs to focus on the Starting Capital (denoted by P),
Annual rate of return (r) and the number of years (t). Let’s use $100,000
starting capital, 10% annual return and 20 years as baseline inputs for
comparisons with other permutations. For simplicity, effects of inflation are
neglected throughout.</span><br />
<span style="color: #181818; font-family: inherit; font-size: 10.5pt; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 18.0pt;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfe4n4A0zvFw0I9SR_6H2sGPVXF73GVLLjiQ7D0I5o3W_vHqDw6Px3iMKX5VaDr7jPLbh8JUTlXM58s2GJr_QKI6Uhh6ncAYIg-zRk81wPn-VRjwlspxCiHd0B24Sgdz6wrKzJkXne7EpE/s1600/Effects+of+Compounding.jpg" imageanchor="1"><img alt="Effects of Compounding" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfe4n4A0zvFw0I9SR_6H2sGPVXF73GVLLjiQ7D0I5o3W_vHqDw6Px3iMKX5VaDr7jPLbh8JUTlXM58s2GJr_QKI6Uhh6ncAYIg-zRk81wPn-VRjwlspxCiHd0B24Sgdz6wrKzJkXne7EpE/s1600/Effects+of+Compounding.jpg" height="278" title="Effects of Compounding Graph" width="563" /></a></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQQZgTzqmMOYbFVuCGaBIwQ5xPjQh66mKyHdDda1a5fLkFET0HP1pY42sDEjRz2PNcblqDesC9kJgvSiUpglWaGYeJAXehypIHWvTZx2WF2vbVPRHBYtNub6LEFKgyhOA98_IIAYUQDZcO/s1600/Compounding+Table.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Compound results table" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQQZgTzqmMOYbFVuCGaBIwQ5xPjQh66mKyHdDda1a5fLkFET0HP1pY42sDEjRz2PNcblqDesC9kJgvSiUpglWaGYeJAXehypIHWvTZx2WF2vbVPRHBYtNub6LEFKgyhOA98_IIAYUQDZcO/s1600/Compounding+Table.png" height="151" title="Compound results table comparison" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Effects of Compounding with Various Inputs</td></tr>
</tbody></table>
<span style="font-family: inherit;">As observed from the table and chart, for all cases the
value of gains is much more than the initial capital itself. But what can we really
learn from these results and what can we do to maximize the compounding effect?</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">I find it quite worthwhile to classify these inputs based on
the level of control we have over them. By identifying them singularly, we can
find out which inputs we are lacking and categorically work on them.</span><br />
<span style="font-family: inherit;"><br /></span></div>
<h3>
<span style="color: #444444; font-family: inherit;">Time Factor (t)</span></h3>
<div class="MsoNormal">
<span style="font-family: inherit;">As observed above, time is an absolute critical factor for
the effects of compounding to snowball the initial capital as much as possible.
All of the input invested 7 years late did worse than the baseline input. If we
have $100K and can compound 10% for 20 years but we do it 7 years later, our
gains is a 57% or </span>$327K<span style="font-family: inherit;"> lesser! 7 years later is 7 years too late. This is
something that we can control <u>only <i>when
we are still young</i></u>. The key is to start investing as early as possible and have the patience to let the compounding effect work. <o:p></o:p></span><br />
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">To put it into practical perspective, if a 40 year old who
earns an average of $100K per year invest with baseline results, he will have
an extra $245K by 53 years old. This would mean that his investments gave him
an extra 2.45 years of working income. However, if he started 7 years earlier
at 33 years old, he will have an extra $570K by 53 years old which also means
that he gets an extra 5.7 years of his working income. Why work another 5.7 years
when you can actually get the same amount of money with less effort? Retiring a
few years earlier is certainly not bad at all!<o:p></o:p></span><br />
<span style="font-family: inherit;"><br /></span></div>
<h3>
<span style="color: #444444; font-family: inherit;">Starting Capital (P)</span></h3>
<div class="MsoNormal">
<span style="font-family: inherit;">The Starting Capital is also important but comparatively les</span><span style="font-family: inherit;">s
controllable. Different individual profiles will have differing amounts of starting capital to
invest. Most of the time, we can’t really control how much we have at the start (especially when we are young). However, all of
us have universal control in terms of the </span><i style="font-family: inherit;"><u>proportion
of our money we set aside to save and invest</u></i><span style="font-family: inherit;">. This is a definitely a decision that
can be made and acted upon for almost everyone.</span><br />
<span style="font-family: inherit;"><br /></span></div>
<h3>
<span style="color: #444444; font-family: inherit;">Return Factor (r)</span></h3>
<div class="MsoNormal">
<span style="font-family: inherit;">Can we really achieve 10% returns per annum for our
investments? No one knows. Sometimes its luck and other times it may be because of innate talent. I believe the best way to potentially improve anyone’s returns is
through continually <i><u>seeking and acquiring investment & financial knowledge</u></i>.
This is definitely something within our control. There are many books, articles
and videos online and offline that teach us how to make our money work harder
for us. Of course, this takes time and effort but I think it’s the only way to handle
this factor properly.<o:p></o:p></span><br />
<span style="font-family: inherit;"><br /></span></div>
<h3>
<span style="color: #444444; font-family: inherit;">The Real Trick –
Combining All 3 Inputs</span></h3>
<div class="MsoNormal">
<span style="font-family: inherit;">What’s the use if we can earn an impressive return from our
investments but we can compound it for only 2 years? There’s also little use
when we have 30 years to compound our money when we can only achieve a 2%
return. The real trick lies in combining all 3 inputs in the compound interest
equation. To do this, we first need to tackle each factor separately by (a) Identifying
which factor we are lacking the most, (b) Find out what we can do that is within our control to improve the factor, (c) Work on improving them and (d) Repeat the process again starting from part (a).
Let me know if you have other ways to optimize the compounding magic :-)</span><br />
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<i><span style="font-family: inherit;">Note: Just want to highlight that there’s
another factor that is not included in this simple compound interest equation.
That is the additional cashflows you can add into your investment sum every
period. Imagine you can compound 10% in 20 years with a starting capital of
$100K and on top of that, you are also able to contribute another $12K into your
portfolio annually - Your final value would be $1.36M with a contribution of
$340K in total. This is compared to the baseline case mentioned above with
$672K final value and $100K contribution.</span></i></div>
<div class="MsoNormal" style="background: white; line-height: 13.5pt; margin-bottom: 11.25pt; mso-outline-level: 1;">
</div>
<div class="MsoNormal">
<span lang="EN-US" style="font-family: inherit;">This post
is longer than expected. I’ll talk more about the companies which can continually compound their value through time from an investor's viewpoint.</span><o:p></o:p></div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com6tag:blogger.com,1999:blog-7010816031691289479.post-57562998553133835062015-01-08T07:51:00.001-08:002015-01-08T07:51:44.534-08:00Avi-Tech Electronics (CT1.SI) – Is Quick Profit Possible?<div class="MsoNormal">
<span lang="EN-US">In my post
on <a href="http://secretinvestors.blogspot.sg/2014/12/my-sg-porfolio-2014-top-realized-gains.html" target="_blank"><u>My SG Portfolio 2014 and Some Recent Picks</u></a>, I’ve mentioned that one of my
event-driven picks for 2015 is Avi-Tech Electronics. I think price then was about
S$0.074 and I’ve accumulated since November at an average price including costs
of S$0.699. There are some interesting comments in the post </span>(you should <a href="http://secretinvestors.blogspot.sg/2014/12/my-sg-porfolio-2014-top-realized-gains.html?showComment=1420034082403#c4074971927229764085" target="_blank"><u>read it here</u></a>) and I thought that
probably it’s good to write a short article about my analysis.<br />
<br /></div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJXL-zAb6KoFs3_p118f0EdynBG2kFfr199A3mV_93Q-oVgNxUsElMq0eT9_fqs6kIZ6Hv1HAhZKk22yKBNOjpjL5c8uDHYxhAEvGwSQqqVcOaFSl-Qfu66LP1dsU9EiUzrEUXt-1PH-1r/s1600/Avi-Tech+Electronics+Logo.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img alt="Avi Tech Electronics Stock logo" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJXL-zAb6KoFs3_p118f0EdynBG2kFfr199A3mV_93Q-oVgNxUsElMq0eT9_fqs6kIZ6Hv1HAhZKk22yKBNOjpjL5c8uDHYxhAEvGwSQqqVcOaFSl-Qfu66LP1dsU9EiUzrEUXt-1PH-1r/s1600/Avi-Tech+Electronics+Logo.jpg" height="224" title="Avi-Tech Stock Logo" width="320" /></a></div>
<br /></div>
<div class="MsoNormal">
<span lang="EN-US"><b><i>Avi-Tech
Electronics</i></b> is listed on the SGX and is a provider for Burn-in, engineering
and manufacturing services in the semi-conductor & electronics industry. In
2011, It ventured into the Imaging Equipment and Energy Efficient Products by
starting 2 subsidiaries to ‘diversify and substantiate long-term growth’ for
the company. Guess what happened in the end: since 2011, the company began incurring losses largely
due to these same subsidiaries and management has finally decided to discontinue these operations just a couple of months back. Originally, the classification of this type of
purchase in my portfolio </span>(<a href="http://secretinvestors.blogspot.sg/2014/12/my-sg-porfolio-2014-top-realized-gains.html" target="_blank"><u>see post for more details</u></a> about this) do not require intensive
analysis – so I’ll try to keep things simple here. The following data are based
on my 30 Dec 2014 post:</div>
<div class="MsoNormal">
<span lang="EN-US"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-US">Price =
S$0.074<br />
Shares outstanding = 342,422,096<br />
Market Cap = S$25.34M<br />
P/E = NA (losses)<br />
EV/EBIT = NA (losses)<br /><o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">P/NTA = 0.63</span></div>
<div class="MsoNormal">
<span lang="EN-US"><br /></span></div>
<div class="MsoNormal">
<h2>
<span lang="EN-US" style="color: #444444; font-size: large;">Investment Thesis</span></h2>
</div>
<div class="MsoNormal">
<span lang="EN-US">The results
in this classification of stocks depend a lot on corporate events which in some sense
serve as a catalyst to close up the price-value gap, hopefully in a fairly short period of time. My investment decision is
premised on the following: </span></div>
<div class="MsoNormal">
</div>
<ol>
<li>The management has destroyed huge value over the years from the 2 loss-making subsidiaries. Many shareholders could have loss confidence with management's ability and decided to sell / cut losses.</li>
<li>The poorer fundamentals and financial results combined with the inclusion onto the SGX watch-list due to 3 consecutive years of pre-tax losses has led to a stock price decline that is likely <i>over-exaggerated.</i></li>
<li>This exaggeration led to a fair degree of undervaluation which also means a <i>potential </i>investment opportunity to the shrewd analyst.</li>
<li>Directors have been mopping up shares recently with their own money and to that extent, agreeing with my view that the stock price might be undervalued.</li>
<li>The disposal of subsidiaries which are main contributors of past years' losses may improve future earnings at least in the short term and this <i>may </i>prop up the market price.</li>
</ol>
<div>
<h2>
<b><span style="color: #444444; font-size: large;">Key Risks / Uncertainty</span></b></h2>
</div>
<div>
<div class="MsoNormal">
<span lang="EN-US">Management</span> indicated that they will “continue with its plans to seek new areas of
growth whether through mergers and acquisitions, or any structured transaction
or business, which will add value to shareholders.” Has management really
learnt their lesson from previous experiences? Are they capable enough to
continue ‘adding value’ through acquisitions? Personally, I feel its foolish for them to do that considering their
core business ain’t doing as well as before too (more details below).<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="color: #333333; mso-bidi-font-family: Arial;">Also,
we can’t deny the fact that they are in a difficult semi-conductor
industry which presents a challenge to the management (that is
perhaps why they insist on growing through acquisitions etc) and a risk that the investor need to be wary of.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="color: #333333; mso-bidi-font-family: Arial;"><br /></span></div>
<div class="MsoNormal">
<h2>
<b><span lang="EN-US" style="color: #444444; font-size: large;">Safeguards and Checks – In case things do not
turn out well</span></b></h2>
</div>
<div class="MsoNormal">
<span lang="EN-US">Like I say, the need for intensive analysis is not really required for the event-type part of my portfolio and I hope to realize some profits in a reasonably short period of time. However, as a safeguard, I better ensure there’s some sort of margin of safety if things don’t work out and I might have to hold on to it for a longer than expected timeframe. </span>Since this will be a minor position in my portfolio, a brief analysis should be sufficient.</div>
<div class="MsoNormal">
<span lang="EN-US"><br /></span></div>
<div class="MsoNormal">
<h3>
<u><span style="font-size: small;">Financial Position</span></u></h3>
</div>
<div class="MsoNormal">
<span lang="EN-US">The balance
sheet is generally cash rich with net cash equivalents of about S$23.5M which compares
favorably to the market cap at S$25.3M. Book value is about S$40M. If the
company is liquidated now, I believe we can get back more than what we pay now.
Of course, if management continues eroding value by doing foolish expansions,
the intrinsic value on a liquidating basis may drop below our price paid in
light of such later developments in the business. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US"><br /></span></div>
<div class="MsoNormal">
<h3>
<u><span style="font-size: small;">Earnings</span></u></h3>
<div>
<u><span style="font-size: small;"><br /></span></u></div>
<div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgl7tqFP5ncgJRkLuKfZ2iotBDdAOX_N9WWp0AfX4TlmP_M6GIy7Mg4MLQipb1lMREPXfMJgbyynuh0pblftQlcMAXgBl1PIwgLID5oFEu48K45mYxU6kvkaVqt5kjx_ItAN8UCpuzhqA4b/s1600/Avi-Tech+Financial+Results.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Avi Tech Electronics Stock Financial Results" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgl7tqFP5ncgJRkLuKfZ2iotBDdAOX_N9WWp0AfX4TlmP_M6GIy7Mg4MLQipb1lMREPXfMJgbyynuh0pblftQlcMAXgBl1PIwgLID5oFEu48K45mYxU6kvkaVqt5kjx_ItAN8UCpuzhqA4b/s1600/Avi-Tech+Financial+Results.jpg" height="160" title="Avi-Tech Electronics Financial Results" width="525" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Avi-Tech Electronics Financial Summary</td></tr>
</tbody></table>
</div>
</div>
<div class="separator" style="clear: both; text-align: left;">
I’ve cleaned up the effects
of the loss-making subsidiaries in the above table and it is clear that these
subsidiaries have indeed eroded earnings between 2011 and 2013, before management
decide to discontinue operations in 2014. The core operations haven’t been doing well too considering that they also have registered
some losses between 2012 to 2014. Core business revenue has declined
drastically from S$70M to S$23M over 7 years.
However, keep in mind that the
bulk of the negative earnings is attributed to the subsidiaries (contribution
by subsidiaries is -S$12.8M compared to +S$1.7M for core business from 2011 to
2013). </div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<h2 style="clear: both; text-align: left;">
<b><span style="color: #444444; font-size: large;">Valuation</span></b></h2>
<div class="MsoNormal">
<span lang="EN-US">Not surprisingly, thanks to these loss-making subsidiaries, share price has declined more than 60% since 2011. </span>The discontinuation of the subsidiaries has stemmed losses greatly and results in 1Q2015 shows a positive profit. Could there be turnaround which can lift share price higher? No one can say this for sure.<br />
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3jPfnIsnQUYCvNrxEZtmnBilDw2oqmJNw0RrrWnUKFD81HK-IwdC4nme1oMPYp6ocOjl7r2UAYh0WENgBljZSLUrgKmEVexna6-DmYZNuW16NkERgAS-e2nc0P4y_ixdl1aPq6Q7BX9Od/s1600/Avi-Tech+5+year+Stock+Chart.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Avi-Tech Electronics 5 Year Stock Chart" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3jPfnIsnQUYCvNrxEZtmnBilDw2oqmJNw0RrrWnUKFD81HK-IwdC4nme1oMPYp6ocOjl7r2UAYh0WENgBljZSLUrgKmEVexna6-DmYZNuW16NkERgAS-e2nc0P4y_ixdl1aPq6Q7BX9Od/s1600/Avi-Tech+5+year+Stock+Chart.jpg" height="227" title="Avi Tech 5 Year Stock Chart" width="502" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Avi-Tech Electronics 5 Year Stock Chart</td></tr>
</tbody></table>
<div class="separator" style="clear: both; text-align: left;">
Let's use 2010 and 2015 results for comparison since in both years, the loss-making
subsidiaries are non-existent. A back-of-the envelope calculation shows PER of
2010 is about 15.6X while forward PER of 2015 appears to be about 9.1X (I
annualized 1Q15 earnings per share of S$0.002 here as an approximation). Assuming all else
remains the same, this could be another indication that share price decline has
been exaggerated and the market probably has not factored in the positive effects
from the disposal. If valuation in 2010 is any guide, the market price should
be priced around S$0.12! Of course, I’m not saying these assumptions are
reasonable but at least it gives me some level of comfort here knowing that I'm not buying at a ridiculously high price.</div>
<div class="MsoNormal">
<span lang="EN-US"><br /></span></div>
<div class="separator" style="clear: both;">
</div>
<div class="MsoNormal">
<span lang="EN-US">Because the earnings has been quite unstable, probably the balance sheet can give better insights
about its intrinsic value. Taking a haircut of 50% to PPE (NB: this part of the
balance sheet is throwing in some S$500K-S$700K rental income annually), 25% to
inventory and 10% to receivables, we get a liquidation value of S$0.094 per
share as compared to the price of S$0.074. (Potential Bonus 1: I did not include the proceeds that the
company may receive from the disposal of subsidiary in this valuation).<b><o:p></o:p></b></span></div>
<div class="MsoNormal">
<br /></div>
<h2>
<b><span style="color: #444444; font-size: large;">Conclusion</span></b></h2>
<div class="MsoNormal">
<span style="background: white; mso-bidi-font-family: Arial;">A
high price can turn stocks of good quality businesses into a speculative
purchase and likewise, a low price can turn a speculative stock into an
attractive investment. My opinion is that Avi-Tech belongs to the latter.
Considering the pros and cons, I think the low price coupled with the existence
of potential catalysts make the purchase of Avi-tech too attractive to be
denied by the security analyst. However, the risks mentioned above also means
that the sizing of the position in the portfolio should be kept relatively
small - just in case management screw things up again. (Potential Bonus 2: we
already ensured there's some margin of safety to absorb unfavourable future
developments but what if by some freak nature, the future acquisitions are so
successful that future earnings improve dramatically? This is definitely not accounted
for yet).<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background: white; mso-bidi-font-family: Arial;"><br /></span></div>
<h2>
<span style="background-color: white;"><b><span style="color: #444444; font-size: large;">Some Final Thoughts</span></b></span></h2>
<div class="MsoNormal">
<span style="background: white; mso-bidi-font-family: Arial;">Due
to it’s classification in my portfolio & unless there’s any clear-cut
change in circumstances, my guess is that I will take most of my profits (if
any) within the next 12 months. I mentioned that my average price purchased
including costs since November ‘14 is S$0.0699. Price now at S$0.078 would mean that my
current returns is about 12% in slightly less than 2 months. Obviously this is
not the best business in the best industry and I have the urge to take my
profits initially when it was at S$0.08. After some deliberation, I figured that my estimate of
S$0.094 is really a minimum valuation which is so conservative to the extent
that it is a reasonably dependable guide. Moreover, one of the directors bought back shares a couple of days back at about S$0.078. Maybe somewhere around S$0.09 I can consider trimming
my stakes. I would be more than happy to get some opinions about this.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background: white; mso-bidi-font-family: Arial;"><br /></span></div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
<span style="background: white; mso-bidi-font-family: Arial;">PS:
I’m surprised that I took about an hour of analysis before my decision to
purchase Avi-Tech but it took me more than 3-4 hours to write it in this blog!<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background: white; mso-bidi-font-family: Arial;"><br /></span></div>
<div class="MsoNormal">
<i>Disclosure:</i></div>
<div class="MsoNormal">
<span style="background: white; mso-bidi-font-family: Arial;"></span></div>
<div class="MsoNormal">
<i>Long Avi-Tech Electronics (CT1.SI)</i></div>
<div class="MsoNormal">
<span lang="EN-US"><br /></span></div>
</div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com55tag:blogger.com,1999:blog-7010816031691289479.post-74001405567273072722014-12-30T19:50:00.000-08:002015-02-01T05:14:04.224-08:00My SG Porfolio 2014 (Top Realized Gains & Losses) and Some Recent Picks<b><i>My portfolio</i></b> experienced quite a few changes in 2014 and I thought its good to highlight a few for my own tracking purposes. I consider this year a lucky year for me as I've sold my 2 main losers before it went down even further. I'm glad to realize a few winners too although most of them went even higher after my sales. Also, my event-type portfolio did not register any losses for 2014. Currently I have 15 Singapore companies in my portfolio and throughout the year it fluctuated between 14 to 18 stocks. Percent wise, my largest total unrealized loss currently in my SG portfolio is -4.4% while the largest total unrealized gain is about +61.3%, both inclusive of dividends.<br />
<br />
I classify my portfolio to 2 main types. The first is the normal ones where we just make the purchase based on its quantitiative & qualitative strength and hold on to them until value is realized. The second type consists of event-driven stocks wherein their results depend a lot on certain external or internal corporate action(s) which I feel will close the price-value gap in a reasonably short period of time. Unlike in the USA, these situations are few and far between in Singapore. Consequently, I define them quite loosely and am pretty flexible with the type of event that occurred. For this group, I ensure that there is at least some degree of undervaluation before I make my purchases just to be safe.<br />
<br />
Below is a list of my top realized winners (I define this by a more than 30% gain on an annualized basis) and my worst realized losers (Since annualized loss shows less meaning here, I define it by a total loss of more than 10%). Typically I'll buy up or sell down my shares on a scale over a period of time. To make things simple, my annualized returns are based on a maximum holding period which means the actual returns should be slightly higher.<br />
<br />
<h2>
<span lang="EN-US" style="color: #444444; font-size: x-large;">Top Realized Winners</span></h2>
<div class="MsoNormal">
<b><span lang="EN-US">SMRT Corporation Ltd<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Cost (Incl. Fees): S$1.02<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Sold: S$1.49<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Max Holding
Period: 211 days<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Returns
(net of costs, include div) based on avg price: +47.6%<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Annualized: +96.0%</span><br />
<span lang="EN-US"><i>Comment: Quite lucky here as a short while from my initial purchase, the price spiked up due to government's announcement about the new model. Nevertheless, the price at S$1.02 was clearly undervalued. The non-fare segment of the company was rather attractive too. Considering the nature and moat of the business, I probably run the risk that I've sold too low at S$1.49. Price now is S$1.58.</i></span><br />
<span lang="EN-US"><i><br /></i></span></div>
<div class="MsoNormal">
<b><span lang="EN-US">PNE Industries<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Cost (Incl. Fees): S$0.1044<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Sold: S$0.167<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Max Holding
Period: 480 days<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Returns
(net of costs, include div) based on avg price: +82.25%<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Annualized: +57.8%</span><br />
<span lang="EN-US"><i>Comment: Price now at S$0.151.</i></span><br />
<br />
<b>UE E&C Ltd</b><br />
<div class="MsoNormal">
<span lang="EN-US">Average Cost (Incl. Fees): S$0.737<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Average Sold: S$1.20<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Max Holding Period: 694 days<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Returns (net of costs, include div) based on avg price: +77.4%<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Annualized: +35.2%</span><br />
<i>Comment: Price now at S$1.26.</i></div>
</div>
<div class="MsoNormal">
<span lang="EN-US"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-US">Koyo International<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Cost (Incl. Fees): S$0.0528<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Sold: 0.0864<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Max Holding
Period: 688 days<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Returns
(net of costs, include div) based on avg price: +66.4%<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Annualized: +31.0%<br /><i>Comment: Unfortunately the price thereafter went up as high as S$0.194. If I'm a bit more patient, it could have been a 250+% gain... Price now at S$0.154.</i></span><br />
<span lang="EN-US"><br /></span></div>
<h2>
<b><span lang="EN-US" style="color: #444444; font-size: x-large;">Worst Realized Losers </span></b></h2>
<div class="MsoNormal">
<b><span lang="EN-US">Vard Holdings <o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Cost (Incl. Fees): S$1.097<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Sold: S$0.958<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Max Holding
Period: 468 days<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Returns
(net of costs, include div) based on avg price: -12.7%<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Annualized:
-10.0%<o:p></o:p></span><br />
<span lang="EN-US"><i>Comment: This is probably my most foolish purchase in 2013. Fortunately, I sold months before the steep fall in oil prices. Counter is at S$0.595 now.</i></span></div>
<div class="MsoNormal">
<span lang="EN-US"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-US">Fujian Zhenyun Plastics<o:p></o:p></span></b></div>
<div class="MsoNormal">
<div class="MsoNormal">
<span lang="EN-US">Average
Cost (Incl. Fees): S$0.168<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Sold: S$0.155<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Max Holding
Period: 934 days<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Returns
(net of costs, include div) based on avg price: -1.8%<o:p></o:p></span></div>
Annualized:
-0.71%<br />
<i>Comment: Lucky here as I heard it is recently suspended due to some issues with its accounts. Price now at S$0.149.</i></div>
<div class="MsoNormal">
<br /></div>
<h2>
<b><span lang="EN-US" style="color: #444444; font-size: x-large;">Top Event-Type Winners</span></b></h2>
<div class="MsoNormal">
<b><span lang="EN-US">Fuji Offset Plates Manufacturing Ltd<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Cost (Incl. Fees): S$0.35<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Average
Sold: S$0.45<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Max Holding
Period: 2 days<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Returns
(net of costs, include div) based on avg price: +27.9%<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-US">Annualized (Simple
Average): >5000%</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b><span lang="EN-US">Captii Ltd<o:p></o:p></span></b></div>
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<span lang="EN-US">Average
Cost (Incl. Fees): S$0.0351<o:p></o:p></span></div>
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<span lang="EN-US">Average
Sold: S$0.041<o:p></o:p></span></div>
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<span lang="EN-US">Max Holding
Period: 123 days<o:p></o:p></span></div>
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<span lang="EN-US">Returns
(net of costs, include div) based on avg price: +17.5%<o:p></o:p></span></div>
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<span lang="EN-US">Annualized: +61.3%<b><o:p></o:p></b></span></div>
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From both the realized and unrealized results, I'm glad that my endeavor to ensure the risk of permanent capital loss is kept to the minimum has been working well. More details about my investment philosophy can be found <a href="http://secretinvestors.blogspot.sg/2014/12/stocks-investment-philosophy.html" target="_blank"><u>in my post here</u></a>. As always, I find that the timing of sales is always the hardest part of the entire investment process. Should we wait for the momentum to fizzle before selling even though it is already above my estimated value? But then again, how do we know that momentum has fizzled and what if the price falls below intrinsic value and never goes back up again? Because of this problem, I tend to start selling in phases when it is near my estimate of intrinsic value range. I guess the trick here is really to make purchases at a price so low that even if the sale is mediocre, the eventual results will still turn out good.<br />
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<span style="color: #444444; font-size: x-large;">
Some Recent Picks</span></h2>
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I shall end off this post with 3 recent picks for my portfolio. For the normal portfolio, they are Sembcorp Industries and AP Oil International. You may want to check out my analysis for <a href="http://secretinvestors.blogspot.sg/2014/12/sembcorp-industries-u96si-is-it-worth.html" target="_blank"><u>Sembcorp Industries here</u></a> and <a href="http://secretinvestors.blogspot.sg/2014/12/ap-oil-5ausi-neglected-but-cheap-stock.html" target="_blank"><u>AP Oil here</u></a>. The event-type pick would be <b>Avi-Tech Electronics Limited</b> (<a href="http://www.avi-tech.com.sg/" rel="nofollow" target="_blank">company website</a>) which I have accumulated at an average price including costs of S$0.699. Let's see how things goes from here. What about you guys? Care to share what are some of your picks? Have a fantastic 2015 ahead!<br />
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Related Articles:<br />
<a href="http://secretinvestors.blogspot.sg/2014/12/sembcorp-industries-u96si-is-it-worth.html" target="_blank">Sembcorp Industries: Is It Worth The Buy Now?</a><br />
<a href="http://secretinvestors.blogspot.sg/2014/12/ap-oil-5ausi-neglected-but-cheap-stock.html" target="_blank">AP Oil - A Neglected but Cheap Stock in Singapore</a><br />
<a href="http://secretinvestors.blogspot.sg/2015/01/avi-tech-electronics-ct1si-is-quick.html" target="_blank">Avi-Tech Electronics - Is Quick Profit Possible?</a><br />
<h3 class="post-title entry-title" itemprop="name" style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 18px; font-stretch: normal; font-weight: normal; margin: 0px; position: relative;">
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<i>Disclosure:</i><br />
<i>Long AP Oil, Sembcorp Industries & Avi-Tech.</i></div>
<br /></div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com17tag:blogger.com,1999:blog-7010816031691289479.post-33367390023154181712014-12-24T23:12:00.000-08:002014-12-30T10:46:39.970-08:00SEMBCORP INDUSTRIES (U96.SI): Is It Worth The Buy Now?<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
<span style="font-family: inherit;">The recent oil price rout has beaten down many stocks of oil-related companies and probably its good to have a look to see if valuations are compelling enough. Now, I usually like to buy clear-cut bargain type stocks and consequently most of my portfolio consists of small to mid cap businesses like AP Oil (see post <a href="http://secretinvestors.blogspot.sg/2014/12/ap-oil-5ausi-neglected-but-cheap-stock.html" target="_blank"><u>here for full details</u></a>). However, one of the rare blue chip companies that I monitor is Sembcorp Industries. Some metrics (based on 8 Dec '14) as follows: </span><br />
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<span style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 15px; line-height: 20.7900009155273px;">Price = S$4.15</span><br />
<span style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 15px; line-height: 20.7900009155273px;">Shares Outstanding = 1801.4 (million)</span><br />
<span style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 15px; line-height: 20.7900009155273px;">Market Cap = S$7,565 (million)</span><br />
<span style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 15px; line-height: 20.7900009155273px;">P/E (TTM) = 9.70</span><br />
<span style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 15px; line-height: 20.7900009155273px;">P/NTA (mrq)= 1.51</span><br />
<span style="background-color: white; color: #333333; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 15px; line-height: 20.7900009155273px;">ROE (ttm) = 14.91%</span></div>
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<span style="background: white; color: #444444; font-family: inherit; font-size: large;">SEMBCORP INDUSTRIES BUSINESS</span></h2>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_cYJ1tFiqG6ZDtEn0Ie3XE5Ad1JIbE3n1ZBGqgUxYvULA6byT0zoH6cctLo61Ngg86RMCcC5s1XaW85FG7E2fXoIVN_Ef8-li6vNDuR4jIMy0ebcZ_yNRzbRoaQJiIzrfoOrRvNNaL7Y7/s1600/Sembcorp+Industries+Logo.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img alt="Sembcorp Logo" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_cYJ1tFiqG6ZDtEn0Ie3XE5Ad1JIbE3n1ZBGqgUxYvULA6byT0zoH6cctLo61Ngg86RMCcC5s1XaW85FG7E2fXoIVN_Ef8-li6vNDuR4jIMy0ebcZ_yNRzbRoaQJiIzrfoOrRvNNaL7Y7/s1600/Sembcorp+Industries+Logo.png" height="126" title="Sembcorp Logo" width="320" /></a></div>
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<span style="background-color: white; color: #222222;">I wouldn't go into details about the business but will probably highlight a few things so that the reader can get a general understanding about its operations. I encourage you to look at t</span><span style="background-color: white; color: #222222;">he Company's Website as it provides a comprehensive overview of its businesses<a href="http://www.sembcorp.com/en/" rel="nofollow" target="_blank"> here</a>.</span><br />
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<span style="background-color: white; color: #222222; font-family: inherit;"><b><i>Sembcorp Industries</i></b> is listed in the SGX and its business consists of
3 main segments:</span><br />
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<span style="background: white; color: #222222; font-family: inherit;"><i>Utilities</i></span></h4>
<span style="background: white; color: #222222; font-family: inherit;">Developer, owner and operator of energy and water assets over 6 continents with an established presence in Asia and growing presence in emerging markets. The company has established a niche as a global leader for the provision of bundled energy, water and on-site logistics to customers in energy-intensive industrial sites, and as a developer, owner and operator of large-scale combined power and water plants.</span><br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzqeWft867SiY_4kaJByz5UC5Yz-rSW5frcMX78YowGRkf6LTNlaqdqHjtkyTsV85ruZRNIo-UrXkXQIREeoCRTMBKL74y9Hdy5PNiP02Okg-8icZsNwhMDLLzK4L4rEQSud6-8JmNDpyG/s1600/Sembcorp+Industries+Utilities+Network.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Sembcrop Utilities Network" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzqeWft867SiY_4kaJByz5UC5Yz-rSW5frcMX78YowGRkf6LTNlaqdqHjtkyTsV85ruZRNIo-UrXkXQIREeoCRTMBKL74y9Hdy5PNiP02Okg-8icZsNwhMDLLzK4L4rEQSud6-8JmNDpyG/s1600/Sembcorp+Industries+Utilities+Network.jpg" height="182" title="Sembcorp Utilities Network" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Sembcorp Utilties Network</td></tr>
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<span style="background: white; color: #222222; font-family: inherit;">As shown in the picture, the Utilties segment already has a global footprint (including emerging markets) and the guidance was that there's still potential for expansion. </span><span style="background: white; color: #222222; font-family: inherit;">T</span><span style="background-color: white; color: #222222; font-family: inherit;">his segment of the company is what probably attracts many investors now due to its natural moat, source of recurring income as well as potential growth.</span></div>
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<span style="background: white; color: #222222; font-family: inherit;"><i>Marine</i></span></h4>
<span style="background: white; color: #222222; font-family: inherit;">Separately listed in the SGX, this segment is a leading global marine and offshore engineering group specializing in a full spectrum of integrated solutions in ship repair, ship building, ship conversion, rig building and offshore engineering and construction. This segment is likely causing the steep decline as it is highly related to the oil industry. </span></div>
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<span style="background: white; color: #222222; font-family: inherit;"><i>Urban Development</i></span></h4>
Sembcorp owns, develops, markets and manages urban developments such as industrial parks, business, commercial and residential spaces in countries like China, Vietnam and Indonesia. The company's early involvement in the development of industrial, residential, business and commercial areas also provides potential opportunities for the provision of utilities and other solutions.This is smallest segment contributing less than 10% to bottom line.<br />
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I don't want to bore the readers with in-depth study of the business model but please do have a look at the company website and annual reports regarding its business strategies and the like.<br />
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<span style="color: #444444; font-size: large;">FINANCIALS</span></h2>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2FIbrgFyyZH-4u5RuWKjhmDM8SttLc-06M7tYqlaiWEsJZpOaHyF9tE9VVE0eKXLfEuXdlaV-b1V3bqvZy_IQUxRlbE8G05YRgykEmboCacj_6WNQVaq-8VZIongkA0kgPrjfnBsFZ3C8/s1600/Sembcorp+Industries+5-year+results.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Semcorp Industries 5-year Summary" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2FIbrgFyyZH-4u5RuWKjhmDM8SttLc-06M7tYqlaiWEsJZpOaHyF9tE9VVE0eKXLfEuXdlaV-b1V3bqvZy_IQUxRlbE8G05YRgykEmboCacj_6WNQVaq-8VZIongkA0kgPrjfnBsFZ3C8/s1600/Sembcorp+Industries+5-year+results.png" height="400" title="Sembcrop Industries 5-year Summary" width="346" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Sembcorp Industries 5-year Summary</td></tr>
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The 5-year financial summary seems to show that on aggregate, the company is performing reasonably well in terms of revenues and earnings. The free cash flow is pretty lumpy as expected due to the capex heavy nature of the marine industry as well as the growing phase of the utilities business. Something that I don't quite like is that the company is currently in net debt and with debt/equity ratio of 65% - but I argue that the overall earnings power is more than sufficient to finance this and the S$2200M cash on hand is definitely enough to pay out the S$930M borrowings due within 1-year. The company has been paying dividends as far back as more than 10 years ago and the past 5 years shows a payout ratio of about 30%-40%. Assuming dividends is maintained at S$0.17, yield is about 4.1%.</div>
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Another worrying trend is the decreasing ROE from 20.6% to 15.7% over a period of 5 years. A 15% ROE is still pretty good in general but its also good to pinpoint the reasons for the decline.</div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0bxfIU7-wIJpJ-0sqNyDzJ0u3QJG-IS2mifTxhMXrrsXuvAof3eEFf0ktXC5cNM5oG4RtcoVKYDYkc2OQkV1fGSaIbgYEhL-p6Sjjx3f_mdwmu8kXIlhz-UAbzU3J-J_VxuCqGcOq716r/s1600/Sembcorp+ROE.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Sembcorp Marine & Utilities ROE" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0bxfIU7-wIJpJ-0sqNyDzJ0u3QJG-IS2mifTxhMXrrsXuvAof3eEFf0ktXC5cNM5oG4RtcoVKYDYkc2OQkV1fGSaIbgYEhL-p6Sjjx3f_mdwmu8kXIlhz-UAbzU3J-J_VxuCqGcOq716r/s1600/Sembcorp+ROE.jpg" height="137" title="Sembcorp Marine & Utilities Returns on Equity" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Sembcorp Industries Segment ROE</td></tr>
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Obviously, we would prefer a business that is able to at least maintain its rate of return whilst employing incremental amounts of capital for expansion over an extended period of time - the Utilities segment is one good example. From 2009 - 2013, while using increasing amounts of capital, ROE for the Utilities business is relatively stable fluctuating between 15.6% to 19.6% while Marine is showing a consistent decline from 38.2% to 20.8%. Kudos to the Utilities segment in this aspect. Of course, we can't discount the fact that Marine's current rate of return is still very decent, but its inability to maintain this may be a cause for concern.</div>
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Perhaps a 10-year summary can provide a more meaningful insight of Sembcorp Industries 2 core operations:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXnbaJcbu16CKQI9_DiItGkQXjS3AbVHIxBrWDEiPmPqZTlBANTKseDb483kJuPDrNb_DrB-1XusF5ZG4fCG8HgguJNtbPCbPcqIiV-pqFMSPLs67eL3I-6RK0lhlxS3ky63qnTWT7Yq-s/s1600/Sembcorp+Industries+10-year+Summary.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXnbaJcbu16CKQI9_DiItGkQXjS3AbVHIxBrWDEiPmPqZTlBANTKseDb483kJuPDrNb_DrB-1XusF5ZG4fCG8HgguJNtbPCbPcqIiV-pqFMSPLs67eL3I-6RK0lhlxS3ky63qnTWT7Yq-s/s1600/Sembcorp+Industries+10-year+Summary.jpg" height="260" width="580" /></a></div>
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As can be seen, both segments registered huge growth in both revenue and net profit over the past 10 years. The clear winner here is no doubt the Marine segment having registered 420% and 259% growth versus Utilities at 140% and 183% growth in revenue and net profit respectively. Are these growth sustainable enough for the analyst to make a decision with regards to its earnings power?</div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-VPTdgjGWmvjbvspOLjDgsHQgE9oTxXus04p30jXbtBzaTrXHLfD0GokYNhvqu-VfXPRmy1OBR_GEx5fi1aP5jYlom-TSi7o-TwCdzWIk32R0KPbk61aPv9fORS0KBVTIj8CwyoV_TbVB/s1600/Sembcorp+Industries+10-year+graph.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="10-year Sales & Earnings Graph for Sembcorp" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-VPTdgjGWmvjbvspOLjDgsHQgE9oTxXus04p30jXbtBzaTrXHLfD0GokYNhvqu-VfXPRmy1OBR_GEx5fi1aP5jYlom-TSi7o-TwCdzWIk32R0KPbk61aPv9fORS0KBVTIj8CwyoV_TbVB/s1600/Sembcorp+Industries+10-year+graph.jpg" height="320" title="10 year Revenue & Profit Graph for Sembcorp " width="308" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">10-year Revenue & Profit Chart for Utilties & Marine</td></tr>
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A look at the chart above shows that in general, the earnings of the Marine is volatile especially since 2007 while that of the Utilties segment is more stable, with earnings contribution surpassing the Marine segment since 2012.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhG12v-lJhPdBwaTOqchdtB_oTcThC4LDVsj5b2vL7f5gi_BRurs2NodTeVzV1j5AOK2ptdF6izdVkhv5o21pu0z5gJYbtKw8xIxNfNY3hWQj8DSMEMA2TDmy_cYiqW7FpRM6ERW-fFk4kE/s1600/Sembcorp+Industries+10-year+NPM.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Sembcorp Industries Net Profit Margin (10-Years)" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhG12v-lJhPdBwaTOqchdtB_oTcThC4LDVsj5b2vL7f5gi_BRurs2NodTeVzV1j5AOK2ptdF6izdVkhv5o21pu0z5gJYbtKw8xIxNfNY3hWQj8DSMEMA2TDmy_cYiqW7FpRM6ERW-fFk4kE/s1600/Sembcorp+Industries+10-year+NPM.jpg" height="166" title="Sembcorp Industries Net Profit Margin (10-Year)" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">10-year Net Profit Margin Chart for Utilities & Marine</td></tr>
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The 10-year period net profit margin confirms this view point. Although the Marine registered a higher average net profit margin (7%) than Utilities (6.2%) over this period, the Utilities segment's margin is more stable at between 4% to 9% versus Marine's 3.5% to 11.5%. Do note that the 9% margin achieved in 2013 includes non-recurring income which when adjusted, should bring it lower to about 7.5%.</div>
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It is not wrong to say that due to the nature of its industry, typical utilities businesses are quite stable. For Sembcorp Industries, with the support of the statistical exhibits from the revenue, earnings, ROE and Net Profit Margin, I argue that its Utilities business is <i>inherently stable</i> and because of this predictability and stability, the Utilities business warrants a higher valuation as compared to other businesses. For the Marine segment, because of its dependence on order book & oil prices, coupled with its statistical showing, we can't for sure say it is a stable operating business. But based on its leadership position in its industry and strong features like ROE, it is also unfair to conclude that it is a lousy business that is worth a very low valuation.</div>
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<h2>
<b><span style="color: #444444; font-size: large;">VALUATION</span></b></h2>
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On 8 Dec 2014, the market cap of Sembcorp Industries is about S$7500M while that of Sembcorp Marine (listed separately with code: S51.SI) is S$6100M. Sembcorp Industries owns 60.7% of the Marine business. With this, the implied valuation of Sembcorp Industries excluding its stake in the Marine business is S$3800. This necessarily means that the market is valuing the Utilties and Others segment at a low P/E (2013) ratio of 7.9x. That's really quite interesting.<br />
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Originally, I would prefer to use cash flows to value Sembcorp. However, the free cash flows are not very consistent owing to the heavy capex required, presumably for future growth. Coupled with the lack of guidance in estimating maintenance capex, perhaps its better to value the entire business on an earnings basis.<br />
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<h4>
<i>Utilities Valuation</i></h4>
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Removing one-time items from the IPO of Sembcorp Salalah in Oman and impairment charges at Teeside in UK, the adjusted 2013 earnings would be about $$380M. As shown above (table and chart), the Utilities segment has shown sustained growth in revenue and earnings in the past decade. We know that this segment is still in the midst of expansion and track record has shown management to be prudent in this aspect.. From this, I think its fair to say that 2013 earnings for Utilities is a nice guide for future earnings. At what multiplier should be fair for this segment then?<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjn6uU5jziy6HrZ8qN1nhAK21UfXKkhSTKzpWJLQg8zdMs-NaYUEvK11Rk-nkYXAt1wILexRkwHHZ5u0y4ZApohpYDTc3_kjoiewzRDVpUtC5DnQR2vizTid_u8TRCSbwm4sfQm5DJBbFLu/s1600/Utilities+Sector+PE+ratio.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img alt="Sector P/E ratio for Utilities Business" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjn6uU5jziy6HrZ8qN1nhAK21UfXKkhSTKzpWJLQg8zdMs-NaYUEvK11Rk-nkYXAt1wILexRkwHHZ5u0y4ZApohpYDTc3_kjoiewzRDVpUtC5DnQR2vizTid_u8TRCSbwm4sfQm5DJBbFLu/s1600/Utilities+Sector+PE+ratio.jpg" height="263" title="Sector P/E for Utilities Business" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Sector P/E extracted from Gurufocus</td></tr>
</tbody></table>
I shall now run the risk of being criticized by fellow investors with the following. As seen in the Sector P/E extracted from Gurufocus, the P/E ratio for Utilities segment in S&P 500 is about 22 (Yahoo Finance shows similar numbers). Of course, S&P 500 concerns the US market plus the current P/E provided may be a poor indicator etc and there are other valuation methods. But for simplicity's sake, i decided to use this as a reference. I had also alluded above that because of its business characteristics and strong statistical showing, the Utilities business is inherently stable and probably deserves a high valuation. I'm not going to use P/E of 22 for the reason that its way too high. Of course, P/E of 10 is unfair too. A reasonable estimate should be probably about P/E=15 which means the Utilities segment is worth about S$5700.<br />
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<h4>
<i>Marine Valuation</i></h4>
<br />
The Marine segment is in a relatively volatile business affected by things like its orderbook, oil prices and sentiments. What I am looking here is for a long-term average of what Marine can consistently earn in the future. Perhaps its better to normalize the earnings and take the average result of the past 10 years, giving us an earnings power of about S$285M. A long term P/E of about 12-13 should be decent enough for a company like Marine, considering its long operating history and track record, despite its supposedly fluctuating business environment. This means that Marine is worth around S$3550M.<br />
<br />
Adding them together, the Valuation should be about S$9250M (or price of about $5.15) as compared to current market cap of S$7,565 implying a margin of safety of 18%. I've decided to ignore the Urban Development segment since it probably is too small (for now) to affect the overall valuation significantly (I'll consider it as an x'mas gift).<br />
<br />
True, the business is currently priced in the market above its book value and on this basis some may feel it is liberally priced. However, accounting treatment has its own constraints and certain non-quantifiable information such as Sembcorp's strong reputation, customer relations and capacity for innovation is not captured directly in the financial statements. I believe these intangibles is definitely worth something for Sembcorp (unlike many companies out there) but I hesitate to come out with a value. Anyway, compared with many blue chip companies, a price to tangible book of 1.5 is actually <i>quite low</i>. As an ongoing business, it is usually the earnings power of its assets rather than balance sheet valuation that really counts and based on these considerations I'm comfortable with the above indicated valuation.<br />
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<h2>
<span style="color: #444444; font-size: large;">SHARE BUYBACK</span></h2>
<br />
Sembcorp Industries has been buying back shares recently. However, a quick check at the total shares outstanding for the past years does not show a decreasing trend. This is likely due to the company's policy of issuing stock options. There's not much to conclude about the value of the company here.<br />
<br />
It is worth highlighting that a director of Sembcorp Marine has bought some shares during the recent price decline, possibly indicating that Marine segment is undervalued as well.<br />
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<h2>
<span style="color: #444444; font-size: large;">CONCLUSION</span></h2>
<br />
Sembcorp Industries is an industrial conglomerate with its core operating business earning a decent return on capital. Based on the market price of Sembcorp Marine, the implied valuation of the market clearly undervalues the Utilities segment. An investor who wants to take part in the undervaluation of the Utilities segment probably could buy Sembcorp Industries and correspondingly short an equivalent proportion of Sembcorp Marine. However, I prefer not to bet against the Marine segment. Looking it at another point of view, buying shares of Sembcorp Industries could bring about a natural industrial and geographical diversification from the Utilities, Marine and Urban Development businesses.<br />
<br />
The concern here is whether the margin of safety is enough to justify a purchase. I'm here reminded about a similar concept (we call this 'safety factor') during my university days studying Engineering. To put it very simply, we were taught that if the consequences are severe or gravely (For eg, when building a bridge for cars and which may involves lives of many people), the typical safety factor should be high. Similarly, if we were to build a chair (that probably won't kill someone if it collapse), a small safety factor should do fine.<br />
<br />
For a company like Sembcorp Industries, I believe we don't need too high a margin of safety to justify a purchase. 20%-30% should be fair enough. However, this is not to say that a margin of safety as low as 5%-10% is sufficient. This would mean that investors who bought at about S$5.00 even though Sembcorp Industries dropped from a high of S$5.50 may not be putting their money to good use.<br />
<br />
All in all, I believe this analysis is consistent with our stock investments philosophy (<a href="http://secretinvestors.blogspot.sg/2014/12/stocks-investment-philosophy.html" target="_blank"><u>read more about it here</u></a>) and should do quite okay in the long term. I'll really appreciate if you can share some insights about this company. Thank you!<br />
<br />
<br />
<i>Disclosure:</i><br />
<i>Long Sembcorp Industries (U96.SI) @ S$4.15 with the hope it'll go down for further accumulation</i><br />
<i>No position in Sembcorp Marine (S51.SI)</i></div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com12tag:blogger.com,1999:blog-7010816031691289479.post-60401954553089590492014-12-10T05:14:00.002-08:002014-12-10T05:19:13.208-08:00Our Stocks Investment Philosophy<div class="MsoNormal">
Analyzing and investing in stocks have been my passion for years. Personally, I feel it is one of the rare few endeavors that taps into our logical, mental and emotional faculties. At the end of the day, not only do we understand how things work in a business but we began to understand more about ourselves and our biases as well as our friends and family members whom we interact with in making investment decisions.<br />
<br />
Below are some reasons why I decided to start this blog. Throughout the blog, you will notice that I like to use words like 'we' or 'our' to give credit to people, friends, authors and investors who gave incredible insights to a particular investment concept, business or a specific company during the process of learning, interactions, discussions and research.<br />
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The underlying purpose of this investment blog is mainly to:</div>
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<span lang="EN-US"><br /></span></div>
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<span lang="EN-US">1) Briefly summarize our investment thesis and pen down our thoughts in a simple and coherent manner<o:p></o:p></span></div>
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<span lang="EN-US">2) Keep track of the main reasons that we feel justify our initial purchase in the shares of a particular business<o:p></o:p></span></div>
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<span lang="EN-US">3) Reinforce and relearn investment concepts<o:p></o:p></span></div>
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<span lang="EN-US">4) Subject our theses to scrutiny and feedback so as to gain new insights in our investment journey<o:p></o:p></span></div>
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<h2>
<span style="color: #444444; font-size: large;">Our Stocks Investment Philosophy</span></h2>
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<span style="color: #444444; font-size: large;"><br /></span></div>
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<span lang="EN-US">Security selection requires a skillful balance between the facts of the past and the possibilities of the future. This can be attained through the use of right strategy and knowledge, keen awareness about one’s own emotional and logical faculty in making judgments and decisions as well as experience.<o:p></o:p></span></div>
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<span lang="EN-US"><br /></span></div>
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<span lang="EN-US">A brief summary of our investment framework which we adhere to are as follows:<o:p></o:p></span></div>
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<span lang="EN-US"><br /></span></div>
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<b><span lang="EN-US">A Business Perspective </span></b></div>
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<span lang="EN-US">This is the core philosophy that encompasses all others. We view a stock as a piece of a business and in doing so, we remain focused on the cash the business will generate and on its financial position as opposed to the opinions of other investors in the market. Both the statistical exhibits as well as the qualitative background of the company are examined. We make sure we understand the business to a reasonable extent before proceeding.<o:p></o:p></span></div>
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<span lang="EN-US"><br /></span></div>
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<b><span lang="EN-US">Conservative Valuation<o:p></o:p></span></b></div>
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<span lang="EN-US">If the business passes our initial analysis, we will estimate how much the business is worth commensurate to its assets, earnings and dividends. The valuation should mirror closely to what a knowledgeable and prudent businessman will pay if given an opportunity to invest in the same business over which he could exercise control.<o:p></o:p></span></div>
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<span lang="EN-US"><br /></span></div>
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<b><span lang="EN-US">Margin of Safety<o:p></o:p></span></b></div>
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<span lang="EN-US">The unifying theme here is that we try to buy things on sale - our opportunity comes when we can capitalize upon a favorable difference between price on the one hand and indicated or appraised value on the other. Margin of safety is both a source of potential profit as well as downside protection.<o:p></o:p></span></div>
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<span lang="EN-US"><br /></span></div>
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<b><span lang="EN-US">Diversification<o:p></o:p></span></b></div>
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<span lang="EN-US">Because the future is uncertain, the margin of safety is not a guarantee of profit and hence the need for diversification to better capture individual probabilities of profit potential as well as spreading unsystematic risk.<o:p></o:p></span></div>
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<span lang="EN-US"><br /></span></div>
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<b><span lang="EN-US">Patience</span></b></div>
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We do not presume to know when or to what extent we will be rewarded for identifying a security that is mispriced in the market but we know from experience that most will eventually. Because we don’t know when, we take most positions with a long-term perspective and this necessarily requires patience. A catalyst is a bonus but not compulsory during the decision-making process.<br />
<br />
I'll be extremely interested to know from you guys what are the other qualities or features in your investment process that you feel is indispensable and should be included in the overall investing framework. Do leave your thoughts in the comments section!</div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com7tag:blogger.com,1999:blog-7010816031691289479.post-33272844469319263312014-12-03T15:30:00.000-08:002014-12-22T19:14:30.915-08:00AP OIL (5AU.SI) - A Neglected but Cheap Stock in Singapore<b>AP Oil</b> (<a href="http://www.apoil.com.sg/" rel="nofollow" target="_blank">Company Website</a>) is listed on the SGX and its main activities consist of 3 segments:<br />
<br />
<ol>
<li>Manufacturing of a range of lubricating and specialty chemicals for industrial, automotive and marine applications under the group's own brand names.</li>
<li>Trading of base oils, additives, chemicals and some related 3rd party products.</li>
<li>Franchising which includes trading in raw material for products under the company's brand name. </li>
</ol>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEsmY_V4Ma66jsP5AQVGLFDGsAvJ_crNpO_xbdvHHXhnbRyffDGy5U1kzGzX2j3Tf6NUvOA-Col4bhnC1EhunFKE1-6ESNs3Zl6MF1k3HICVnUJ-WfVqt11OxbD_x7EwViFputzHiAuh-d/s1600/AP+Oil+Main+pic.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img alt="AP Oil International Logo" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEsmY_V4Ma66jsP5AQVGLFDGsAvJ_crNpO_xbdvHHXhnbRyffDGy5U1kzGzX2j3Tf6NUvOA-Col4bhnC1EhunFKE1-6ESNs3Zl6MF1k3HICVnUJ-WfVqt11OxbD_x7EwViFputzHiAuh-d/s1600/AP+Oil+Main+pic.jpg" height="191" title="AP Oil International Logo" width="400" /></a></div>
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<div>
Their products are marketed to some 20 countries including Singapore, Bangladesh, Myanmar, Vietnam and others. What attracted me to this company is its relatively strong asset backing as well as ability to generate solid operating earnings and free cash flow. Also, throughout the company's more than 30 years of operations, it only suffered one year of loss which is due to one-off losses in a new business venture. Some key metrics are as follows:</div>
<div>
<br /></div>
<div>
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Price = S$0.191<br />
Shares Outstanding = 164,531,172<br />
Market Cap = S$31.43M<br />
P/E (ttm) = 7.0x<br />
P/NTA (mrq)= 0.74x<br />
EV/EBIT (ttm) = 4.3x<br />
ROE (ttm) = 10.9%</div>
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<h2>
<span style="color: #444444; font-size: large;">AP Oil Financials</span></h2>
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<span style="color: #444444; font-size: x-large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWfqQsvNRWVWmMAoEvqkSgRYF9B_c7C8wvgw8Wh1xddZZNnknEltRKh-Tw_wKOURwW_MhkXu_aIukmGcjlUV_Ih1Tz7rYOG0heIjIXdi_7ZkqAZtJEgfqkz3ZdmOLWoWNCZIRU_wyDyJEf/s1600/AP+Oil+Financials.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img alt="AP Oil International Singapore 5-year results" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWfqQsvNRWVWmMAoEvqkSgRYF9B_c7C8wvgw8Wh1xddZZNnknEltRKh-Tw_wKOURwW_MhkXu_aIukmGcjlUV_Ih1Tz7rYOG0heIjIXdi_7ZkqAZtJEgfqkz3ZdmOLWoWNCZIRU_wyDyJEf/s1600/AP+Oil+Financials.jpg" height="363" title="AP Oil International (5AU.SI) 5-year results" width="400" /></a></div>
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<div>
Having a P/NTA of 0.74x may not be spectacular but I would
like to highlight a few things. The first is that the balance sheet is pretty
clean and liquid, with net cash of S$20M (1H2014 Results) or S$0.12 per share.
This compares quite favourably with the current market price. Secondly, a close
look at the statements shows Associates contributing about $650K to the bottom
line while it is booked at $2.9M. If a knowledgeable businessman were to buy
this part of the company, I believe they would probably pay at least 7-8 times
of its earnings (i.e. about $5M). Lastly, management is able to grow its book
value consistently at a compounded rate of >10%/year since 2002 when the
statements are available.</div>
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<o:p></o:p></div>
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Statistically, we see that the earnings and free cash flows
are on average, relatively stable and consistent. As alluded above, the
trailing ROE is 10.9% and has decreased significantly from 22% in ’09. However,
if we adjust for the low returns due to the huge excess cash horde, it should be higher (we estimate it to be in excess of
14%).<o:p></o:p></div>
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The company pays out 10-20% of its earnings, giving a
relatively mediocre yield of about 2.5%. The only consolation is that the
company has been paying dividends since 2010.<o:p></o:p></div>
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</div>
<h2>
<span style="color: #444444; font-size: large;">AP Oil Business</span></h2>
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<br /></div>
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<span style="font-family: inherit;">Now, we're no genius in the petroleum lubricating or specialty
chemicals industry. Much of the qualitative aspects of the
company should be reflected into the financials. Since there’s no easy way to
‘quantify’ its quality, our main concern is whether or not we can count upon the
company to remain in business like it has before in the foreseeable future.<o:p></o:p></span></div>
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<span style="font-family: inherit;"><br /></span></div>
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<span style="font-family: inherit;">Other than the usual risks like fluctuation of raw material
prices etc (which AP Oil has proven to manage quite well overall and our guess is that the current low oil price bodes well for its bottom line), the key
business risk is the concentration of its major customers. The top 2
customers contributes about 40% sales in 2013 and the top 3 about 59% sales
respectively in 2012. This got to be a big minus. As a sort of counterbalance,
the company has plans to grow market share in existing markets and foray into
untapped new territories. Hopefully, this will introduce both customer and
geographic diversification. With its strong financial position and experience, AP Oil is well poised to take advantage of further expansion opportunities.<o:p></o:p></span></div>
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<span style="font-family: inherit;"><br /></span></div>
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<span style="font-family: inherit;">AP Oil is likely to enjoy regular recurring sales from repeat
clients. Firstly, the lubricants and blended chemical are expendable products
and secondly, it is hardly ‘postponable’ (i.e. once it’s being used up or
expended, they need to replenish it pretty soon). Also, our guess is that for
some applications and clients, these products form a small part of their budget
and it is quite unlikely for them to actively source for another supplier.</span></div>
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<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Lastly, some products are non-standard and require certain R&D and technical know-how. When a customer orders a product to meet specific requirements, R&D is required to develop a new formula to meet these requirements. </span>Note that AP Oil will retain ownership of the formulation
which builds on its existing knowledge and database. In some cases, customers provide
sensitive formulation owned by them (which may be sometimes a positive too in
terms of customer retention).</div>
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<h2>
<span style="color: #444444; font-size: large;">AP Oil - Valuation</span></h2>
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<br /></div>
<div>
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It seems that AP Oil is a pretty solid business with decent
assets backing. Is the company undervalued relative to the market price
now? <o:p></o:p></div>
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<br /></div>
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As mentioned, AP oil consists of 3 segments. The financial reports
separated their individual revenue and gross profit contributions (all 3
segments are still positive here) but lumped all the expenses together. Thus
the best way to value the company is by considering the whole. <o:p></o:p></div>
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<br /></div>
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With its predictable & stable results, it is not hard to
have a conservative earnings power estimate for the company of about $4M, which
is lower than the past 5 years as well as the TTM results of $4.5M. Despite
having a relatively simple business model, nice track record, potential for
growth and strong financial setup, I hesitate to give a high multiplier due to
some key risks I’ve discussed earlier (I'll probably touch more on that in my future post). A 9-11x multiple should be good enough.
Adding to our $12M estimate of net excess cash,
the valuation becomes $52M or $0.315 per share. Comparing market price of 0.191, we have
an upside of 65%.<o:p></o:p></div>
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<br /></div>
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Of course, this is just a very simple but in our opinion, quite reasonable
valuation process. Although we did test this with other valuation models (which
coincidentally gives an intrinsic value range of between $0.25 - $0.35 which
reinforces this estimate of $0.315) I think this is good enough. As long as the
estimate is sensible and conservative, coupled with a huge margin of safety,
there’s no need for an accurate figure. It’s better to be approximately right
than precisely wrong.<o:p></o:p></div>
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<h2>
<span style="color: #444444; font-size: large;">Insider Ownership</span></h2>
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<br /></div>
<div>
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Insider ownership is pretty high at about 50% and the
management should care enough for the business to do well. The question here is
do they own too much to ignore outside minority shareholders?<o:p></o:p></div>
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<h2>
<span style="color: #444444; font-size: large;">Conclusion</span></h2>
</div>
<div>
<br /></div>
<div>
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With a long operating track record, potential for growth,
coupled with a price that offers sufficient margin of safety, we decided to
take a position in the company. Sure, the business isn’t the best of the best
but a purchase at this low price should be well justified. It's not easy nowadays to find a relatively good ROE company with low valuations. If one can find 10
companies like this, the diversified result should turn out quite satisfactory.<o:p></o:p></div>
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<i>Disclosure:</i></div>
<div class="MsoNormal">
<i>Long AP Oil (5AU.SI)</i></div>
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<o:p></o:p></div>
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<o:p></o:p></div>
secretinvestorshttp://www.blogger.com/profile/02516160455880025991noreply@blogger.com19